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                       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, 1998

[ ]  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 23, 1998, based on the average price on that date, was
$63,142,000.  At July 23, 1998, the number of shares outstanding of the issuer's
common stock was 48,688,212.


                       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.


General

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

     In fiscal 1992, the Company, through the purchase of a 55% interest in Vaso
Interim  Corp.  ("Vaso  Interim"),  acquired the worldwide  exclusive  marketing
rights (except in China) to EECP 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 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 technology.  Vasogenics and
Vaso Interim were subsequently merged into Vasomedical.

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


The EECP  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).
<PAGE>
     In March 1989,  Vasogenics received 510(k) marketing clearance from the FDA
for the MC1 model of the EECP 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 procedure in the treatment of patients suffering from stable
and unstable angina pectoris, acute myocardial infarction and cardiogenic shock.
The Company has,  however,  decided to focus initially only on the stable angina
pectoris indication.

     A US patent (which  expires in 2005) covering EECP design and functions was
issued in June 1988 to Dr. Zheng of Sun Yat-sen  University of Medical  Sciences
in China. This patent was assigned to Vasogenics in September 1991 and it is now
owned by the Company.  Additional international and domestic patent applications
were filed in May 1993.  A new US patent  was  issued to the  Company in October
1996, as well as several  international  patents since then. The Company expects
additional international patents to issue during fiscal 1999. Such patents cover
several specific enhancements to the current EECP model.

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

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

Clinical Studies
     Early   experiments   with   counterpulsation   at  Harvard  in  the  1950s
demonstrated that this technique markedly reduces the workload,  and thus oxygen
consumption, of the left ventricle. This basic effect has been demonstrated over
the past 40 years in both  animal  experiments  and in  patients.  The  clinical
benefits of external  counterpulsation  were not consistently  achieved in early
studies because the equipment used then lacked some of the features found in the
EECP  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 . Not only did a course of treatment
with EECP 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 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 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  produced a  significant  increase
(19%) in exercise tolerance in the total patient population.

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

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

     Subsequent  data from a group of 50 angina  patients  who were treated with
EECP 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.
<PAGE>
     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
outpatient  therapy  appears  to exert  effects  on the heart  similar  to those
achieved by exercise  training.  After receiving EECP , 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
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 . A maximal
radionuclide  stress  test was  performed  prior to entry into the  study.  Upon
completion of the EECP 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  radionuclide  images  demonstrated
meaningful  increases in maximal  exercise times.  However,  in the "unimproved"
group, there was a significant decrease in post-EECP double product,  indicating
a useful decrease in peripheral vascular resistance.  The authors concluded that
the two proposed  mechanisms of EECP , 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 was reported by the Stony Brook center in April 1997.
These  patients  had  received  35 hours of EECP  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 , 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  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 is effective  both in the short- and  long-term  therapy of chronic  angina
pectoris.

     In  1995,   the  Company   began  a  large   randomized,   controlled   and
double-blinded   multi-center  clinical  study  ("MUST-EECP")  in  four  leading
university  hospitals in the United States to 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 Company  expects the results of  MUST-EECP to be published in a major
peer-review medical journal in 1998.
<PAGE>
     This ground-breaking  study shows that EECP 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.

     Patients with a documented  history of CHD,  positive exercise stress tests
and who were classified with Canadian  Cardiovascular  Society Classes I, II and
III angina  pectoris  were  randomized  to  treatment  counterpulsation  or sham
counterpulsation.  Exclusion  criteria  included:  unstable  angina,  myocardial
infarction,  CABG three months prior,  cardiac  catheterization two weeks prior,
greater than 50% stenosis in the left main artery,  ECG abnormalities that would
interfere  with the  interpretation  of stress  tests,  overt  congestive  heart
failure,  and inability to provide  consent or cooperate with the study protocol
for the duration of the trial.

     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
in one-hour sessions, until they had completed 35 hours of treatment.

     In fiscal 1999, the Company intends to conduct further studies with EECP in
the United States and abroad to expand the patient data base in the treatment of
angina, as well as to expand the EECP claim structure.  Moreover, the Company is
sponsoring a long-term quality-of-life and resource-utilization  study with EECP
in the  same  institutions  and  with the same  patients  that  participated  in
MUST-EECP. The Company expects to supplement its applications to the Health Care
Financing  Authority ("HCFA") and other third-party payers for positive coverage
policies with the results of this study.

     In pursuit of its claim  expansion  program,  the  Company  applied for and
received  FDA  approval  in April 1998 to study the  application  of EECP 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  and at the  University of California San Francisco 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 therapy as a new standard of care in CHD.
     (b)  Publish  the  results  of  MUST-EECP  in a major  peer-review  medical
          journal in calendar 1998.
     (c)  Complete,  in calendar 1998, a cost-effectiveness  and quality-of-life
          evaluation  of  EECP  therapy  to  justify   reimbursement  from  HCFA
          (Medicare),   State  Welfare  (Medicaid)   agencies,   and  commercial
          insurance companies.
     (d)  Engage  in   educational   campaigns   designed   to   highlight   the
          cost-effectiveness of EECP therapy to managed care organizations.
     (e)  Complete a distribution network in international markets.
     (f)  Complete a  feasibility  study for the use of EECP in CHF in  calendar
          1999.
     (g)  Expand the EECP  clinical  research  program to  establish  new claims
          (e.g.,  use in the  treatment  of  peripheral  vascular  disease)  and
          confirm  authorized  claims  (e.g.,  use in  the  treatment  of  acute
          coronary syndromes).
     (h)  Complete  the  development  of  the  next-generation  EECP  model  and
          initiate its in-house assembly in calendar 1999.
     (i)  Establish and support academic  reference centers in the United States
          and  overseas in order to  accelerate  the growth and prestige of EECP
          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.
     (j)  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 - "Enhanced" describes the Company's
 proprietary  system  which  increases  the level of diastolic  augmentation  by
 40-50% over that of earlier devices
Ischemia - lack of blood supply
Occlusion - blockage of blood vessels
Percutaneous  Transluminal  Coronary  Angioplasty  or PTCA - insertion of a wire
 into a coronary  artery to which a balloon or other  instrument is attached for
 the purpose of widening a narrowed vessel
Stenosis - the narrowing of a blood vessel's diameter
Systole - contracting period during which the heart is pumping blood to the rest
 of the body 
Thallium - an imaging medium used to detect areas of ischemia within
 the heart muscle


Competition
     Presently,  Vasomedical  is aware of only one  competitor  with an external
counterpulsation  device.  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 competitive factor. Further, there can be no assurance
that  other  companies  will  not  enter  the  intended  market  for EECP . Such
companies may have substantially greater financial, manufacturing, marketing and
technological  resources than those possessed by the Company and may, therefore,
succeed in developing  products or  technologies  that are more  effective  than
those offered by the Company and that would render the Company's  technology and
existing products obsolete or noncompetitive.
<PAGE>
Government Regulations
     The EECP 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
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 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  system  will not be  reclassified  in the future by the FDA and
subject to additional regulatory requirements.

     If substantial  equivalence  cannot be established or if the FDA determines
that a more extensive review of the device is in order, the FDA will require the
manufacturer  to  submit a  premarket  application  ("PMA")  that  must be fully
reviewed  and  approved by the FDA.  Management  does not believe  that the EECP
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 and there can be no
assurance that EECP would receive PMA approval.

     In most countries to which the Company seeks to export the EECP 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 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 ,  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 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  system  in the  countries  of the
European  Union.  The ISO 9001  Certificate  covers  the  Company's  design  and
manufacturing  operation for the EECP system and recognizes that the Company has
established and operates a world-class quality system.

Third-Party Reimbursements
     Health care providers,  such as hospitals and physicians,  that purchase or
lease  medical  devices,  such as the EECP  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.
<PAGE>
     The Company is currently engaged in discussions with HCFA and several large
health care insurers. Although it is unlikely that these third-party payers will
issue  positive  coverage  policies for EECP  therapy  before the results of the
Company's multi-center study are published in a peer-review journal, the Company
will continue to pursue  reimbursement  vigorously in fiscal 1999. At a minimum,
the Company believes that its discussions with third-party  payers will 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. 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").  Although such code is not essential and although there is no assurance
that a new code will be issued,  the Company  believes that having an up-to-date
CPT code will accelerate the processing of reimbursement claims.

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

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

Patents and Trademarks
     The Company has  received  two US patents  with  respect to the EECP system
expiring  2005 and 2013,  respectively.  In  addition,  the Company has received
several  international  patents and expects additional  international patents to
issue during fiscal 1999. Moreover, a trademark has been registered for the name
"EECP".  The loss of the  Company's  EECP  patents  and  trademark  could have a
material adverse effect upon the Company's business.

Employees

     As of July 23, 1998, the Company employed thirty-two persons on a full-time
basis  consisting  of its  four  executive  officers,  nine  salespersons,  four
clinical   applications    specialists,    seven   manufacturing   and   service
professionals/technicians,    three    marketing    professionals,    and   five
administrative personnel.

ITEM TWO - PROPERTIES

     The  Company  maintains  its office  and  warehouse  at 180 Linden  Avenue,
Westbury,  New York 11590,  where  approximately  18,000 square feet of space is
leased from a non-affiliated landlord through October 31, 2000 at an annual cost
of approximately $121,000. Upon the expiration of the lease, the Company, at its
option,  may renew the lease for an additional  five-year period or purchase the
facility at fair market value, as defined.

ITEM THREE - LEGAL PROCEEDINGS

     In  February  1995,  the Company  received a subpoena  duces tecum from the
broker-dealer  branch of the Northeast  Regional  Office of the  Securities  and
Exchange Commission  requesting certain documents from the Company pursuant to a
formal order of private  investigation in connection with possible  registration
and  reporting  violations.  The Company has complied  with the request for such
documents.  Whatever the ultimate  objectives of the  Commission's  fact-finding
inquiry may be, the Company intends to cooperate as the investigation  proceeds.
As stated in the subpoena,  the "investigation is confidential and should not be
construed as an indication by the Commission or its staff that any violations of
law have occurred,  nor should it be interpreted as an adverse reflection on any
person,  entity or security." This  investigation is in its early stages and the
Company is unable to determine the likelihood of an  unfavorable  outcome or the
existence or amount of any potential loss.
<PAGE>
     On or about May 23, 1996,  an action was  commenced in the Supreme Court of
the State of New York,  Nassau  County,  against the Company,  its directors and
certain of its officers and employees for the alleged  breach of an agreement to
appoint a non-affiliated party as its exclusive  distributor of the EECP system.
The complaint seeks damages in the  approximate sum of $50,000,000,  declaratory
relief and punitive damages.  The Company denies the existence of any agreement,
believes  that the  complaint is frivolous  and without  merit and is vigorously
defending the claims as well as asserting substantial counterclaims. This matter
is in its  preliminary  stages  and the  Company  is  unable  to  determine  the
likelihood of an unfavorable outcome or the existence or amount of any potential
loss.

     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.  Management
believes that this action is fully  covered by insurance.  This matter is in its
preliminary stages and the Company is unable to determine  the  likelihood of an
unfavorable outcome or the existence or amount of any potential loss.

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

     No matters were  submitted to a vote of the Company's  stockholders  during
the fourth quarter of fiscal 1998.


                                     PART II

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

     "The Nasdaq  Stock  Market" or "Nasdaq"  is a  highly-regulated  electronic
securities  market  comprised  of  competing  Market  Makers  whose  trading  is
supported by a communications  network linking them to quotation  dissemination,
trade  reporting,  and  order  execution  systems.  This  market  also  provides
specialized  automation services for screen-based  negotiations of transactions,
online  comparison  of  transactions,  and a  range  of  informational  services
tailored to the needs of the securities industry, investors and issuers.

     The Company's Common Stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol VASO.  The table below sets forth the range
of high and low trade  prices of the Common  Stock as reported by Nasdaq for the
fiscal periods  specified.  The  approximate  number of record holders of Common
Stock as of July 23, 1998 was 830.


<TABLE>
<CAPTION>

                                   Fiscal 1998         Fiscal 1997

                                  High        Low      High        Low

<S>                              <C>         <C>       <C>       <C>   
First Quarter                    $2.063      $1.563    $4.313    $2.375
Second Quarter                   $3.563      $1.719    $3.063    $1.938
Third Quarter                    $2.250      $1.719    $2.781    $1.563
Fourth Quarter                   $2.094      $1.500    $2.563    $1.531
</TABLE>

     The  last bid  price of the  Company's  Common  Stock on July 23,  1998 was
$1.344 per share.  The Company has never paid any cash  dividends  on its Common
Stock.  While  the  Company  does  not  intend  to  pay  cash  dividends  in the
foreseeable  future,  payment of cash dividends,  if any, will be dependent upon
the earnings and financial position of the Company, investment opportunities and
such other factors as the Board of Directors deems appropriate. Stock dividends,
if any,  also will be dependent on such factors as the Board of Directors  deems
appropriate.
<PAGE>
ITEM SIX - SELECTED FINANCIAL DATA

     The following table summarizes selected financial data for each of the five
years  ended May 31, 1998 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,

                                               1998           1997           1996         1995           1994

<S>                                          <C>            <C>            <C>            <C>           <C>
Statement of Operations

Revenues (1)                                 $5,225,064     $2,096,562     $2,683,128     $-            $1,370,257
                                             ---------------------------------------------------------------------
Cost of sales and services                    1,543,849      1,020,047        609,136                      404,471
Selling, general & administrative expenses    5,689,704      4,155,552      3,738,789      2,172,555     4,373,623
Research and development expenses             1,595,970      1,045,184        364,455        598,178       443,850
Depreciation and amortization                   363,101        333,482        269,443        117,851       433,390
Provision for losses                                           225,000                       318,000     
Minority interests in net losses of
subsidiaries                                                                                              (221,587)
Net loss on sale or disposition of 
subsidiary stock                                                                                           780,299
Interest and financing costs                      4,057          8,511        515,451          2,523         3,261
Interest and other income, net                 (169,422)      (174,810)      (171,001)       (91,813)      (35,897)
                                             ---------------------------------------------------------------------
                                              9,027,259      6,612,966      5,326,273      3,117,294     6,181,410
                                             ---------------------------------------------------------------------
Net loss                                     (3,802,195)    (4,516,404)    (2,643,145)    (3,117,294)   (4,811,153)

Deemed dividend on preferred stock           (1,132,000)
Preferred stock dividend requirement            (96,717)
                                             ---------------------------------------------------------------------
Net loss applicable to common stock         $(5,030,912)   $(4,516,404)   $(2,643,145)   $(3,117,294) $(4,811,153)
                                             ---------------------------------------------------------------------

Net loss per common share
 (basic and diluted)                              $(.11)         $(.10)         $(.07)         $(.10)       $(.20)
                                             ---------------------------------------------------------------------

Weighted average common shares
outstanding (basic and diluted)              47,873,711     46,297,142     39,226,258     30,519,640    24,011,515
                                             ---------------------------------------------------------------------

Balance Sheet

Working capital                              $5,046,202     $1,981,331     $4,958,973       $747,070    $1,410,114     
                                             ---------------------------------------------------------------------
Total assets                                 $7,345,246     $4,175,021     $8,246,151     $2,753,138    $2,122,046
                                             ---------------------------------------------------------------------
Long-term debt                                       $0             $0     $3,725,000             $0            $0
                                             ---------------------------------------------------------------------
Stockholders' equity (2)                     $5,752,993     $3,020,962     $3,091,094     $2,259,991    $1,528,031
                                             ---------------------------------------------------------------------
-------------------
<FN>
(1) Substantially all revenues from fiscal 1994 were generated from subsidiaries
which have been disposed of. 
(2) 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, 1998 and 1997
     The Company  generated  revenues from the sale and lease of its EECP 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).  The Company  generated  increasing  revenues in fiscal 1998 as the
number of EECP  units  purchased  or rented by  treatment  centers  is  growing,
although  there  can be no  assurances  that  the  EECP  device  will  become  a
commercial success.  Management believes that the number of cardiology practices
and  hospitals  interested  in becoming  providers of EECP therapy has increased
following the announcement of the results of the Company's multi-center clinical
study at the American Heart Association meeting in November 1997 (which data are
expected to be published in a major peer-review  journal in 1998) and additional
reports  presented at the American  College of Cardiology  meeting at the end of
March 1998.
     Gross margins are dependent on a number of factors, particularly the mix of
EECP units sold and rented  during the period,  the ongoing  costs of  servicing
such units, and by certain fixed period costs, including facilities, payroll and
insurance.  Gross  margins  are  furthermore  affected  by the  location  of the
Company's  customers  and the amount and nature of  training  and other  initial
costs   required  to  place  the  EECP  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, 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  and for
promotional materials, and the expansion of the Company's direct sales force.
     Research and  development  (R&D) expenses  increased  $551,000 for the year
ended May 31, 1998  compared to the prior  period.  The increase was a result of
commitments and expenses related to the Company's  multicenter clinical study of
EECP which was completed in July 1997, the initiation of the  development of the
next-generation  model of the EECP system,  and expenses related to a continuing
quality-of-life  and resource  utilization  study  started in parallel  with the
multi-center  clinical study.  Expenses  related to this study (which includes a
long-term  follow-up  phase),  the expansion of the  International  EECP Patient
Registry at the University of Pittsburgh,  the completion of the  development of
the new model of the EECP system and the  initiation of  feasibility  studies in
congestive heart failure and peripheral  vascular disease are expected to affect
operating results in fiscal 1999.

Fiscal Years Ended May 31, 1997 and 1996
     The Company  generated  revenues from the sale and lease of its EECP system
of  $2,097,000  and  $2,683,000  for the  years  ended  May 31,  1997 and  1996,
respectively.  The Company  incurred net losses of $4,516,000 and $2,643,000 for
fiscal  1997 and 1996,  respectively.  Quarterly  fiscal 1997  revenues  did not
continue at the level  achieved in the last  quarter of fiscal  1996,  which the
Company   believes  was  the  result  of  the  continuing   absence  of  blanket
reimbursement  coverage for EECP therapy and the inability or  unwillingness  of
certain  patients to pay for treatment.  Management  believes another factor was
that many  cardiologists  interested in becoming  providers of EECP therapy were
awaiting the  announcement of the Company's  multi-center  clinical study due to
occur  during  the first half of fiscal  1998.  Moreover,  quarterly  results in
fiscal 1997 were adversely  affected by the mix favoring  rentals over sales and
the non-payment of certain leases.
     Gross  margins  from  the  EECP  are  dependent  on a  number  of  factors,
particularly  the number of units sold or leased during the period,  the ongoing
costs of servicing  such units,  and by certain  fixed period  costs,  including
facilities, payroll and insurance. Gross margins are furthermore affected by the
location of the  Company's  customers  and the amount and nature of training and
other  initial  costs  required to place the EECP system in service for customer
use.
<PAGE>
     Selling,  general and administrative (SGA) expenses for the years ended May
31, 1997 and 1996 were  approximately  $4,156,000 and $3,739,000,  respectively.
The $417,000  increase in SGA expenses for the comparable fiscal period resulted
primarily  from a $732,000  increase in payroll,  commissions  and related costs
associated  with the  addition  of a  direct  national  sales  force  and  other
operating  personnel,  offset by $168,000 in costs  reported in this category in
the prior year,  the nature of which was allocable to cost of sales and services
from the onset of revenues.
     Research and development (R&D) expenses  increased $681,000 compared to the
prior fiscal  period.  The increase was the result of  commitments  and expenses
related  to the  Company's  multi-center  clinical  study  of EECP ,  which  was
completed July 1997, the  initiation of the  development of the next  generation
model of the EECP system,  and commitments and expenses  related to a continuing
quality-of-life and resource  utilization study being conducted in parallel with
the  multi-center  clinical study.  Such commitments and expenses related to the
aforementioned  parallel study (which includes a long-term  follow-up phase) and
the continuing  mechanical and clinical  development of EECP continued in fiscal
1998.
     The decrease in interest and financing  costs was directly  attributable to
the conversion of debt in June 1996.

Liquidity and Capital Resources
     Working capital  increased by $3,065,000 from $1,981,000 at May 31, 1997 to
$5,046,000  at May 31, 1998,  principally  as a result of net proceeds  from the
issuance of convertible preferred stock ($6,112,000) and the exercise of options
and warrants ($484,000), offset by continuing operating losses.
     In March  1996,  the  Company  entered  into an  agreement  with a  medical
equipment  finance  company  whereby this third party will purchase,  subject to
credit approval, the EECP 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.
     On June 25, 1997,  the Company  issued  150,000  shares of newly created 5%
Series B Convertible  Preferred  Stock to one accredited  investor at a price of
$20 per share, realizing net cash proceeds of $2,818,000.  Dividends due on such
preferred  stock  have  been,  and are  expected  to be,  paid in  shares of the
Company's common stock. At May 31, 1998, approximately 66% of Series B preferred
stock had been converted into common stock.
     On April 30, 1998,  the Company  issued  175,000 shares of newly created 5%
Series C Convertible  Preferred Stock to the same accredited investor at a price
of $20 per share,  realizing net cash proceeds of  $3,294,000.  Dividends due on
such preferred  stock are expected to be paid in shares of the Company's  common
stock.  At May 31, 1998,  no Series C preferred  stock had been  converted  into
common stock.
     Management  believes that its present working  capital  position at May 31,
1998,  along with the ongoing  commercialization  of the EECP system in domestic
and  international  markets,  some  units  of  which  will be  purchased  by the
aforementioned  medical equipment finance company, will make it possible for the
Company to support its internal  overhead expenses and to implement its business
plans 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 has not yet contacted  other companies on whose services the Company
depends to determine  whether such  companies'  systems are year 2000 compliant.
Although the Company  intends to make its systems year 2000 compliant (the costs
of which are not expected to be significant),  there can be no assurance that at
the year 2000 such  systems  will in fact be  compliant.  If the  systems of the
Company or other companies on whose services the Company depends,  including the
Company's  customers,  or with whom the Company's systems interface are not year
2000  compliant,  there  could be a  material  adverse  effect on the  Company's
financial condition or results of operations.
<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 1998 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 1998 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 1998 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 1998 Annual Meeting of Stockholders,
and is incorporated herein by reference.
<PAGE>
ITEM FOURTEEN-EXHIBITS AND REPORTS ON FORM 8-K

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

(a)  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)

     (22)      Subsidiary of the Registrant
<TABLE>
<CAPTION>
                                                         Percentage
     Name                  State of Incorporation     Owned by Company
     ----                  ----------------------     ----------------
<S>                               <C>                        <C>
     Viromedics, Inc.             Delaware                   61%
</TABLE>

     (23)      Consent of Grant Thornton LLP (13)

     (27)      Financial Data Schedule (13)
<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) Filed herewith.

(b)  Form 8-K Reports
     Report on Form 8-K dated April 30, 1998.
<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 thirty-first day
of July, 1998.


                         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 July 31, 1998 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 (Principal Financial
-----------------------             and Accounting Officer)
Joseph A. Giacalone

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

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

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

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

/s/ Zhen-sheng Zheng               Director
--------------------
Zhen-sheng Zheng
<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, 1998 and 1997          F-3

     Consolidated Statements of Operations for the
       years ended May 31, 1998, 1997 and 1996                        F-4

     Consolidated Statement of Changes in Stockholders'
       Equity for the years ended May 31, 1998, 1997 and 1996         F-5

     Consolidated Statements of Cash Flows for the
       years ended May 31, 1998, 1997 and 1996                        F-6

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



<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, 1998 and 1997, 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, 1998. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the 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,  1998 and 1997,  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,  1998,  in  conformity  with  generally  accepted
accounting principles.


/s/ Grant Thornton LLP
GRANT THORNTON LLP


Melville, New York
July 28, 1998
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                           CONSOLIDATED BALANCE SHEETS

                                     May 31,
<TABLE>
<CAPTION>

                                                                    1998              1997
                                                                    ----              ----  
<S>                                                             <C>                 <C>
               ASSETS
CURRENT ASSETS
     Cash and cash equivalents                                  $4,367,986          $1,753,004
     Accounts receivable                                           976,341              56,648
     Inventories                                                   678,302             953,045
     Other current assets                                          164,826              86,063
                                                                ----------          ---------- 
         Total current assets                                    6,187,455           2,848,760

PROPERTY AND EQUIPMENT, net                                        352,902             308,204
CAPITALIZED COST IN EXCESS OF FAIR
     VALUE OF NET ASSETS ACQUIRED, net                             781,373             994,469
OTHER ASSETS                                                        23,516              23,588
                                                                ----------          ---------- 
                                                                $7,345,246          $4,175,021
                                                                ----------          ---------- 
     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                        $436,730            $272,978
     Accrued warranty and customer support expenses                240,000             321,000
     Accrued professional fees                                     225,833             243,062
     Accrued commissions                                           176,553              30,389
     Dividends payable                                              62,137            
                                                                ----------           --------- 
         Total current liabilities                               1,141,253             867,429

ACCRUED WARRANTY COSTS                                             334,000             220,000
OTHER LONG-TERM LIABILITIES                                        117,000              66,630

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred  stock,  $.01 par value;  1,000,000
      shares  authorized;  225,750 shares at May 31, 1998
       issued and outstanding                                        2,258
     Common stock, $.001 par value; 110,000,000 shares authorized;
       48,531,278 and 46,782,003 shares at May 31, 1998
       and 1997, respectively, issued and outstanding               48,531              46,782
     Additional paid-in capital                                 36,458,155          28,699,219
     Accumulated deficit                                       (30,755,951)        (25,725,039)
                                                               -----------         -----------
                                                                 5,752,993           3,020,962
                                                               -----------         -----------  
                                                                $7,345,246          $4,175,021
                                                               -----------         -----------  
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                          Year ended May 31,
                                              1998               1997                  1996
                                              ----               ----                  ----
<S>                                        <C>                <C>                   <C>
Revenues
 Equipment sales                           $4,958,333         $1,625,150            $2,507,528
 Equipment rentals and services               266,731            471,412               175,600
                                           ----------         ----------            ----------  
                                            5,225,064          2,096,562             2,683,128
                                           ----------         ----------            ----------  
Costs and expenses
 Cost of sales and services                 1,543,849          1,020,047               609,136
 Selling, general and administrative        5,689,704          4,155,552             3,738,789
 Research and development                   1,595,970          1,045,184               364,455
 Depreciation and amortization                363,101            333,482               269,443
 Write-off of accounts receivable                                225,000
 Interest and financing costs                   4,057              8,511               515,451
 Interest and other income - net             (169,422)          (174,810)             (171,001)
                                            ---------          ---------             --------- 
                                            9,027,259          6,612,966             5,326,273
                                            ---------          ---------             --------- 
 NET LOSS                                  (3,802,195)        (4,516,404)           (2,643,145)

  Deemed dividend on preferred stock       (1,132,000)
  Preferred stock dividend requirement        (96,717)          
                                         ------------        -----------           -----------
 NET LOSS APPLICABLE TO
    COMMON STOCK                          $(5,030,912)       $(4,516,404)          $(2,643,145)
                                          -----------        -----------           -----------   

Net loss per common share (basic and diluted)   $(.11)             $(.10)                $(.07)
                                                -----              -----                 -----

Weighted average common shares
 outstanding (basic and diluted)           47,873,711         46,297,142            39,226,258
                                         ------------       ------------          ------------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
                        Vasomedical, Inc. and Subsidiary

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                                           Total
                                                                       Additional   Deferred      Loss                     stock-
                                 Preferred stock     Common stock        paid-in     compen-    on invest-  Accumulated   holders'
                                  Shares  Amount    Shares   Amount      capital     sation       ments       deficit      equity
                                  ------  ------    ------   ------    ----------   --------    ----------  -----------   --------
<S>                             <C>       <C>     <C>        <C>       <C>          <C>          <C>       <C>           <C>       
Balance at June 1, 1995                -       -  37,899,432 $37,899   $21,134,578  $(339,626)   $(7,370)  $(18,565,490) $2,259,991

Common stock issued to consultant
  in connection with debt financing                  600,000     600       599,400                                          600,000
Common stock issued in lieu of cash interest          89,096      89        89,007                                           89,096
Conversion of debt                                   275,000     275       274,725                                          275,000
Exercise of warrants                               3,340,585   3,341     2,319,628                                        2,322,969
Warrants issued to consultants                                              10,000                                           10,000
Amortization of deferred compensation                                                  169,813                              169,813
Realized loss on sale of investments                                                               7,370                      7,370
Net loss                                                                                                     (2,643,145) (2,643,145)
                                -------   ------  ----------  ------    ----------    --------     -----    -----------  ----------
Balance at May 31, 1996               -        -  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
                                 -------  ------  ----------  -------  -----------  ----------   -------   ------------  ----------

<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
<PAGE>


                        Vasomedical, Inc. and Subsidiary

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                        Year ended May 31,
                                                                        -----------------   
                                                        1998                    1997                     1996
                                                        ----                    ----                     ----
<S>                                                 <C>                      <C>                      <C>
Cash flows from operating activities
  Net loss                                          $(3,802,195)             $(4,516,404)             $(2,643,145)
                                                    -----------              -----------              -----------
  Adjustments to reconcile net loss
    to net cash used in operating activities
      Depreciation and amortization                     363,101                  333,482                  269,443
      Provision for losses                                                       225,000
      Amortization of deferred compensation                                      169,813                  169,813
      Amortization of deferred loan costs                                                                 272,555
      Warrants issued to consultants                                                                       10,000
      Changes in operating assets and liabilities
        Accounts receivable                            (919,693)                 729,317               (1,010,965)
        Inventories                                     389,382                 (389,773)                (563,272)
        Other assets                                    (78,691)                  74,924                  (54,338)
        Accounts payable, accrued expenses and 
         other current liabilities                      211,687                 (113,978)                 820,006
        Other liabilities                               164,370                   77,000                  206,000
                                                     ----------               ----------               ----------
                                                        130,156                1,105,785                  119,242
                                                     ----------               ----------               ----------  
     Net cash used in operating activities           (3,672,039)              (3,410,619)              (2,523,903)
                                                     ----------               ----------               ----------  
Cash flows from investing activities
  Purchase of investments                                                                                 (20,034)
  Proceeds from sale of investments                                                                       655,556
  Purchase of property and equipment                   (309,342)                (216,067)                (186,391)
                                                     ----------               ----------               ----------  
     Net cash (used in) provided by investing 
      activities                                       (309,342)                (216,067)                 449,131
                                                     ----------               ----------               ----------  
Cash flows from financing activities
  Proceeds from exercise of options and warrants        484,463                  941,884                2,322,969
  Proceeds from issuance of preferred stock, net      6,111,900
  Proceeds from issuance of long-term debt, net                                                         3,708,000
  Debt conversion fees                                                           (10,000)
                                                      ---------               ----------                ---------
     Net cash provided by financing activities        6,596,363                  931,884                6,030,969
                                                      ---------               ----------                --------- 
      NET INCREASE (DECREASE) IN
        CASH AND CASH EQUIVALENTS                     2,614,982               (2,694,802)               3,956,197
Cash and cash equivalents - beginning of year         1,753,004                4,447,806                  491,609
                                                     ----------               ----------               ----------  
Cash and cash equivalents - end of year              $4,367,986               $1,753,004               $4,447,806
                                                     ----------               ----------               ----------  
Non-cash investing and financing activities 
 were as follows:
  Deemed dividend on preferred stock                 $1,132,000
  Issuance of common stock in lieu of preferred 
   dividends                                             34,580
  Issuance of common stock upon conversion of debt                            $3,344,575                 $275,000
  Issuance of common stock in lieu of cash interest                                                        89,096
  Issuance of common stock for services                                                                   600,000

<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>


                        Vasomedical, Inc. and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           May 31, 1998, 1997 and 1996

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  enhanced  external
counterpulsation system ("EECP "), a microprocessor-based medical device for the
noninvasive, atraumatic treatment of patients with coronary artery disease. EECP
is  marketed  worldwide  to  hospitals,  clinics and other  cardiac  health care
providers.  To date,  substantially  all of the  Company's  revenues  have  been
generated from customers in the United States.
    In fiscal 1992, the Company,  through the purchase of a 55% interest in Vaso
Interim  Corp.  ("Vaso  Interim"),  acquired the worldwide  exclusive  marketing
rights (except in China) to EECP 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 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.  The  acquisition of
Vasogenics was recorded as a purchase  transaction.  The Company fair valued the
5,000,000  shares of common stock it issued in  consideration of the acquisition
at  $1,465,000  or 75% of the quoted  market  price on the  acquisition  date to
recognize the restriction on the subsequent  sale of such shares.  The excess of
the  purchase  price  over the fair  value of assets  acquired  and  liabilities
assumed,   aggregating   $1,492,000,   was   capitalized  in  the   accompanying
consolidated balance sheet.
    EECP , which had undergone  clinical  studies at the State University of New
York's University Medical Center at Stony Brook,  received  marketing  clearance
from  the  Food  and  Drug  Administration  ("FDA")  under  a  510(k)  premarket
notification in February 1995.

    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.

    Long-lived Assets
    The Company  reviews for the  impairment  of  long-lived  assets and certain
identifiable intangibles (including the capitalized cost in excess of fair value
of net assets acquired and property and equipment) whenever events or changes in
circumstances  indicate  that  the  carrying  amount  of the  asset  may  not be
recoverable.  An impairment loss would be recognized when estimated  future cash
flows expected to result from the use of the asset and its eventual  disposition
is less than its  carrying  amount.  The  Company  has not  identified  any such
impairment  loss.  The  capitalized  cost in excess of fair  value of net assets
acquired  arising from the  acquisition  of Vasogenics  is being  amortized on a
straight-line basis over a period of seven years.
<PAGE>
    Revenue Recognition
    The  Company  recognizes  revenue  from the sale of its EECP  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  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 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 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
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
     In fiscal 1998,  the Company  adopted  Statement  of  Financial  Accounting
Standards  No. 128 ("SFAS No.  128"),  "Earnings  Per Share",  which  supercedes
Accounting  Principles Board Opinion No. 15. Pursuant to SFAS No. 128,  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 per 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. For the
fiscal years ended May 31, 1998, 1997 and 1996,  there is no difference  between
basic and diluted  net loss per share or between the basic and diluted net  loss
per share as previously  reported.  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
provided in Note D, pro forma  disclosure of the effect on net loss and loss per
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.
<PAGE>
NOTE B - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
                                                                      May 31,
                                                                      ------
    Property and equipment is summarized as follows:           1998           1997
                                                               ----           ----  
         <S>                                                 <C>            <C>     
         Office, laboratory and other equipment              $261,964       $151,344
         EECP  units under operating leases                   186,287        281,336
         Furniture and fixtures                                81,232         68,808
         Leasehold improvements                                89,760         89,760
                                                             --------       --------
                                                              619,243        591,248
         Less accumulated depreciation and amortization      (266,341)      (283,044)
                                                             --------       --------
                                                             $352,902       $308,204
                                                             --------       --------
</TABLE>
NOTE C - STOCKHOLDERS' EQUITY AND WARRANTS
Fiscal 1996
    In July 1995, the Company sold $4,000,000  principal  amount of 7% five-year
Convertible  Debentures (the "Notes"),  convertible into shares of the Company's
common stock at $1.00 per share commencing December 1, 1995 at the option of the
holder.  The  conversion  price was equivalent to the quoted market price of the
Company's common stock when the transaction was negotiated. Deferred loan costs,
aggregating $892,000, incurred in connection with obtaining the Notes were being
amortized over the life of the Notes. In fiscal 1996,  $275,000 principal amount
of Notes was converted  into 275,000  shares of the Company's  common stock.  In
connection with the sale of the Notes,  the Company issued 600,000 shares of its
common stock to the broker/finder for services rendered. These shares, valued at
$600,000  (such  value  being  equivalent  to the  quoted  market  price  of the
Company's common stock), were included in deferred loan costs.
    In July 1995,  the Company  issued 89,096 shares of its common stock in lieu
of $89,096 of interest previously accrued for, at the option of the lender.
    The Company  issued  warrants to an outside  consultant to purchase  100,000
shares of the  Company's  common stock at $1.44 per share (then  current  market
value)  exercisable  through February 2001 for services rendered to the Company.
Based upon trading history,  stock price volatility and other relevant  factors,
management fair valued those warrants issued at $.10 per share.

Fiscal 1997
    In June 1996, the remaining  $3,725,000 in outstanding  principal  amount of
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 has no voting rights and is convertible into common stock of the
Company at an effective  conversion  price of the lower of (i) $2.18 or (ii) 85%
of the  average  closing  bid of the  Company's  common  stock  for the five (5)
trading  days  immediately  preceding  the  conversion  date,  as defined in the
Certificate of Designation of the convertible preferred stock. In addition,  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.  Subsequent to May 31, 1998,
8,250 shares of Series B preferred  stock were  converted into 149,536 shares of
common stock.
<PAGE>
     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 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  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 will be recognized from the date of
issuance through the date such preferred stock is 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 will  recognize the remaining
portion of the deemed  dividend of $661,000 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.

Warrants
    Warrant  activity  for the  years  ended  May 31,  1996,  1997  and  1998 is
summarized as follows:
<TABLE>
<CAPTION>

                                                Non-employee
                                                  Directors      Employees         Consultants            Total        Price Range
                                                ------------     ---------         -----------            -----        -----------
<S>                                               <C>            <C>                 <C>                <C>            <C>    
Balance at June 1, 1995                           1,275,000      2,595,000           6,728,539          10,598,539     $.25 - $5.00
  Issued                                                  -              -             100,000             100,000            $1.44
  Exercised                                        (100,000)      (585,000)         (2,655,585)         (3,340,585)    $.25 - $1.03
  Canceled/retired                                        -        (35,000)         (1,985,854)         (2,020,854)    $.73 - $5.00
                                                  ---------      ---------           ---------           ---------    -------------
Balance at May 31, 1996                           1,175,000      1,975,000           2,187,100           5,337,100     $.25 - $1.81
  Exercised                                               -        (25,000)           (827,890)           (852,890)    $.41 - $1.81
  Canceled/retired                                        -              -            (141,209)           (141,209)   $1.10 - $1.81
                                                  ---------      ---------           ---------           ---------    -------------
Balance at May 31, 1997                           1,175,000      1,950,000           1,218,001           4,343,001     $.25 - $1.50
  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
                                                  ---------      ---------           ---------           ---------     ------------
Number of shares exercisable                      1,125,000      1,595,000           1,828,712           4,548,712     $.38 - $2.18
                                                  ---------      ---------           ---------           ---------     ------------
<FN>
    The  weighted-average  fair value of warrants granted during fiscal 1998 and
1996 was $.80 and $.10, respectively.
</FN>
</TABLE>

    The following table summarizes information about warrants outstanding at May
31, 1998:

<TABLE>
<CAPTION>
                                 Warrants Outstanding             Warrants Exercisable
                        ---------------------------------------  ----------------------
                                         Weighted    
                            Number       Average       Weighted     Number      Weighted  
                        Outstanding at   Remaining      Average  Exercisable at Average
                         May 31, 1998  Contractual     Exercise    May 31, 1998 Exercise
Range of Exercise Prices                Life (yrs.)      Price                    Price
----------------------------------------------------------------------------------------
<S>                       <C>               <C>          <C>       <C>           <C> 
$.38  -  $.56              2,500,000         1.4          $.42      2,175,000      $.42
$.91  - $1.25                895,000         0.4         $1.02        895,000     $1.02
$1.44 - $1.50                400,000         0.9         $1.49        400,000     $1.49
$2.08 - $2.18              1,078,712         4.5         $2.13      1,078,712     $2.13
                           ------------------------------------------------------------
                           4,873,712         1.9         $1.00      4,548,712     $1.04
                           ------------------------------------------------------------
</TABLE>
<PAGE>
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.

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.

    Activity under all the plans is summarized as follows:
<TABLE>
<CAPTION>
                                                        Outstanding Options
                                            ----------------------------------------------
                           Shares Available  Number of        Exercise     Weighted Average
                              for Grant      Shares       Price per Share   Exercise Price
                          ----------------------------------------------------------------

<S>                           <C>            <C>            <C>                 <C> 
Balance at June 1, 1995       1,800,000      25,000         $.91  -  $1.03      $.93
  Options granted               (77,418)     77,418                   $.78      $.78
                              ------------------------------------------------------
Balance at May 31, 1996       1,722,582      102,418        $.78  -  $1.03      $.81
  Options granted              (943,675)     943,675       $2.00  -  $3.44     $3.21
  Options canceled               20,000      (20,000)                $3.44     $3.44
                              ------------------------------------------------------
Balance at May 31, 1997         798,907    1,026,093        $.78  -  $3.44     $2.97
  Shares authorized           1,800,000            -                     -         -
  Plans terminated             (798,907)           -                     -         -
  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         755,950    2,060,143        $.78  -  $3.44     $2.44
                              ------------------------------------------------------

</TABLE>
<PAGE>
    The following table summarizes  information about stock options  outstanding
at May 31, 1998:

<TABLE>
<CAPTION>
                                   Options Outstanding           Options Exercisable
                         ------------------------------------- -----------------------
                                           Weighted 
                              Number       Average    Weighted   Number       Weighted
                         Outstanding at    Remaining   Average Exercisable    Average
                          May 31, 1998    Contractual Exercise      at        Exercise
Range of Exercise Prices                  Life (yrs.)   Price  May 31, 1998     Price
--------------------------------------------------------------------------------------
<S>                         <C>               <C>      <C>       <C>            <C> 
$.78   -  $1.03                97,418         6.7       $.80      97,418         $.80
$2.00  -  $2.21             1,195,725         9.1      $1.93      71,675        $2.09
$3.44                         767,000         8.0      $3.44     279,000        $3.44
                         -------------------------------------------------------------
                            2,060,143         8.6      $2.44     448,093        $2.65
                         -------------------------------------------------------------
</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 by
SFAS No.  123 for  awards  granted  after  May 31,  1995 as if the  Company  had
accounted  for its  stock-based  awards  under the fair value method of SFAS 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,       1998           1997           1996
-------------------------       ----           ----           ----
<S>                             <C>            <C>            <C>            
Expected life (years)              5              5              5              
Expected volatility               85%            85%            85%
Risk-free interest rate         5.68%          6.69%          5.90%
</TABLE>


    The  following are the pro forma net loss and net loss per share amounts for
fiscal 1998,  1997 and 1996, as if compensation  expense for stock-based  awards
had been determined based on their estimated fair value at the date of grant:

<TABLE>
<CAPTION>
                                   1998                 1997                1996
                                   ----                 ----                ----
<S>                             <C>                  <C>                  <C>         
Pro forma net loss              $(5,702,635)         $(5,607,637)         $(2,685,725)
Pro forma net loss per share          $(.12)               $(.12)               $(.07)
</TABLE>

    The weighted-average  fair value of options granted during fiscal 1998, 1997
and 1996 was $1.34,  $2.29 and $.55,  respectively.  At May 31, 1998, there were
19,625,364  shares of authorized but unissued common stock reserved for issuance
under all stock option plans, stock warrants 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 will purchase,  subject to credit  approval,  the
EECP  system on a  non-recourse  basis and  lease  the  system to the  Company's
customers.  During fiscal 1998, 1997 and 1996,  approximately  13%, 54% and 51%,
respectively, of the Company's revenues were derived through such transactions.

    In fiscal 1998, the Company had sales to one customer  accounting for 10% of
the Company's revenues.  In fiscal 1997, the Company had sales to two customers,
each accounting for over 10% of the Company's sales,  both of which are included
above,  aggregating 43% of the Company's  revenues.  In fiscal 1996, the Company
had  sales to four  customers,  each  accounting  for over 10% of the  Company's
sales, two of which are included above, aggregating 54% of such revenues.
<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,
                                                      -------------------- 
                                                      1998            1997
                                                      ----            ---- 
   <S>                                             <C>             <C>
   Deferred tax assets        
   Net operating loss and other carryforwards      $10,908,000     $9,226,000
   Accrued compensation                                120,000        148,000
   Other                                               268,000        304,000
                                                   -----------     ----------
        Total gross deferred tax assets             11,296,000      9,678,000
   Valuation allowance                             (11,296,000)    (9,678,000)
                                                   -----------     ----------
                                                   $         -     $        -
                                                   -----------     ----------
</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,  1998,  the  Company had net  operating  loss  carryforwards  for
Federal income tax purposes of  approximately  $28,400,000,  expiring at various
dates through 2013.

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, 1998, are summarized as follows:
<TABLE>
<CAPTION>
                          Fiscal Year          Amount
                          -----------          ------
                              <S>             <C>     
                              1999            $569,000
                              2000             569,000
                              2001             391,000
                              2002              93,000
                                            ---------- 
                                            $1,622,000
                                            ---------- 
</TABLE>
Lease
   The  Company  occupies  office  and  warehouse  space  under a  noncancelable
operating  lease which  expires on October 31, 2000.  Rent expense was $121,000,
$118,000, and $111,000 in fiscal 1998, 1997, and 1996, respectively.
    Approximate  aggregate minimum annual obligations under this lease agreement
and  other  equipment  leasing  agreements  at May 31,  1998 are  summarized  as
follows:
<TABLE>
<CAPTION>
                          Fiscal Year          Amount
                          -----------          ------
                              <S>             <C>     
                              1999            $152,000
                              2000             157,000
                              2001              69,000
                              2002              10,000
                              2003               2,000
                                              --------
                                              $390,000
                                              --------
</TABLE>
<PAGE>
SEC Investigation
    In  February  1995,  the  Company  received  a subpoena  duces  tecum by the
broker-dealer  branch of the Northeast  Regional  Office of the  Securities  and
Exchange  Commission  ("SEC")  requesting  certain  documents  from the  Company
pursuant to a formal order of private  investigation in connection with possible
registration and reporting violations. The Company complied with the request for
such   documents.   Whatever  the  ultimate   objectives  of  the   Commission's
fact-finding   inquiry  may  be,  the  Company   intends  to  cooperate  as  the
investigation  proceeds.  As  stated  in the  subpoena,  the  "investigation  is
confidential  and should not be construed as an indication by the  Commission or
its staff that any violations of law have occurred, nor should it be interpreted
as an adverse reflection on any person,  entity or security." This investigation
is in its early stages and the Company is unable to determine the  likelihood of
an unfavorable outcome or the existence or amount of any potential loss.

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

     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.  Management
believes that this action is fully  covered by insurance.  This matter is in its
preliminary  stages and the Company is unable to determine the  likelihood of an
unfavorable outcome or the existence or amount of any potential loss.

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, 1998 and 1997.

Agreement with Foshan
    In  connection  with the  acquisition  of  Vasogenics  in 1995,  the Company
assumed  commitments  under an agreement,  expiring  November 2008,  with Foshan
Analytical  Instrument Factory ("Foshan"),  a Chinese company,  for the contract
manufacture of its current EECP model, subject to certain performance standards,
as defined. At May 31, 1998, the Company had outstanding purchase commitments of
$504,000.

Related Party
    In fiscal 1996,  payments for office  facilities,  services and equipment of
$42,000 were made to an entity whose principal  stockholder is a director of the
Company.
<PAGE>

                                  EXHIBIT INDEX

Exhibit No.

(10.1) Extension  and  Modification  Agreement  dated March 12, 1998 between the
       Registrant and Anthony Viscusi

(10.2) Extension  and  Modification  Agreement  dated March 12, 1998 between the
       Registrant and Anthony Peacock

(10.3) Extension  and  Modification  Agreement  dated March 12, 1998 between the
       Registrant and John Hui

(10.4) Extension  and  Modification  Agreement  dated March 12, 1998 between the
       Registrant and Joseph Giacalone

(23)   Consent of Grant Thornton LLP

(27)   Financial Data Schedule