UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-K

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934 For the fiscal year ended May 31, 2001

[ ]  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 August 14, 2001,  based on the average price on that date,
was  $214,000,000.  At August 14, 2001, the number of shares  outstanding of the
issuer's common stock was 57,210,453.


                      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.
<PAGE>
                                     PART I

ITEM ONE - BUSINESS

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

General

     Vasomedical, Inc. (the Company),  incorporated in Delaware in July 1987, is
engaged in the  research,  development  and  commercialization  of  systems  and
equipment  designed to provide  non-invasive,  outpatient  treatment of patients
with cardiovascular  disease.  The Company's lead product,  its EECP(R) ("EECP")
enhanced external  counterpulsation  system, is a patented  microprocessor-based
device  that  delivers  a  retrograde  arterial  pressure  wave  to  the  heart,
increasing coronary perfusion and reducing  ventricular  afterload.  The therapy
serves to  increase  circulation  in areas of the heart with less than  adequate
blood supply and the Company believes it may restore systemic vascular function.
EECP  therapy  offers  dramatic  relief of symptoms to angina  sufferers  who no
longer   respond   to   medication   or  are  poor   candidates   for   invasive
revascularization procedures such as bypass surgery or balloon angioplasty. This
system is marketed worldwide to hospitals, clinics and other cardiac health care
providers.  EECP is  currently  indicated  for use in  patients  with  stable or
unstable angina, acute myocardial  infarction and cardiogenic shock. The Company
is also actively engaged in research to determine the potential benefits of EECP
therapy in the setting of acute coronary syndromes, as well as in the management
of other major vascular disease states,  including  congestive heart failure and
diabetes.

The EECP Enhanced External Counterpulsation System

General Discussion

     Cardiovascular disease (CVD) is the leading cause of death in the world and
is among the top three diseases in terms of healthcare  spending in nearly every
country.  CVD claimed  approximately  950,000 lives in the United States in 1998
and was  responsible for 1 of every 2.5 deaths.  The American Heart  Association
(AHA)  reports in its 2001 Heart and Stroke  Statistical  Update  that,  if high
blood pressure is included,  approximately 60 million Americans suffer from some
form of  cardiovascular  disease.  Among these,  12 million have coronary artery
disease,  6.4 million of whom suffer from angina  pectoris,  a painful and often
debilitating  complication  caused by  obstruction  of the arteries  that supply
blood to the  myocardium or heart muscle,  with an additional  350,000 new cases
seen annually.  Medications,  including  vasodilators,  are often  prescribed to
increase  blood  flow to the  coronary  arteries.  When  drugs  fail or cease to
correct the problem, invasive  revascularization  procedures such as angioplasty
and coronary stent placement,  as well as coronary artery bypass grafting (CABG)
are employed. Despite the success of these procedures in lowering the death rate
from cardiovascular  disease and allowing many to live longer lives,  restenosis
or  reocclusion  of the affected  vessels  remains a problem.  Restenosis  rates
currently reported in the literature for angioplasty and stenting range from 18%
- 30%.  Half of all vein grafts in coronary  artery  bypass  procedures  exhibit
localized or diffuse narrowings within approximately ten years.

     In February  1995,  the Company  received  510(k)  clearance  to market the
second-generation   version  of  its  EECP  therapy   system,   the  MC2,  which
incorporated a number of technological improvements over the original system. In
addition,  in December 2000, the Company received 510(k) clearance to market its
third generation  system,  the TS3. The FDA's clearance in all cases was for the
use of EECP  therapy in the  treatment  of  patients  suffering  from  stable or
unstable angina pectoris, acute myocardial infarction and cardiogenic shock.

                                       1
<PAGE>
The System

     The EECP therapy  systems MC2 and TS3  (collectively,  the  system(s))  are
advanced  treatment  systems  utilizing  fundamental  hemodynamic  principles to
relieve angina pectoris.  Treatment is administered to patients on an outpatient
basis in daily one-hour  sessions,  5 days per week over seven weeks for a total
of 35 treatments.

     During EECP therapy,  the patient lies on a bed while wearing three sets of
inflatable  pressure  cuffs,  resembling  oversized blood pressure cuffs, on the
calves, the upper and lower thighs and buttocks.  The cuffs inflate sequentially
-- via  computer-interpreted  ECG  signals  --  starting  from  the  calves  and
proceeding  upward during the resting phase of each heartbeat  (diastole).  When
the  heart  pumps  (systole),  all three  cuffs  instantaneously  deflate.  This
sequential  "squeezing"  of the legs  creates a pressure  wave that forces blood
from the legs to the heart.  To  coordinate  the  inflation and deflation of the
cuffs  with  the  beating  heart,  the  heart  rate  and  rhythm  are  monitored
constantly.  Precise  timing  means that each wave of blood is  delivered to the
heart when it will do the most good. This surge of circulation  insures that the
heart does not have to work as hard to pump large  amounts of blood  through the
body,  and that more blood is forced into the  coronary  arteries  which  supply
energy to the heart muscle or myocardium.

     While the precise  mechanism  of action  remains  unknown,  there is strong
hypothetical  evidence to suggest that EECP triggers a  neuro-hormonal  response
that  induces  the  production  of growth  factors and  dilates  existing  blood
vessels, thus fostering the recruitment of collateral blood vessels.  These tiny
collateral  vessels,  it is theorized,  then bypass  current  blockages and feed
blood to areas of the heart that are receiving an inadequate supply.

     Circulation improvement is further induced or reinforced by the fact that a
course of EECP treatment  represents sustained and moderately vigorous exercise,
even  though  passive  in  nature,  that is much more  than the often  sedentary
patient has been able to attempt previously.

     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.  Data reported in the April 2000 issue of Clinical Cardiology showed
a five-year  survival  rate for those who respond to EECP therapy of 88%, a rate
similar to those seen in contemporary  surgical  bypass and angioplasty  trials,
despite  the fact that many of the  patients  who  underwent  EECP  therapy  had
already  failed  previous  attempts  at  revascularization.  In  addition,  data
collected  by the  International  EECP  Patient  Registry at the  University  of
Pittsburgh  Graduate  School of Public  Health  points to sustained  lowering of
anginal severity and frequency of attacks at six, twelve and twenty-four  months
post-treatment.

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 forty 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
current EECP systems, such as the computerized electrocardiographic gating, that
makes sequential cuff inflation possible.  As the technology improved,  however,
it became apparent that both internal (i.e.  intra-aortic  balloon  pumping) 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"  sequentially  inflating
EECP  device that  incorporated  a third cuff for the  buttocks.  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 the State University of
New York at Stony Brook (Stony Brook) to undertake a number of open studies with
EECP  between  1989  and 1996 to  reproduce  the  Chinese  results,  using  both
subjective   and   objective   endpoints.   These   studies,   though  open  and
non-randomized, showed statistical improvement in exercise tolerance by patients
as evidenced by  thallium-stress  testing and partial or complete  resolution of
coronary perfusion defects as evidenced by radionuclide  imaging studies. All of
these  results have been  reported in the  literature  and support the assertion
that EECP therapy is an effective and durable  treatment for patients  suffering
from chronic angina pectoris.

     In  1995,   the  Company   began  a  large   randomized,   controlled   and
double-blinded multicenter clinical study (MUST-EECP) at four leading university
hospitals in the United States to confirm the patient  benefits  observed in the
open  studies  conducted  at Stony  Brook and to provide  definitive  scientific

                                       2
<PAGE>
evidence of EECP therapy's  effectiveness.  Initial participating sites included
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 the Yale University School of Medicine. These institutions were later joined
by Loyola University, the University of Pittsburgh and Grant/Riverside Methodist
Hospitals. MUST-EECP was completed in July 1997 and the results presented at the
annual  meetings of the  American  Heart  Association  in November  1997 and the
American  College of  Cardiology  in March 1998.  The results of MUST-EECP  were
published in the Journal of the American  College of Cardiology  (JACC), a major
peer- review medical journal, in June 1999.

     This 139 patient study, which included a placebo control group, showed that
EECP therapy was a safe and effective  treatment  option for patients  suffering
from  angina  pectoris,  including  those  on  maximal  medication  and for whom
invasive  revascularization  procedures were no longer an option. The results of
the MUST-EECP  study confirmed the clinical  benefits  described in earlier open
trials,  namely a decline in anginal  frequency,  an  increase in the ability to
exercise and a decrease in exercise-induced  signs of myocardial ischemia.  Data
collected by the International EECP Patient Registry (IEPR) at the University of
Pittsburgh  Graduate  School of Public Health closely mirror the results seen in
the MUST-EECP trial.

     In fiscal 1999, the Company completed a quality-of-life  study with EECP in
the same institutions and with the same patients that participated in MUST-EECP.
Two highly regarded standardized means of measurement were used to gauge changes
in patients outlook and ability to participate in normal daily living during the
treatment phase and for up to 12 months after treatment.  Results of this study,
which have been presented at major scientific  meetings,  show that the group of
patients receiving EECP enjoyed significantly improved aspects of health-related
quality of life compared to those who received a sham treatment.  Publication of
this work in a peer-review journal is expected in fiscal 2002.

     As part of its program to expand the therapy's  indications  for use beyond
the  treatment of angina,  the Company  applied for and received FDA approval in
April 1998 to study, under an  Investigational  Device Exemption (IDE) protocol,
the application of EECP in the treatment of congestive heart failure (CHF). Data
from the AHA  indicates  that CHF  affects  nearly 5  million  Americans  and 22
million worldwide and is the single most frequent cause of hospitalization among
people age 65 and older.  The incidence of new cases of heart failure is 550,000
annually  and  rising.  An aging  population  and an  increase  in the number of
patients who survive heart attacks are the primary  engines  behind this rise in
new cases.  For most CHF  patients,  there are few  accepted  forms of treatment
beyond medical  management,  though left ventricular  assist devices (LVADs) and
the use of cardiac resynchronization and implantable  defibrillators continue to
advance.

     A  32-patient  feasibility  study  was  conducted   simultaneously  at  the
University of  Pittsburgh,  the  University of California  San Francisco and the
Grant/Riverside Methodist Hospitals in Columbus, Ohio. The results of this study
were  presented  at the 49th  Scientific  Sessions  of the  American  College of
Cardiology  in March  2000 and the Heart  Failure  Society of  America's  Annual
Meeting in September 2000. This study concluded that EECP therapy was beneficial
to left  ventricular  function  in heart  failure  patients  and may be a useful
adjunct to current medical therapy.

     In summer  2000,  an IDE  supplement  to  proceed  with a pivotal  study to
demonstrate the efficacy of EECP therapy in most types of heart failure patients
was  approved.  This study,  known as PEECH  (Prospective  Evaluation of EECP in
Congestive  Heart  Failure),  began  patient  enrollment  in  March  2001 and is
expected to take approximately two years to complete, including data compilation
necessary for submission to FDA for premarket  approval.  The PEECH trial, which
is expected to involve eighteen  centers and enroll 180 patients,  will evaluate
improvements in exercise  capacity and quality of life, as well as the reduction
in the need for certain medications that CHF patients are typically  prescribed.
Centers  participating in the PEECH trial include,  among others,  the Cleveland
Clinic, Mayo Clinic, Ochsner Clinic, Scripps Clinic, Texas Heart Institute,  the
University  of  California  at San  Diego  Medical  Center,  the  University  of
California at Los Angeles Medical Center,  University  Hospital at the UMDNJ/New
Jersey  Medical  School,  the  University of Pittsburgh  Medical  Center and the
Cardiovascular  Research  Institute.  In July 2001, the Company reached a formal
agreement with the FDA that the key parameters of its  investigational  plan for
studying  the use of EECP in patients  with CHF were  appropriate  to access the
safety and  effectiveness of EECP as an adjunct therapy for heart failure.  Such
agreement with the FDA could facilitate the premarket  approval of EECP for this
indication.

     The Company has recently  initiated  discussions with leading heart failure
clinicians  in Europe to design and  implement  an efficacy  study of the use of
EECP therapy in heart failure.  This study is intended to provide  complimentary
data to that  provided  by the PEECH  trial  and will be  tailored  to  clinical
practices in Europe.

     The  International  EECP Patient  Registry at the  University of Pittsburgh
Graduate  School of Public Health was  established  in January 1998 to track the
outcomes of patients who have  undergone EECP therapy.  As of this  publication,
more than one hundred  centers  participate  in the registry and data from 5,000

                                       3
<PAGE>
patient  records has been  entered.  The IEPR is a vital  source of  information
about the  effectiveness  of EECP in a  real-world  environment  for the medical
community  at large.  For this reason,  the Company will  continue to provide an
ongoing grant to fund the Registry to publicize data that may assist  clinicians
in  delivering  optimal care to patients.  Recently  released data from the IEPR
show that  patients  continue  to receive  dramatic  benefit at six,  twelve and
twenty-four months following the completion of their course of EECP therapy.

The Company's Plans

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

     (a)  Maximize its  penetration  of the current  angina  market  through the
          initiation  of a  stepped-up  campaign to market the  benefits of EECP
          therapy directly to patients and clinicians.

     (b)  Enlarge the market opportunity,  short and long-term, by (i) advancing
          the progress of marketplace  acceptance of EECP as a common  treatment
          for the early and mid-stage (Class I and II) angina populations,  (ii)
          increasing  the  reimbursed  patient  base  for  the  existing  angina
          indication, (iii) drive the clinical validation process for acceptance
          of EECP as a primary or  complimentary  therapy for  congestive  heart
          failure,   diabetes  disease   management,   peripheral  vascular  and
          cerebrovascular  conditions  and (iv) renew the exposure of EECP as an
          already  approved  therapy  for  acute  coronary  conditions,  such as
          myocardial infarction and cardiogenic shock.

     (c)  Continue the development of EECP in international markets, principally
          through the establishment of a distribution network.

     (d)  Continue to 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.

     (e)  Continue  product  development  efforts to improve the EECP system and
          expand  its  intellectual  property  estate by filing  for  additional
          patents.

     (f)  Engage in educational campaigns for providers and medical directors of
          third party insurers designed to highlight the  cost-effectiveness and
          quality-of-life  advantages  of  EECP  therapy  in  order  to  broaden
          coverage policies and process claims more rapidly for EECP services.

     (g)  Publish the results of its long-term quality-of-life outcomes study in
          a major peer-review medical journal in fiscal 2002.

     (h)  Invest in  creative  partnerships  with  others  who have  distinctive
          competencies or delivery  capabilities for serving the  cardiovascular
          and disease management marketplace.

     (i)  Continue to provide an ongoing  grant to fund the  International  EECP
          Patient  Registry at the University of Pittsburgh  Graduate  School of
          Public  Health  to  publicize  key  information  relating  to  patient
          outcomes.

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
Congestive Heart Failure or CHF A condition in which the heart is unable to pump
     blood  efficiently  enough  to meet the  body's  demands.  The  circulatory
     systems of CHF patients become  congested when the heart fails to empty its
     chambers  sufficiently,  leading to an  accumulation in the chest and lower
     limbs
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

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<PAGE>

Percutaneous  Transluminal  Coronary  Angioplasty  or PTCA - insertion of a wire
     into a coronary  artery to which a balloon or other  instrument is attached
     for the purpose of widening a narrowed vessel
Stenosis - the narrowing of a blood vessel's diameter
Systole - contracting period during which the heart is pumping blood to the rest
     of the body
Thallium - an imaging  medium used to detect areas of ischemia  within the heart
     muscle

Sales and Marketing

Domestic Operations

     The Company  sells its EECP  systems to  treatment  providers in the United
States  through a direct sales force that is  supported  by an in-house  service
organization.  The Company's sales force has  effectively  tripled since January
2000 and is now comprised of twenty sales representatives, including management.
The sales team is expected to  continue to grow at a pace  necessary  to achieve
the Company's  growth  objectives.  Independent  representatives,  who have been
employed to extend the reach of the Company's  sales effort in the past, will be
utilized on a limited basis where sufficient geographic coverage is not achieved
by the  Company's  direct  sales  force.  The  efforts  of the  Company's  sales
organization are further supported by a field-based staff of clinical  educators
who are responsible for the on-site training and certification of physicians and
therapists as new centers are established.  Training generally takes three days.
These centers are closely  monitored and their charts reviewed for several weeks
following the initial  training of the center's  clinicians to ensure  treatment
guidelines are being appropriately followed. This clinical applications group is
also  responsible for training and  certification of new personnel at each site,
as well as for updating providers on new clinical  developments relating to EECP
therapy.

     The expanded  sales force has allowed the Company to focus more intently on
sales to  National  Accounts.  The  Company  plans to  continue  developing  its
relationships  with such major U.S. hospital groups as Tenet Healthcare,  Kaiser
Permanente,  Health South,  Columbia HCA, the Veterans  Administration  and with
other cardiac care operations that have plans for nationwide expansion. To date,
the  Company  has  entered   into   agreements   with  three  group   purchasing
organizations:  Amerinet,  Magnet and MedAxiom.  In addition, in April 2001, the
Company   entered   into  a   co-promotional   agreement   with   CardioDynamics
International  Corporation,  a market leader in Impedance Cardiography (ICG), to
market the  companies'  respective  noninvasive  technologies  to physicians and
hospitals throughout the US.

     Vasomedical's continuing transformation to a more commercial, market-driven
company will be reflected in its marketing activities planned for 2002. Included
among these activities are a national media campaign and a WEB-based promotional
program  designed to  accelerate  patient-driven  demand for the  therapy  while
heightening  awareness among clinicians.  Additional  activities are expected to
include journal advertising, publication of EECP-related newsletters, support of
physician education programs, exhibition at national, international and regional
medical  conferences,  as  well  as  sponsorship  of  seminars  at  professional
association  meetings.  All of  these  programs  are  designed  to  support  the
Company's field sales organization.

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

International Operations

     One of the Company's key objectives is to appoint  distributors in exchange
for  exclusive  marketing  rights  to EECP in their  respective  countries.  The
Company  currently  has  distribution  agreements  for Canada,  the Middle East,
India,  Pakistan,  Greece,  the  United  Kingdom,  Italy and the Far East.  Each
distribution  agreement  contains a number of requirements  that must be met for
the distributor to retain exclusivity,  including minimum performance standards.
In most cases,  distributors  must  either  obtain an  FDA-equivalent  marketing
clearance  or establish  confirmation  clinical  evaluations  conducted by local
opinion leaders in cardiology. Each distributor is responsible for obtaining any
required  approvals and  maintaining  an  infrastructure  to provide  post-sales
support,  including clinical training and product maintenance  services. In July
2000, the Company  received its medical device license to market its EECP system
in  Canada.  However,  there  can be no  assurance  that  all  of the  Company's
distributors  will be  successful  in obtaining  proper  approvals  for the EECP
system  in  their  respective  countries  or  that  these  distributors  will be
successful  in  their  marketing  efforts.  The  Company  plans  to  enter  into
additional  distribution  agreements to enhance its  international  distribution
base.  There can be no assurance that the Company will be successful in entering
into any additional distribution agreements.

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<PAGE>
     To date,  revenues from international  operations have not been significant
(fiscal 2001  revenues  approximated  5%) but are expected to increase in future
periods.  Toward that end, in June 2001,  the Company  hired a Director of Sales
and Marketing for Europe.  Marketing  activities  planned  include,  among other
things,  increasing our  participation in medical  conferences to create greater
awareness and acceptance of EECP therapy by clinicians.  International sales may
be subject to certain risks, including  export/import  licenses,  tariffs, other
trade  regulations  and local medical  regulations.  Tariff and trade  policies,
domestic and foreign tax and economic  policies,  exchange rate fluctuations and
international  monetary conditions have not significantly affected the Company's
business to date.

Competition

     Presently,  Vasomedical  is  aware  of at  least  two  competitors  with an
external  counterpulsation  device on the market, namely Cardiomedics,  Inc. and
Nicore,  Inc. While the Company believes that these competitors'  involvement in
the market is limited,  there can be no assurance that these  companies will not
become a  significant  competitive  factor.  The  Company  believes  it competes
favorably  in value with these  companies,  as EECP is the only  system  that is
clinically  proven in controlled  trials and the only system to be covered by an
independent   patient  registry.   In  addition,   EECP  is  the  only  external
counterpulsation  system to have been  granted  an IDE to  conduct a  controlled
study in heart failure. FDA has determined this to be a new intended use of EECP
and will  require a PMA  approval  prior to  marketing.  Although  pursuit of an
approved  indication  for use of EECP in heart  failure is  expected  to require
considerable resources,  the Company believes that such investment could provide
a significant  competitive advantage.  Vasomedical views other companies engaged
in  the  development  of  device-related  and  biotechnology  approaches  to the
management of cardiovascular disease as potential competitors in the marketplace
as well.

     There can be no assurance  that other  companies  will not enter the market
intended for EECP systems.  Such other companies may have substantially  greater
financial,  manufacturing and marketing  resources and  technological  expertise
than those  possessed by the Company and may,  therefore,  succeed in developing
technologies  or  products  that are more  efficient  than those  offered by the
Company and that would render the  Company's  technology  and existing  products
obsolete or noncompetitive.

Government Regulations

     The EECP 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 Act 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 more extensive  efficacy and safety data are in order, the FDA will require
the  manufacturer  to submit a premarket  application  (PMA) for full review and
approval.  Management  does not believe  that the EECP  system  will  ultimately
require PMA approval for continued commercialization under its present labeling;
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. The Company received notice in June 2000 that its EECP system, when
used to treat congestive heart failure patients,  will be classified by FDA as a
Class III PMA device. This  classification has important strategic  implications
for the Company and could  provide a  significant  competitive  advantage  and a
barrier to entry for  would-be  competitors  over the course of the next several
years.

     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 in non-domestic markets.

                                       6
<PAGE>
     There can be no assurance that all the necessary FDA clearances,  including
approval of any PMA required,  and  non-domestic  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 Company's EECP System Model MC2 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 this 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.  In
addition,  in July 2000,  the Company  received its license for Level II devices
from the Canadian Health  authority.  In July 2001, the Company  received the UL
classified mark, an electrical certification, for its new TS3 system and intends
to pursue the CE Mark for the TS3.

     Compliance with current Good  Manufacturing  Practices (GMP) regulations is
necessary  to receive  FDA  approval to market new  products  and to continue to
market current  products.  The Company's  manufacturing  (including its contract
manufacturer),   quality   control  and   quality   assurance   procedures   and
documentation  are  currently  in  compliance,   and  are  subject  to  periodic
inspection and evaluation by the FDA.

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.

     In February  1999,  the Health Care Financing  Administration  (HCFA),  the
federal agency that  administers  the Medicare  program for more than 39 million
beneficiaries,  issued a national coverage policy for the use of the EECP system
for  patients  with  disabling   angina  pectoris  who,  in  the  opinion  of  a
cardiologist or  cardiothoracic  surgeon,  are not readily  amenable to surgical
interventions,  such as balloon  angioplasty and cardiac  bypass.  In July 1999,
HCFA communicated  payment  instructions for the EECP therapy to its contractors
around the country,  stipulating coverage for services provided on or after July
1, 1999. In January  2000, a national  Medicare  payment level was  established.
Effective  January 1, 2001,  HCFA approved an 11% increase in the  reimbursement
rate for EECP  therapy  which raised the average  Medicare  payment from $130 to
$144 per  hourly  session.  Beginning  August 1,  2000,  Medicare  coverage  was
extended to include EECP treatment  received on an outpatient basis at hospitals
and outpatient  clinics under the new APC  (Ambulatory  Payment  Classification)
system. The national average payment rate approximates $150 per hourly session.

     Some private  insurance  carriers  continue to adjudicate  EECP claims on a
case-by-case  basis.  Since the  establishment  of  reimbursement by the federal
government,  however,  an  increasing  number  of  these  private  carriers  now
routinely  pay for use of EECP for the  treatment  of angina.  Over 200  private
insurers  are  reimbursing  for EECP today at  improved  levels and the  Company
expects increasing third-party reimbursement.

     The Company is continuing its dialogue with several large commercial health
care payers for the  establishment of positive  coverage  policies.  The Company
believes that its discussions with these third-party  payers will, as a minimum,
continue to define  circumstances  that justify  reimbursement on a case-by-case
basis and create a pathway for rapid review of patient data and determination of
medical necessity. To date, there have been many such reimbursements.

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

                                       7
<PAGE>
Patents and Trademarks

     The Company  owns three US Patents  that issued in June 1988,  October 1996
and  December  1999  which  expire  in 2005,  2013 and  2017,  respectively.  In
addition, several international patents have issued which expire in 2013 and the
Company expects  additional  international  patents to issue during fiscal 2002.
Such patents cover several specific enhancements to the current EECP models. The
Company  has filed for a  continuation  in part on one  patent  and is  pursuing
several  additional  patent   applications.   Moreover,   trademarks  have  been
registered  for  the  names  "EECP"  and  "Natural  Bypass",  as well as for its
widely-recognized man-like figure representing the application of EECP therapy.

     The  Company  pursues a policy of seeking  patent  protection,  both in the
United  States  and  abroad,  for its  proprietary  technology.  There can be no
assurance  that the  Company's  patents  will not be violated or that any issued
patents will provide protection that has commercial significance. Litigation may
be necessary to protect the Company's  patent  position.  Such litigation may be
costly and  time-consuming,  and there can be no assurance that the Company will
be successful in such  litigation.  The loss or violation of the Company's  EECP
patents and trademarks  could have a material  adverse effect upon the Company's
business.

Employees

     As of July 15, 2001, the Company  employed  ninety-four  full-time  persons
with  twenty-two  in sales and sales  support,  eight in clinical  applications,
thirty-seven in manufacturing and technical service,  nine in marketing,  ten in
engineering,  regulatory and clinical research and eight in administration. None
of the  Company's  employees  are  represented  by a labor  union.  The  Company
believes that its employee relations are satisfactory.

Manufacturing

     The Company  manufactures  its EECP Model TS3 at its plant in Westbury,  NY
and  believes its  manufacturing  facility,  in addition to the other  warehouse
facilities  presently  under  lease,  are  adequate  to  meet  the  current  and
immediately  foreseeable future demand for the production of these systems.  The
Company also  contracts  for the  manufacture  of its EECP Model MC2 system with
VAMED Medical Instrument Company Ltd. ("VAMED"),  a Chinese company. The Company
believes  that  VAMED  will be able to meet the  Company's  needs  for such EECP
systems.

ITEM TWO - PROPERTIES

     The Company  owns its 18,000  square foot  headquarters  and  manufacturing
facility at 180 Linden  Avenue,  Westbury,  New York  11590.  In  addition,  the
Company maintains two additional warehouses,  approximating 7,000 square feet of
space, under leases with two  non-affiliated  landlords through October 31, 2002
and October 31, 2006, respectively,  at an annual cost of approximately $65,000.
Management  believes that the Company's combined facilities are adequate to meet
its  current  needs and  should  continue  to be  adequate  for the  immediately
foreseeable future.




ITEM THREE - LEGAL PROCEEDINGS

     In June 2001, an action was commenced in the New York Supreme Court, Nassau
County,  against the Company.  The action seeks undefined damages based upon the
alleged  breach of an agreement  to register the  Company's  common  stock.  The
Company believes that the complaint is without merit and is vigorously defending
the claims.  This matter is in its preliminary  stages and the Company is unable
to establish the likelihood of an unfavorable outcome or the existence or amount
of any potential loss.

     In February  1999,  an action was commenced in the  Massachusetts  Superior
Court, Essex County, against the Company. The action seeks damages in the sum of
$1,000,000  based  upon an  alleged  breach  of a sales  contract.  The  Company

                                       8
<PAGE>
believes that the  complaint is without  merit and is  vigorously  defending the
claims.  This matter is in its  preliminary  stages and the Company is unable to
establish the likelihood of an unfavorable outcome or the existence or amount of
any potential loss.


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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year.



                                    PART II

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

     The Company's Common Stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock MarketSM under the symbol VASO.  The  approximate  number of record
holders of Common  Stock as of July 30,  2001 was 912,  which  does not  include
approximately  45,000 beneficial owners of shares held in the name of brokers or
other  nominees.  The  table  below  sets  forth the range of high and low trade
prices of the Common Stock as reported by the Nasdaq SmallCap Market tier of The
Nasdaq Stock MarketSM for the fiscal periods specified.


<TABLE>
<CAPTION>
                                       Fiscal 2001                     Fiscal 2000
                                   High            Low             High            Low
<S>                             <C>             <C>             <C>             <C>
First Quarter                   $  5.500        $  3.563        $  2.000        $  1.219
Second Quarter                  $  5.500        $  2.531        $  1.688        $   .813
Third Quarter                   $  5.625        $  2.000        $  3.375        $   .781
Fourth Quarter                  $  5.000        $  2.938        $ 14.188        $  2.500
</TABLE>

     The last bid price of the  Company's  Common  Stock on August 14,  2001 was
$3.95 per share.  The  Company has never paid any cash  dividends  on its Common
Stock.  While  the  Company  does  not  intend  to  pay  cash  dividends  in the
foreseeable  future,  payment of cash dividends,  if any, will be dependent upon
the earnings and financial position of the Company, investment opportunities and
such other factors as the Board of Directors deems  pertinent.  Stock dividends,
if any,  also will be dependent on such factors as the Board of Directors  deems
pertinent.

                                       9
<PAGE>


ITEM SIX - SELECTED FINANCIAL DATA

     The following table summarizes selected financial data for each of the five
years  ended May 31, 2001 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,
                                                   2001            2000            1999            1998            1997
Statement of Operations
<S>                                             <C>             <C>             <C>             <C>             <C>
Revenues                                        $27,508,338     $13,673,632     $6,024,263      $5,225,064      $2,096,562
Cost of sales and services                        7,910,359       3,277,700      2,035,578       1,654,979       1,103,417
                                                --------------------------------------------------------------------------
 Gross profit                                    19,597,979      10,395,932      3,988,685       3,570,085         993,145

Selling, general & administrative expenses       11,634,965       7,383,567      6,207,924       5,941,675       4,405,664
Research and development expenses                 2,554,470       1,413,464        706,934       1,595,970       1,045,184
Provision for doubtful accounts                     325,000         400,000                                        225,000
Interest and financing costs                         48,294           7,302         11,880           4,057           8,511
Interest and other income, net                     (201,992)        (99,317)      (115,064)       (169,422)       (174,810)
                                                --------------------------------------------------------------------------
                                                 14,360,737       9,105,016      6,811,674       7,372,280       5,509,549
                                                --------------------------------------------------------------------------
Net earnings (loss) before tax benefit            5,237,242       1,290,916     (2,822,989)     (3,802,195)     (4,516,404)

Income tax benefit                                6,457,108         400,000           -               -               -
                                                --------------------------------------------------------------------------
Net earnings (loss)                              11,694,350       1,690,916     (2,822,989)     (3,802,195)     (4,516,404)

Deemed dividend on preferred stock                     -               -          (864,000)     (1,132,000)           -
Preferred stock dividend requirement                   -            (94,122)      (205,163)        (96,717)           -
                                                --------------------------------------------------------------------------
Earnings (loss) applicable to
 common stockholders                            $11,694,350      $1,596,794     $(3,892,152)   $(5,030,912)    $(4,516,404)
                                                ==========================================================================
Net earnings (loss) per common share
   - basic                                             $.21            $.03           $(.08)         $(.11)          $(.10)
                                                ==========================================================================
   - diluted                                           $.20            $.03           $(.08)         $(.11)          $(.10)
                                                ==========================================================================
Weighted average common shares
 outstanding - basic                             56,571,402      52,580,623      49,371,574     47,873,711      46,297,142
                                                ==========================================================================
             - diluted                           59,927,199      57,141,949      49,371,574     47,873,711      46,297,142
                                                ==========================================================================
Balance Sheet

Working capital                                 $16,214,655      $7,380,236      $2,174,774     $5,046,202      $1,981,331
Total assets                                    $36,518,974     $10,588,962      $5,198,172     $7,345,246      $4,175,021
Long-term debt                                   $1,108,593              $0              $0             $0              $0
Stockholders' equity (1)                        $28,508,729      $7,943,770      $3,153,533     $5,752,993      $3,020,962
<FN>
-------------------
(1) No cash dividends were declared during any of the above periods.
</FN>
</TABLE>

                                       10
<PAGE>

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

Results of Operations

Fiscal Years Ended May 31, 2001 and 2000

     The Company  generated  revenues from the sale and lease of EECP systems of
$27,508,000 and $13,674,000 for fiscal 2001 and fiscal 2000,  respectively.  The
Company  generated  earnings of  $11,694,000  and $1,597,000 for fiscal 2001 and
fiscal 2000, respectively (after recognition of a deferred income tax benefit of
$6.6  million for fiscal 2001 and after  deducting  $94,000 in  preferred  stock
dividend requirements related to its June 1997 financing for fiscal 2000).

     The number of  cardiology  practices,  hospitals  and  independent  centers
interested  in becoming  providers  of EECP  external  counterpulsation  therapy
increased following the announcement by the Health Care Financing Administration
(HCFA) in February 1999 of its decision to extend Medicare  coverage  nationally
to the Company's noninvasive,  outpatient treatment for coronary artery disease.
HCFA  is  the  federal  agency  that   administers  the  Medicare   program  for
approximately  39  million  beneficiaries.  In  addition,  the  results  of  the
Company's multicenter,  prospective,  randomized,  blinded,  controlled clinical
study of EECP  (MUST-EECP)  were published in the June 1999 issue of the Journal
of the American  College of  Cardiology.  Interest in EECP therapy has also been
spurred by the  announcements  of the  results of  six-month,  twelve-month  and
twenty-four month  post-treatment  outcomes  reported by the International  EECP
Patient  Registry and  presented at major  scientific  meetings,  including  the
American Heart  Association  (AHA) and the American  College of Cardiology (ACC)
annual meetings.

     Revenue  growth in the prior  fiscal  period  (fiscal  2000) was  initially
hindered because local Medicare contractors  established  inappropriate  payment
levels  that did not take into  account the full value of the  resources  health
care  providers must deploy to deliver EECP therapy.  Consequently,  in November
1999,  HCFA created a specific  code for external  counterpulsation  therapy and
established a nationally  applicable allowable charge, which became effective on
January  1,  2000.  The  allowable  charge  under the new code was based  upon a
preliminary determination of Relative Value Units (RVUs) assigned by HCFA to the
resources  needed for the  administration  of the therapy.  Certain patients may
require  additional  services,  such as evaluation and management,  which may be
billed  separately.  This  resulted  in a  standard  charge of $4,550 for a full
course of therapy, which typically involves 35 one-hour outpatient sessions. The
assigned  code  now  allows  EECP  providers  to bill  Medicare  electronically,
substantially  reducing the process for receiving  reimbursement.  Moreover,  in
light of the new payment instructions, local Medicare contractors no longer have
the  responsibility of establishing  reimbursement  rates.  Effective January 1,
2001, HCFA approved an 11% increase in the  reimbursement  rate for EECP therapy
which raised the average  Medicare payment from $130 to $144 per hourly session,
or $5,040 for a full  course of  therapy.  Beginning  August 1,  2000,  Medicare
coverage was extended to include EECP treatment  received on an outpatient basis
at  hospitals  and  outpatient  clinics  under the new APC  (Ambulatory  Payment
Classification)  system. The national average payment rate approximates $150 per
session.  These  events led to an  increased  demand for EECP  therapy  and EECP
equipment and,  consequently,  to revenue growth overall, as well as an increase
in the number of systems  placed  under  fee-per-use  arrangements  with certain
providers.

     In fiscal 2001,  the Company  shipped 168% more systems over the prior year
under  various  domestic and  non-domestic  commercial  arrangements,  including
direct  sales,  rental  and  "fee-per-use"   placements  and  sales  to  foreign
distributors.  Revenues from non-domestic business were $1.4 million, accounting
for 5% of total revenues compared to $155K, or 1%, in 2000.

     Gross profit for fiscal 2001 and 2000 were 71% and 76%, respectively. Gross
profits are dependent on a number of factors, particularly the mix of EECP units
sold and rented  during the  period,  the mix of EECP models  sold,  the ongoing
costs of  servicing  such  units,  and certain  fixed  period  costs,  including
facilities, payroll and insurance. Gross margins are furthermore affected by the
location  of the  Company's  customers  (including  non-  domestic  business  or
distributorship  arrangements  which, for discounted  equipment purchase prices,
co-invest in establishing a market for EECP equipment) and the amount and nature
of training and other initial costs required to place the EECP system in service
for customer use.  Consequently,  the gross profit  realized  during the current
period may not be indicative of future margins. The decrease in gross profit for
fiscal 2001 was partially  attributable to the increased  manufacturing costs of
its Model TS3 system  manufactured  in Westbury,  NY.  Management  believes that
these increased costs will be offset in the future by manufacturing efficiencies
and the Company is presently engaged in a product cost reduction program.

     Selling,  general and  administrative  (SG&A)  expenses for fiscal 2001 and
2000  were  $11,635,000  and  $7,384,000,  respectively.  The  increase  in SG&A
expenses of $4,251,000 from the comparable prior fiscal year resulted  primarily

                                       11
<PAGE>
from increases in personnel in sales,  marketing and  administrative  functions,
increases in selling and marketing expenses,  including commissions,  related to
increased revenues,  as well as increases in insurance and other  administrative
expenses.

     Research and development (R&D) expenses of $2,554,0000,  or 9% of revenues,
in fiscal 2001 increased by $1,141,000  from the comparable  prior year expenses
of $1,413,000,  or 10% of revenues.  The increase relates primarily to continued
product design and development  costs  (including an increase in engineering and
other  personnel),  as well as the  initiation  of the  pivotal  study  in heart
failure (which received FDA approval in July 2000 and began treating patients in
March 2001). The Company's newly developed EECP system,  Model TS3, received FDA
510(k) clearance to market in December 2000 and was  commercially  available for
sale in the fourth quarter of fiscal 2001. The Company  intends to  aggressively
invest in product  development  and clinical trials in future periods to further
expand the clinical applications of EECP,  including,  but not limited to, heart
failure and diabetes disease management.

     In fiscal  2001,  the  Company  recorded  a  benefit  for  income  taxes of
$6,457,000,  inclusive of $140,000 in current tax expense principally  resulting
from  the  federal  alternative  minimum  tax  and a  deferred  tax  benefit  of
$6,597,000 resulting principally from the change in the valuation allowance. The
fiscal 2001  deferred  tax benefit  does not include the tax benefit  associated
with the current  and prior  years'  exercises  of stock  options and  warrants,
aggregating  $7,209,000,  which was  credited  directly  to  additional  paid-in
capital in fiscal 2001.

     In fiscal 2000,  management  had  established  a valuation  allowance for a
portion of the deferred tax assets  based on  uncertainties  with respect to the
Company's  ability to generate  future  taxable  income.  At May 31,  2000,  the
valuation  allowance  primarily related to net operating losses and a $6,165,000
tax benefit from the exercise of stock options and warrants  included in the net
operating loss carryforward.

     As of May 31, 2001,  management  determined that no valuation allowance was
required based upon its financial performance,  which was positively affected by
the  availability  of Medicare  coverage and  reimbursement  and the  increasing
acceptance  by  the  medical  community  of  the  Company's  cost-effective  and
noninvasive  therapy  system.  In  addition,  the  Company's  assessment  of the
cardiovascular   disease   marketplace,   which   includes   favorable   patient
demographics  and  unmet  clinical  needs,   provides  a  substantial   economic
opportunity and  anticipated  future earnings stream with respect to current and
prospective clinical applications for its products.  Ultimate realization of the
deferred tax assets is dependent upon the Company generating  sufficient taxable
income prior to the expiration of the loss carryforwards.  Although  realization
is not  assured,  management  believes  it is more  likely than not that the net
deferred  tax assets will be  realized.  The amount of the  deferred  tax assets
considered  realizable,  however, could be reduced in the future if estimates of
future taxable income during the carryforward period are reduced.

Fiscal Years Ended May 31, 2000 and 1999

     The Company  generated  revenues from the sale and lease of EECP systems of
$13,674,000  and  $6,024,000  for  the  years  ended  May  31,  2000  and  1999,
respectively.  The Company  incurred net earnings of $1,691,000  for fiscal 2000
versus a net loss of $2,823,000 for fiscal 1999,  respectively (before deducting
$864,000 in deemed  dividends  on  preferred  stock  representing  the  discount
resulting from the allocation of proceeds to the beneficial  conversion  feature
and  the  fair  value  of  underlying   warrants,   and  $94,000  and  $205,000,
respectively,  in dividend requirements,  in connection with the Company's April
1998 and June 1997 financings).

     Revenues in fiscal  1999,  particularly  in the first two fiscal  quarters,
were adversely affected by the nature of the commercial arrangements under which
those units were placed. The overall increase in Company revenues in fiscal 1999
were  attributable  to fourth quarter sales of  $3,500,000,  which were aided by
HCFA's reimbursement decision.

     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 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, 2000 and 1999 were  approximately  $7,384,000 and $6,208,000,  respectively.
The $1,176,000  increase in SGA expenses for the comparable fiscal year resulted
primarily from an increase in marketing personnel, commissions and other selling
expenses related to increased revenues.

                                       12
<PAGE>
     Research  and  development  (R&D)  expenses  in the year ended May 31, 2000
increased by $707,000  from the prior  fiscal  year.  The increase is related to
significant prior year expenses for the completion of the Company's  multicenter
clinical study of EECP  (completed in July 1997) and the  front-loaded  expenses
for the  development of an upgraded EECP system.  Fiscal 2000 expenses relate to
the  long-term  follow-up  phase of the  multicenter  clinical  study,  i.e.,  a
quality-of-life  outcomes study  (completed in July 1998),  the expansion of the
International  EECP Patient  Registry at the University of  Pittsburgh,  and the
feasibility  study in congestive  heart failure,  all of which,  to some extent,
will further affect operating results in fiscal 2001.

     In fiscal 2000, the Company recorded a benefit for income taxes of $400,000
resulting  principally  from the change in its  valuation  allowance  related to
deferred tax assets.

Liquidity and Capital Resources

     The Company has financed its fiscal 2001 and 2000 operations primarily from
working capital and operating  results.  At May 31, 2001, the Company had a cash
balance of  $3,785,000  and working  capital of  $16,215,000  compared to a cash
balance of $3,058,000  and working  capital of  $7,380,000 at May 31, 2000.  The
Company's operating activities provided (used) cash of $679,000 and $(1,159,000)
for fiscal 2001 and fiscal 2000, respectively. Net cash provided from operations
during fiscal 2001 consisted primarily of earnings from operations and increases
in accounts  payable  and  accrued  expenses,  offset by  increases  in accounts
receivable  and  inventories.  The  increase in  inventories,  particularly  raw
materials, and the increase in accounts payable are attributable to the purchase
of components  and  assemblies  for the  production of the new Model TS3 system,
which began commercial shipments in the fourth quarter of fiscal 2001.

     Investing activities used net cash of $1,578,000 and $279,000 during fiscal
2001 and fiscal 2000, respectively.  The principal uses were for the purchase of
property and equipment, including the purchase of the Company's headquarters and
manufacturing  facility in November 2000. The purchase price,  including planned
improvements,   approximated  $1,400,000.  The  Company  has  secured  long-term
financing at favorable  interest rates through two financing  programs sponsored
by New York State,  which are expected to close in August  2001.  In the interim
period, the Company secured bridge financing with its existing bank for a period
of nine months, for which $1,141,667 cash has been restricted as collateral.

     Financing  activities  provided cash of $1,627,000  and  $2,819,000  during
fiscal  2001 and fiscal  2000,  respectively,  which  resulted  from the sale of
common stock and receipt of cash  proceeds  upon the exercise of Company  common
stock options and warrants by officers,  directors,  employees and  consultants.
During fiscal 2001, the Company established a secured revolving credit line with
its existing  bank.  The credit line provides for  borrowings up to  $5,000,000,
based upon eligible accounts  receivable,  as defined therein, at the Libor Rate
plus 150 basis  points.  Under  the terms of the  agreement,  which  expires  on
September  30, 2001 and is  expected  to be renewed,  the Company is required to
meet certain covenants, including, among others, maintenance of minimum tangible
net worth and current ratio. In addition,  the line is secured by  substantially
all  the  tangible  assets  of the  Company.  At May  31,  2001,  there  were no
outstanding borrowings under this line.  Furthermore,  as a result of commercial
agreements  generated  from units shipped under  operating  leases,  the Company
believes that additional financing, if necessary, could be secured on a recourse
basis, generating more than $1,500,000 in additional working capital.

     Management  believes that its working capital  position at May 31, 2001 and
the ongoing commercialization of the EECPR) system will make it possible for the
Company to support its operating  expenses and to implement  its business  plans
for at least the next twelve months.

                                       13
<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 2001 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 2001 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 2001 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 2001 Annual Meeting of Stockholders,
and is incorporated herein by reference.

                                       14
<PAGE>
ITEM FOURTEEN-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- K

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

     (2)  The following Consolidated Financial Statement Schedule is included in
          Part IV of this report:
              Schedule II Valuation and Qualifying Accounts (14)
     All other  schedules are omitted  because they are not  applicable,  or not
     required,   or  because  the  required   information  is  included  in  the
     Consolidated Financial Statements or notes thereto.

(b)  Form 8-K Reports
     ----------------
     None
(c)  Exhibits
     --------
     (3)  (a) Restated Certificate of Incorporation (2)
          (b) By-Laws (1)
     (4)  (a) Specimen Certificate for Common Stock (1)
          (b)  Certificate of Designation of the Preferred Stock, Series A (3)
          (c)  Certificate of Designation of the Preferred Stock, Series B (8)
          (d)  Form of  Rights  Agreement  dated  as of March  9,  1995  between
               Registrant and American Stock Transfer & Trust Company (5)
          (e)  Certificate of Designation of the Preferred Stock, Series C (9)
          (f)  Stock Purchase  Agreement dated April 30, 1998 between Registrant
               and JNC Opportunity Fund, Ltd. (9)
          (g)  Registration  Rights  Agreement  dated  April  30,  1998  between
               Registrant and JNC Opportunity Fund, Ltd. (9)
          (h)  Form of Warrant dated April 30, 1998 (9)
     (10) (a)  1995 Stock Option Plan (6)
          (b)  Outside Director Stock Option Plan (6)
          (c)  Employment Agreement dated February 1, 1995, as amended March 12,
               1998, between Registrant and John C.K. Hui (4) (9)
          (d)  Modification and Extension Agreement dated March 12, 1998 between
               Registrant and Joseph Giacalone (10)
          (e)  1997 Stock Option Plan, as amended (10)
          (f)  Employment  Agreement dated January 6, 2000, and amended November
               2000, between Registrant and D. Michael Deignan (11) (13)
          (g)  1999 Stock Option Plan, as amended (12)

    (22)       Subsidiary of the Registrant
  <TABLE>
<CAPTION>
                                                                         Percentage
               Name                    State of Incorporation          Owned by Company
               ----                    ----------------------          ----------------
               <S>                             <C>                           <C>
               Viromedics, Inc.                Delaware                       61%
               180 Linden Avenue Corp.         New York                      100%
</TABLE>

(23)           Consent of Grant Thornton LLP (14)
--------------------------
(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  Registration  Statement on Form 8-A dated May
     12, 1995.
(6)  Incorporated by reference to Notice of Annual Meeting of Stockholders dated
     December 5, 1995.
(7)  Incorporated by reference to Report on Form 8-K dated June 25, 1997.
(8)  Incorporated by reference to Report on Form 8-K dated April 30, 1998.
(9)  Incorporated  by reference to Report on Form 10-K for the fiscal year ended
     May 31, 1998.
(10) Incorporated  by reference to Report on Form 10-K for the fiscal year ended
     May 31, 1999.
(11) Incorporated  by reference to Report on Form 10-Q for the quarterly  period
     ended February 29, 2000.
(12) Incorporated  by reference to Report on Form 10-K for the fiscal year ended
     May 31, 2000.
(13) Incorporated  by reference to Report on Form 10-Q for the quarterly  period
     ended November 30, 2000.
(14) Filed herewith.
                                       15
<PAGE>

(15) 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
     seventeenth day of August, 2001.


                              VASOMEDICAL, INC.

                              By: /s/ D. Michael Deignan
                                 --------------------------------
                                 D. Michael Deignan
                                 President, Chief Executive Officer and Director
                                 (Principal Executive Officer)

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below on August 17, 2001 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/ Abraham E. Cohen            Chairman of the Board
Abraham E. Cohen

/s/ D. Michael Deignan          President, Chief Executive Officer and Director
D. Michael Deignan              (Principal Executive Officer)

/s/ Joseph A. Giacalone         Chief Financial Officer (Principal Financial and
Joseph A. Giacalone             Accounting Officer)

/s/ John C.K. Hui               Senior Vice President, Chief Technology Officer
John C.K. Hui                   and Director

/s/ Photios T. Paulson          Director
Photios T. Paulson

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

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

/s/ Anthony Viscusi             Director
Anthony Viscusi

/s/ Forrest R. Whittaker        Director
Forrest R. Whittaker

/s/ Zhen-sheng Zheng            Director
Zhen-sheng Zheng

                                       16
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                 Schedule II Valuation and Qualifying Accounts



                       Vasomedical, Inc. and Subsidiaries

                 Schedule II Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
            Column A                    Column B                Column C                Column D            Column E
------------------------------------------------------------------------------------------------------------------------
                                                                Additions
                                                                ---------
                                                             (1)        (2)
                                        Balance at       Charged to  Charged to                             Balance at
                                       beginning of      costs and     other                               end of period
                                          period         expenses     accounts         Deductions
------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>              <C>            <C>             <C>                   <C>
Allowance for doubtful accounts (a)
 Year ended May 31, 2001                $400,000        $325,000                       $180,000 (a)           $545,000
 Year ended May 31, 2000                      $-        $400,000                                              $400,000

Reserve for obsolete inventory
 Year ended May 31, 2001                      $-        $150,000                                              $150,000

Valuation Allowance  Deferred Tax
Asset
 Year ended May 31, 2001             $14,665,000                                    $14,665,000                     $0
 Year ended May 31, 2000             $12,252,000                     $2,413,000                            $14,665,000
 Year ended May 31, 1999             $11,296,000                       $956,000                            $12,252,000

Provision for warranty obligations
 Year ended May 31, 2001                $387,000      $1,250,000                       $582,000             $1,055,000
 Year ended May 31, 2000                $496,000        $316,000                       $425,000               $387,000
 Year ended May 31, 1999                $574,000        $438,000                       $516,000               $496,000
<FN>
(a)  accounts receivable written off
</FN>
</TABLE>
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Financial Statements
        Consolidated Balance Sheets as of May 31, 2001 and 2000       F-3

        Consolidated Statements of Earnings for the
          years ended May 31, 2001, 2000 and 1999                     F-4

        Consolidated Statement of Changes in Stockholders'
          Equity for the years ended May 31, 2001, 2000 and 1999      F-5

        Consolidated Statements of Cash Flows for the
          years ended May 31, 2001, 2000 and 1999                     F-6

        Notes to Consolidated Financial Statements                    F-7 - F-16

                                      F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Stockholders and Board of Directors
of Vasomedical, Inc.

We have audited the  accompanying  consolidated  balance sheets of  Vasomedical,
Inc.  and  Subsidiaries  (the  "Company")  as of May 31, 2001 and 2000,  and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for each of the three  fiscal years in the period ended May 31, 2001.
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 auditing standards generally accepted
in the  United  States of  America.  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,  2001 and 2000,  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,  2001 in  conformity  with  accounting  principles
generally accepted in the United States of America.

We have also audited Schedule II - Valuation and Qualifying Accounts for each of
the three fiscal years in the period  ended May 31, 2001.  In our opinion,  this
schedule presents fairly, in all material respects,  the information required to
be set forth therein.



/s/Grant Thornton LLP
GRANT THORNTON LLP


Melville, New York
July 27, 2001

                                      F-2

<PAGE>


                       Vasomedical, Inc. and Subsidiaries

                          CONSOLIDATED BALANCE SHEETS

                                    May 31,
<TABLE>
<CAPTION>
                                                                        2001          2000
                                                                        ----          ----
<S>                                                                   <C>          <C>
     ASSETS
CURRENT ASSETS
     Cash and cash equivalents                                        $3,785,456   $3,058,367
     Restricted cash                                                   1,141,667
     Accounts receivable, net of an allowance for doubtful accounts
      of $545,000 and $400,000 at May 31, 2001 and 2000, respectively  9,731,749    4,832,810
     Inventories                                                       4,367,943      906,984
     Deferred income taxes                                             2,908,000      400,000
     Other current assets                                                443,887      479,267
                                                                      ----------   ----------
            Total current assets                                      22,378,702    9,677,428
PROPERTY AND EQUIPMENT, net                                            2,606,037      548,316
CAPITALIZED COST IN EXCESS OF FAIR
  VALUE OF NET ASSETS ACQUIRED, net of accumulated amortization
     of $1,349,613 and $1,136,517 at May 31, 2001 and 2000,
     respectively                                                        142,085      355,181
DEFERRED INCOME TAXES                                                 11,298,000
OTHER ASSETS                                                              94,150        8,037
                                                                      ----------  -----------
                                                                     $36,518,974  $10,588,962
                                                                     ===========  ===========
     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                            $4,573,791   $1,219,803
     Current maturities of long-term debt                                 33,074
     Accrued warranty and customer support expenses                      567,000      258,000
     Accrued professional fees                                           320,854      276,000
     Accrued commissions                                                 669,328      543,389
                                                                      ----------  -----------
           Total current liabilities                                   6,164,047    2,297,192
LONG-TERM DEBT                                                         1,108,593
ACCRUED WARRANTY COSTS                                                   488,000      129,000
OTHER LONG-TERM LIABILITIES                                                6,454       16,000
DEFERRED REVENUES                                                        243,151      203,000
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock, $.01 par value; 1,000,000 shares authorized;
      none issued and outstanding                                              -            -
     Common stock, $.001 par value; 110,000,000 shares authorized;
      57,195,453 and 55,921,330 shares at May 31, 2001 and 2000,
      respectively, issued and outstanding                                57,195       55,921
     Additional paid-in capital                                       49,808,493   40,939,158
     Accumulated deficit                                             (21,356,959) (33,051,309)
                                                                      ----------  -----------
                                                                      28,508,729    7,943,770
                                                                      ----------  -----------
                                                                     $36,518,974  $10,588,962
                                                                     ===========  ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>

                                                             Year ended May 31,
                                                        2001            2000            1999
                                                ---------------------------------------------------
<S>                                                   <C>            <C>            <C>
Revenues
 Equipment sales                                      $26,912,373    $13,120,144     $5,335,200
 Equipment rentals and services                           595,965        553,488        689,063
                                                      -----------    -----------     ----------
                                                       27,508,338     13,673,632      6,024,263
 Cost of sales and services                             7,910,359      3,277,700      2,035,578
                                                      -----------    -----------     ----------
  Gross profit                                         19,597,979     10,395,932      3,988,685
Expenses
 Selling, general and administrative                   11,634,965      7,383,567      6,207,924
 Research and development                               2,554,470      1,413,464        706,934
 Provision for doubtful accounts                          325,000        400,000
 Interest and financing costs                              48,294          7,302         11,880
 Interest and other income - net                         (201,992)       (99,317)      (115,064)
                                                      -----------    -----------     ----------
                                                       14,360,737      9,105,016      6,811,674
                                                      -----------    -----------     ----------
 NET EARNINGS (LOSS) BEFORE INCOME TAXES                5,237,242      1,290,916     (2,822,989)
 Income tax benefit, net                                6,457,108        400,000
                                                      -----------    -----------     ----------
 NET EARNINGS (LOSS)                                   11,694,350      1,690,916     (2,822,989)
Deemed dividend on preferred stock                                                     (864,000)
Preferred stock dividend requirement                                     (94,122)      (205,163)
                                                      -----------    -----------    -----------
  EARNINGS (LOSS) APPLICABLE TO
   COMMON STOCKHOLDERS                                $11,694,350     $1,596,794    $(3,892,152)
                                                      ===========    ===========    ===========
Net earnings (loss) per common share
   - basic                                                   $.21           $.03          $(.08)
                                                            =====          =====         ======
   - diluted                                                 $.20           $.03          $(.08)
                                                            =====          =====         ======
Weighted average common shares
 outstanding - basic                                    56,571,402    52,580,623     49,371,574
                                                      ===========    ===========    ===========
             - diluted                                  59,927,199    57,141,949     49,371,574
                                                      ===========    ===========    ===========
</TABLE>
The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                                    Total
                                                                                   Additional      Accum-           stock-
                                            Preferred stock       Common stock        paid-in      ulated          holders'
                                            Shares    Amount    Shares     Amount     capital      deficit          equity
                                            ------    ------    ------     ------  ----------      -------        ---------
<S>                                         <C>        <C>    <C>         <C>     <C>          <C>              <C>
Balance at June 1, 1998                     225,750    $2,258 48,531,278  $48,531 $36,458,155  $(30,755,951)   $5,752,993

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

Conversion of preferred stock              (175,000) (1,750)   3,095,612    3,096       (1,346)                          -
Exercise of options and warrants                               2,169,831    2,169    2,816,542                    2,818,711
Preferred stock dividend requirement                                                                 (94,122)       (94,122)
Common stock issued in lieu of
 preferred stock dividends                                       253,200      253      287,479                      287,732
Stock options granted for services                                                      87,000                       87,000
Net earnings                                                                                       1,690,916      1,690,916
                                           --------  ------   ----------   ------   ----------   -----------     ----------
Balance at May 31, 2000                                       55,921,330   55,921   40,939,158   (33,051,309)     7,943,770

Exercise of options and warrants                               1,274,123    1,274    1,625,335                    1,626,609
Stock options granted for services                                                      35,000                       35,000
Tax benefit of stock options and warrants
 exercised in the current and prior years                                            7,209,000                    7,209,000
Net earnings                                                                                      11,694,350     11,694,350
                                           --------  ------   ----------  -------  -----------  ------------    -----------
Balance at May 31, 2001                           -  $    -   57,195,453  $57,195  $49,808,493  $(21,356,959)   $28,508,729
                                           ========  ======   ==========  =======  ===========  ============    ===========
</TABLE>
The accompanying notes are an integral part of this statement.

                                      F-5
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                           Year ended May 31,
                                                                           -----------------
                                                                  2001             2000           1999
                                                                  ----             ----           ----
<S>                                                             <C>             <C>            <C>
Cash flows from operating activities
 Net earnings (loss)                                            $11,694,350     $1,690,916     $(2,822,989)
                                                                -----------     ----------     -----------
 Adjustments to reconcile net earnings (loss)
  to net cash used in operating activities
   Depreciation and amortization                                    587,541        483,627         463,859
   Provision for doubtful accounts, net of write-offs               145,000        400,000
   Reserve for inventory obsolescence                               150,000
   Deferred income taxes                                         (6,597,000)      (400,000)
   Stock options granted for services                                35,000         87,000
   Changes in operating assets and liabilities
    Accounts receivable                                          (5,043,939)    (3,647,378)       (609,091)
    Inventories                                                  (4,460,572)      (281,337)       (367,791)
    Other current assets                                             35,380       (301,555)        (12,887)
    Other assets                                                    (90,251)        15,077             402
    Accounts payable, accrued expenses and other current
     liabilities                                                  3,833,781        630,164         587,915
    Other liabilities                                               389,605        164,000        (267,000)
                                                                -----------     ----------     -----------
                                                                (11,015,455)    (2,850,402)       (204,593)
                                                                -----------     ----------     -----------
   Net cash provided by (used in) operating activities              678,895     (1,159,486)     (3,027,582)
                                                                -----------     ----------     -----------
Cash flows from investing activities
 Purchase of property and equipment                              (1,578,415)      (279,033)        (17,229)
                                                                -----------     ----------     -----------
  Net cash used in investing activities                          (1,578,415)      (279,033)        (17,229)
                                                                -----------     ----------     -----------
Cash flows from financing activities
 Proceeds from notes                                              1,141,667
 Restricted cash                                                 (1,141,667)
 Proceeds from exercise of options and warrants                   1,626,609      2,818,711         355,000
                                                                -----------     ----------     -----------
  Net cash provided by financing activities                       1,626,609      2,818,711         355,000
                                                                -----------     ----------     -----------
  NET INCREASE (DECREASE) IN
   CASH AND CASH EQUIVALENTS                                        727,089      1,380,192      (2,689,811)
Cash and cash equivalents - beginning of year                     3,058,367      1,678,175       4,367,986
                                                                -----------     ----------     -----------
Cash and cash equivalents - end of year                          $3,785,456     $3,058,367      $1,678,175
                                                                ===========     ==========     ===========
Non-cash investing and financing activities were as follows:
 Deemed dividend on preferred stock                                                               $864,000
 Issuance of common stock in lieu of preferred dividends                           $94,122          73,692
 Inventories transferred to property and equipment,
  attributable to operating leases  net                            $849,613         31,554         452,000

Supplemental disclosures:
Interest paid                                                       $48,294         $7,302         $11,880
Income taxes paid                                                    10,749          9,224           9,486
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          May 31, 2001, 2000 and 1999

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 cardiovascular disease. EECP
is  marketed  worldwide  to  hospitals,  clinics and other  cardiac  health care
providers.  To date, a significant  portion of the Company's  revenues have been
generated from customers in the United States.

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

     Principles of Consolidation


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

     Inventories

     Inventories  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 thirty-nine 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, whichever is less.

     Capitalized Cost in Excess of Fair Value of Net Assets Acquired

     The capitalized cost in excess of the fair value of the net assets acquired
(goodwill) is being  amortized on a  straight-line  basis over a period of seven
years. On an ongoing basis, management reviews the valuation and amortization of
goodwill to determine  possible  impairment  by  considering  current  operating
results and comparing the carrying value to the anticipated  undiscounted future
cash flows of the related assets.

     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 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.  Revenues from the sale of extended warranties on
the EECP system are  recognized  on a  straight-line  basis over the life of the
extended warranty, ranging from one year to four years. Deferred revenues relate
to  extended  warranty  fees  that  have  been  paid by  customers  prior to the
performance of extended warranty services.

     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, as a  consequence,  believes that its
receivable credit risk exposure is limited. Receivables are generally due within
60-90 days.

     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.

                                      F-7
<PAGE>

     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 is established,  when necessary,  to reduce
deferred tax assets to the amount expected to be realized.  In estimating future
tax  consequences,  the Company  generally  considers all expected future events
other than an  enactment  of changes in the tax laws or rates.  The deferred tax
asset is continually  evaluated for  realizability.  To the extent  management's
judgment  regarding  the  realization  of the  deferred  tax assets  change,  an
adjustment  to the  allowance  is  recorded,  with  an  offsetting  increase  or
decrease,  as appropriate,  in income tax expense. Such adjustments are recorded
in the period in which  management's  estimate  as to the  realizability  of the
asset changed.

     Use of Estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. These estimates and assumptions
relate to estimates of collectibility of accounts receivable,  the realizability
of deferred tax assets,  and the adequacy of  inventory  and warranty  reserves.
Actual results could differ from those estimates.

     Net Earnings (Loss) Per Common Share

     Basic  earnings  (loss) per  common  share are  computed  by  dividing  net
earnings (loss) available to common  stockholders by the weighted average number
of shares  outstanding  during the period.  Diluted  earnings  (loss) per common
share  reflect the  potential  dilution  that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common  stock.  Potential  common  shares from stock
options,  warrants  and  convertible  preferred  stock are excluded in computing
basic and diluted net loss per share for fiscal 1999 as their effects would have
been antidilutive.

     Stock Compensation

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

     Statements of Cash Flows

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

     Reclassifications

     Certain  reclassifications  have  been made to the  prior-years'  financial
statements to conform to the fiscal 2001 presentation.


NOTE B - INVENTORIES
<TABLE>
<CAPTION>
                                                                  May 31,
                                                                  -------
        Inventories consist of the following:                 2001       2000
                                                              ----       ----
                <S>                                         <C>         <C>
                Raw materials                               $3,364,276  $545,924
                Work in progress                               497,667         -
                Finished goods                                 506,000   361,060
                                                            ----------  --------
                                                            $4,367,943  $906,984
                                                            ==========  ========
</TABLE>

                                      F-8
<PAGE>
NOTE C - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
                                                                  May 31,
                                                                  -------
        Property and equipment is summarized as follows:      2001       2000
                                                              ----       ----
                <S>                                         <C>         <C>

                Land                                        $200,000    $      -
                Building and improvements                  1,252,423           -
                Office, laboratory and other equipment       617,875     413,070
                EECP units under operating leases          1,176,500     416,000
                Furniture and fixtures                       124,764      81,232
                Construction in progress                        -        139,317
                Leasehold improvements                       112,578      95,610
                                                          ----------    --------
                                                           3,484,140   1,145,229
                Less accumulated depreciation and
                 amortization                               (878,103)   (596,913)
                                                          ----------    --------
                                                          $2,606,037    $548,316
                                                          ==========    ========
</TABLE>
NOTE D  LONG-TERM DEBT AND LINE OF CREDIT AGREEMENT
<TABLE>
<CAPTION>
                                                            May 31,
                                                             2001
                                                            -------
<S>                                                        <C>
Revolving credit agreement (a)                                      -
Term loan (b)                                              $1,141,667
                                                           ----------
                                                            1,141,667
Less current portion                                           33,074
                                                           ----------
                                                           $1,108,593
                                                           ==========
</TABLE>
     (a) On February  28,  2001,  the Company  established  a secured  revolving
credit line with its existing  bank.  The credit line provides for borrowings up
to $5,000,000,  based upon eligible accounts receivable,  as defined therein, at
the Libor Rate plus 150 basis points (5.65% at May 31, 2001). Under the terms of
the  agreement,  which expires on September 30, 2001, the Company is required to
meet certain covenants, including, among others, maintenance of minimum tangible
net worth and current ratio. In addition,  the line is secured by  substantially
all  the  tangible  assets  of the  Company.  At May  31,  2001,  there  were no
outstanding borrowings under this line.

     (b) In November 2000, the Company  purchased its headquarters and warehouse
facilities  and  secured  a  note  payable  from  a  financial  institution  for
$1,141,667.  The note bears  interest  at the Libor  Rate plus 150 basis  points
(5.65% at May 31, 2001) and is due in monthly  payments of interest only, with a
balloon payment due in August 2001. The note is secured by the building, and the
Company  maintains a restricted cash balance with the financial  institution for
the amount of the note  during its term.  The  Company  has  received  long-term
financing  commitments  under  two  programs  sponsored  by New  York  State  at
favorable  fixed interest  rates,  ranging from 6% to 7.9%,  over a fifteen-year
term. The existing note is expected to be refinanced under these  commitments in
August  2001.  As such,  the  Company  has  classified  the note  payable in the
accompanying  consolidated  balance  sheet  in  accordance  with  the  estimated
amortization schedule of principal and interest payments.
<TABLE>
<CAPTION>

        Maturities of long-term debt are as follows at May 31, 2001:
                <S>                                     <C>
                2002                                    $33,074
                2003                                     46,879
                2004                                     50,270
                2005                                     53,912
                2006                                     57,823
                Thereafter                              899,709
                                                     ----------
                                                     $1,141,667
                                                     ==========
</TABLE>
                                      F-9
<PAGE>
NOTE E - STOCKHOLDERS' EQUITY AND WARRANTS

Fiscal 1999

     Based  upon  negotiations  between  the  Company  and  the  holder  of  its
then-existing 5% Series C Cumulative  Convertible Preferred Stock (the "Series C
preferred  stock") in December 1998 relating to the delayed  effectiveness  of a
registration  statement  covering the  underlying  shares of common  stock,  the
conversion price with respect to the Series C preferred stock was reduced to the
lower of (i)  $2.00  per  share or (ii) 81% of the  Average  Closing  Price,  as
defined.  The Company  estimated the incremental  value of the deemed  dividend,
representing the additional  discount  resulting from the allocation of proceeds
to the beneficial conversion feature, to approximate $203,000.  Accordingly, the
Company  recognized  this  incremental  deemed dividend in the second quarter of
fiscal  1999.  In fiscal 1999,  the  remaining  balance of 50,750  shares of its
then-existing 5% Series B Cumulative  Convertible Preferred Stock were converted
into 975,882 shares of common stock.

Fiscal 2000

     In  fiscal  2000,  all  175,000  shares of Series C  preferred  stock  were
converted  into  3,095,612  shares of common  stock.  In  addition,  warrants to
purchase  1,435,000 shares of common stock were exercised (net of 101,910 shares
offered in payment in lieu of cash),  aggregating  $1,272,000 in proceeds to the
Company.

Fiscal 2001

     In fiscal 2001,  warrants to purchase  776,212  shares of common stock were
exercised, aggregating $1,143,000 in proceeds to the Company.

Warrants
--------
     Warrant  activity  for the  years  ended  May 31,  1999,  2000  and 2001 is
summarized as follows:
<TABLE>
<CAPTION>
                                Non-employee
                                 Directors      Employees      Consultants       Total           Price Range
                                ------------    ---------      -----------       -----           -----------
<S>                             <C>             <C>             <C>             <C>              <C>
Balance at June 1, 1998         1,125,000       1,920,000       1,828,712       4,873,712        $.38 - $2.18
 Exercised                       (300,000)       (525,000)              -        (825,000)       $.38 -  $.45
 Canceled/retired                (425,000)       (120,000)       (450,000)       (995,000)       $.91 - $1.50
                                ---------       ---------       ---------       ---------        ------------
Balance at May 31, 1999           400,000       1,275,000       1,378,712       3,053,712        $.38 - $2.18
 Exercised                       (400,000)       (525,000)       (510,000)     (1,435,000)       $.38 - $2.18
                                ---------       ---------       ---------       ---------        ------------
Balance at May 31, 2000                 -         750,000         868,712       1,618,712        $.45 - $2.08
 Exercised                                       (250,000)       (526,212)       (776,212)       $.45 - $2.08
                                ---------       ---------       ---------       ---------        ------------
Balance at May 31, 2001                 -         500,000         342,500         842,500        $.45 - $2.08
                                =========       =========       =========       =========        ============
Number of shares exercisable            -         500,000         342,500         842,500        $.45 - $2.08
                                =========       =========       =========       =========        ============
</TABLE>
        The following table summarizes information about warrants outstanding
                        and exercisable at May 31, 2001:
                      Warrants Outstanding and Exercisable
                      ------------------------------------
<TABLE>
<CAPTION>
                                                            Weighted
                                    Number                   Average
                                Outstanding and             Remaining             Weighted
                                 Exercisable at          Contractual Life          Average
Range of Exercise Prices          May 31, 2001                (yrs.)            Exercise Price
----------------------------------------------------------------------------------------------
<S>                                 <C>                        <C>                 <C>
 $.45                               500,000                    1.6                 $.45
 $.91                               200,000                    5.4                 $.91
$2.08                               142,500                    1.1                $2.08
                                ----------------------------------------------------------
                                    842,500                    2.4                 $.83
                                ==========================================================
</TABLE>
                                      F-10
<PAGE>
NOTE F - 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.

     In January 1999, the Company's  Board of Directors  increased the number of
shares  authorized  for  issuance  under  the 1997 Plan by  1,000,000  shares to
2,800,000  shares.  In addition,  the Board of Directors  granted  stock options
under the 1997 Plan to a consultant to purchase  150,000  shares of common stock
at an exercise price of $.875 per share (which represented the fair market value
of the underlying common stock at the time of grant).  The stock options granted
to the consultant were contingent upon meeting certain performance criteria. The
stock  options  were  fair-valued  at $87,000 for which the  Company  recorded a
charge to operations in fiscal 2000,  commensurate  with the satisfaction of the
performance criteria defined therein.

1999 Stock Option Plan

     In July 1999,  the  Company's  Board of  Directors  approved the 1999 Stock
Option Plan (the "1999  Plan"),  for which the Company  reserved an aggregate of
2,000,000  shares  of  common  stock.  The 1999  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 1999 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 1999
Plan expires  July 12,  2009.  In July 2000,  the  Company's  Board of Directors
increased the number of shares  authorized  for issuance  under the 1999 Plan by
1,000,000 shares to 3,000,000 shares.

     In January  2001,  the Board of Directors  granted  stock options under the
1999 Plan to a  consultant  to  purchase  25,000  shares  of common  stock at an
exercise  price of $3.81 per share (which  represented  the fair market value of
the underlying  common stock at the time of the respective  grant).  These stock
options were  fair-valued at $60,000 which the Company will charge to operations
over the one-year period in which services are rendered. During fiscal 2001, the
Company charged $35,000 to operations.

     Subsequent  to May 31, 2001,  the Board of Directors  granted stock options
under the 1999 Plan to  officers/employees  to purchase an  aggregate of 700,000
shares of common stock at exercise  prices ranging from $3.96 to $4.02 per share
(which  represented the fair market value of the underlying  common stock at the
time of the respective grants).


                                      F-11
<PAGE>
     Activity  under all the plans for the years  ended May 31,  1999,  2000 and
2001 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>           <C>
Balance at June 1, 1998       855,500              2,060,143        $.78 - $3.44         $2.44
  Shares authorized         1,000,000
  Options granted          (1,853,500)             1,853,500        $.75 -  $.88          $.87
  Options canceled             38,500                (58,500)       $.88 - $1.91         $1.36
                          -----------------------------------------------------------------------
Balance at May 31, 1999        40,500              3,855,143        $.75 - $3.44         $1.70
  Shares authorized         2,000,000
  Options granted          (1,270,000)             1,270,000       $1.22 - $5.15         $1.95
  Options exercised                 -               (836,741)      $.75  - $3.44         $1.85
  Options canceled            134,668               (144,668)      $.88  - $1.91         $1.47
                          -----------------------------------------------------------------------
Balance at May 31, 2000       905,168              4,143,734       $.75  - $5.15         $1.76
  Shares authorized         1,000,000
  Options granted            (798,000)               798,000       $2.66 - $5.00         $4.00
  Options exercised                 -               (497,911)      $.75  - $3.44          $.97
  Options canceled            111,000               (111,000)      $.75  - $3.47         $1.90
                          -----------------------------------------------------------------------
Balance at May 31, 2001     1,218,168              4,332,823       $.75  - $5.15         $2.03
                          =======================================================================
</TABLE>
     The following table summarizes  information about stock options outstanding
and exercisable at May 31, 2001:
<TABLE>
<CAPTION>
                                                Options Outstanding                              Options Exercisable
                                ----------------------------------------------------     --------------------------------
                                                  Weighted
                                                  Average
                                Number            Remaining           Weighted            Number           Weighted
                                Outstanding at    Contractual Life    Average             Exercisable at    Average
Range of Exercise Prices        May 31, 2001      (yrs.)              Exercise Price      May 31, 2001      Exercise Price
--------------------------------------------------------------------------------------------------------------------------
<S>      <C>                    <C>                  <C>                 <C>                <C>                <C>
$.75  -  $.88                   1,017,279            5.7                 $.87               828,780            $.87
$1.22 -  $1.77                    938,250            8.4                $1.36               281,582           $1.41
$1.91 -  $2.66                    873,294            7.0                $1.99               803,294           $1.93
$2.91 -  $4.28                  1,206,000            7.3                $3.68               621,000           $3.49
$4.59 -  $5.15                    298,000            9.1                $4.82                60,000           $5.15
                               ------------------------------------------------           --------------------------
                                4,332,823            7.2                $2.26             2,594,656           $1.98
                               ================================================           ==========================
</TABLE>
     As permitted  under  Statement of Financial  Accounting  Standards No. 123,
"Accounting  for  Stock-Based  Compensation"  ("SFAS No. 123"),  the Company has
elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") in accounting for stock-based awards. Pursuant to APB 25, the Company
generally  recognizes no compensation  expense with respect to such awards.  Pro
forma  information  regarding  net income and earnings per share is required for
awards granted as if the Company had accounted for its stock-based  awards under
the  fair  value  method  of SFAS No.  123.  The  fair  value  of the  Company's
stock-based awards was estimated using the Black-Scholes option valuation model.
The fair value of the Company's  stock-based  awards was  estimated  assuming no
expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
Fiscal year ended May 31,               2001            2000            1999
-------------------------               ----            ----            ----
<S>                                       <C>             <C>             <C>
Expected life (years)                     5               5               5
Expected volatility                      80%             80%             80%
Risk-free interest rate                 5.2%            6.0%            4.4%
</TABLE>
     The following are the pro forma net earnings (loss) and net earnings (loss)
per share  basic and  diluted  amounts  for fiscal  2001,  2000 and 1999,  as if
compensation  expense for stock-based  awards had been determined based on their
estimated fair value at the date of grant:
<TABLE>
<CAPTION>
                                                2001            2000            1999
                                                ----            ----            ----
<S>                                         <C>               <C>          <C>
Pro forma net earnings (loss)               $10,382,690        $576,435     $(5,534,569)
Pro forma net earnings (loss) per share
     - basic                                       $.18            $.01           $(.11)
     - diluted                                     $.17            $.01           $(.11)
</TABLE>
                                      F-12
<PAGE>
     The weighted-average fair value of options granted during fiscal 2001, 2000
and 1999 was $2.73,  $2.75 and $.58,  respectively.  At May 31, 2001, there were
approximately  13,180,000  remaining  authorized  shares of common  stock  after
reserves for all stock option plans, stock warrants and shareholders' rights.

NOTE G  EARNINGS PER COMMON SHARE

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share:
<TABLE>
<CAPTION>
                                          For the fiscal year ended May 31,
                                        ------------------------------------
                                        2001            2000            1999
                                        ----            ----            ----
<S>                                  <C>             <C>            <C>
Numerator:
   Basic earnings (loss)             $11,694,350     $1,690,916     $(2,822,989)
     Preferred stock dividends                 -       (94,122)      (1,069,163)
                                     -----------     ----------     ------------
   Diluted earnings (loss)           $11,694,350     $1,596,794     $(3,892,152)
                                     ===========     ==========     ============
Denominator:
   Basic - weighted average shares    56,571,402     52,580,623       49,371,574
     Stock options                     2,270,094      1,389,607                -
     Warrants                          1,085,703      1,428,678                -
     Convertible preferred stock               -      1,743,041                -
                                     -----------     ----------     ------------
   Diluted  weighted average shares   59,927,199     57,141,949       49,371,574
                                     ===========     ==========     ============
Earnings (loss) per share - basic           $.21          $0.03           $(.08)
                                           =====          =====           ======
                          - diluted         $.20          $0.03           $(.08)
                                           =====          =====           ======
</TABLE>
NOTE H - REVENUE CONCENTRATIONS

     In fiscal 1999,  the Company had sales to one customer,  accounting for 21%
of the Company's revenues.  No single customer accounted for greater than 10% of
the Company's revenues in fiscal 2001 and 2000.

NOTE I - INCOME TAXES

     In fiscal  2001,  the  Company  recorded  a  benefit  for  income  taxes of
$6,457,108,  inclusive of $139,892 in current tax expense principally  resulting
from  the  federal  alternative  minimum  tax  and a  deferred  tax  benefit  of
$6,597,000 resulting principally from the change in the valuation allowance.  In
fiscal 2000, the Company  recorded a $400,000 benefit for income taxes resulting
principally from a change in the deferred tax valuation allowance. The Company's
deferred tax assets are  summarized as follows:
<TABLE>
<CAPTION>
                                                                May 31,
                                                  ------------------------------------
                                                  2001            2000            1999
                                                  ----            ----            ----
<S>                                             <C>            <C>            <C>
Deferred tax assets
  Net operating loss and other carryforwards    $13,422,000    $14,627,000    $11,913,000
  Accrued  compensation                                   -         12,500         92,000
  Bad debts                                         178,000        187,000              -
  Other                                             606,000        238,500        247,000
                                                -----------    -----------    -----------
  Total  gross  deferred  tax assets             14,206,000     15,065,000     12,252,000
  Valuation  allowance                                    -    (14,665,000)   (12,252,000)
                                                -----------    -----------    -----------
  Net deferred tax assets                       $14,206,000    $   400,000    $         -
                                                ===========    ===========    ===========
</TABLE>
     The fiscal  2001  deferred  tax  benefit  does not  include the tax benefit
associated  with the current and prior  years'  exercises  of stock  options and
warrants,  aggregating  $7,209,000,  which was credited  directly to  additional
paid- in capital in such year.

     In fiscal 2000 and 1999,  management had established a valuation  allowance
for all or a portion of the  deferred  tax assets  based on  uncertainties  with
respect to the Company's  ability to generate future taxable income.  At May 31,
2000, the valuation  allowance  primarily  related to net operating losses and a
$6,165,000 tax benefit from the exercise of stock options and warrants  included
in the net operating loss carryforward. At May 31, 1999, the valuation allowance
primarily  related to net operating losses and a $2,200,000 tax benefit from the
exercise  of stock  options and  warrants  included  in the net  operating  loss
carryforward.

                                      F-13

<PAGE>

     As of May 31, 2001,  management  determined that no valuation allowance was
required based upon its financial performance,  which was positively affected by
the  availability  of Medicare  coverage and  reimbursement  and the  increasing
acceptance  by  the  medical  community  of  the  Company's  cost-effective  and
noninvasive  therapy  system.  In  addition,  the  Company's  assessment  of the
cardiovascular   disease   marketplace,   which   includes   favorable   patient
demographics  and  unmet  clinical  needs,   provides  a  substantial   economic
opportunity and  anticipated  future earnings stream with respect to current and
prospective clinical applications for its products.  Ultimate realization of the
deferred tax assets is dependent upon the Company generating  sufficient taxable
income prior to the expiration of the loss carryforwards.  Although  realization
is not  assured,  management  believes  it is more  likely than not that the net
deferred  tax assets will be  realized.  The amount of the  deferred  tax assets
considered  realizable,  however, could be reduced in the future if estimates of
future taxable income during the carryforward period are reduced.

     At May 31,  2001,  the Company had net  operating  loss  carryforwards  for
Federal income tax purposes of  approximately  $39,058,000,  expiring at various
dates from 2005 through 2020.

     The following is a  reconciliation  of the effective income tax rate to the
federal statutory rate:
<TABLE>
<CAPTION>
                                           2001                    2000                   1999
                                          Amount          %       Amount        %        Amount         %
                                  ---------------------------------------------------------------------------
<S>                                   <C>               <C>       <C>          <C>      <C>           <C>
Federal statutory rate                $1,781,000        34.0      $387,911     34.0     $(959,816)    (34.0)
State taxes, net                          65,000         1.2        83,451      7.3      (275,455)     (9.7)
Permanent differences                     67,300         1.3        89,756      7.8        86,165       3.1
Net operating loss generating no
  current year tax benefit                                                              1,149,106      40.6
Utilization of net operating          (1,781,000)      (34.0)     (561,118)   (49.1)            -         -
  loss
Change in valuation allowance                                                                   -         -
  relating to operations              (6,719,000)     (128.3)     (400,000)   (35.0)
Other                                    129,592         2.5
                                  ---------------------------------------------------------------------------
                                    $(6,457,108)     (123.3)     $(400,000)   (35.0)       $    -         -
                                  ===========================================================================
</TABLE>
     Under current tax law, the utilization of tax attributes will be restricted
if an ownership change, as defined,  were to occur.  Section 382 of the Internal
Revenue Code  provides,  in general,  that if an "ownership  change" occurs with
respect to a corporation with net operating and other loss  carryforwards,  such
carryforwards  will be available to offset  taxable  income in each taxable year
after the ownership change only up to the "Section 382 Limitation" for each year
(generally,  the product of the fair market value of the corporation's  stock at
the time of the  ownership  change,  with certain  adjustments,  and a specified
long-term  tax-exempt bond rate at such time). The Company's  ability to use its
loss carryforwards would be limited in the event of an ownership change.

NOTE J - COMMITMENTS AND CONTINGENCIES

Employment Agreements

     The  Company  maintains   employment   agreements  with  certain  executive
officers,  expiring at various dates through  January 2002. All 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 the 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.

                                      F-14

<PAGE>


     The approximate  aggregate  minimum  compensation  obligation  under active
employment agreements at May 31, 2001 is $213,000 payable in fiscal 2002.

Leases

     The Company  leases  additional  warehouse  space  under two  noncancelable
operating  leases  which  expire on October 31,  2002 and  September  30,  2006,
respectively.  Rent expense was  $69,000,  $130,000 and $125,000 in fiscal 2001,
2000 and 1999,  respectively.  In November 2000,  upon the expiration of another
unrelated  lease,  the Company  purchased  its  headquarters  and  manufacturing
facilities.

     Approximate   aggregate  minimum  annual   obligations  under  these  lease
agreements and other equipment leasing agreements at May 31, 2001 are summarized
as follows:

<TABLE>
<CAPTION>
                               Fiscal Year             Amount
                               -----------             ------
<S>                               <C>                 <C>
                                  2002                $81,000
                                  2003                 75,000
                                  2004                 49,000
                                  2005                 42,000
                                  2006                 37,000
                                  2007                 12,000
                                                      -------
                                                     $296,000
                                                     ========
</TABLE>

Litigation

     In June 2001, an action was commenced in the New York Supreme Court, Nassau
County,  against the Company.  The action seeks undefined damages based upon the
alleged  breach of an agreement  to register the  Company's  common  stock.  The
Company believes that the complaint is without merit and is vigorously defending
the claims.  This matter is in its preliminary  stages and the Company is unable
to establish the likelihood of an unfavorable outcome or the existence or amount
of any potential loss.

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

401(k) Plan

     In April 1997, the Company  adopted the  Vasomedical,  Inc.  401(k) Plan to
provide retirement  benefits for its employees.  As allowed under Section 401(k)
of the Internal Revenue Code, the plan provides  tax-deferred  salary deductions
for  eligible  employees.  Employees  are  eligible to  participate  in the next
quarter  enrollment  period after  employment.  Participants  may make voluntary
contributions  to  the  plan  up  to  15%  of  their  compensation.  No  Company
contributions were made for the fiscal years ended May 31, 2001, 2000 and 1999.

Purchase Commitments

     At May 31,  2001,  the  Company had  outstanding  purchase  commitments  of
$1,296,000  with VAMED  Medical  Instrument  Company Ltd.  ("VAMED"),  a Chinese
company,  for the contract manufacture of its EECP Model MC2 system. The Company
believes  that VAMED will be able to meet the  Company's  future needs for these
systems.


NOTE K  SUMMARY OF QUARTERLY FINANCIAL DATA

     The following is a summary of the Company's  unaudited  quarterly operating
results for the years ended May 31, 2000 and 2001.

<TABLE>
<CAPTION>
                                                              Three months ended
                     ----------------------------------------------------------------------------------------------------
(in   000s   except
earnings per share        May 31,     Feb. 28,      Nov. 30,     Aug. 31,     May 31,    Feb. 29,    Nov. 30,    Aug. 31,
data)                      2001         2001          2000         2000        2000        2000        1999        1999
-------------------------------------------------------------------------------------------------------------------------
<S>                        <C>          <C>           <C>          <C>         <C>         <C>         <C>         <C>
Revenues                   $8,741       $7,068        $6,454       $5,245      $4,521      $3,178      $2,956      $3,019
Gross Profit               $6,115       $4,836        $4,765       $3,882      $3,564      $2,341      $2,138      $2,353
Net Earnings               $6,814       $1,785        $1,695       $1,400      $1,023        $250         $54        $270

                                      F-15
<PAGE>

Earnings per
  share - basic              $.12         $.03          $.03         $.02        $.02        $.00        $.00        $.01
        - diluted            $.11         $.03          $.03         $.02        $.02        $.00        $.00        $.01

Weighted average
  common shares
  outstanding
           - basic         57,068       56,711        56,383       56,129      55,746      52,687      51,093      50,851
           - diluted       60,299       59,891        59,852       59,694      60,948      55,271      55,488      56,216
</TABLE>

                                      F-16