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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934 For the fiscal year ended May 31, 2000

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

Commission File No. 0-18105

                                VASOMEDICAL, INC.
        (Name of registrant as specified in its charter)
Delaware                                                    11-2871434
(State or other jurisdiction of                             (IRS Employer
incorporation or organization)                              Identification No.)

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

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

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

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

     Indicate by a check mark whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
     Yes [ X ]   No [   ]

     Indicate by a check mark if  disclosure of  delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ X ]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant as of July 31, 2000, based on the average price on that date, was
$218,842,000. At July 31, 2000, the number of shares outstanding of the issuer's
common stock was 56,339,042.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

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<PAGE>
                                     PART I

ITEM ONE - BUSINESS

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

General

     Vasomedical, Inc. (the Company),  incorporated in Delaware in July 1987, is
engaged in the  research,  development  and  commercialization  of  systems  and
equipment   designed  to  provide   non-invasive   treatment  of  patients  with
cardiovascular  disease.  The  Company's  lead  product,  its Enhanced  External
Counterpulsation (EECP ) system, is a patented  microprocessor-based device that
delivers a retrograde  arterial pressure wave to the heart,  increasing coronary
perfusion  and reducing  ventricular  afterload.  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  received  marketing
clearance from the Food and Drug  Administration  (FDA) under a 510(k) premarket
notification in February 1995.

The EECP Enhanced External Counterpulsation System
General Discussion

     Cardiovascular  disease  (CVD) is the leading  cause of death in the world.
CVD claimed 953,110 lives in the United States in 1997 and was responsible for 1
of every 2.4 deaths.  The American Heart  Association  reports in its 2000 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,  6.2 million of
whom suffer from angina pectoris, a painful and often debilitating  complication
caused by  obstruction  of the arteries  which supply blood to the myocardium or
heart  muscle.  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 percutaneous
transluminal  coronary  angioplasty (PTCA),  stenting and 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.
<PAGE>
     In February  1995,  the Company  received  510(k)  clearance  to market the
second generation  version of this system,  the MC2, which incorporated a number
of technological  improvements over the original system.  The FDA's clearance in
both  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.

     The Company has, for several years now, focused its resources on the angina
market.  According to 2000 data  published by the  American  Heart  Association,
there are  approximately 6.2 million patients in the U.S. who suffer from angina
with an additional 350,000 new cases seen annually.

     Data from the AHA  indicates  that  congestive  heart failure (CHF) affects
nearly  5  million   Americans  and  is  the  single  most  frequent   cause  of
hospitalization  among  people age 65 and older.  The  incidence of new cases of
heart  failure  is 400,000  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 other implantable  devices are continuing to advance,
particularly as a bridge to transplant.

     The potential  annual patient pool for EECP treatments in the U.S. alone is
over one million  patients.  The unrealized  opportunity for EECP is significant
and could approach $150 - $200 million per annum within five years.

The System

     The MC2 is an advanced treatment system utilizing  fundamental  hemodynamic
principles to relieve angina pectoris.  Treatment is administered to patients 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  supplying 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  angiogenisis  the development of new 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  and  twelve   months
post-treatment.
<PAGE>
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
EECP  system,  such  as the  computer-controlled  operating  system  that  makes
sequential cuff inflation  possible.  As the technology  improved,  however,  it
became  apparent  that both internal  (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
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  ground-breaking  139 patient study,  which included a placebo control
group,  showed  once  and for all 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 long-term  quality-of-life  study
with EECP in the same  institutions and with the same patients that participated
in  MUST-EECP.  The  positive  results  of this study  were  presented  at major
scientific  meetings,  and a  publication  in a  major  peer-review  journal  is
expected during fiscal 2001.

     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), a
disabling  condition  affecting  nearly  5  million  Americans.  CHF is the most
frequent cause of hospitalization  for those over 65 years of age. The study was
conducted  simultaneously  at the  University of  Pittsburgh,  the University of
California  San  Francisco  and  the  Grant/Riverside   Methodist  Hospitals  in
Columbus, Ohio, and the results presented at the 49th Scientific Sessions of the
American  College of Cardiology in March 2000.  This pilot 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  July 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 with  conditions by the FDA, to which the Company will agree.  This
study is  scheduled  to begin  patient  enrollment  in the fall of 2000,  and is
expected to take two years to  complete.  The study will  involve up to eighteen
centers and enroll approximately 200 patients.

     CHF occurs  when the heart is unable to pump blood well  enough to meet the
body's needs. The circulatory  system becomes  congested when the heart fails to
empty its chambers  sufficiently,  leading to an  accumulation  in the chest and
lower limbs.  According to the American Heart  Association,  2.5 million men and
2.4 million women in the United States have CHF.  About 400,000 new cases of the
disease occur each year. The need to find new and effective methods to treat CHF
<PAGE>
is pressing,  since the prevalence of the disease is growing rapidly as a result
of the aging population and the improved  survival rate following heart attacks,
while deaths caused by the disease increased 116% between 1979 and 1995.

     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,
eighty  centers  participate  in the Registry  and data from over 2,700  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 work with the Registry to
publicize  data  which may  assist  clinicians  in  delivering  optimal  care to
patients.  Recently  released data from the IEPR shows that patients continue to
receive  dramatic  benefit at six and twelve 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)  Increase its  penetration  of the current  angina  market  through the
          initiation  of  a  dramatically  stepped-up  campaign  to  market  the
          benefits of EECP therapy directly to patients and clinicians.
     (b)  Engage  in   educational   campaigns   designed   to   highlight   the
          cost-effectiveness  and quality-of-life  advantages of EECP therapy to
          State Welfare (Medicaid) agencies, commercial insurance companies, and
          managed care organizations.
     (c)  Initiate  a  pivotal  multicenter  study for the use of EECP in CHF in
          fiscal 2001.
     (d)  Continue product  development efforts to improve the EECP system, seek
          additional patents and initiate in-house assembly during fiscal 2001.
     (e)  Publish the results of its long-term quality-of-life outcomes study in
          a major peer-review medical journal in fiscal 2001.
     (f)  Continue to work with the  International  EECP Patient Registry at the
          University of Pittsburgh Graduate School of Public Health to publicize
          key information relating to patient outcomes.
     (g)  Pursue additional clinical indications for EECP therapy.
     (h)  Establish a distribution network in international markets.
     (i)  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.

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
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
<PAGE>
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 tripled since January 2000 and is
now comprised of sixteen sales representatives and two area directors. The sales
team will continue to grow at a pace necessary to achieve its growth objectives.
Independent  representatives,  who have been employed to extend the reach of the
Company's sales effort in the past, will be phased out as sufficient  geographic
coverage is achieved by the  Company's  direct sales  force.  The efforts of the
Company's sales  organization is further supported by a field-based staff of six
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 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 will allow the Company to focus more  intently on
sales to National  Accounts and in a somewhat  more formal  manner.  The Company
will continue to develop its relationships  with such major U.S. hospital groups
as Tenet Healthcare,  Amerinet,  Kaiser Permanente,  Health South, Columbia HCA,
the Veterans  Administration  and with other cardiac care  operations  that have
plans for nationwide expansion.

     Vasomedical's  continued  transformation  from a research  and  development
organization to a more  commercial,  market-driven  company will be reflected in
its marketing activities planned for 2001. 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  will  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 warranty that
includes parts and labor.  The Company intends to offer extended  service to its
customers under annual service contracts or on a fee-for-service basis.

International Operations

     The  Company's  key  objective is to appoint  distributors  in exchange for
exclusive  marketing rights to EECP in their respective  countries.  The Company
currently  has  distribution  agreements  for Canada,  Japan,  the Middle  East,
Greece,  the United Kingdom and Italy.  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.  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.

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

Competition

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

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

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

     If substantial  equivalence  cannot be established or if the FDA determines
that 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 overseas.

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

     In June 1998, the EECP system was awarded the CE Mark,  which satisfies the
regulatory  provisions for marketing in all 15 countries of the European  Union.
The CE Mark was awarded by DGM of Denmark, an official notified regulatory body,
under the European Council Directive concerning medical devices. The CE Mark, in
combination   with  the  ISO  9001   certification   awarded  by   Underwriter's
Laboratories  (UL) in February 1998,  places the Company in full compliance with
requirements  for the  marketing  of the EECP  system  in the  countries  of the
European  Union.  The ISO 9001  Certificate  covers  the  Company's  design  and
manufacturing  operation for the EECP system and recognizes that the Company has
established  and operates a world-class  quality  system.  In addition,  in July
2000,  the Company  received  its license for Level II devices from the Canadian
Health authority.

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

Third-Party Reimbursements

     Health care providers,  such as hospitals and physicians,  that purchase or
lease  medical  devices,  such as the EECP  system,  for use on  their  patients
generally rely on third-party payers, principally Medicare, Medicaid and private
health  insurance  plans,  to  reimburse  all or  part  of the  costs  and  fees
associated  with the procedures  performed with these devices.  Even if a device
has FDA approval,  Medicare and other third-party  payers may deny reimbursement
if they conclude that the device is not  cost-effective,  is  experimental or is
used for an unapproved indication.
<PAGE>
     In February  1999,  the Health Care Financing  Administration  (HCFA),  the
federal agency that  administers  the Medicare  program for more than 38 million
beneficiaries,  issued a national coverage policy for the use of the EECP 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.  In
July 2000, the American  Medical  Association's  Relative Value Update Committee
(RUC), which periodically reviews Medicare reimbursement levels,  proposed a 20%
increase in payment to Medicare-sponsored  healthcare providers of EECP therapy.
If approved by HCFA,  the proposed  change would  increase the national  average
payment from $127.42 to $153.49 per session effective January 1, 2001.

     Beginning August 1, 2000 Medicare coverage will be extended to include EECP
treatment received on an outpatient basis at hospitals and clinics under the new
APC (Ambulatory  Payment  Classification)  system.  The national average payment
rate is $149.83 per 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 150  private
insurers  are  reimbursing  for EECP today 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.  In
anticipation of receiving approval for broad-based coverage, the Company intends
to pursue,  through the cardiology  profession,  the  establishment of a Current
Procedural Code (CPT) specific to the EECP procedure.  Although such code is not
essential  and  although  there  is  no  assurance  that  a  new  code  will  be
established,  the Company believes that having a CPT code specifically  assigned
to EECP will accelerate the processing of reimbursement claims.

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

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 2001.
Such patents cover several specific  enhancements to the current EECP model. The
Company  has filed for a  continuation  in part on one  patent  and is  pursuing
additional patent applications.

     Moreover, trademarks have been registered for the names "EECP" and "Natural
Bypass",   and  in  1999  the  Company  filed  for  registration  of  additional
trademarks.

     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 20, 2000, the Company  employed  fifty-three  full-time  persons
with  nineteen  in sales  and sales  support,  seven in  clinical  applications,
thirteen in  manufacturing  and technical  service,  three in marketing,  two in
engineering and nine in administration  (including its four executive officers).
None of the Company's  employees are  represented by a labor union.  The Company
believes that its employee relations are satisfactory.
<PAGE>
Manufacturing

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

ITEM TWO - PROPERTIES

     The  Company  maintains  its office  and  warehouse  at 180 Linden  Avenue,
Westbury,  New York 11590,  where  approximately  18,000 square feet of space is
leased from a non-affiliated landlord through October 31, 2000 at an annual cost
of approximately $130,000. Upon the expiration of the lease, the Company, at its
option,  may renew the lease for an additional  five-year period or purchase the
facility at fair market value, as defined.  In April 2000, the Company exercised
its option under the lease to purchase the building and is presently negotiating
the purchase price. The purchase price, including improvements,  is estimated at
$1,300,000,  which the Company intends to finance with a mortgage lender. In the
event the Company is unsuccessful in its negotiations, it has the right to renew
the  aforementioned  lease through  October 2005.  Management  believes that the
Company's  facilities are adequate to meet its current needs and should continue
to be adequate for the foreseeable future.

ITEM THREE - LEGAL PROCEEDINGS

Litigation

     In May 1996,  an action was  commenced in the Supreme Court of the State of
New York, Nassau County,  against the Company,  its directors and certain of its
officers  and  employees  for the alleged  breach of an  agreement  to appoint a
non-affiliated party as its exclusive distributor of EECP systems. The complaint
sought damages in the  approximate sum of  $50,000,000,  declaratory  relief and
punitive  damages.  The  Company  denied the  existence  of any  agreement,  and
contended that the complaint was frivolous and without  merit.  The Company also
asserted  substantial  counterclaims.  In  August  1999,  a motion  for  summary
judgment to dismiss the complaint in its entirety was granted. This decision has
been appealed.

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

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

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year.
<PAGE>
                                     PART II

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

     The Company's Common Stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock MarketSM under the symbol VASO.  The  approximate  number of record
holders of Common  Stock as of July 21,  2000 was 872,  which  does not  include
approximately 44,400 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 2000                   Fiscal 1999
                         -----------------------        -----------------------
                            High          Low             High            Low
                            ----          ---             ----            ---
<S>                      <C>            <C>             <C>             <C>
First Quarter            $  2.000       $  1.219        $1.688          $  .750
Second Quarter           $  1.688       $   .813        $1.210          $  .625
Third Quarter            $  3.375       $   .781        $2.063          $  .656
Fourth Quarter           $ 14.188       $  2.500        $1.500          $ 1.000
</TABLE>

     The  last bid  price of the  Company's  Common  Stock on July 31,  2000 was
$4.0625 per share.  The Company has never paid any cash  dividends on its Common
Stock.  While  the  Company  does  not  intend  to  pay  cash  dividends  in the
foreseeable  future,  payment of cash dividends,  if any, will be dependent upon
the earnings and financial position of the Company, investment opportunities and
such other factors as the Board of Directors deems  pertinent.  Stock dividends,
if any,  also will be dependent on such factors as the Board of Directors  deems
pertinent.
<PAGE>
ITEM SIX - SELECTED FINANCIAL DATA

     The following table summarizes selected financial data for each of the five
years  ended May 31, 2000 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,
                                        ---------------------------------------------------------------
                                           2000          1999         1998        1997         1996
                                           ----          ----         ----        ----         ----
<S>                                     <C>            <C>          <C>         <C>          <C>
Statement of Operations

Revenues                                $13,673,632    $6,024,263   $5,225,064  $2,096,562   $2,683,128
                                        -----------    ----------   ----------  ----------   ----------
Cost of sales and services                3,060,765     1,833,238    1,543,849   1,020,047      609,136
Selling, general & administrative
 expenses                                 7,118,836     5,946,405    5,689,704   4,155,552    3,738,789
Research and development expenses         1,411,503       706,934    1,595,970   1,045,184      364,455
Depreciation and amortization               483,627       463,859      363,101     333,482      269,443
Provision for losses                        400,000                                225,000
Interest and financing costs                  7,302        11,880        4,057       8,511      515,451
Interest and other income, net              (99,317)     (115,064)    (169,422)   (174,810)    (171,001)
                                        -----------    ----------   ----------  ----------   ----------
                                         12,382,716     8,847,252    9,027,259   6,612,966    5,326,273
                                        -----------    ----------   ----------  ----------   ----------
Net earnings (loss) before tax benefit    1,290,916    (2,822,989)  (3,802,195) (4,516,404)  (2,643,145)

Income tax benefit                          400,000          -            -           -            -
                                        -----------    ----------   ----------  ----------   ----------
Net earnings (loss)                       1,690,916    (2,822,989)  (3,802,195) (4,516,404)  (2,643,145)

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 stock                            $1,596,794   $(3,892,152) $(5,030,912)$(4,516,404) $(2,643,145)
                                         ==========   ===========  =========== ===========  ===========
Net earnings (loss) per common share
    (basic and diluted)                        $.03         $(.08)       $(.11)      $(.10)       $(.07)
                                         ==========   ===========  =========== ===========  ===========
Weighted average common shares
outstanding - basic                      52,580,623    49,371,574   47,873,711  46,297,142   39,226,258
                                         ==========   ===========  =========== ===========  ===========
Weighted average common shares
outstanding - diluted                    57,141,949    49,371,574   47,873,711  46,297,142   39,226,258
                                         ==========   ===========  =========== ===========  ===========
Balance Sheet

Working capital                          $7,380,236    $2,174,774   $5,046,202  $1,981,331   $4,958,973
Total assets                            $10,588,962    $5,198,172   $7,345,246  $4,175,021   $8,246,151
Long-term debt                                   $0            $0           $0          $0   $3,725,000
Stockholders' equity (1)                 $7,943,770    $3,153,533   $5,752,993  $3,020,962   $3,091,094
<FN>
-------------------
(1) No cash dividends were declared during any of the above periods.
</FN>
</TABLE>
<PAGE>
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Results of Operations
Fiscal Years Ended May 31, 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  reported net earnings of $1,691,000  for fiscal 2000
versus a net loss  $2,823,000  for fiscal  1999  (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 in fiscal 1999,  and $94,000 and $205,000 in fiscal 2000
and 1999, respectively,  in dividend requirements related to the Company's April
1998 and June 1997 financings).

     The number of cardiology  practices  and  hospitals  interested in becoming
providers of enhanced external  counterpulsation  (EECP) has increased following
the announcement by the Health Care Financing  Administration (HCFA) in February
1999 of its decision to extend  Medicare  coverage  nationally  to the Company's
noninvasive,  outpatient  treatment  for coronary  artery  disease.  HCFA is the
federal  agency that  administers  the  Medicare  program for  approximately  38
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  announcement
of the results of the  Company's  one-year  follow-up  quality-of-life  outcomes
study at the American Heart  Association  (AHA) annual meetings in November 1999
and 1998, at the American  College of Cardiology  (ACC) annual  meeting in March
1999 and other scientific meetings.

     Revenue growth in 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,  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. The Company estimates
the standard  national  charge to approximate  $130 per session of EECP therapy,
which may be  adjusted by certain  geographic  indices.  This would  result in a
standard charge of $4,550 for a full course of therapy, which typically involves
35 one-hour outpatient sessions.  The assigned code will allow EECP providers to
bill Medicare  electronically,  substantially reducing the process for receiving
reimbursement.  Moreover,  in  light  of the  new  payment  instructions,  local
Medicare  contractors  will no longer have the  responsibility  of  establishing
reimbursement  rates.  These events led to revenue  growth in the latter  fiscal
quarters,  aided by the conversion to financed leases or outright sales of units
previously  placed under rental or fee-for-use  arrangements.  In July 2000, the
American Medical  Association's  Relative Value Update  Committee  (RUC),  which
periodically reviews Medicare  reimbursement levels,  proposed a 20% increase in
payment to Medicare- sponsored healthcare providers of EECP therapy. If approved
by HCFA, the proposed  change would increase the national  average  payment from
$127.42 to $153.49 per session effective January 1, 2001. Management expects the
aforementioned  events to provide a strong foundation for accelerated  growth in
fiscal 2001.

     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 primarily  attributable  to fourth quarter sales of $3,500,000,  which were
aided by the HCFA decision  described  above, as well as some placements made in
the past  under  rental or  fee-for-use  arrangements  that  began to convert to
financed leases or outright sales.

     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   (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 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  $7,119,000 and $5,946,000,  respectively.
The $1,173,000  increase in SGA expenses for the comparable fiscal year resulted
primarily  from  an  increase  in  sales  and  marketing  personnel   (including
non-recurring recruiting expenses), sales commissions and other selling expenses
related to increased revenues.
<PAGE>
     Research  and  development  (R&D)  expenses  in the year ended May 31, 2000
increased by $705,000 from the prior fiscal year. The increase relates primarily
to the expansion of the International EECP Patient Registry at the University of
Pittsburgh,  continued product design and development costs, and the feasibility
study in heart failure.

Fiscal Years Ended May 31, 1999 and 1998

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

     Revenues in fiscal  1999,  particularly  in the first two fiscal  quarters,
were adversely affected by the nature of the commercial arrangements under which
those units were placed. The overall increase in Company revenues in fiscal 1999
were attributable to fourth quarter sales of $3,500,000, which were aided by the
HCFA'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, 1999 and 1998 were  approximately  $5,946,000 and $5,690,000,  respectively.
The $256,000  increase in SGA expenses for the  comparable  fiscal year resulted
primarily from an increase in marketing personnel, commissions and other selling
expenses related to increased revenues.

     Research  and  development  (R&D)  expenses  in the year ended May 31, 1999
decreased by $889,000  from the prior  fiscal  year.  The decrease is related to
significant prior year expenses for the completion of the Company's  multicenter
clinical study of EECP  (completed in July 1997) and the  front-loaded  expenses
for the  development of an upgraded EECP system.  Current period expenses relate
to the long-term  follow-up  phase of the multicenter  clinical  study,  i.e., a
quality-of-life  outcomes study  (completed in July 1998),  the expansion of the
International  EECP Patient  Registry at the University of  Pittsburgh,  and the
ongoing  feasibility  study in congestive  heart failure,  all of which, to some
extent, will further affect operating results in fiscal 2000.

Liquidity and Capital Resources

     The Company has financed its fiscal 2000 operations  primarily from working
capital and  operating  results.  For the past two fiscal  years,  the Company's
operations  were  primarily  funded from the  proceeds of equity  financings  in
fiscal 1998 (described  below).  At May 31, 2000, the Company had a cash balance
of $3,058,000 and working  capital of $7,380,000,  compared to a cash balance of
$1,678,000  and working  capital of  $2,175,000  at May 31, 1999.  The Company's
operating  activities used cash of $1,159,000 and $3,028,000 for fiscal 2000 and
1999,  respectively.  Net cash used during  fiscal 2000  consisted  primarily of
earnings from operations,  increases in accounts  payable and accrued  expenses,
offset by  increases  in  accounts  receivable,  inventories  and other  current
assets.

     Investing  activities  used net cash of $279,000 and $17,000  during fiscal
2000 and  1999,  respectively.  The  principal  uses  were for the  purchase  of
property  and  equipment.  At May 31 2000,  the  Company  is in the  negotiation
process  for  the  purchase  of its  present  facilities.  The  purchase  price,
including improvements, is estimated at $1,300,000, which the Company intends to
finance with a mortgage lender.

     Financing activities provided cash of $2,819,000 and $355,000 during fiscal
2000 and 1999, respectively.  Financing activities during fiscal 2000 and fiscal
1999  consisted  primarily  from the sale of common  stock and  receipt  of cash
proceeds  upon the  exercise  of Company  common  stock  warrants  by  officers,
directors,  employees and  consultants.  Subsequent to May 31, 2000, the Company
received  additional  cash  proceeds  of $868,000  from the  exercise of Company
common stock options and warrants.

     In fiscal 1998,  the Company issued an aggregate of 325,000 shares of newly
created  5%  Series  B and  5%  Series  C  Convertible  Preferred  Stock  to one
accredited investor at a price of $20 per share,  realizing net cash proceeds of
$6,112,000.  Dividends  due on such  preferred  stock were paid in shares of the
Company's  common stock.  By February 1999, all of the Series B preferred  stock
(150,000  shares) had been  converted  into  2,135,946  shares of the  Company's
common stock. By February 29, 2000, all of the Series C preferred stock (175,000
shares) had been converted into 3,095,612 shares of the Company's common stock.
<PAGE>
     Management  believes  that its working  capital  position at May 31,  2000,
along with the ongoing commercialization of the EECP system and possible further
proceeds  from the exercise of options and  warrants,  will make it possible for
the Company to support its  internal  overhead  expenses  and to  implement  its
business plans for at least the next twelve months.

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 2000 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 2000 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 2000 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 2000 Annual Meeting of Stockholders,
and is incorporated herein by reference.
<PAGE>
ITEM FOURTEEN-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Financial Statements and Financial Statement Schedules
     ---------------
     (1)  See  Index  to  Consolidated  Financial  Statements  on  page  F-1  at
          beginning of attached financial statements.
     (2)  The following Consolidated Financial Statement Schedule is included in
          Part IV of this report:
          Schedule II - Valuation and Qualifying Accounts (13)
     All other  schedules are omitted  because they are not  applicable,  or not
     required,   or  because  the  required   information  is  included  in  the
     Consolidated Financial Statements or notes thereto.

(c)  Exhibits
     --------
     (3)  (a)  Restated Certificate of Incorporation (2)
          (b)  By-Laws (1)
     (4)  (a)  Specimen Certificate for Common Stock (1)
          (b)  Certificate of Designation of the Preferred  Stock,  Series A (3)
          (c)  Certificate of Designation of the Preferred Stock, Series B (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 (7)
          (b)  Outside Director Stock Option Plan (7)
          (c)  Employment  Agreement  dated  January  23,  1995,  as  amended on
               October  24,  1995 and March 12,  1998,  between  Registrant  and
               Anthony E. Peacock (4) (6) (10)
          (d)  Employment Agreement dated February 1, 1995, as amended March 12,
               1998, between Registrant and John C.K. Hui (4) (10)
          (e)  Modification and Extension Agreement dated March 12, 1998 between
               Registrant and Joseph Giacalone (10)
          (f)  1997 Stock Option Plan, as amended (11)
          (g)  Employment  Agreement dated January 6, 2000,  between  Registrant
               and D. Michael Deignan (12)
          (h)  1999 Stock Option Plan, as amended (13)
     (22)      Subsidiary of the Registrant
<TABLE>
<CAPTION>
                                                                   Percentage
               Name               State of Incorporation        Owned by Company
               ----               ----------------------        ----------------
               <S>                        <C>                          <C>
               Viromedics, Inc.           Delaware                     61%
     (23)      Consent of Grant Thornton LLP (13)
<FN>
     Financial Data Schedule (13)
</FN>
</TABLE>
---------
(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 Report on Form 8-K dated October 24, 1995.
(7)  Incorporated by reference to Notice of Annual Meeting of Stockholders dated
     December 5, 1995.
(8)  Incorporated by reference to Report on Form 8-K dated June 25, 1997.
(9)  Incorporated by reference to Report on Form 8-K dated April 30, 1998.
(10) Incorporated  by reference to Report on Form 10-K for the fiscal year ended
     May 31, 1998.
(11) Incorporated  by reference to Report on Form 10-K for the fiscal year ended
     May 31, 1999.
(12) Incorporated  by reference to Report on Form 10-Q for the quarterly  period
     ended February 29, 2000.
(13) Filed herewith.

(b)  Form 8-K Reports
     ----------------
     None
<PAGE>
     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange  Act of 1934,  the  Company has duly caused this report to be signed on
its behalf by the undersigned,  thereunto duly authorized on the 31st day of
July, 2000.

                         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 July 31,  2000 by the following  persons in
the capacities indicated:

----------------------        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
-----------------------       (Principal Executive Officer)
D. Michael Deignan

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

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

/s/ 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
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                 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                         Balance at
                                beginning       costs and       to other                          end of
                                of period       expenses        accounts        Deductions        period
                                ----------      ----------      --------        ----------      ----------
<S>                                    <C>      <C>                                               <C>
Year ended May 31, 2000
Allowance for doubtful
accounts (a)                           $-       $400,000                                          $400,000
                                ==========================================================================
Year ended May 31, 1999
  Allowance for doubtful
accounts (a)                           $-                                                               $-
                                ==========================================================================
Year ended May 31, 1998
  Allowance for doubtful
accounts (a)                           $-                                                               $-
                                ==========================================================================
<FN>
 (a)     Deducted from accounts receivable.
</FN>
</TABLE>
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Financial Statements

     Consolidated Balance Sheets as of May 31, 2000 and 1999               F-3

     Consolidated Statements of Operations for the

       years ended May 31, 2000, 1999 and 1998                             F-4

     Consolidated Statement of Changes in Stockholders'
       Equity for the years ended May 31, 2000, 1999 and 1998              F-5

     Consolidated Statements of Cash Flows for the

       years ended May 31, 2000, 1999 and 1998                             F-6

     Notes to Consolidated Financial Statements                       F-7 - F-15

                                      F-1
<PAGE>
                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS


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

We have audited the  accompanying  consolidated  balance sheets of  Vasomedical,
Inc. and Subsidiary (the "Company") as of May 31, 2000 and 1999, and the related
consolidated statements of operations,  changes in stockholders' equity and cash
flows for each of the three fiscal years in the period ended May 31, 2000. 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,  2000 and 1999,  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,  2000,  in  conformity  with  generally  accepted
accounting principles.

We have also audited  Schedule II Valuation and Qualifying  Accounts for each of
the three years in the period ended May 31, 2000. In our opinion,  this schedule
presents fairly, in all material  respects,  the information  required to be set
forth therein.

GRANT THORNTON LLP


Melville, New York
July 20, 2000

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

                           CONSOLIDATED BALANCE SHEETS

                                     May 31,
<TABLE>
<CAPTION>
                                                                   2000               1999
                                                                   ----               ----
<S>                                                            <C>                  <C>
         ASSETS

CURRENT ASSETS
     Cash and cash equivalents                                  $3,058,367          $1,678,175
     Accounts receivable, net of an allowance for doubtful
          accounts of $400,000 at May 31, 2000                   4,832,810           1,585,432
     Inventories                                                   906,984             594,093
     Deferred income taxes                                         400,000
     Other current assets                                          479,267             177,713
                                                               -----------          ----------
         Total current assets                                    9,677,428           4,035,413
PROPERTY AND EQUIPMENT, net                                        548,316             571,368
CAPITALIZED COST IN EXCESS OF FAIR
     VALUE OF NET ASSETS ACQUIRED, net of accumulated
     amortization of $1,136,517 and $923,421 at May 31,
     2000 and 1999, respectively                                   355,181             568,277
OTHER ASSETS                                                         8,037              23,114
                                                               -----------          ----------
                                                               $10,588,962          $5,198,172
                                                               ===========          ==========
     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                      $1,219,803            $705,640
     Accrued warranty and customer support expenses                258,000             382,000
     Accrued professional fees                                     276,000             271,438
     Accrued commissions                                           543,389             307,951
     Dividends payable                                                                 193,610
                                                               -----------          ----------
         Total current liabilities                               2,297,192           1,860,639
ACCRUED WARRANTY COSTS                                             129,000             114,000
OTHER LONG-TERM LIABILITIES                                         16,000              70,000
DEFERRED REVENUES                                                  203,000
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred  stock,  $.01 par value;  1,000,000
       shares  authorized;  175,000 shares at May 31,
       1999, issued and outstanding (liquidation preference
       of $3,500,000 at May 31, 1999)                                                    1,750
     Common stock, $.001 par value; 110,000,000 shares authorized;
       55,921,330 and 50,402,687 shares at May 31, 2000 and 1999,
       respectively, issued and outstanding                         55,921              50,403
     Additional paid-in capital                                 40,939,158          37,749,483
     Accumulated deficit                                       (33,051,309)        (34,648,103)
                                                               -----------          ----------
                                                                 7,943,770           3,153,533
                                                               -----------          ----------
                                                               $10,588,962          $5,198,172
                                                               ===========          ==========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>

                                      F-3
<PAGE>


                        Vasomedical, Inc. and Subsidiary

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                          Year ended May 31,
                                          ----------------------------------------------------
                                              2000               1999                  1998
                                              ----               ----                  ----
<S>                                       <C>                 <C>                   <C>
Revenues

 Equipment sales                          $13,120,144         $5,335,200            $4,958,333
 Equipment rentals and services               553,488            689,063               266,731
                                          -----------         ----------            ----------
                                           13,673,632          6,024,263             5,225,064
                                          -----------         ----------            ----------
Costs and expenses

 Cost of sales and services                 3,060,765          1,833,238             1,543,849
 Selling, general and administrative        7,118,836          5,946,405             5,689,704
 Research and development                   1,411,503            706,934             1,595,970
 Depreciation and amortization                483,627            463,859               363,101
 Provision for doubtful accounts              400,000
 Interest and financing costs                   7,302             11,880                 4,057
 Interest and other income - net             (99,317)          (115,064)             (169,422)
                                          -----------         ----------            ----------
                                           12,382,716          8,847,252             9,027,259
                                          -----------         ----------            ----------
 NET EARNINGS (LOSS) BEFORE INCOME TAXES    1,290,916         (2,822,989)           (3,802,195)

 Benefit for income taxes                     400,000
                                          -----------         ----------            ----------
 NET EARNINGS (LOSS)                        1,690,916         (2,822,989)           (3,802,195)
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 STOCK                           $1,596,794        $(3,892,152)          $(5,030,912)
                                          ===========        ===========           ===========
Net earnings (loss) per common share
           (basic and diluted)                   $.03              $(.08)                $(.11)
                                                 ====              =====                 =====
Weighted average common shares
 outstanding - basic                       52,580,623         49,371,574            47,873,711
                                          ===========        ===========           ===========
             - diluted                     57,141,949         49,371,574            47,873,711
                                          ===========        ===========           ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>

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

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                                        Total
                                                                                       Additional      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, 1997                  -          -       46,782,003    $46,782     $28,699,219     $(25,725,039)    $3,020,962

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

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

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
                                      =======     ======    ==========    =======     ===========     ============     ==========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
                                      F-5
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                          Year ended May 31,
                                                                          ------------------
                                                         2000                    1999                     1998
                                                         ----                    ----                     ----
<S>                                                   <C>                    <C>                      <C>
Cash flows from operating activities
  Net earnings (loss)                                $1,690,916              $(2,822,989)             $(3,802,195)
                                                     ----------               ----------               ----------
  Adjustments to reconcile net earnings (loss)
    to net cash used in operating activities
      Depreciation and amortization                     483,627                  463,859                  363,101
      Provision for doubtful accounts                   400,000
      Deferred income taxes                            (400,000)
      Stock options granted for services                 87,000
      Changes in operating assets and liabilities
        Accounts receivable                          (3,647,378)                (609,091)                (919,693)
        Inventories                                    (281,337)                (367,791)                 203,096
        Other assets                                   (286,478)                 (12,485)                 (78,691)
        Accounts payable, accrued expenses and
         other current liabilities                      630,164                  587,915                  211,687
        Other liabilities                               164,000                 (267,000)                 164,370
                                                     ----------               ----------               ----------
                                                     (2,850,402)                (204,593)                 (56,130)
                                                     ----------               ----------               ----------
     Net cash used in operating activities           (1,159,486)              (3,027,582)              (3,858,325)
                                                     ----------               ----------               ----------
Cash flows from investing activities
  Purchase of property and equipment                   (279,033)                 (17,229)                (123,056)
                                                     ----------               ----------               ----------
     Net cash used in investing activities             (279,033)                 (17,229)                (123,056)
                                                     ----------               ----------               ----------
Cash flows from financing activities
  Proceeds from exercise of options and warrants      2,818,711                  355,000                  484,463
  Proceeds from issuance of preferred stock, net                                                        6,111,900
                                                     ----------               ----------               ----------
     Net cash provided by financing activities        2,818,711                  355,000                6,596,363
                                                     ----------               ----------               ----------
      NET INCREASE (DECREASE) IN
        CASH AND CASH EQUIVALENTS                     1,380,192               (2,689,811)               2,614,982
Cash and cash equivalents - beginning of year         1,678,175                4,367,986                1,753,004
                                                     ----------               ----------               ----------
Cash and cash equivalents - end of year              $3,058,367               $1,678,175               $4,367,986
                                                     ==========               ==========               ==========
Non-cash investing and financing activities were
 as follows:

  Deemed dividend on preferred stock                                            $864,000               $1,132,000
  Issuance of common stock in lieu of preferred
   dividends                                             $94,122                  73,692                   34,580
  Inventories transferred to property and equipment,
     attributable to operating leases - net               31,554                 452,000                   71,647
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
                                      F-6
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           May 31, 2000, 1999 and 1998

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,  substantially  all of the  Company's  revenues  have  been
generated from customers in the United States.

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

     Principles of Consolidation

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

     Inventories

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

     Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation and
amortization.  Depreciation  is provided over the estimated  useful lives of the
assets,  which  range  from  three to seven  years,  on a  straight-line  basis.
Accelerated  methods  of  depreciation  are  used  for tax  purposes.  Leasehold
improvements  are  amortized  over the shorter of the useful life of the related
leasehold improvement or the life of the related lease, 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  which  have  been paid by  customers  prior to the
performance of extended warranty services.

     In December 1999, the  Securities  and Exchange  Commission  released Staff
Accounting  Bulletin  No.  101 ("SAB  101"),"Revenue  Recognition  in  Financial
Statements."  The  Company  will  adopt the  provisions  of SAB 101 in the first
quarter  of  fiscal  2001 and  anticipates  that such  adoption  will not have a
material impact on the Company's financial statements.

     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.

                                      F-7
<PAGE>
     Warranty Costs

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

     Research and Development

     Research and development costs are expensed as incurred.

     Income Taxes

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

     Use of Estimates

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

     Net 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 and 1998 as their  effects
would be antidilutive.

     Stock Compensation

     The Company measures  stock-based  awards using the intrinsic value method.
As  described  in Note E, 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.

NOTE B - INVENTORIES
<TABLE>
<CAPTION>
                                                        May 31,
                                                        -------
     Inventories consist of the following:      2000                1999
                                                ----                ----
          <S>                                 <C>                  <C>
          Raw materials                       $545,924             $79,174
          Finished goods                       361,060             514,919
                                              --------            --------
                                              $906,984            $594,093
                                              ========            ========
</TABLE>

                                      F-8
<PAGE>
NOTE C - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
                                                                      May 31,
                                                                      ------
     Property and equipment is summarized as follows:          2000           1999
                                                               ----           ----
          <S>                                                <C>            <C>
          Office, laboratory and other equipment             $413,070       $273,354
          EECP units under operating leases                   416,000        624,000
          Furniture and fixtures                               81,232         81,232
          Construction in progress                            139,317
          Leasehold improvements                               95,610         95,610
                                                            ---------      ---------
                                                            1,145,229      1,074,196
          Less accumulated depreciation and amortization     (596,913)      (502,828)
                                                            ---------      ---------
                                                            $ 548,316      $ 571,368
                                                            =========      =========
</TABLE>

NOTE D - STOCKHOLDERS' EQUITY AND WARRANTS

Fiscal 1998
    On June 25, 1997,  the Company  issued  150,000  shares of newly  created 5%
Series  B  Cumulative  Convertible  Preferred  Stock,  $.01  par  value,  to one
accredited investor pursuant to Regulation D under the Securities Act of 1933 at
a price of $20 per share,  for net cash proceeds of $2,818,000.  The convertible
preferred  stock had no voting rights and was  convertible  into common stock of
the Company at an effective conversion price of the lower of (i) $2.18 per share
or (ii) 85% of the average  closing bid of the  Company's  common  stock for the
five (5) trading days  immediately  preceding the conversion date, as defined in
the Certificate of Designation of the convertible  preferred stock. In addition,
the investor was granted five-year warrants to purchase 405,405 shares of common
stock at an exercise  price of $2.18 per share.  The  Company  recorded a deemed
dividend of  $857,000  in the first  quarter of fiscal  1998,  representing  the
discount resulting from the allocation of proceeds to the beneficial  conversion
feature and the fair value of the underlying warrants.  Such deemed dividend was
recognized  from the date of issuance  through the date such preferred stock was
first  convertible.  In connection  with this  transaction,  the Company  issued
five-year  warrants to the  broker/finder  to purchase  150,000 shares of common
stock at an exercise  price of $2.18 per share.  These warrants were fair valued
at $123,000.  During fiscal 1998, 99,250 shares of Series B preferred stock were
converted into 1,160,064 shares of common stock.

    On April 30, 1998, the Company  completed a second tranche of financing with
the same  accredited  investor  and issued  175,000  shares of newly  created 5%
Series C Cumulative  Convertible  Preferred Stock,  $.01 par value,  pursuant to
Regulation D under the Securities  Act of 1933 at a price of $20 per share,  for
net cash proceeds of $3,294,000.  The convertible  preferred stock has no voting
rights and is  convertible  into  common  stock of the  Company at an  effective
conversion  price of the lower of (i) $2.08 per share or (ii) 85% of the average
closing  bid of the  Company's  common  stock  for the  five  (5)  trading  days
immediately  preceding the conversion  date (the "Average  Closing  Price"),  as
defined in the Certificate of Designation of the convertible preferred stock. In
addition, the investor was granted five-year warrants to purchase 413,712 shares
of  common  stock at an  exercise  price of $2.08 per  share.  The  Company  has
estimated the value of the deemed dividend,  representing the discount resulting
from the  allocation of proceeds to the  beneficial  conversion  feature and the
fair value of the  underlying  warrants,  to approximate  $936,000.  Such deemed
dividend  was  recognized  from  the date of  issuance  through  the  date  such
preferred   stock  was  first   convertible  (on  or  about  August  15,  1998).
Accordingly,  the Company recognized a deemed dividend of $275,000 in the fourth
quarter of fiscal 1998 and the $661,000  remaining  deemed dividend in the first
quarter of fiscal 1999. In connection with this transaction,  the Company issued
five-year  warrants to the  broker/finder  to purchase  175,000 shares of common
stock at an exercise  price of $2.08 per share.  These warrants were fair valued
at $135,000.

                                      F-9
<PAGE>

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

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.
Subsequent to May 31, 2000,  warrants to purchase 413,712 shares of common stock
were exercised, aggregating $861,000 in proceeds to the Company.

Warrants

    Warrant  activity  for the  years  ended  May 31,  1998,  1999  and  2000 is
summarized as follows:
<TABLE>
<CAPTION>
                            Non-employee
                              Directors     Employees      Consultants      Total       Price Range
                            ------------    ---------      -----------      -----       -----------
<S>                           <C>            <C>            <C>           <C>          <C>
Balance at June 1, 1997       1,175,000      1,950,000      1,218,001     4,343,001     $.25 - $1.50
  Issued                              -              -      1,144,117     1,144,117    $2.08 - $2.18
  Exercised                     (50,000)       (30,000)     (483,406)      (563,406)    $.25 - $2.18
  Canceled/retired                    -              -       (50,000)       (50,000)           $1.50
                              ---------      ---------     ---------      ---------     ----   -----
Balance at May 31, 1998       1,125,000      1,920,000     1,828,712      4,873,712     $.38 - $2.18
  Exercised                    (300,000)      (525,000)            -       (825,000)    $.38 -  $.45
  Canceled/retired             (425,000)      (120,000)     (450,000)      (995,000)    $.91 - $1.50
                              ---------      ---------     ---------      ---------     ----   -----
Balance at May 31, 1999         400,000      1,275,000     1,378,712      3,053,712     $.38 - $2.18
  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
                              =========      =========     =========      =========     ====   =====
Number of shares exercisable          -        750,000       868,712      1,618,712     $.45 - $2.08
                              =========      =========     =========      =========     ====   =====
</TABLE>
     The weighted-average  fair value of warrants granted during fiscal 1998 was
$.80.

     The following table summarizes  information about warrants  outstanding and
exercisable at May 31, 2000:
<TABLE>
<CAPTION>
                                   Warrants Outstanding and Exercisable

                                                   Weighted
                                Number              Average
                             Outstanding and       Remaining            Weighted
                             Exercisable at      Contractual Life       Average
Range of Exercise Prices     May 31, 2000            (yrs.)          Exercise Price
------------------------     ------------        ----------------    --------------
<S>                           <C>                     <C>                <C>
$.45                            750,000                2.1                $.45
$.91                            200,000                6.4                $.91
$1.44                           100,000                 .8               $1.44
$2.08                           568,712                2.1               $2.08
                              ---------                ---               -----
                              1,618,712                2.5               $1.14
                              =========                ===               =====
</TABLE>
                                      F-10
<PAGE>

NOTE E - 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.  Subsequent to May 31, 2000,  the Board of Directors
granted  stock  options  under the 1999 Plan to employees  and a  consultant  to
purchase  an  aggregate  of 191,500  shares and 30,000  shares of common  stock,
respectively,  at exercise  prices  ranging from $4.28 to $4.94 per share (which
represented the fair market value of the underlying  common stock at the time of
the  respective  grants).  The  stock  options  issued  to the  consultant  were
fair-valued at $126,000 for which the Company will record a charge to operations
in the periods that the options vest, as defined.

                                      F-11
<PAGE>
     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.

     Activity  under all the plans for the years  ended May 31,  1998,  1999 and
2000 is summarized as follows:
<TABLE>
<CAPTION>
                                                                 Outstanding Options
                                                     ----------------------------------------------
                                Shares Available     Number of       Exercise      Weighted Average
                                   for Grant          Shares      Price per Share   Exercise Price
                                ----------------     ---------    ---------------  ----------------
<S>                               <C>                <C>           <C>                    <C>
Balance at June 1, 1997             798,907          1,026,093     $.78   -  $3.44         $2.97
  Shares authorized               1,800,000                  -                   -             -
  Plans terminated                 (699,357)                 -                   -             -
  Options granted                (1,054,050)         1,054,050    $1.77   -  $2.44         $1.91
  Options exercised                       -             (5,000)              $1.03         $1.03
  Options canceled                   10,000            (15,000)   $1.91   -  $3.44         $2.42
                                 ----------          ---------    ----------------         -----
Balance at May 31, 1998             855,500          2,060,143     $.78   -  $3.44         $2.44
  Shares authorized               1,000,000
  Options granted                (1,853,500)         1,853,500     $.75   -   $.88          $.87
  Options canceled                   38,500            (58,500)    $.88   -  $1.91         $1.36
                                 ----------          ---------    ----------------         -----
Balance at May 31, 1999              40,500          3,855,143     $.75   -  $3.44         $1.70
  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      $.78  -  $5.15         $1.76
                                 ==========          =========     ===============         =====
</TABLE>

     The following table summarizes  information about stock options outstanding
and exercisable at May 31, 2000:
<TABLE>
<CAPTION>
                                           Options Outstanding                      Options Exercisable
                             --------------------------------------------------     -------------------

                                                 Weighted
                                                  Average                                          Weighted
                                 Number          Remaining         Weighted          Number        Average
                              Outstanding at  Contractual Life      Average      Exercisable at    Exercise
Range of Exercise Prices       May 31, 2000       (yrs.)         Exercise Price    May 31, 2000      Price
------------------------      --------------  ----------------   --------------  --------------    --------
<S>                             <C>                <C>               <C>           <C>             <C>
$.75   -  $.88                  1,514,515          6.1                $.86          1,061,846        $.87
$1.22  -  $1.78                   973,900          9.3               $1.37             33,900       $1.77
$1.91  -  $2.44                   839,319          7.7               $1.93            534,981       $1.94
$3.44  -  $5.15                   816,000          7.2               $3.69            621,000       $3.60
                                ---------          ---               -----          ---------       -----
                                4,143,734          7.4               $1.76          2,251,727       $1.89
                                =========          ===               =====          =========       =====
</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,              2000           1999         1998
-------------------------              ----           ----         ----

<S>                                    <C>             <C>         <C>
Expected life (years)                     5               5           5
Expected volatility                     80%             80%         85%
Risk-free interest rate                6.0%            4.4%        5.7%
</TABLE>
                                      F-12
<PAGE>
     The following are the pro forma net earnings (loss) and net earnings (loss)
per share - basic and diluted  amounts  for fiscal  2000,  1999 and 1998,  as if
compensation  expense for stock-based  awards had been determined based on their
estimated fair value at the date of grant:
<TABLE>
<CAPTION>
                                            2000            1999             1998
                                            ----            ----             ----
<S>                                       <C>            <C>              <C>
Pro forma net earnings (loss)             $576,435       $(5,534,569)     $(5,702,635)
Pro forma net earnings (loss) per share
- basic and diluted                           $.01             $(.11)           $(.12)
</TABLE>

     The weighted-average fair value of options granted during fiscal 2000, 1999
and 1998 was $2.75,  $.58 and $1.34,  respectively.  At May 31, 2000, there were
approximately  16,400,000  remaining  authorized  shares of common  stock  after
reserves for all stock option plans, stock warrants and shareholders' rights.

NOTE F   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,
                                              --------------------------------
                                            2000            1999            1998
                                            ----            ----            ----
<S>                                     <C>             <C>             <C>
Numerator:
   Basic earnings (loss)                $1,690,916      $(2,822,989)    $(3,802,195)
      Preferred stock dividends            (94,122)      (1,069,163)     (1,228,717)
                                        ----------      -----------     -----------
   Diluted earnings (loss)              $1,596,794      $(3,892,152)    $(5,030,912)
                                        ==========      ===========     ===========
Denominator:
   Basic - weighted average shares      52,580,623       49,371,574      47,873,711
    Stock options                        1,389,607                -               -
    Warrants                             1,428,678                -               -
    Convertible preferred stock          1,743,041                -               -
                                        ----------      -----------     -----------
   Diluted - weighted average shares    57,141,949       49,371,574      47,873,711
                                        ==========      ===========     ===========
Basic and diluted earnings (loss) per
 share                                       $0.03            $(.08)          $(.11)
                                             =====            =====           =====
</TABLE>

NOTE G - 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 1998 and 2000.

NOTE H - INCOME TAXES

    In fiscal  2000,  the  Company  recorded a deferred  tax benefit of $400,000
resulting from the recognition of a deferred tax asset summarized as follows:
<TABLE>
<CAPTION>

                                                                           May 31,
                                                                           ------
                                                        2000                1999                1998
                                                        ----                ----                ----
   <S>                                               <C>                 <C>                 <C>
   Deferred tax assets

    Net operating loss and other carryforwards       $14,627,000         $11,913,000         $10,908,000
    Accrued compensation                                  12,500              92,000             120,000
    Bad debts                                            187,000                   -                   -
    Other                                                238,500             247,000             268,000
                                                     -----------         -----------         -----------
         Total gross deferred tax assets              15,065,000          12,252,000          11,296,000
    Valuation allowance                              (14,665,000)        (12,252,000)        (11,296,000)
                                                     -----------         -----------         -----------
                                                     $   400,000         $         -         $         -
                                                     ===========         ===========         ===========
</TABLE>
                                      F-13
<PAGE>
     Management  has  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 Company had net  operating  loss  carryforwards  for
Federal income tax purposes of  approximately  $42,685,000,  expiring at various
dates from 2003 through 2020.

The  following  is a  reconciliation  of the  effective  income  tax rate to the
federal statutory rate:
<TABLE>
<CAPTION>
                                          2000                   1999                    1998
                                          ----                   ----                    ----
                                         Amount        %        Amount        %         Amount        %
                                         ------        -        ------        -         ------        -
<S>                                     <C>          <C>      <C>           <C>       <C>           <C>
Federal statutory rate                  $387,911     34.0     $(959,816)    (34.0)    $(1,292,746)  (34.0)
State taxes, net of federal benefit       83,451      7.3      (275,455)     (9.7)       (304,175)   (8.0)
Permanent differences                     89,756      7.8        86,165       3.1          92,611     2.4
Utilization of current year net operating
  loss generating no tax benefit        (561,118)   (49.1)    1,149,106      40.6       1,504,310    39.6
Adjustment of valuation allowance       (400,000)   (35.0)            -         -               -       -
                                       ---------     ----     ---------      ----      ----------    ----
                                       $(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 I - COMMITMENTS AND CONTINGENCIES

Employment Agreements

     The Company maintains  employment  agreements with its executive  officers,
expiring at various  dates through  January 2002. In January 2000,  the Board of
Directors  appointed a new President and CEO and approved a one-year  employment
agreement   for  annual   compensation   of  $180,000,   including  a  grant  of
non-qualified  stock options to purchase 600,000 shares of common stock at $1.21
per share,  subject to vesting provisions,  as defined.  Additionally,  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  his  employment  agreement.  Upon such  termination,  the
employee has the right to receive, as a lump-sum payment,  certain  compensation
remaining to be paid for the balance of the term of the agreement.

     Approximate aggregate minimum annual compensation  obligations under active
employment agreements at May 31, 2000, are summarized as follows:
<TABLE>
<CAPTION>

                       Fiscal Year              Amount
                       -----------              ------
                              <S>             <C>
                              2001            $403,000
                              2002              93,000
                                              --------
                                              $496,000
                                              ========
</TABLE>

                                      F-14
<PAGE>
Leases

    The  Company  occupies  office and  warehouse  space  under a  noncancelable
operating  lease which  expires on October 31, 2000.  Rent expense was $130,000,
$125,000  and  $121,000 in fiscal 2000,  1999 and 1998,  respectively.  In April
2000, the Company  exercised its option under the lease to purchase the building
and is presently  negotiating  the purchase  price,  which it expects to finance
through a  mortgage  lender.  In the event the  Company is  unsuccessful  in its
negotiations, it has the right to renew the aforementioned lease through October
2005.

     Approximate aggregate minimum annual obligations under this lease agreement
and  other  equipment  leasing  agreements  at May 31,  2000 are  summarized  as
follows:
<TABLE>
<CAPTION>
                       Fiscal Year              Amount
                       -----------              ------
                              <S>              <C>
                              2001            $113,000
                              2002              19,000
                              2003              16,000
                                              --------
                                              $148,000
                                              ========
</TABLE>
Litigation

     In May 1996,  an action was  commenced in the Supreme Court of the State of
New York, Nassau County,  against the Company,  its directors and certain of its
officers and employees for the alleged  breach of an agreement to appoint a non-
affiliated  party as its exclusive  distributor  of EECP systems.  The complaint
sought damages in the  approximate sum of  $50,000,000,  declaratory  relief and
punitive  damages.  The  Company  denied the  existence  of any  agreement,  and
contended that the complaint was frivolous and without  merit.  The Company also
asserted  substantial  counterclaims.  In  August  1999,  a motion  for  summary
judgment to dismiss the complaint in its entirety was granted. This decision has
been appealed.

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

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

401(k) Plan

     In April 1997, the Company  adopted the  Vasomedical,  Inc.  401(k) Plan to
provide retirement  benefits for its employees.  As allowed under Section 401(k)
of the Internal Revenue Code, the plan provides  tax-deferred  salary deductions
for  eligible  employees.  Employees  are  eligible to  participate  in the next
quarter  enrollment  period after  employment.  Participants  may make voluntary
contributions  to  the  plan  up  to  15%  of  their  compensation.  No  Company
contributions were made for the fiscal years ended May 31, 2000, 1999 and 1998.

Agreement with VAMED

    In connection with an acquisition in 1995, the Company  assumed  commitments
under an  agreement,  expiring  November  2008,  with VAMED  Medical  Instrument
Company Ltd. ("VAMED"),  a Chinese company,  for the contract manufacture of its
current EECP system,  subject to certain performance  standards,  as defined. At
May 31, 2000, the Company had outstanding purchase commitments of $389,000.  The
Company  believes that VAMED will be able to meet the  Company's  needs for EECP
systems.

                                      F-15
<PAGE>
                                  EXHIBIT INDEX

Exhibit No.

(10)      1999 Stock Option Plan, as amended

(23)      Consent of Grant Thornton LLP

(27)      Financial Data Schedule