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, 2003

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

Commission File No. 0-18105

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

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

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

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

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

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

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

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant as of August 20, 2003,  based on the average price on that date,
was  $50,082,000.  At August 20, 2003,  the number of shares  outstanding of the
issuer's common stock was 57,827,690.


                      DOCUMENTS INCORPORATED BY REFERENCE

     Part  III -  (Items  10,  11,  12 and 13).  Registrant's  definitive  proxy
statement to be filed pursuant to Regulation 14A to the Securities  Exchange Act
of 1934.


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                                     PART I

ITEM ONE - BUSINESS

     Except for historical  information  contained herein, the matters discussed
are forward looking statements that involve risks and  uncertainties.  When used
herein,  words such as  "anticipates",  "believes",  "estimates",  "expects" and
"intends"  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 the dramatic  changes  taking place in the  healthcare
environment;  the  impact  of  competitive  procedures  and  products  and their
pricing;  medical insurance  reimbursement  policies;  unexpected  manufacturing
problems;  unforeseen  difficulties and delays in the conduct of clinical trials
and other product development  programs;  the actions of regulatory  authorities
and third-party  payers in the United States and overseas;  uncertainties  about
the acceptance of a novel therapeutic modality by the medical community; and the
risk  factors  reported  from time to time in the  Company's  SEC  reports.  The
Company  undertakes  no  obligation  to update  forward-looking  statements as a
result of future events or developments.

General Overview

     Vasomedical, Inc. (the Company),  incorporated in Delaware in July 1987, is
primarily  engaged in designing,  manufacturing,  marketing and supporting  EECP
external  counterpulsation systems based on the Company's proprietary technology
currently  indicated for use in cases of angina (i.e., chest pain),  cardiogenic
shock,  acute myocardial  infarction  (i.e.,  heart attack) and congestive heart
failure (CHF). The Company is also actively engaged in research to determine the
potential  benefits of EECP therapy in the setting of acute coronary  syndromes,
as well as in the management of other major vascular  disease states,  including
congestive  heart failure.  EECP is a non-invasive,  outpatient  therapy for the
treatment  of  diseases of the  cardiovascular  system.  The  therapy  serves to
increase  circulation in areas of the heart with less than adequate blood supply
and may restore systemic  vascular  function.  The Company  provides  hospitals,
clinics and private  practices with EECP equipment,  treatment  guidance,  and a
staff  training and  maintenance  program  designed to provide  optimal  patient
outcomes.  EECP is a registered  trademark for  Vasomedical's  enhanced external
counterpulsation  systems.

     EECP  therapy is  currently  reimbursed  by  Medicare  and  numerous  other
commercial  third-party  payers for the  treatment  of  refractory  angina.  The
reimbursement  rate for a full  course of 35  one-hour  treatments  ranges  from
$6,000 to $10,500.  Although  Medicare has not  modified  its national  coverage
policy for EECP  therapy to  specifically  include  CHF  patients,  the  Company
believes, based upon data published from the International EECP Patient Registry
(IEPR),  that there exists a  significant  subset of patients with CHF that also
have disabling  angina that would qualify for Medicare  reimbursement  under its
present coverage policy.

The EECP External Counterpulsation Systems

General Discussion

     Cardiovascular disease (CVD) is the leading cause of death in the world and
is among the top three diseases in terms of healthcare  spending in nearly every
country.  CVD claimed  approximately  950,000 lives in the United States in 2000
and was  responsible for 1 of every 2.5 deaths.  The American Heart  Association
(AHA)  reports in its 2003 Heart and Stroke  Statistical  Update  that,  if high
blood pressure is included,  approximately 62 million Americans suffer from some
form of cardiovascular  disease.  Among these, 12.9 million have coronary artery
disease,  6.6 million of whom suffer from angina  pectoris,  a painful and often
debilitating  complication  caused by  obstruction  of the arteries  that supply
blood to the  myocardium or heart muscle,  with an additional  400,000 new cases
seen annually.  Medications,  including  vasodilators,  are often  prescribed to
increase  blood  flow to the  coronary  arteries.  When  drugs  fail or cease to
correct the problem, invasive  revascularization  procedures such as angioplasty
and coronary stent placement,  as well as coronary artery bypass grafting (CABG)
are employed. Despite the success of these procedures in lowering the death rate
from cardiovascular  disease and allowing many to live longer lives,  restenosis
or  reocclusion  of the affected  vessels  remains a problem.  Restenosis  rates
currently reported in the literature for angioplasty and stenting range from 18%
- 50%.  Half of all vein grafts in coronary  artery  bypass  procedures  exhibit
localized or diffuse narrowings within approximately ten years.

     CHF is a complication of many serious diseases in which the heart loses its
full pumping  capacity,  causing blood to back up into other organs,  especially
the lungs and liver.  The  condition  affects  both sexes and is most  common in

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people over age 50. Symptoms include shortness of breath,  fatigue,  swelling of
the abdomen,  legs and ankles, rapid or irregular heartbeat,  low blood pressure
and  enlargement  of the liver.  Causes range from high blood  pressure,  heart-
valve disease, heart attack, coronary artery disease,  heartbeat irregularities,
severe lung disease such as emphysema, congenital heart disease, cardiomyopathy,
hyperthyroidism and severe anemia.

     CHF is treated with medication and,  sometimes,  surgery on heart valves or
the coronary  arteries and, in certain  severe cases,  heart  transplants.  Left
ventricular assist devices (LVADs) and the use of cardiac  resynchronization and
implantable  defibrillators  continue to advance.  Still,  no consensus  therapy
currently  exists for CHF and patients  must  currently  suffer  their  symptoms
chronically and have a reduced life expectancy.

     According to 2003 AHA data, 2.4 million men and 2.5 million women in the US
have the  condition.  About  550,000 new cases of the  disease  occur each year.
Deaths caused by the disease increased 148% from 1979 to 2000. The prevalence of
the disease is growing  rapidly as a result of the aging of the  population  and
the improved  survival  rate of people after heart  attacks.  Also,  because the
condition  frequently  entails  visits  to the  emergency  room and in-  patient
treatment,  two-thirds of all hospitalizations for people over age 65 are due to
CHF. In addition to careful outpatient care and monitoring,  the economic burden
of  heart  failure  is  enormous.  A  discussion  of this  subject  in  Clinical
Cardiology  (March 2000) estimated that heart failure  management costs in 1999,
for the US alone,  were $56 billion.  Worldwide,  22 million people have CHF and
there are over 1 million new cases of CHF each year.  Clearly,  a treatment that
can reduce the  incidence  of heart  failure and  alleviate  some of this burden
would be quickly adopted.

     Given the pressing need to identify new and effective methods to treat CHF,
the Company has been actively  focusing clinical  development  resources on CHF.
Heart failure  offers a good  strategic fit with the  Company's  current  angina
business and offers an equal or better market opportunity.  Unmet clinical needs
in CHF are greater than those for angina,  as there are no consensus  therapies,
invasive or  otherwise,  beyond  medical  management  for the  condition.  It is
noteworthy  that the IEPR  currently  shows  that  approximately  one-  third of
patients  treated  also have a  history  of CHF and have  demonstrated  positive
outcomes from EECP therapy.

The Systems

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

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

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

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

     Patients usually begin to experience  symptomatic relief of angina after 15
or 20 hours of a 35-hour  treatment  regimen.  Positive  effects  are  sustained
between  treatments and usually persist years after  completion of a full course
of therapy.  Data reported in the April 2000 issue of Clinical Cardiology showed
a five-year  survival  rate for those who respond to EECP therapy of 88%, a rate
similar to those seen in contemporary  surgical  bypass and angioplasty  trials,
despite  the fact that many of the  patients  who  underwent  EECP  therapy  had
already  failed  previous  attempts  at  revascularization.  In  addition,  data
collected by the IEPR at the University of Pittsburgh  Graduate School of Public
Health points to sustained lowering of anginal severity and frequency of attacks
at six, twelve and twenty-four months post-treatment.

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<PAGE>
     In February  1995,  the Company  received  510(k)  clearance  to market the
second-generation   version  of  its  EECP  therapy   system,   the  MC2,  which
incorporated a number of technological improvements over the original system. In
addition,  in December 2000, the Company received 510(k) clearance to market its
third generation system, the TS3. The FDA's clearance in these 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. In
June 2002,  the FDA granted  510(k) market  clearance for an upgraded TS3, which
incorporated the Company's  patent-pending  CHF treatment and oxygen  saturation
monitoring  technologies,  and provided for a new indication for the use of EECP
in CHF, which applied to all present models of the Company's EECP systems.

Clinical Studies

     Early   experiments   with   counterpulsation   at  Harvard  in  the  1950s
demonstrated that this technique markedly reduces the workload,  and thus oxygen
consumption, of the left ventricle. This basic effect has been demonstrated over
the past forty years in both animal  experiments  and in patients.  The clinical
benefits of external  counterpulsation  were not consistently  achieved in early
studies because the equipment used then lacked some of the features found in the
current EECP systems, such as the computerized electrocardiographic gating, that
makes sequential cuff inflation possible.  As the technology improved,  however,
it became apparent that both internal (i.e.  intra-aortic  balloon  pumping) and
external  forms of  counterpulsation  were  capable  of  improving  survival  in
patients with cardiogenic shock following myocardial  infarction.  Later, in the
1980s, Dr. Zheng and colleagues in China reported on their extensive  experience
in treating angina using the newly developed "enhanced"  sequentially  inflating
EECP  device that  incorporated  a third cuff for the  buttocks.  Not only did a
course of  treatment  with EECP  reduce the  frequency  and  severity of anginal
symptoms  during  normal  daily  functions  and also  during  exercise,  but the
improvements were sustained for years after therapy.

     These results  prompted a group of investigators at the State University of
New York at Stony Brook (Stony Brook) to undertake a number of open studies with
EECP  between  1989  and 1996 to  reproduce  the  Chinese  results,  using  both
subjective   and   objective   endpoints.   These   studies,   though  open  and
non-randomized, showed statistical improvement in exercise tolerance by patients
as evidenced by  thallium-stress  testing and partial or complete  resolution of
coronary perfusion defects as evidenced by radionuclide  imaging studies. All of
these  results have been  reported in the  literature  and support the assertion
that EECP therapy is an effective and durable  treatment for patients  suffering
from chronic angina pectoris.

     In  1995,   the  Company   began  a  large   randomized,   controlled   and
double-blinded multicenter clinical study (MUST-EECP) at four leading university
hospitals in the United States to confirm the patient  benefits  observed in the
open  studies  conducted  at Stony  Brook and to provide  definitive  scientific
evidence of EECP therapy's  effectiveness.  Initial participating sites included
the  University of California  San  Francisco,  Columbia  University  College of
Physicians & Surgeons at the  Columbia-Presbyterian  Medical Center in New York,
Beth Israel Deaconess Hospital,  a teaching affiliate of Harvard Medical School,
and the Yale University School of Medicine. These institutions were later joined
by Loyola University, the University of Pittsburgh and Grant/Riverside Methodist
Hospitals. MUST-EECP was completed in July 1997 and the results presented at the
annual  meetings of the  American  Heart  Association  in November  1997 and the
American  College of  Cardiology  in March 1998.  The results of MUST-EECP  were
published in the Journal of the American  College of Cardiology  (JACC), a major
peer- review medical journal, in June 1999.

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

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

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     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 CHF. A 32-patient  feasibility study
was conducted simultaneously at the University of Pittsburgh,  the University of
California  San  Francisco  and  the  Grant/Riverside   Methodist  Hospitals  in
Columbus,  Ohio. The results of this study were presented at the 49th Scientific
Sessions  of the  American  College  of  Cardiology  in March 2000 and the Heart
Failure Society of America's Annual Meeting in September 2000 and were published
in the July/August 2002 issue of Congestive Heart Failure.  This study concluded
that EECP therapy increased functional capacity of the patients,  was beneficial
to left  ventricular  function  and  portends to be a useful  adjunct to current
medical therapy in heart failure patients.

     In summer  2000,  an IDE  supplement  to  proceed  with a pivotal  study to
demonstrate the efficacy of EECP therapy in most types of heart failure patients
was  approved.  This study,  known as PEECH  (Prospective  Evaluation of EECP in
Congestive Heart Failure), began patient enrollment in March 2001 and enrollment
is expected to be complete by the end of calendar 2003.  The PEECH trial,  which
presently  involves  nearly  thirty  centers  and was  designed  to  enroll  180
patients,  will evaluate  improvements in exercise capacity and quality of life,
as well as the reduction in the need for certain  medications  that CHF patients
are typically  prescribed.  Centers  participating  in the PEECH trial  include,
among  others,  the  Cleveland  Clinic,  Mayo  Clinic,  Scripps  Clinic,  Thomas
Jefferson University Hospital,  University of North Carolina at Chapel Hill, The
Minnesota Heart Failure  Consortium,  Advocate Christ  Hospital,  Hull Infirmary
(UK), the University of California at San Diego Medical  Center,  the University
of Pittsburgh  Medical Center and the  Cardiovascular  Research  Institute.  The
510(k) clearance for CHF granted in June 2002 obviated the need to continue this
trial for regulatory reasons. However, it is the intention of the Company to use
the expected  positive clinical outcomes of this trial to establish the clinical
validation  of EECP as a  treatment  for CHF and to  obtain  Medicare  and other
third-party reimbursement for this indication.

     The IEPR 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.  More than one hundred centers have  participated in the
registry and data from 5,000 patient  records has been  entered.  Phase 2 of the
IEPR, planned for an additional 2,500 patients, began enrollment in January 2002
and  incorporates  sub-studies  that are examining  treatment beyond 35 hours of
treatment, where needed, the presence of protein in the urine of type 2 diabetic
patients as a predictor of response to EECP, the effects on peripheral  vascular
disease,  and the effects of sexual  function in men. The IEPR is a vital source
of information about the  effectiveness of EECP in a real-world  environment for
the medical  community at large.  For this reason,  the Company will continue to
provide an ongoing  grant to fund the  registry to  publicize  data that assists
clinicians in delivering optimal care to patients.  Data from the IEPR show that
patients  continue to receive  dramatic  benefit at six,  twelve and twenty-four
months following completion of their course of EECP therapy.

     Over the last  several  years,  the  Company's  clinical  bibliography  has
expanded to include numerous publications in major peer-review journals, as well
as abstracts presented a major medical conferences.  Notable among these studies
are  several  discussing  the  neurohumoral  effects of EECP  therapy  including
increases in the levels of nitric oxide, a potent  vasodilator  and decreases in
levels of endothelin a vasoconstrictor  as well as the release of certain growth
factors.

The Company's Plans

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

     (a)  Enlarge the market opportunity,  short and long-term, by (i) advancing
          the progress of marketplace  acceptance of EECP as a common  treatment
          for  the  early  and  mid-stage  (Canadian  Class  I  and  II)  angina
          populations and as a viable  treatment  modality for CHF  (principally
          the chronic  patient with NYHA Class II and III) and, (ii)  increasing
          the  reimbursed   patient  base  for  the  existing   angina  and  CHF
          indications,  (iii) continue to drive the clinical  validation process
          for  acceptance  of EECP as a primary  or  complimentary  therapy  for
          congestive  heart  failure,  (iv)  renew  the  exposure  of EECP as an
          already  approved  therapy  for  acute  coronary  conditions,  such as
          myocardial  infarction and cardiogenic  shock, and (v) investigate the
          possible  applications of EECP therapy in diabetes disease management,
          and peripheral vascular and cerebrovascular conditions.

     (b)  Continue the  development  of campaigns to market the benefits of EECP
          therapy directly to clinicians, third-party payers and patients.

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

     (d)  Continue to establish and support  academic  reference  centers in the
          United  States  and  overseas  in order to  accelerate  the growth and
          prestige of EECP therapy and to increase  the number and  diversity of
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          clinical  and  mode-of-action  studies,  as  well  as  the  number  of
          presentations,  publications,  speakers  and  advocates.

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

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

     (g)  Complete  the PEECH  clinical  trial,  publish  the results in a major
          peer-review  medical  journal and submit data to  insurers,  including
          Medicare, for favorable coverage policies.

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

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

     (j)  Launch   the   Company's   new  TS4   system   at  the   Transcatheter
          Cardiovascular Therapeutics (TCT) and Heart Failure Society of America
          meetings in September 2003.

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 is comprised of  approximately  twenty
sales representatives,  including management,  as well as four independent sales
agents.

     The efforts of the Company's sales  organization are further supported by a
field-based  staff of  clinical  educators  who are  responsible  for the onsite
training of physicians and therapists as new centers are  established.  Training
generally  takes three days.  These  centers  are  closely  monitored  and their
medical charts reviewed for several weeks following the initial  training of the
center's  clinicians  to ensure  treatment  guidelines  are being  appropriately
followed.  This clinical applications group is also responsible for training and
certification  of new personnel at each site, as well as for updating  providers
on new clinical developments relating to EECP therapy.

     The Company  expects to focus more intently on sales to National  Accounts.
The Company plans to continue  developing its relationships with such major U.S.
hospital groups as Tenet Healthcare,  Kaiser Permanente,  Health South, Columbia
HCA and with  other  cardiac  care  operations  that have  plans for  nationwide
expansion.  The Company has entered into agreements with three group  purchasing
organizations:  Amerinet,  Magnet and MedAxiom. The impact upon our revenues and
operating  results  relating to the agreements  with the three group  purchasing
organizations have not been material to date.

     Vasomedical's continuing transformation to a more commercial, market-driven
company  will be  reflected  in its  marketing  activities  planned  for 2004 to
heighten  awareness  among  clinicians,  third-party  payers and patients.  Such
activities  are  expected  to  include  journal   advertising,   publication  of
EECP-related newsletters,  support of physician education and physician outreach
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.  Additional Company marketing  activities include supporting
direct-to-patient  marketing campaigns to individuals  suffering from angina and
other  heart  failure  related  symptoms  as well as  creating  awareness  among
third-party  payers to the  benefits of EECP for patients  suffering  from heart
failure as well as angina.

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

International Operations

     One of the Company's key  objectives  has been to appoint  distributors  in
exchange for exclusive  marketing rights to EECP in their respective  countries.
The Company  currently has  distribution  agreements for Canada,  Europe (United
Kingdom, Italy, Germany, Sweden, Denmark, Netherlands, Greece, Belgium, Ireland,
Turkey,  Romania) the Middle East (Israel,  Saudi Arabia,  Egypt,  Jordan, Iran,
United Arab Emirates,  Syria, Kuwait,  Lebanon),  Russia, India,  Pakistan,  the
Caribbean Basin and the Far East (Japan, Malaysia,  Singapore, Taiwan, Thailand,
Philippines,  Indonesia,  Burma,  Viet Nam, Laos,  Cambodia).  Each distribution

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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  assist  the  Company  either  to  obtain  an  FDA-equivalent
marketing clearance or to establish  confirmation clinical evaluations conducted
by local opinion  leaders in cardiology.  Each  distributor  is responsible  for
obtaining any required  approvals and maintaining an  infrastructure  to provide
post-sales   support,   including  clinical  training  and  product  maintenance
services.  In July 2000,  the Company  received  its medical  device  license to
market its EECP system in Canada and, in November 2002, the Company received the
authorization  to  apply  the CE mark  for its TS3  system.  Foreign  regulatory
approvals and/or export licenses have been granted for several countries to date
and applications  are presently  pending in Taiwan,  Russia and Japan.  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
(fiscal 2003  revenues  approximated  5%) but are expected to increase in future
years.  Marketing  activities  planned  include,  among other things,  assist in
obtaining national or third-party healthcare insurance  reimbursement  approval,
increasing our participation in medical  conferences to create greater awareness
and acceptance of EECP therapy by clinicians. International sales may be subject
to  certain  risks,  including  export/import  licenses,  tariffs,  other  trade
regulations and local medical regulations.  Tariff and trade policies,  domestic
and  foreign  tax  and  economic   policies,   exchange  rate  fluctuations  and
international  monetary conditions have not significantly affected the Company's
business to date.

Competition

     Presently,  Vasomedical  is  aware  of at  least  two  competitors  with an
external  counterpulsation  device on the market, namely Cardiomedics,  Inc. and
Nicore,  Inc. While the Company believes that these competitors'  involvement in
the market is limited,  there can be no assurance that these  companies will not
become a  significant  competitive  factor.  The  Company  believes  it competes
favorably  in  value  with  these  companies,  as  EECP  is  the  only  external
counterpulsation system that is clinically proven in controlled clinical trials,
the only system to be covered by an  independent  patient  registry and the only
system to have secured a CE mark.  Vasomedical  views other companies engaged in
the development of device-related and biotechnology approaches to the management
of cardiovascular disease as potential competitors in the marketplace as well.

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

Government Regulations

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

     If a medical  device  manufacturer  can  establish  that a newly  developed
device is "substantially equivalent" to a device that was legally marketed prior
to the  enactment of the Medical  Device  Amendments  Act of 1976 or to a device
subsequently  granted  510(k)  market  clearance  , 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 otherwise  "substantially  equivalent".
The  Company's  EECP  systems 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 systems 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 an application  for a Premarket  Approval (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 protocols for MUST-EECP

                                       7
<PAGE>
and PEECH 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,
would be classified by FDA as a Class III PMA device.  However, the FDA reversed
that  determination  in June 2002 and the Company  understands  from discussions
with the FDA that one reason for the change in the regulatory status of EECP for
the  treatment  of  congestive  heart  failure  was the  result of the  agency's
reassessment of the safety profile for EECP therapy.  As such, the Company filed
a 510(k)  premarket  notification and in June 2002, FDA granted market clearance
to all three of the models of the EECP  system for a new  indication  for use in
the treatment of congestive heart failure.

     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.  The Company has obtained  regulatory approval of the EECP system in
certain  non-domestic  markets,  including  Europe,  and  is in the  process  of
obtaining such approvals in Taiwan, Russia and Japan.

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

     In June 1998,  the Company's EECP System Model MC2 was awarded the CE Mark,
which  satisfies the regulatory  provisions for marketing in all 15 countries of
the European Union (EU). The CE Mark was awarded by DGM of Denmark,  an official
notified  regulatory  body,  under the  European  Council  Directive  concerning
medical  devices.   The  ISO  9001  and  ISO  13485   Certificates,   issued  by
Underwriter's  Laboratories  (UL), cover the Company's design and  manufacturing
operation for the EECP systems 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  and, in February  2003,  the Company  received a certificate  from UL
regarding its compliance with the Canadian Medical Device Conformity  Assessment
Standards  (CMDCAS).  In July 2001, the Company received the UL classified mark,
an electrical  certification,  for its new TS3 system and received authorization
to apply the CE Mark for the TS3 in November 2002.  This CE  certification  also
enables the Company to begin  marketing  new or improved EECP products in the EU
without undergoing separate review and inspection for each product.

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

Third-Party Reimbursements

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

     In February 1999, the Centers for Medicare and Medicaid Services (CMS), the
federal agency that  administers  the Medicare  program for more than 39 million
beneficiaries,  issued a national coverage policy for the use of the EECP system
for  patients  with  disabling   angina  pectoris  who,  in  the  opinion  of  a
cardiologist or  cardiothoracic  surgeon,  are not readily  amenable to surgical
interventions, such as balloon angioplasty and cardiac bypass. In July 1999, CMS
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.
Beginning  August 1, 2000,  Medicare  coverage  was  extended  to  include  EECP
treatment  received on an outpatient  basis at hospitals and outpatient  clinics
under the new APC  (Ambulatory  Payment  Classification)  system.  The  national
average payment rate approximated  $150 per hourly session.  Since January 2000,
CMS approved three separate increases to the reimbursement rate for EECP therapy
which,   effective  March  2003,  has  raised  the  average   Medicare   payment
approximately  60%  cumulatively  to $208 per hourly session,  or  approximately
$7,300 for a full course of therapy.

     Some private  insurance  carriers  continue to adjudicate  EECP claims on a
case-by-case  basis.  Since the  establishment  of  reimbursement by the federal
                                       8
<PAGE>

government,  however,  an  increasing  number  of  these  private  carriers  now
routinely  pay for use of EECP for the  treatment  of  angina  and  have  issued
positive coverage policies. The Company estimates that over 300 private insurers
are  reimbursing  for EECP today at  favorable  payment  levels and the  Company
expects that the number of private  insurers and their related health plans that
provide for EECP therapy as a covered benefit will continue to increase.

     In June 2002,  the  Company  announced  that all three of its models of the
EECP system had been granted a 510(k)  market  clearance  from the FDA for a new
indication  for the  treatment of congestive  heart  failure.  Congestive  heart
failure is the single most expensive  disease state in the nation.  Although CMS
has not modified its national  coverage  policy for EECP therapy to specifically
include CHF  patients,  the Company  believes  that there  exists a  significant
subset of patients with CHF that also have  disabling  angina that would qualify
for Medicare reimbursement under its present definition.  The Company intends to
apply to CMS for a national coverage policy for EECP specific to CHF when it has
completed  and analyzed the results of the ongoing  PEECH trial,  a  randomized,
controlled  clinical  study  on the  use of EECP in CHF  patients.  The  Company
expects the  enrollment in PEECH to be completed by the end of calendar 2003 and
submission of the results to CMS no earlier than the end of calendar 2004.

     The Company intends to vigorously pursue a constructive  dialogue with many
private insurers for the  establishment of positive  coverage  policies for EECP
that include CHF patients.  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.

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

Patents and Trademarks

     The Company owns five US patents that issued in June 1988,  September 1996,
December  1999,  June 2003 and July 2003,  which expire at various times between
2005 and 2020.  In addition,  foreign  patents have issued which expire in 2013,
and  others  are  pending.  At  August  1  2003,  the  Company  has  two  patent
applications  in  the US  outstanding  regarding  aspects  of  the  TS3  system,
potential improvements, and new methods of treatment. The Company is planning to
pursue these applications in other countries,  including members of the European
Union. The Company is also planning to file other patent applications  regarding
specific  enhancements to the current EECP models,  future generation  products,
and methods of treatment.  Moreover,  trademarks  have been  registered  for the
names "EECP" and "Natural Bypass", as well as for its widely-recognized man-like
figure representing the application of EECP therapy.

     With respect to the patent  expiring in fiscal 2005, we do not believe that
the  expiration  of this  particular  patent will have a material  effect on our
future  operations  because  the  Company's  EECP units do not  incorporate  the
features described in this patent.

     The Company pursues a policy of seeking patent  protection,  both in the US
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 August 1, 2003,  the  Company  employed  91  full-time  persons and 1
part-time  person  with 22 in direct  sales and sales  support,  10 in  clinical
applications,  32 in manufacturing,  quality control and technical service, 8 in
marketing  and customer  support,  11 in  engineering,  regulatory  and clinical
research  and  9  in  administration.   None  of  the  Company's  employees  are
represented by a labor union. The Company  believes that its employee  relations
are good.

Manufacturing

     The Company  manufactures  its EECP Model TS3 at its plant in Westbury,  NY
and  believes its  manufacturing  facility,  in addition to the other  warehouse
facilities  presently  under  lease,  are  adequate  to  meet  the  current  and
immediately  foreseeable future demand for the production of these systems.  The

                                       9
<PAGE>

Company's  EECP  Model MC2  system  was  manufactured  for the  Company by Vamed
Medical  Instrument  Company Ltd.  (Vamed),  a Chinese  company.  Early in 2002,
Foshan Life Sciences Co. Ltd.  (FLSC),  a Chinese  joint venture  comprised of a
Florida company and Vamed, assumed the operational  activities for manufacturing
the EECP Model MC2 systems and accessories for the Company  pursuant to separate
purchase  orders issued by the Company.  The Company  believes that FLSC will be
able to meet the Company's future need for this Model MC2 system.

ITEM TWO - PROPERTIES

     The Company  owns its 18,000  square foot  headquarters  and  manufacturing
facility at 180 Linden  Avenue,  Westbury,  New York 11590.  The Company  leases
approximately  7,100  square  feet  of  additional  warehouse  space  under  two
operating leases with non-affiliated  landlords, of which one expires in October
2003  and the  other in  September  2006,  at an  annual  cost of  approximately
$70,000.  Management  believes that the Company can  renegotiate  the lease that
will expire in October  2003 or lease  other  available  space under  reasonable
terms and that these combined  facilities are adequate to meet its current needs
and should continue to be adequate for the immediately foreseeable future.

ITEM THREE - LEGAL PROCEEDINGS

     In June 2001, an action was commenced in the New York Supreme Court, Nassau
County,  against  the  Company  by the former  holder of a warrant  to  purchase
100,000  shares of the Company's  stock seeking  undefined  damages based upon a
claim that the Company  breached an  agreement  to  register  the common  shares
underlying  the warrant at the "earliest  practicable  date" after due demand by
the warrant  holder had been made.  In October  2002,  the Company  settled this
matter for  $600,000  through the  execution  of an  agreement  that enables the
Company to satisfy this obligation over a four-year  period  ($200,000 in fiscal
2003,  $100,000 in fiscal 2004,  $133,000 each in fiscal years 2005 and 2006 and
$34,000 in fiscal 2007). Accordingly,  the Company recorded a $600,000 charge to
operations  in fiscal 2003. In December  2002,  the Company paid $200,000 to the
warrant holder pursuant to the terms of the settlement agreement.

     In or about late June 2002,  the Company was  notified by a letter from the
domestic  counsel for Foshan Life  Sciences  Co. Ltd.  (FLSC),  a joint  venture
comprised of a Florida  company and Vamed  Medical  Instrument  Company  Limited
(Vamed), a Chinese company with whom the Company had an agreement to manufacture
the Company's  EECP Model MC2 system,  that FLSC was  initiating an  arbitration
proceeding  before the Hong Kong  International  Arbitration  Council (HKIAC) to
recover compensatory and punitive damages in excess of $1,000,000 and injunctive
relief  based upon  claims of breach of the  manufacturing  agreement,  tortious
interference and misappropriation of confidential information and trade secrets.
Although  possessing several  substantive  defenses to these claims, the Company
initially has  challenged the HKIAC's right to hear and determine the dispute on
the  ground  that  FLSC is  neither a  legitimate  nor  recognized  party to the
manufacturing  agreement which provides for such arbitration and, therefore,  is
not entitled to enforce the same. The Company demanded on July 3, 2002 that FLSC
deposit with the HKIAC security to cover the Company's costs of arbitration.  To
date,  FLSC has neither  responded  to the  Company's  demand for  security  nor
apparently filed a formal statement of claim with the HKIAC.

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

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

                                    PART II

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

     The Company's Common Stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock MarketSM under the symbol VASO.  The  approximate  number of record
holders of Common Stock as of August 1, 2003 was approximately 1,000, which does
not include approximately 31,600 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.

                                       10
<PAGE>
<TABLE>
<CAPTION>
                           Fiscal 2003                 Fiscal 2002
                       High           Low          High           Low
<S>                    <C>           <C>           <C>           <C>
First Quarter          $3.00         $1.25         $4.32         $3.51
Second Quarter         $1.85         $0.52         $3.75         $2.26
Third Quarter          $1.20         $0.70         $4.02         $2.65
Fourth Quarter         $1.60         $0.63         $3.30         $1.65
</TABLE>

     The last bid price of the  Company's  Common  Stock on August 20,  2003 was
$.92 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.

                                       11
<PAGE>
ITEM SIX - SELECTED FINANCIAL DATA

     The following table summarizes selected financial data for each of the five
years  ended May 31, 2003 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,
                                                      2003           2002            2001           2000            1999
<S>                                               <C>            <C>             <C>            <C>              <C>
Statements of Earnings

Revenues                                          $24,823,619    $34,830,471     $27,508,338    $13,673,632      $6,024,263
Cost of sales and services                          9,251,221     10,538,731       7,910,359      3,277,700       2,035,578
                                                -------------- -------------- --------------- -------------- ---------------
   Gross profit                                    15,572,398     24,291,740      19,597,979     10,395,932       3,988,685

Selling, general & administrative expenses         13,714,913     13,686,958      11,634,965      7,383,567       6,207,924
Research and development expenses                   4,544,822      5,112,258       2,554,470      1,413,464         706,934
Provision for doubtful accounts                     3,728,484      1,304,000         325,000        400,000               -
Interest and financing costs                          186,574         98,140          48,294          7,302          11,880
Interest and other income, net                      (176,724)      (249,722)       (201,992)       (99,317)       (115,064)
                                                -------------- -------------- --------------- -------------- ---------------
                                                   21,998,069     19,951,634      14,360,737      9,105,016       6,811,674
                                                -------------- -------------- --------------- -------------- ---------------
Earnings (loss) before income taxes               (6,425,671)      4,340,106       5,237,242      1,290,916     (2,822,989)

Income tax (expense) benefit, net                   1,634,688    (1,554,000)       6,457,108        400,000              -
                                                -------------- -------------- --------------- -------------- ---------------

Net earnings (loss)                               (4,790,983)      2,786,106      11,694,350      1,690,916     (2,822,989)

Deemed dividend on preferred stock                          -              -               -              -       (864,000)
Preferred stock dividend requirement                        -              -               -       (94,122)       (205,163)

                                                -------------- -------------- --------------- -------------- ---------------
Earnings (loss) applicable to
 common stockholders                             $(4,790,983)     $2,786,106     $11,694,350     $1,596,794    $(3,892,152)
                                                ============== ============== =============== ============== ===============

Net earnings (loss) per common share
    - basic                                            $(.08)           $.05            $.21           $.03          $(.08)
                                                ============== ============== =============== ============== ===============
    - diluted                                          $(.08)           $.05            $.20           $.03          $(.08)
                                                ============== ============== =============== ============== ===============
Weighted average common shares
  outstanding - basic                              57,647,032     57,251,035      56,571,402     52,580,623      49,371,574
                                                ============== ============== =============== ============== ===============
              - diluted                            57,647,032     59,468,092      59,927,199     57,141,949      49,371,574
                                                ============== ============== =============== ============== ===============

Balance Sheet

Working capital                                   $11,478,092    $17,225,434     $16,214,655     $7,380,236      $2,174,774
Total assets                                      $35,327,550    $41,418,258     $36,518,974    $10,588,962      $5,198,172
Long-term debt                                     $1,177,804     $1,072,716      $1,108,593             $-              $-
Stockholders' equity (1)                          $27,319,302    $31,602,604     $28,508,729     $7,943,770      $3,153,533

<FN>
__________________
(1) No cash dividends on common stock were declared during any of the above periods.
</FN>
</TABLE>

                                       12
<PAGE>
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Results of Operations

Fiscal Years Ended May 31, 2003 and 2002

     The Company  generated  revenues  from the sale,  lease and service of EECP
systems  of  $24,824,000  and  $34,830,000  for  fiscal  2003 and  fiscal  2002,
respectively, representing a 29% decrease. The Company generated earnings (loss)
before income taxes of  $(6,426,000)  and  $4,340,000 for fiscal 2003 and fiscal
2002, respectively. The Company reported net earnings (loss) of $(4,791,000) and
$2,786,000 for fiscal 2003 and fiscal 2002,  respectively,  after recognition of
an income tax provision (benefit) of $(1,635,000) and $1,554,000,  respectively.

     The  decrease  in  revenues  in fiscal 2003 as compared to fiscal 2002 is a
result of the following:

(1)  The  Company's  prior-year  period  revenues  were  favorably  impacted  by
     $4,187,000  resulting  from the  shipment  of EECP units  under  sales-type
     leases. There was no equipment sold under sales-type leases in fiscal 2003.
     The  Company  offered  equipment  under  sales-type  leases  only to select
     customers  in the past,  based upon,  among other  things,  the  customers'
     business model and history with the Company.

(2)  Revenues in fiscal  2003 were  affected by several  factors  including,  an
     increase in the duration of the selling cycle of the Company's EECP systems
     and reduced average unit selling prices.  Factors that have caused a longer
     selling cycle for EECP systems include, among other things, (a) a change in
     the mix of  prospective  customers  toward  larger  medical  practices  and
     hospitals which have longer decision-making  processes; (b) inconsistent or
     inadequate   reimbursement  coverage  policies  among  certain  third-party
     insurers;   and  (c)  general  economic   conditions.   Factors  that  have
     contributed to reduced average selling prices include increased competition
     and general economic conditions.  Fiscal 2003 revenues from equipment sales
     were adversely impacted by reductions in average selling prices aggregating
     approximately $5,100,000.

(3)  Revenues from non-domestic business were $1,122,000,  accounting for nearly
     5% of total revenues compared to $2,725,000, or 8%, in fiscal 2002.

     The  Company's  revenue  growth  over the last  several  prior  fiscal year
periods  through  2002  resulted  primarily  from  the  increase  in  cardiology
practices  and  hospitals  who became  providers of EECP therapy  following  the
announcement by the Centers for Medicare and Medicaid Services (CMS) in February
1999 of its decision to extend  Medicare  coverage  nationally  to the Company's
noninvasive,  outpatient  treatment  for  coronary  artery  disease.  CMS is the
federal  agency that  administers  the  Medicare  program for  approximately  39
million  beneficiaries.  In addition,  the results of the Company's multicenter,
prospective,  randomized, blinded, controlled clinical study of EECP (MUST-EECP)
were published in the June 1999 issue of the Journal of the American  College of
Cardiology.  Interest in EECP therapy has also been spurred by the  announcement
of the results of six- month,  twelve-month and twenty-four month post-treatment
outcomes  reported  by the  International  EECP  Patient  Registry,  as  well as
numerous  other  studies  reported and presented at major  scientific  meetings,
including  the American  Heart  Association  (AHA) and the  American  College of
Cardiology (ACC) annual meetings.

     The Company  continues to be optimistic about its future. In June 2002, the
Company  announced  that all  three of its  models of the EECP  system  had been
granted a 510(k) market  clearance from the Food and Drug  Administration  (FDA)
for a new indication for the treatment of congestive  heart failure.  Congestive
heart failure  afflicts  more than 5 million  people in the United States alone,
with more than 550,000 new patients  diagnosed every year. It is the single most
expensive  disease state in the nation,  accounting for more than $40 billion in
direct and indirect medical costs.  EECP therapy was the featured topic at a CME
(Continuing  Medical  Education)  satellite  symposium held at the Heart Failure
Society of America's Sixth Annual Scientific Meeting in September where over 300
heart failure  specialists  attended the symposium,  entitled "Enhanced External
Counterpulsation:  A Novel  Potential  Approach  to Heart  Failure,"  which  was
sponsored by the University of Minnesota and supported by an  educational  grant
from the  Company.  Vasomedical's  multicenter,  randomized,  controlled,  PEECH
(Prospective  Evaluation of EECP in Congestive Heart Failure) trial, which is at
80% enrollment,  is of significant importance and should confirm the benefits of
EECP for heart  failure  patients  that have been  observed  to date in  smaller
studies and lead to more  widespread  acceptance  and adoption of the therapy in
clinical practice.  The Company's heart failure  feasibility study was published
in the July/August 2002 issue of the journal Congestive Heart Failure.

     In November  2002,  the Company  received the CE Mark approval for its EECP
systems from its notified body, DGM of Denmark,  indicating  compliance with the
European Union (EU) Medical Device Directives. This enables the Company to begin
marketing new or improved  EECP products in all 15 EU countries and  cooperating
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partner  countries  without  undergoing  separate review and inspection for each
product.  As a result,  the Company  began  marketing its Model TS3 EECP system,
which includes the Company's  patent-pending  congestive heart failure treatment
and oxygen saturation monitoring technologies, throughout the EU.

     In late  December,  CMS  published  changes to the Medicare  Physician  Fee
Schedule for Calendar  Year 2003 that were  expected to result in a new national
average payment level of  approximately  $195 per session for the Company's EECP
therapy,  or $6,841 per standard course of treatment.  The new proposed  average
payment reflected a 27% increase in the national average  reimbursement for EECP
over 2002 levels.  In February 2003,  CMS finalized its December  proposal which
further  increased the national average payment level to approximately  $208 per
session  for the  Company's  EECP  therapy,  or $7,280  per  standard  course of
treatment,  resulting  in an  increase  of 35% over 2002  levels.  The  national
average  payment rate for the therapy has  increased by 60% since  January 2000.
The new rates took effect March 1, 2003.

     Gross profit  margins for fiscal 2003 and fiscal 2002 and were 63% and 70%,
respectively.  Gross profits are dependent on a number of factors,  particularly
the mix of EECP models sold and their respective average selling prices, the mix
of EECP units sold,  rented or placed  during the period,  the ongoing  costs of
servicing  such units,  and certain  fixed period costs,  including  facilities,
payroll and insurance.  Gross profit margins are generally less on non- domestic
business  due to the use of  distributors  resulting  in lower  selling  prices.
Consequently,  the gross profit  realized  during the current  period may not be
indicative  of future  margins.  The decrease in overall gross profit for fiscal
2003 compared to 2002 primarily  resulted from  increases in unit costs,  due to
lower production  levels,  as well as overall  reductions in the average selling
price of EECP units.

     Selling,  general and  administrative  (SG&A)  expenses for fiscal 2003 and
fiscal  2002  were  $13,715,000  (55%  of  revenues)  and  $13,687,000  (39%  of
revenues),  respectively.  The increase in the  percentage of SG&A expenses as a
percentage of sales was primarily  due to the  significant  decrease in revenues
from the prior  comparable  periods,  as discussed  above.  The increase in SG&A
expenses,  on an  absolute  basis,  from the  comparable  prior  fiscal  periods
resulted  primarily  from a $600,000  accrual  arising  from the  settlement  of
litigation in the first quarter,  non-recurring charges of $420,000 for employee
severance  arrangements  and executive  recruiting  fees in the second  quarter,
partially offset by overall decreases in sales related expenses due to decreased
revenues.

     Research and development (R&D) expenses of $4,545,000 (18% of revenues) for
fiscal 2003  decreased  by  $567,000,  or 11%,  from fiscal 2002 R&D expenses of
$5,112,000 (15% of revenues).  R&D expenses are primarily  impacted by the PEECH
clinical  trial in heart failure and other clinical  initiatives  (including the
International  EECP Patient  Registry),  as well as continued product design and
development  costs.  The Company  expects to continue its investments in product
development  and clinical  trials in fiscal 2004 and beyond to further  validate
and expand the clinical  applications  of EECP,  including,  but not limited to,
heart failure and acute coronary syndromes.

     During  fiscal  2003,  the  Company  charged  $3,728,000  (net of bad  debt
recoveries of $494,000) to its  provision  for doubtful  accounts as compared to
$1,304,000 in fiscal 2002. These charges  primarily  resulted from the write-off
of receivables  from a major customer during the first quarter of fiscal 2003 of
approximately  $3,000,000  due to  significant  uncertainties  related  to  this
customer's ability to satisfy its financial obligations to the Company (Note C),
as well as specific reserves against certain domestic and international accounts
that defaulted on their payment obligations. During the second quarter of fiscal
2003, the Company was able to successfully  recover all of the units that it had
sold under sales-type leases to the aforementioned  major customer back into its
finished  goods  inventory and recorded a bad debt  recovery of $479,408,  which
represented the present carrying amount of the equipment. The Company redeployed
certain pieces of the equipment  while certain other pieces were returned to the
Company's inventory for resale.

     The Company's  standard  payment terms on its equipment sales are generally
net 30 days and do not  contain  "right of return"  provisions.  The Company has
historically  offered a variety of extended payment terms,  including sales-type
leases,  in certain  situations and to certain  customers in order to expand the
market  for its  EECP  products  in the US and  internationally.  Such  extended
payment  terms  were  offered  in  lieu of  price  concessions,  in  competitive
situations,  when opening new markets or geographies  and for repeat  customers.
Extended payment terms cover a variety of negotiated terms, including payment in
full - net 120, net 180 days or some fixed or variable  monthly  payment  amount
for a six to twelve month period followed by a balloon  payment,  if applicable.
However, in fiscal 2003,  approximately 2% of revenues were generated from sales
in which  extended  payment  terms were  offered and no  sales-type  leases were
offered.  In fiscal 2003,  approximately  $454,000 included in the provision for
doubtful  accounts  related to specific  accounts that had been offered extended
payment terms,  while $752,000  included in the provision for doubtful  accounts
related to accounts offered standard terms. At May 31, 2003, $1,033,000, or 17%,

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<PAGE>
of gross accounts receivable  represent accounts offered extended payment terms.
In general,  reserves are generally  calculated  on a formula basis  considering
factors such as the aging of the receivables,  time past due, and the customer's
credit  history and their current  financial  status.  In most  instances  where
reserves are required,  or accounts are ultimately  written-off,  customers have
been unable to  successfully  implement  their EECP  program.  As the Company is
creating a new market for EECP and recognizes the challenges that some customers
may encounter,  it has opted,  at times,  on a customer-by-  customer  basis, to
recover its equipment  instead of pursuing  other legal  remedies  against these
customers,  which  necessitated the recording of a reserve or a write-off by the
Company.

     Sales-type leases are for terms ranging from three to six years. The annual
minimum lease  payments are subject to  adjustment  based on usage of the leased
units and, if  applicable,  balloon  payments  may be required at the end of the
lease term. In fiscal 2003,  approximately  $2,500,000 included in the provision
for doubtful accounts resulted from financing receivables and a loan written-off
in connection  with the major  customer  described  above.  At May 31, 2003, net
financing receivables to one customer were $679,000.

     The decrease in interest  income from the prior fiscal period is the direct
result of a decrease in interest income related to certain  equipment sold under
sales-type  leases to a major  customer  reported  in fiscal 2002 and during the
first quarter of fiscal 2003, as well as declining interest rates this year over
last year,  offset by the increase in the average cash balances  invested during
the current year.

     The increase in interest expense over the prior periods is primarily due to
interest on working  capital  borrowings and related charges under the Company's
revolving  secured  credit  facility,  as well as loans secured to refinance the
November 2000 purchase of the Company's  headquarters and warehouse facility.

     In fiscal  2003,  the Company  recorded a net  benefit for income  taxes of
$1,635,000,  inclusive of a $622,000 valuation allowance on deferred tax assets.
This is in  contrast  to an income  tax  provision  reported  in fiscal  2002 of
$1,554,000.  Ultimate  realization of the deferred tax assets,  inclusive of the
$1,891,000  deferred tax benefit  recorded in fiscal 2003, is dependent upon the
Company generating sufficient taxable income prior to the expiration of the loss
carryforwards. In accordance with the Statement of Financial Accounting Standard
No. 109 "Accounting for Income Taxes" ("FAS 109"),  management concluded,  based
upon the weight of available evidence,  that it is more likely than not that all
of the deferred tax assets would be  realized.  It is  management's  belief that
realization of the deferred tax asset is not dependent on material  improvements
over the average of fiscal 2000  through  fiscal 2002 levels of pre-tax  income,
and believes that the Company is positioned  for  long-term  growth  despite the
results achieved in fiscal 2003 (much of which was unexpected and non-recurring,
including the write-off of approximately $2,600,000 in financing receivables and
loan from the default of one  customer,  a $600,000  litigation  settlement  and
$400,000 in employee severance payments and related expenses).

     The following  factors are  anticipated to positively  impact the future of
the Company's business activities and initiatives:

     A.   A   large   and   increasing   worldwide   patient   population   with
          cardiovascular  disease  demanding new choices of therapy,  leading to
          increased  coverage  by CMS (in the US) and other  foreign  regulatory
          bodies.  The estimated US patient  population  for angina  patients is
          approximately  6.2 million and  approximately  5 million  patients for
          heart failure.

     B.   Medicare  coverage  rates  for EECP have  risen in each  year  since a
          national  rate  was  established  in  January  2000,   increasing  60%
          cumulatively.

     C.   Potential  extension  of  Medicare  coverage to include all classes of
          angina  (beyond the present  Class  III/IV  indication,  for which the
          Company  estimates  the annual  patient  population in the US alone is
          150,000, necessitating an installed base in excess of 3,000 systems).

     D.   Approval of Medicare  coverage and other  third-party  payer  policies
          specific to the congestive  heart failure  indication.  The results of
          the  Company's  ongoing  PEECH  trial are likely a  pre-requisite  for
          significant coverage policies. The PEECH trial results are expected to
          be  favorable  (based  upon a  published  feasibility  study and other
          analyses) and should be available in early 2005.  The  combination  of
          favorable PEECH trial results and Medicare  reimbursement would likely
          be a significant catalyst for significant Company growth.

     E.   A cardiology  community  with a mandate to offer  patients new disease
          management   solutions   providing  effective  clinical  and  economic
          outcomes.  The Company has cultivated  relationships  with many of the
          leading  institutions and cardiologists (as evidenced in its roster of
          PEECH study sites).  The Company's  Scientific Council is comprised of
          leading  academic  cardiologists,  many of whom are past presidents of
          the American College of Cardiology,  the American Heart Association or
          the Heart Failure Society of America.

     F.   The accumulation of EECP clinical  validation and removal of obstacles
          to  third-party  insurance   reimbursement.   Numerous  abstracts  and

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<PAGE>

          publications  are  presented  each year at major  scientific  meetings
          worldwide. The Company estimates that more than 300 third party payers
          reimburse for EECP therapy, many on a routine basis.

     G.   Expanded base of future  FDA-cleared  indications to more  effectively
          penetrate  the  hospital  market,  particularly  with respect to heart
          failure (for which FDA  clearance  was  received in June 2002),  acute
          coronary  syndromes (also cleared by FDA),  diabetes  management,  and
          peripheral and cerebrovascular diseases.

     H.   Initiatives  planned to lower the standard cost of the Company's  EECP
          systems, improving margins or preserving them from further erosion.

     I.   The  Company  has a large,  non-domestic  market  opportunity  that is
          developing  through  a  network  of  local  independent  distributors,
          primarily  in Europe for which the  Company has  received  the CE Mark
          (FDA-clearance equivalent).

     J.   Continuing to prove more definitively the mechanism of action by which
          EECP  operates.  These  smaller  scale  clinical  studies are aimed at
          convincing those with lingering doubt about EECP's  effectiveness that
          the therapy is,  indeed,  safe and  effective and serves to expand the
          market. Studies have been presented and published in this area.

     K.   Increased  hardware  utility  to  allow  for  the  use of  EECP  in an
          increasing  number of  patient  environments.  The EECP TS3  system is
          mobile and can be used more easily in the hospital environment. Future
          system modifications could allow for emergency room use.

     The Company  acknowledges  that certain risk factors have the  potential to
adversely affect the business  opportunity  that has been outlined.  Initiatives
planned to mitigate the impact of such risks have been addressed. They include:

     A.   Dependence  on  outcome  of  PEECH  trial  and  related  reimbursement
          coverage  policies.  Presently,  the  Company  is engaged in the PEECH
          trial, a pivotal study to evaluate the  effectiveness  of EECP therapy
          for congestive heart failure  patients.  The results of this study are
          likely  to  be  the  catalyst  for  Medicare  and  other   third-party
          reimbursement  coverage policies  specific to heart failure.  Although
          the Company has  received  clearance  from the FDA to market for heart
          failure,  medical community acceptance and insurance coverage policies
          are highly  influenced  by  scientifically  proven  technologies.  The
          Company had designed its PEECH  protocol in  cooperation  with the FDA
          and  had  reached  a  formal  agreement  with  the  FDA  that  the key
          parameters of its investigational plan for this trial were appropriate
          to determine the effectiveness of EECP as an adjunct therapy for heart
          failure.  The Company believes that its PEECH trial is robust and will
          provide  favorable  results that should provide a reasonable basis for
          market acceptance and insurance reimbursement.

     B.   Dependence on a single product platform.  Current FDA labeling extends
          beyond chronic stable angina and congestive  heart failure to unstable
          angina,  myocardial  infarction  and  cardiogenic  shock (i.e.,  acute
          coronary syndromes). The Company intends to pursue additional clinical
          studies to  validate  the safety  and  effectiveness  of EECP in acute
          coronary syndromes over the next few years.

     C.   Dependence on consistency of research findings about EECP efficacy and
          increasing  acceptance of EECP by the medical community.  To that end,
          the Company has  sponsored  the  International  EECP Patient  Registry
          (IEPR),  maintained at the University of  Pittsburgh.  Results to date
          (5,000 patients enrolled) have supported favorable results achieved in
          the initial  trials  conducted at the State  University of New York at
          Stony Brook, as well the conclusions  from the MUST-EECP  multicenter,
          controlled,  randomized and double-blinded efficacy trial completed in
          1997.  Phase 2 of the registry,  known as IEPR II, began enrollment of
          2,500 patients in January 2002 and is capturing  additional  date from
          angina  patients  that include,  among other  things,  data related to
          concomitant heart failure symptoms.

     D.   Technological  obsolescence of EECP by newly developed process, device
          or therapy.  There is no assurance that such technology couldn't exist
          in the  future  to make EECP  obsolete.  However,  there is  presently
          little  evidence  to suggest  it.  Several  companies  are  evaluating
          devices  and  drugs  for  heart  failure  but  there is  presently  no
          consensus treatment for those patients.  Even in the event one or more
          drugs  are  developed,  it is  unlikely  that EECP  would be  replaced
          completely  as many ill patients  suffer a myriad of  conditions  with
          co-morbid disease states that would make them contraindicated for use.
          The  cardiovascular  disease  market  is so large and the  disease  so
          complex that numerous  technologies  can aggressively and successfully
          compete in the marketplace.

                                       16
<PAGE>
     E.   Competition,  through acquisition or development,  from companies with
          superior  financial  resources and marketing  capabilities.  There are
          presently   only   two   competitors   with   a   marketed    external
          counterpulsation  system.  The Company  believes  that neither is well
          capitalized or positioned within the medical  community  (neither have
          done extensive  clinical trials).  The Company estimates having a 75%+
          market share and doesn't foresee significant changes.

     F.   New  or  changed   regulatory   environment  that  creates  unforeseen
          obstacles,  or costs,  to continue to market and sell the EECP system.
          None are known at this time.  Such  changes in this  industry  are not
          swift and would allow,  in the opinion of management,  sufficient time
          to modify its business plan or become compliant.

     G.   New or  changed  insurance  reimbursement  criteria  that  create,  or
          reinstate,  obstacles to physician acceptance of EECP. With respect to
          Medicare,  the Company is confident that rates are now and will remain
          at sufficient  levels to support the Company's  growth.  In fact,  CMS
          raised  rates for EECP  treatment by 35% in March 2003 while all other
          cardiovascular procedures were adjusted downward by 4%. It is unlikely
          that Medicare  rates would drop to a level that would  adversely  harm
          the   Company's   future   prospects   as  EECP  is  proven  to  be  a
          cost-effective solution in the management of angina.

     Although  ultimate  realization  of all deferred tax assets is not assured,
management has concluded, in accordance with FAS 109, that based upon the weight
of  available  evidence,  it is more likely than not that the deferred tax asset
will be realized.  The amount of the deferred tax assets considered  realizable,
however,  could be reduced in the future if estimates of future  taxable  income
during the carryforward period are reduced.

Fiscal Years Ended May 31, 2002 and 2001

     The Company  generated  revenues from the sale and lease of EECP systems of
$34,830,000  and  $27,508,000  for fiscal  2002 and fiscal  2001,  respectively,
representing a 27% increase.  The Company generated earnings before income taxes
of $4,340,000 and $5,237,000 for fiscal 2002 and fiscal 2001, respectively.  The
Company  reported net earnings of $2,786,000 and $11,694,000 for fiscal 2002 and
fiscal  2001,  respectively,  after  recognition  of  an  income  tax  provision
(benefit) of $1,554,000 and $(6,457,000), respectively.

     Effective  January 1, 2002,  CMS  approved  an  additional  increase of 7%,
raising the average Medicare payment to $153 per hourly session, or $5,355 for a
full course of therapy. These events led to an increased demand for EECP therapy
and EECP equipment and,  consequently,  to revenue growth  overall.  Pursuant to
contractual  arrangements  with two  customers,  the Company has sold  equipment
under sales-type  leases.  In fiscal 2002,  revenues of $4,187,000 were reported
from equipment sold under sales-type leases. Revenues from non-domestic business
were  $2,725,000,  accounting  for  nearly  8% of  total  revenues  compared  to
$1,441,000, or 5%, in fiscal 2001.

     Gross  profit   margins  for  fiscal  2002  and  2001  were  70%  and  71%,
respectively.  Gross profits are dependent on a number of factors,  particularly
the mix of EECP units  sold,  rented or placed  during the  period,  the ongoing
costs of  servicing  such  units,  and certain  fixed  period  costs,  including
facilities,  payroll and  insurance.  Gross profit margins are generally less on
non-domestic business due to the use of distributors  resulting in lower selling
prices.  Consequently,  the gross profit  realized during the current period may
not be  indicative  of future  margins.  The decrease in gross profit margin for
fiscal  2002  compared  to 2001 was  primarily  attributable  to a change in the
product mix now favoring the new, but more costly, Model TS3 system manufactured
in Westbury,  NY. Management believes that the increased production costs of TS3
will be  offset in the  future by  manufacturing  efficiencies  and  engineering
initiatives  toward further  product cost reduction.  In addition,  gross profit
margin was  further  affected  by the change in sales mix,  inclusive  of an 89%
increase  in revenues  from  non-domestic  business  in fiscal  2002  which,  as
described above, has been less profitable than the Company's domestic business.

     Selling,  general and  administrative  (SG&A)  expenses for fiscal 2002 and
2001 were  $13,687,000  (39% of revenues)  and  $11,635,000  (42% of  revenues),
respectively. The Company has been effectively leveraging its SG&A expenses as a
percentage of sales,  decreasing by 3%. The  increases in SG&A  expenses,  on an
absolute basis,  from the comparable  prior fiscal year resulted  primarily from
increases in personnel in sales and  marketing  functions,  increases in selling
and marketing expenses (including commissions) related to increased revenues, as
well as increases in insurance and other administrative expenses.

     Research and development (R&D) expenses of $5,112,000 (15% of revenues) for
fiscal 2002  increased  by  $2,558,000,  or 100%,  from the prior fiscal year of
$2,554,000 (9% of revenues). The increase relates primarily to expenses incurred
for the PEECH clinical  trial in heart failure  (which  received FDA approval in
July 2000 and began  treating  patients in March 2001),  the initiation of other
clinical  studies  and  initiatives,  as well as  continued  product  design and

                                       17
<PAGE>

development  costs  (including an increase in engineering and other  personnel).
The  Company's  newly  developed  EECP  system,  Model TS3,  received FDA 510(k)
clearance to market in December 2000 and was commercially  available for sale in
the fourth quarter of fiscal 2001. The Company  intends to invest  approximately
12%-14% of revenues in product development and clinical trials in fiscal 2003 to
further expand the clinical applications of EECP, including, but not limited to,
heart failure, diabetes disease management and acute coronary syndromes.

     In fiscal  2002,  the  Company  charged  $1,304,000  to its  provision  for
doubtful accounts,  increasing reserves primarily as a result of extended credit
terms  offered to certain  domestic and  international  customers,  as well as a
valuation reserve in connection with long-term financing  receivables  generated
by equipment sold under sales-type  leases. The Company's standard payment terms
on its equipment  sales are  generally net 30 days and do not contain  "right of
return" provisions.  However,  the Company has historically offered a variety of
extended payment terms,  including  sales-type leases, in certain situations and
to certain  customers in order to expand the market for its EECP products in the
US and  internationally.  Such  extended  payment  terms were offered in lieu of
price  concessions,  in  competitive  situations,  when  opening  new markets or
geographies and for repeat customers.  Extended payment terms cover a variety of
negotiated  terms,  including  payment  in full - net 120,  net 180 days or some
fixed or  variable  monthly  payment  amount  for a six to twelve  month  period
followed by a balloon  payment,  if  applicable.  In fiscal 2002,  approximately
$288,000  included in the  provision for doubtful  accounts  related to specific
accounts that had been offered extended payment terms,  while $666,000  included
in the  provision for doubtful  accounts  related to accounts  offered  standard
terms.  At May 31,  2002,  $5,072,000,  or 37%,  of  gross  accounts  receivable
represent  accounts  offered  extended  payment terms. In general,  reserves are
generally calculated on a formula basis considering factors such as the aging of
the  receivables,  time past due, and the  customer's  credit  history and their
current  financial  status.  In most instances  where reserves are required,  or
accounts are ultimately written-off,  customers have been unable to successfully
implement  their EECP program.  As the Company is creating a new market for EECP
and recognizes the challenges  that some customers may encounter,  it has opted,
at times, on a  customer-by-customer  basis, to recover its equipment instead of
pursuing other legal remedies  against these customers,  which  necessitated the
recording of a reserve or a write-off by the Company.

     Sales-type leases are for terms ranging from three to six years. The annual
minimum lease  payments are subject to  adjustment  based on usage of the leased
units and, if  applicable,  balloon  payments  may be required at the end of the
lease term. In fiscal 2002, approximately $350,000 included in the provision for
doubtful accounts related to financing  receivables to recognize the possibility
that some units that were located in centers to be closed by one customer  might
not be  utilized as planned  and  subsequently  default.  At May 31,  2002,  net
financing receivables to two customers were $3,575,000.

     The  increase in interest  expense  over the prior fiscal year is primarily
due to interest  payments on loans  secured  for the  purchase of the  Company's
headquarters and operating facility in November 2000, as well as working capital
borrowings under the Company's revolving secured credit facility.

     The  increase  in interest  income in fiscal  2002 is the direct  result of
interest income reported on equipment sold under  sales-type  leases,  offset by
the decrease in the average cash balances  invested  during the year, as well as
declining interest rates this year over last year.

     In fiscal  2002,  the  Company  recorded a  provision  for income  taxes of
$1,554,000,  inclusive of $39,000 in current tax expense  principally  resulting
from state  taxes.  This is in  contrast to a deferred  tax benefit  reported in
fiscal 2001 of $6,457,000  resulting  principally  from a change in the deferred
tax valuation allowance.

Liquidity and Capital Resources

     The Company has financed its fiscal 2003 and 2002 operations primarily from
working capital and operating  results.  At May 31, 2003, the Company had a cash
balance of $5,223,000  and working  capital of  $11,478,000,  compared to a cash
balance of $2,968,000  and working  capital of  $17,225,000 at May 31, 2002. The
Company's working capital decreased in fiscal 2003 primarily due to, among other
things  described  below, the  reclassification  of approximately  $2,730,000 in
current  deferred tax assets  related to the  anticipated  utilization in fiscal
2003 of net operating loss  carryforwards to long-term  deferred tax assets as a
result of current year operating losses and management's revised estimate of the
anticipated   utilization  of  such  deferred  asset.  The  Company's  operating
activities  provided  (used) cash of $3,180,000 and  $(2,317,000) in fiscal 2003
and fiscal 2002,  respectively.  Net cash provided from operations during fiscal
2003 consisted  primarily of decreases in accounts  receivable,  inventories and
other current  assets and increases in other  long-term  liabilities,  partially
offset by decreases in accounts  payable and accrued  expenses.  The decrease in
inventories primarily resulted from the better management and utilization of raw
materials.   The  decrease  in  accounts   receivable  resulted  primarily  from

                                       18
<PAGE>

collection  efforts in the period.  The Company's  management  has tightened its
sales and credit  policies and provides  routine  oversight  with respect to its
accounts receivable credit and collection efforts, as well as the procurement of
its raw  materials and  management  of finished  goods  inventory  levels.  Cash
provided by operations in fiscal 2003 may not  necessarily  be indicative of the
results expected in future periods.

     Accounts receivable turnover was 2.5 and 2.7 for the fiscal years ended May
31,  2003  and  2002,  respectively,  representing  a  decline  of 7%.  Accounts
receivable  turnover  has been  primarily  impacted by the  offering of extended
payment terms to customers  during  fiscal 2002.  The Company has offered only a
limited  number of such  extended  payment  terms to  customers  in fiscal 2003,
approximating  2% of equipment sales. At the end of the fourth quarter ended May
31,  2003,  net  accounts   receivable   exceeded  quarterly  revenues  by  13%,
representing  a reduction of 10% from the  comparative  2002 period rate of 23%.
Other factors that can impact the periodic net accounts  receivable to quarterly
revenues  ratio  include  sales growth,  the type of customer  (i.e.,  physician
practice,  hospital,  distributor)  and their  payment  routine,  the  timing of
respective sales in a given quarterly  period and overall  economic  conditions.
The ratio of the allowance for doubtful  accounts to gross  accounts  receivable
was  9.4%  and  7.9%  for  the  fiscal  years  ended  May  31,  2003  and  2002,
respectively.  This ratio was  adversely  affected in fiscal 2003 as a result of
additional reserves, primarily on fiscal 2002 revenues. The Company expects each
of  these  ratios  to  improve  in  future  periods  primarily  as a  result  of
collections  of  existing  accounts  receivable  with  extended  payment  terms,
limiting the offering of extended  payment  terms in the future,  and  continued
application of its revised credit policies which include  customer  deposits and
external credit verification and validation.

     Investing  activities  used net cash of $326,000 and $820,000 during fiscal
2003 and fiscal 2002, respectively. The principal use of cash during fiscal 2003
was for the purchase of property and equipment.

     Financing  activities  provided  (used) cash of $(598,000)  and  $2,319,000
during fiscal 2003 and fiscal 2002,  respectively.  Financing  activities during
fiscal 2003 and fiscal 2002 consisted of the utilization of the Company's credit
facility,  as well as the receipt of cash  proceeds upon the exercise of Company
common  stock  options  and  warrants  by  officers,  directors,  employees  and
consultants.  In addition,  in fiscal 2002, the Company refinanced its long-term
obligations  on the purchase of its  headquarters  and  warehouse  facility.  In
October 2002, the Company  amended its existing  credit  facility to provide for
borrowings  up to  $5,000,000  ($2,000,000,  at any time that  consolidated  net
income  for the  immediately  preceding  three-month  period  is less  than $1),
primarily based upon eligible accounts  receivable,  as defined therein,  at the
Libor  Rate plus 200  basis  points or the  published  Prime  Rate plus 50 basis
points.  Under the terms of the  agreement,  which expires in February 2005, the
Company is required to meet  certain  quarterly  covenants,  including  leverage
ratio,  liquidity,  capital expenditures,  minimum net income,  minimum interest
coverage  and  minimum  tangible  net worth.  Although  the  Company  was not in
compliance  with  certain  financial  covenants  during  each of its first three
fiscal  quarters  of 2003,  the bank  issued  waivers to the  Company  for those
periods.  In April  2003,  the  agreement  was  further  amended  to  allow  for
borrowings  absent  compliance  with  the  financial  covenants  as long as such
eligible  borrowings  are  collateralized  by cash.  In April 2003,  the Company
repaid all  outstanding  borrowings  under the agreement  instead of maintaining
restricted cash balances.  At May 31, 2003, the Company did not meet the minimum
interest  coverage and tangible net worth  covenants and future  compliance with
each of these  covenants in the near term is not certain.  Management  believes,
based upon its cash balance ay May 31, 2003 and its internal forecasts, that any
limitation on the Company's  ability to borrow  against this credit  facility in
fiscal 2004 would not have an adverse effect on the Company's operations.

     On February 14, 2003,  the Company was notified by The Nasdaq Stock Market,
Inc. that it was not in compliance with the minimum $1.00 per share  requirement
for continued listing inclusion and that it would be provided 180 days to regain
compliance. On June 16, 2003, Nasdaq notified the Company that since the closing
bid price of the  Company's  common stock had been at $1.00 per share or greater
for at least ten consecutive  trading days, the Company regained  compliance and
that the issue of non-compliance has been closed.

     Management  believes that its working capital position at May 31, 2003, the
ongoing  commercialization  of the EECP  system,  and the effect of  initiatives
undertaken to improve our cash  position by managing  operating  expense  levels
will make it possible for the Company to support its  operating  expenses and to
implement its business plans for at least the next twelve months.

     The following table presents the Company's  expected cash  requirements for
contractual obligations outstanding as of May 31, 2003:
<PAGE>
                                       19
<PAGE>
<TABLE>
<CAPTION>
                                                  Due as of   Due as of 5/31/05    Due as of 5/31/07
                                        Total       5/31/04         and 5/31/06          and 5/31/08 Due Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>                 <C>                  <C>            <C>
Long-Term Debt                     $1,286,000      $108,000            $243,000             $149,000       $786,000
Operating Leases                      152,000        61,000              79,000               12,000              -
Litigation Settlement                 400,000       100,000             300,000                    -              -
Severance obligations                 100,000       100,000                   -                    -              -
Employment Agreements                 602,000       398,000             204,000                    -              -
                                ------------------------------------------------------------------------------------
Total      Contractual      Cash   $2,540,000      $767,000            $826,000             $161,000       $786,000
Obligations
                                ====================================================================================
</TABLE>
Effects of Inflation

     The Company believes that inflation and changing prices over the past three
years have not had a  significant  impact on our  revenue  or on our  results of
operations.

Critical Accounting Policies

     Financial  Reporting  Release No. 60, which was released by the  Securities
and Exchange  Commission,  or SEC, in December  2001,  requires all companies to
include a  discussion  of critical  accounting  policies or methods  used in the
preparation  of  financial  statements.  Note A of  the  Notes  to  Consolidated
Financial  Statements  included in the Company's  Annual Report on Form 10-K for
the year ended May 31,  2003  includes a summary  of the  Company's  significant
accounting  policies  and  methods  used  in the  preparation  of our  financial
statements.  In preparing these financial  statements,  the Company has made its
best  estimates  and  judgments  of certain  amounts  included in the  financial
statements,  giving due  consideration to materiality.  The application of these
accounting  policies involves the exercise of judgment and use of assumptions as
to future uncertainties and, as a result, actual results could differ from these
estimates. The Company's critical accounting policies are as follows:

        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,
which includes  delivery and customer  acceptance.  The sale of EECP systems are
not subject to a right of return,  other than for normal warranty  matters,  and
the  Company is not  obligated  for  post-sale  upgrades to these  systems.  The
Company has also entered into lease  agreements  for its EECP system,  generally
for terms of one year or less, that are classified as operating leases. Revenues
from operating leases are generally recognized,  in accordance with the terms of
the lease agreements,  on a straight-line  basis over the life of the respective
leases.  For certain operating leases in which payment terms are determined on a
"fee-per- use" basis, revenues are recognized as incurred (i.e., as actual usage
occurs). The cost of the EECP system utilized under operating leases is recorded
as a component of property and  equipment and is amortized to cost of sales over
the estimated useful life of the equipment,  not to exceed five years. There are
no significant  minimum rental  commitments on these operating leases at May 31,
2003.  Revenues  from the sale of  extended  warranties  on the EECP  system are
recognized  on a  straight-line  basis over the life of the  extended  warranty,
ranging  from one year to four  years.  Deferred  revenues  relate  to  extended
warranty  fees  that have been paid by  customers  prior to the  performance  of
extended warranty services.

     The Company follows SFAS No. 13,  "Accounting For Leases," for its sales of
EECP units  under  sales-type  leases it  presently  has with one  customer.  In
accordance  with  SFAS No.  13,  the  Company  records  the  sale and  financing
receivable at the amount of the minimum lease  payment,  less unearned  interest
income,  which is  computed at the  interest  rate  implicit  in the lease,  and
executory costs,  which are primarily related to product warranties on each unit
sold.  Unearned interest income is amortized to income in a manner that produces
a constant rate of return on the investment in the sales-type lease. The cost of
the EECP unit  acquired by the customer is recorded as cost of sales in the same
period that the sale is recorded.

     Accounts Receivable/Financing Receivables

     The Company's  accounts  receivable-trade are due from customers engaged in
the provision of medical  services.  Credit is extended based on evaluation of a
customer's  financial  condition  and,  generally,  collateral  is not required.
Accounts receivable are generally due 30 to 60 days from shipment and are stated
at amounts due from customers net of allowances for doubtful accounts,  returns,
term  discounts  and other  allowances.  Accounts  outstanding  longer  than the
contractual  payment  terms  are  considered  past  due.  Estimates  are used in
determining  our  allowance  for  doubtful  accounts  based  on  our  historical
collections  experience,  current trends,  credit policy and a percentage of our
accounts receivable by aging category. In determining these percentages, we look

                                       20
<PAGE>

at  historical  write-offs  of our  receivables.  The Company  also looks at the
credit  quality of its customer base as well as changes in its credit  policies.
The Company  continuously  monitors collections and payments from its customers.
While  credit  losses  have  historically  been  within   expectations  and  the
provisions  established,  the Company cannot  guarantee that it will continue to
experience the same credit loss rates that it has in the past.

        In addition, the Company periodically reviews and assesses the net
realizability of its receivables arising from sales-type leases. If this review
results in a lower estimate of the net realizable value of the receivable, an
allowance for the unrealized amount is established in the period in which the
estimate is changed. In the first quarter of fiscal 2003, management decided to
write-off financing receivables under sales-type leases of approximately
$2,558,000 as a result of significant uncertainties with respect to a major
customer's ability to meet its financial obligations.

Inventories

     The Company values inventory at the lower of cost or estimated market, cost
being determined on a first- in, first-out basis. The Company  regularly reviews
inventory  quantities on hand,  particularly  raw materials and components,  and
records a  provision  for excess  and  obsolete  inventory  based  primarily  on
existing and anticipated design and engineering  changes to our products as well
as forecasts of future product demand.

Warranty Costs

     Equipment sold is generally  covered by a warranty  period of one year. The
Company  accrues a warranty  reserve  for  estimated  costs to provide  warranty
services  when the  equipment  sale is  recognized.  The factors  affecting  the
Company's warranty liability include the number of units sold and historical and
anticipated  rates of claims  and  costs per  claim.  The  Company  periodically
assesses  the  adequacy  of its  warranty  liability  based on  changes in these
factors.  Warranty  reserves related to units sold under  sales-type  leases are
recorded  as  executory  costs,  which  serve to reduce the amount of  financing
receivables  reported in the  consolidated  balance sheets.  The Company records
revenue on extended  warranties  on a  straight-line  basis over the term of the
related warranty contracts. Service costs are expensed as incurred.

     Deferred  revenues  related  to  extended  warranties  are  $1,709,551  and
$991,204 at May 31, 2003 and 2002,  respectively.

Income Taxes

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

     Deferred  tax  liabilities  and assets  shall be  classified  as current or
non-current  based on the  classification  of the related asset or liability for
financial reporting. A deferred tax liability or asset that is not related to an
asset or  liability  for  financial  reporting,  including  deferred  tax assets
related to carryforwards, shall be classified according to the expected reversal
date of the temporary difference. The deferred tax asset recorded by the Company
relates  primarily to the  realization of net operating loss  carryforwards,  of
which the allocation of the current portion reflects the expected utilization of
such net  operating  losses  in  fiscal  2004.  Such  allocation  is based  upon
management's  internal  financial forecast for fiscal 2004 and may be subject to
revision based upon actual results.

Stock Compensation

     The Company has four stock-based  employee  compensation  plans,  which are
described  more  fully  in  Note  H.  The  Company   accounts  for   stock-based
compensation  using the  intrinsic  value method in accordance  with  Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations ("APB No. 25") and has adopted the disclosure provisions
of  Statement  of  Financial  Accounting  Standards  No.  148,  "Accounting  for
Stock-Based  Compensation  -  Transition  and  Disclosure,  an amendment of FASB
Statement  No. 123." under APB No. 25, when the exercise  price of the Company's
employee stock options  equals the market price of the  underlying  stock on the

                                       21
<PAGE>

date  of  grant,  no  compensation  expense  is  recognized.   Accordingly,   no
compensation   expense  has  been  recognized  in  the  consolidated   financial
statements in connection with employee stock option grants.

     Pro forma compensation  expense may not be indicative of future disclosures
because it does not take into effect pro forma  compensation  expense related to
grants before 1995.  For purposes of estimating the fair value of each option on
the date of grant, the Company utilized the Black-Scholes option-pricing model.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded options,  which have no vesting restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly  different from those of traded options and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     Equity  instruments  issued to nonemployees in exchange for goods, fees and
services are accounted for under the fair value-based method of SFAS No. 123.

Recently Issued Accounting Standards

     In August 2001, the Financial  Accounting  Standards  Board ("FASB") issued
SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets"
("SFAS No.  144").  SFAS No. 144  supersedes  SFAS No. 121  "Accounting  for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
Accounting  Principles Board Opinion No. 30, "Reporting  Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and  Infrequently  Occurring  Events and  Transactions."  This statement
retains  the  fundamental  provisions  of  SFAS  No.  121  for  recognition  and
measurement of impairment, but amends the accounting and reporting standards for
segments of a business to be disposed of. The new rules were  effective  for the
Company on June 1, 2002.  The  adoption  of SFAS No. 144 did not have a material
effect on the Company's financial position or results of operations.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148") which addresses financial
accounting  and  reporting  for  recording  expenses for the fair value of stock
options.  SFAS 148 provides  alternative  methods of transition  for a voluntary
change  to fair  value  based  method of  accounting  for  stock-based  employee
compensation.  Additionally,  SFAS No.  148  requires  more  prominent  and more
frequent  disclosures in financial  statements  about the effects of stock-based
compensation.  The  provisions of this  Statement are effective for fiscal years
ending  after  December  15,  2002.  The adoption of SFAS No. 148 did not have a
material  impact on the  financial  position  or  results of  operations  of the
Company.

     In April 2003, the FASB issued Statement of Financial  Accounting Standards
No. 149 ("SFAS No. 149"),  "Amendment of Statement 133 on Derivative Instruments
and Hedging  Activities,"  which amends and clarifies  financial  accounting and
reporting for derivative  instruments,  including certain derivative instruments
embedded in other contracts and for hedging  activities under SFAS No. 133. SFAS
No. 149 is effective for contracts  entered into or modified after June 30, 2003
except for the provisions that were cleared by the FASB in prior pronouncements.
The Company is currently  evaluating  the effect of the adoption of SFAS No. 149
on its financial position and results of operations.

     In May 2003, the FASB issued  Statement of Financial  Accounting  Standards
No. 150 ("SFAS No. 150"),  "Accounting for Certain  Financial  Instruments  with
Characteristics  of both  Liabilities  and Equity." This  statement  establishes
standards  for  how an  issuer  classifies  and  measures  in its  statement  of
financial  position certain financial  instruments with  characteristics of both
liabilities and equity. In accordance with the standard,  financial  instruments
that  embody  obligations  for the  issuer  are  required  to be  classified  as
liabilities. This Statement shall be effective for financial instruments entered
into or modified  after May 31, 2003,  and  otherwise  shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
is  currently  evaluating  the  effect of the  adoption  of SFAS No.  150 on its
financial position and results of operations.

     In November 2002, the FASB issued FASB  Interpretation No. 45, "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others"  ("FIN 45").  FIN 45 requires that upon
issuance of a guarantee,  a guarantor  must  recognize a liability  for the fair
value  of an  obligation  assumed  under  a  guarantee.  FIN  45  also  requires
additional  disclosures  by a  guarantor  in its  interim  and annual  financial
statements  about  the  obligations   associated  with  guarantees  issued.  The
recognition  provisions  of FIN 45 are effective  for any  guarantees  issued or
modified after December 31, 2002. The disclosure  requirements are effective for
financial  statements  of interim or annual  periods  ending after  December 15,
2002.  The  adoption of FIN 45 did not have a material  impact on the  Company's
financial position or results of operations.

                                       22
<PAGE>
     In January 2003, the FASB issued FASB  Interpretation No. 46 "Consolidation
of Variable  Interest  Entities"  ("FIN 46").  In general,  a variable  interest
entity is a corporation,  partnership,  trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity  investors  that do not  provide  sufficient  financial
resources for the entity to support its activities.  A variable  interest entity
often holds financial  assets,  including  loans or receivables,  real estate or
other property.  A variable interest entity may be essentially passive or it may
engage  in  activities  on behalf  of  another  company.  Until  now,  a company
generally has included another entity in its consolidated  financial  statements
only if it controlled the entity through voting  interests.  FIN 46 changes that
by requiring a variable  interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable  interest
entity's  activities or entitled to receive a majority of the entity's  residual
returns  or both.  FIN 46's  consolidation  requirements  apply  immediately  to
variable  interest  entities  created or acquired  after  January 31, 2003.  The
consolidation  requirements  apply to older entities in the first fiscal year or
interim  period  beginning  after  June  15,  2003.  Certain  of the  disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable  interest  entity was  established.  The Company
adopted FIN 46 effective January 31, 2003. The adoption of FIN 46 did not have a
material impact on the Company's financial position or results of operations.

     In  November  2002,  the  Emerging  Issues  Task Force  reached a consensus
opinion of EITF 00-21, "Revenue Arrangements with Multiple  Deliverables".  That
consensus provides that revenue  arrangements with multiple  deliverables should
be divided into separate  units of  accounting if certain  criteria are met. The
consideration  of the  arrangement  should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair  value  is  contingent  on  delivery  of  specified  items  or  performance
conditions. Applicable revenue criteria should be considered separately for each
separate unit of  accounting.  EITF 00-21 is effective for revenue  arrangements
entered into in fiscal periods beginning after June 15, 2003. Entities may elect
to report the change as a cumulative  effect  adjustment in accordance  with APB
Opinion 20, "Accounting Changes." The Company is currently evaluating the impact
of the adoption of EITF 00-21 on its financial statements.

Qualitative and Quantitative Disclosures About Market Risk

     The Company is exposed to certain financial market risks, including changes
in interest rates. All of the Company's  revenue,  expenses and capital spending
are transacted in US dollars.  The Company's exposure to market risk for changes
in interest rates relates  primarily to our cash and cash  equivalent  balances,
investments in sales-type leases and the line of credit agreement.  The majority
of our investments are in short-term  instruments and subject to fluctuations in
US interest rates. Due to the nature of our short-term  investments,  we believe
that there is no material risk exposure.

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 2003 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 2003 Annual Meeting of Stockholders,
and is incorporated herein by reference.

                                       23
<PAGE>
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 2003 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 2003 Annual Meeting of Stockholders,
and is incorporated herein by reference.

ITEM FOURTEEN - CONTROLS AND PROCEDURES

     The Company  carried out an evaluation,  under the supervision and with the
participation  of  the  Company's  management,  including  the  Company's  Chief
Executive  Officer and Chief  Financial  Officer,  of the  effectiveness  of the
design  and  operation  of the  Company's  disclosure  controls  and  procedures
pursuant to Exchange  Act Rule 13a- 15.  Based upon that  evaluation,  the Chief
Executive  Officer and Chief  Financial  Officer  concluded  that the  Company's
disclosure  controls and  procedures  are  effective.  There were no significant
changes  in the  Company's  internal  controls  or in other  factors  that could
significantly affect these controls subsequent to the date of their evaluation.

                                       24
<PAGE>
ITEM FIFTEEN - 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 (17)

     All other  schedules are omitted  because they are not  applicable,  or not
     required,   or  because  the  required   information  is  included  in  the
     Consolidated Financial Statements or notes thereto.

(b)  Form 8-K Reports
     ----------------
        None

(c)  Exhibits
     --------
     (3)  (a) Restated Certificate of Incorporation (2) (b) By-Laws (1)
     (4)  (a) Specimen Certificate for Common Stock (1)
          (b) Certificate of Designation of the Preferred Stock, Series A (3)
          (c)  Certificate of Designation of the Preferred Stock, Series B (8)
          (d)  Form of  Rights  Agreement  dated  as of March  9,  1995  between
               Registrant and American Stock Transfer & Trust Company (5)
          (e)  Certificate of Designation of the Preferred Stock, Series C (9)
     (10) (a) 1995 Stock Option Plan (6)
          (b)  Outside Director Stock Option Plan (6)
          (c)  Employment Agreement dated February 1, 1995, as amended March 12,
               1998 and October 10, 2001,  between  Registrant and John C.K. Hui
               (4) (9) (13)
          (d)  1997 Stock Option Plan, as amended (10)
          (e)  1999 Stock Option Plan, as amended (11)
          (f)  Credit  Agreement  dated  February 21, 2002 between  Vasomedical,
               Inc. and Fleet National Bank (12)
          (g)  Agreement  dated October 1, 2002 between the Registrant and Peter
               F. Cohn (14)
          (h)  Termination  and  Settlement  Agreement  dated  October  21, 2002
               between the Registrant and D. Michael Deignan (14)
          (i)  Employment Agreement dated October 28, 2002, and amended June 30,
               2003, between the Registrant and Gregory D. Cash (14) (16)
          (j)  Amendment and Waiver to Credit  Agreement  dated October 18, 2002
               between the Vasomedical, Inc. and Fleet National Bank (14)
          (k)  Amendment  No. 2 and Waiver to Credit  Agreement  dated April 10,
               2003 between the Registrant and Fleet National Bank (15)
     (22)      Subsidiaries of the Registrant
                                                                   Percentage
               Name                State of Incorporation       Owned by Company
               ----                ----------------------       ----------------
               Viromedics, Inc.            Delaware                   61%
               180 Linden Avenue Corp.     New York                  100%
     (23)      Consent of Grant Thornton LLP (17)
     (31)      Certification Reports  pursuant to Securities  Exchange  Act Rule
               13a-14 (17)
     (32)      Certification Reports pursuant to Section 906  of  Sarbanes-Oxley
               Act of 2002 (17)
--------------------------
     (1)  Incorporated by reference to Registration  Statement on Form S-18, No.
          33-24095.
     (2)  Incorporated by reference to  Registration  Statement on Form S-1, No.
          33-46377 (effective 7/12/94).
     (3)  Incorporated  by  reference  to Report on Form 8-K dated  November 14,
          1994.
     (4)  Incorporated  by  reference  to Report on Form 8-K dated  January  24,
          1995.
     (5)  Incorporated by reference to Registration  Statement on Form 8-A dated
          May 12, 1995.
     (6)  Incorporated  by reference to Notice of Annual Meeting of Stockholders
          dated December 5, 1995.
     (7)  Incorporated by reference to Report on Form 8-K dated June 25, 1997.
     (8)  Incorporated by reference to Report on Form 8-K dated April 30, 1998.
     (9)  Incorporated  by  reference to Report on Form 10-K for the fiscal year
          ended May 31, 1998.
     (10) Incorporated  by  reference to Report on Form 10-K for the fiscal year
          ended May 31, 1999
     (11) Incorporated  by  reference to Report on Form 10-K for the fiscal year
          ended May 31, 2000.
     (12) Incorporated  by  reference  to Report on Form 10-Q for the  quarterly
          period ended February 28, 2002.
     (13) Incorporated  by  reference to Report on Form 10-K for the fiscal year
          ended May 31, 2002.
     (14) Incorporated  by  reference  to Report on Form 10-Q for the  quarterly
          period ended November 30, 2002.
     (15) Incorporated  by  reference  to Report on Form 10-Q for the  quarterly
          period ended February 28, 2003.
     (16) Incorporated by reference to Report on Form 8-K dated June 30, 2003.
     (17) Filed herewith.
                                       25
<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 22nd day of August, 2003.

                                 VASOMEDICAL, INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been  signed  below on  August  22,  2003 by the  following  persons  in the
capacities indicated:

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

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

/s/ Gregory D. Cash              President, Chief Executive Officer and Director
Gregory D. Cash                  (Principal Executive Officer)

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

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

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

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

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

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

/s/ Anthony Viscusi              Director
Anthony Viscusi

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

/s/ Martin Zeiger                Director
Martin Zeiger

                                       26
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                 Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
----------------------------------------------- --------------- ---------------------------- ----------------- -----------------
                   Column A                        Column B              Column C                Column D          Column E
----------------------------------------------- --------------- ---------------------------- ----------------- -----------------
                                                                         Additions
                                                                ----------------------------
                                                                     (1)            (2)
                                                  Balance at      Charged to    Charged to
                                                 beginning of     costs and        other                        Balance at end
                                                    period         expenses      accounts       Deductions        of period
----------------------------------------------- --------------- --------------- ------------ ----------------- -----------------
<S>                                                 <C>             <C>                        <C>                   <C>
Allowance for doubtful accounts
  Year ended May 31, 2003                           $1,099,687      $1,227,324                 (a) $1,528,382          $768,629
  Year ended May 31, 2002                             $545,000        $954,000                       $399,313        $1,099,687
  Year ended May 31, 2001                             $400,000        $325,000                       $180,000          $545,000

Valuation Allowance - Financing Receivables
  Year ended May 31, 2003                             $718,879                                       $473,885          $244,994
  Year ended May 31, 2002                                   $-        $718,879                                         $718,879

Reserve for obsolete inventory
  Year ended May 31, 2003                             $180,000        $100,000                                         $280,000
  Year ended May 31, 2002                             $150,000         $30,000                                         $180,000
  Year ended May 31, 2001                                   $-        $150,000                                         $150,000

Valuation Allowance - Deferred Tax Asset
  Year ended May 31, 2003                                   $-        $622,000                                         $622,000
  Year ended May 31, 2002                                   $-                                                               $-
  Year ended May 31, 2001                          $14,665,000                                    $14,665,000                $-

Provision for warranty obligations
  Year ended May 31, 2003                             $991,000        $724,000                       $927,000          $788,000
  Year ended May 31, 2002                           $1,055,000        $780,000                       $844,000          $991,000
  Year ended May 31, 2001                             $387,000      $1,250,000                       $582,000        $1,055,000
<FN>
(a)      accounts receivable written off, net of $15,000 in recoveries in fiscal 2003
</FN>
</TABLE>
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Financial Statements
        Consolidated Balance Sheets as of May 31, 2003 and 2002            F-3

        Consolidated Statements of Earnings for the
          years ended May 31, 2003, 2002 and 2001                          F-4

        Consolidated Statement of Changes in Stockholders'
          Equity for the years ended May 31, 2003, 2002 and 2001           F-5

        Consolidated Statements of Cash Flows for the
          years ended May 31, 2003, 2002 and 2001                          F-6

        Notes to Consolidated Financial Statements                    F-7 - F-19

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


Stockholders and Board of Directors
  Vasomedical, Inc. and Subsidiaries

We have audited the  accompanying  consolidated  balance sheets of  Vasomedical,
Inc.  and  Subsidiaries  (the  "Company")  as of May 31, 2003 and 2002,  and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for each of the three  fiscal years in the period ended May 31, 2003.
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
Vasomedical,  Inc.  and  Subsidiaries  as of May  31,  2003  and  2002,  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, 2003,  in  conformity
with accounting principles generally accepted in the United States of America.

We have also audited  Schedule II Valuation and Qualifying  Accounts for each of
the three fiscal years in the period  ended May 31, 2003.  In our opinion,  this
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.


/s/ GRANT THORNTON LLP
----------------------
GRANT THORNTON LLP


Melville, New York
August 1, 2003

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

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                       May 31,
                                                                                 2003           2002
                                                                                 ----           ----
<S>                                                                            <C>            <C>

          ASSETS
CURRENT ASSETS
          Cash and cash equivalents                                            $5,222,847     $2,967,627
          Accounts receivable, net of an allowance for doubtful accounts
            of $768,629 and $1,099,687 at May 31, 2003 and 2002, respectively   7,377,118     12,682,725
          Inventories                                                           3,439,567      4,902,121
          Deferred income taxes                                                   303,000      3,033,000
          Financing receivables, net                                              264,090        633,786
          Other current assets                                                    268,231        627,243
                                                                              -----------    -----------
                  Total current assets                                         16,874,853     24,846,502
PROPERTY AND EQUIPMENT, net                                                     3,233,158      3,252,030
FINANCING RECEIVABLES, net                                                        679,296      2,941,587
NOTES RECEIVABLE                                                                        -        512,329
DEFERRED INCOME TAXES                                                          14,279,000      9,658,000
OTHER ASSETS                                                                      261,243        207,810
                                                                              -----------    -----------
                                                                              $35,327,550    $41,418,258
                                                                              ===========    ===========
          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
          Accounts payable and accrued expenses                                $2,667,861     $3,645,846
          Current maturities of long-term debt and notes payable                  108,462      1,046,445
          Sales tax payable                                                       461,704        732,362
          Deferred revenues                                                       789,118        272,000
          Accrued warranty and customer support expenses                          575,000        588,334
          Accrued professional fees                                               207,793        362,083
          Accrued commissions                                                     586,823        973,998
                                                                              -----------    -----------
                  Total current liabilities                                     5,396,761      7,621,068
LONG-TERM DEBT                                                                  1,177,804      1,072,716
ACCRUED WARRANTY COSTS                                                            213,000        402,666
DEFERRED REVENUES                                                                 920,433        719,204
OTHER LIABILITIES                                                                 300,250              -

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
          Preferred stock, $.01 par value; 1,000,000 shares authorized;
            none issued and outstanding                                                 -              -
          Common stock, $.001 par value; 110,000,000 shares authorized;
            57,822,023 and 57,309,120 shares at May 31, 2003 and 2002,
            respectively, issued and outstanding                                   57,822         57,309
          Additional paid-in capital                                           50,623,316     50,116,148
          Accumulated deficit                                                 (23,361,836)   (18,570,853)
                                                                              -----------    -----------
                                                                               27,319,302     31,602,604
                                                                              -----------    -----------
                                                                              $35,327,550    $41,418,258
                                                                              ===========    ===========
</TABLE>
The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

                       CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
                                                                                  Year ended May 31,
                                                                   --------------------------------------------
                                                                      2003            2002              2001
                                                                      ----            ----              ----
<S>                                                                <C>             <C>              <C>
Revenues
  Equipment sales                                                  $22,850,391     $29,304,349      $26,912,373
  Equipment rentals and services                                     1,973,228       1,339,113          595,965
  Equipment sold under sales-type leases                                     -       4,187,009                -
                                                                   -----------     -----------      -----------
                                                                    24,823,619      34,830,471       27,508,338
Cost of sales and services                                           9,251,221      10,538,731        7,910,359
                                                                   -----------     -----------      -----------
    Gross profit                                                    15,572,398      24,291,740       19,597,979
Expenses
  Selling, general and administrative                               13,714,913      13,686,958       11,634,965
  Research and development                                           4,544,822       5,112,258        2,554,470
  Provision for doubtful accounts                                    3,728,484       1,304,000          325,000
  Interest and financing costs                                         186,574          98,140           48,294
  Interest and other income, net                                      (176,724)       (249,722)        (201,992)
                                                                   -----------     -----------      -----------
                                                                    21,998,069      19,951,634       14,360,737
                                                                   -----------     -----------      -----------
EARNINGS (LOSS) BEFORE INCOME TAXES                                 (6,425,671)      4,340,106        5,237,242
  Income tax (expense) benefit, net                                  1,634,688      (1,554,000)       6,457,108
                                                                   -----------     -----------      -----------
NET EARNINGS (LOSS)                                                $(4,790,983)     $2,786,106      $11,694,350
                                                                   ===========      ==========      ===========
Net earnings (loss) per common share
     - basic                                                             $(.08)           $.05             $.21
                                                                         =====            ====             ====
     - diluted                                                           $(.08)           $.05             $.20
                                                                         =====            ====             ====
Weighted average common shares outstanding
     - basic                                                        57,647,032      57,251,035       56,571,402
                                                                   ===========      ==========      ===========
     - diluted                                                      57,647,032      59,468,092       59,927,199
                                                                   ===========      ==========      ===========
</TABLE>
The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                                     Total
                                                                                         Additional    Accum-        stock-
                                             Preferred stock           Common stock        paid-in     ulated        holders'
                                             Shares     Amount     Shares        Amount    capital    deficit        equity
                                             ------     ------     ------        ------   ---------   -------        ---------
<S>                                               <C>   <C>      <C>             <C>      <C>          <C>            <C>
Balance at June 1, 2000                           -          -   55,921,330      $55,921  $40,939,158  $(33,051,309)  $7,943,770

Exercise of options and warrants                                  1,274,123        1,274    1,625,335                  1,626,609
Stock options granted for services                                                             35,000                     35,000
Tax benefit of stock options and warrants
  exercised in the current and prior years                                                  7,209,000                  7,209,000
Net earnings                                                                                        _    11,694,350   11,694,350
                                            -------     ------   ----------      -------  -----------  ------------  -----------
Balance at May 31, 2001                             -        -   57,195,453       57,195   49,808,493   (21,356,959)  28,508,729

Exercise of options and warrants                                    113,667          114      199,529                    199,643
Stock options granted for services                                                             50,126                     50,126
Tax benefit of stock options and warrants
  exercised in the current year                                                                58,000                     58,000
Net earnings                                                                                              2,786,106    2,786,106
                                            -------     ------   ----------      -------  -----------  ------------  -----------
Balance at May 31, 2002                           -          -   57,309,120       57,309   50,116,148   (18,570,853)  31,602,604

Exercise of options and warrants                                    512,903          513      234,487                    235,000
Stock options granted for services                                                             50,681                     50,681
Tax benefit of stock options and warrants
  exercised in the current year                                                               222,000                    222,000
Net loss                                                                                                 (4,790,983)  (4,790,983)
                                            -------     ------   ----------      -------  -----------  ------------  -----------
Balance at May 31, 2003                           -          -   57,822,023      $57,822  $50,623,316  $(23,361,836) $27,319,302
                                            =======     ======   ==========      =======  ===========  ============  ===========
</TABLE>
The accompanying notes are an integral part of this statement.

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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                      Year ended May 31,
                                                                                      -----------------
                                                                         2003             2002             2001
                                                                         ----             ----             ----
<S>                                                                  <C>               <C>             <C>
Cash flows from operating activities
  Net earnings (loss)                                                $(4,790,983)      $2,786,106      $11,694,350
  Adjustments to reconcile net earnings (loss)                       ------------      ----------      -----------
    to net cash provided by (used in) operating activities
      Depreciation and amortization                                    1,132,996          962,167          587,541
      Provision for doubtful accounts, net of write-offs               2,209,101          904,687          145,000
      Reserve for inventory obsolescence                                 100,000           30,000          150,000
      Deferred income taxes                                           (1,669,000)       1,573,000       (6,597,000)
      Stock options granted for services                                  50,681           50,126           35,000
      Changes in operating assets and liabilities
        Accounts receivable                                            5,643,288       (3,855,663)      (5,043,939)
        Financing receivables, net                                       118,126       (3,575,373)               -
        Inventories                                                    1,079,976       (1,694,198)      (4,460,572)
        Other current assets                                             359,012         (183,356)          35,380
        Other assets                                                     (79,082)        (142,062)         (90,251)
        Accounts payable, accrued expenses and other current
         liabilities                                                  (1,286,324)         443,649        3,833,781
        Other liabilities                                                311,813          384,265          389,605
                                                                     -----------      -----------      -----------
                                                                       7,970,587       (5,102,758)     (11,015,455)
                                                                     -----------      -----------      -----------
     Net cash provided by (used in) operating activities               3,179,604       (2,316,652)         678,895
                                                                     -----------      -----------      -----------
Cash flows from investing activities
  Issuance of notes                                                            -         (500,000)               -
  Purchase of property and equipment                                    (326,489)        (319,981)      (1,578,415)
                                                                     -----------      -----------      -----------
     Net cash used in investing activities                              (326,489)        (819,981)      (1,578,415)
                                                                     -----------      -----------      -----------
Cash flows from financing activities
  Proceeds from notes                                                    238,071        2,141,667        1,141,667
  Payments on notes                                                   (1,070,966)      (1,164,173)               -
  Restricted cash                                                              -        1,141,667       (1,141,667)
  Proceeds from exercise of options and warrants                         235,000          199,643        1,626,609
                                                                     -----------      -----------      -----------
     Net cash provided by (used in) financing activities                (597,895)       2,318,804        1,626,609
                                                                     -----------      -----------      -----------
      NET INCREASE (DECREASE) IN
        CASH AND CASH EQUIVALENTS                                      2,255,220         (817,829)         727,089
Cash and cash equivalents - beginning of year                          2,967,627        3,785,456        3,058,367
                                                                     -----------      -----------      -----------
Cash and cash equivalents - end of year                               $5,222,847       $2,967,627       $3,785,456
                                                                     ===========      ===========      ===========
Non-cash investing and financing activities were as follows:
  Inventories transferred to property and equipment
     attributable to operating leases, net                              $761,986       $1,130,020          $849,613

Supplemental disclosures:
  Interest paid                                                         $186,574          $98,139          $48,294
  Income taxes paid                                                      $87,963         $304,263          $10,749
</TABLE>
The accompanying notes are an integral part of these statements.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          May 31, 2003, 2002 and 2001

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   external
counterpulsation system ("EECP"), a microprocessor-based  medical device for the
noninvasive,  outpatient treatment of patients with cardiovascular disease. EECP
is  marketed  worldwide  to  hospitals,  clinics and other  cardiac  health care
providers.  To date, a significant  portion of the Company's  revenues have been
generated from customers in the United States.

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

        Principles of Consolidation

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

        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,
which includes  delivery and customer  acceptance.  The sale of EECP systems are
not subject to a right of return,  other than for normal warranty  matters,  and
the  Company is not  obligated  for  post-sale  upgrades to these  systems.  The
Company has also entered into lease  agreements  for its EECP system,  generally
for terms of one year or less, that are classified as operating leases. Revenues
from operating leases are generally recognized,  in accordance with the terms of
the lease agreements,  on a straight-line  basis over the life of the respective
leases.  For certain operating leases in which payment terms are determined on a
"fee-per-use" basis,  revenues are recognized as incurred (i.e., as actual usage
occurs). The cost of the EECP system utilized under operating leases is recorded
as a component of property and  equipment and is amortized to cost of sales over
the estimated useful life of the equipment,  not to exceed five years. There are
no significant  minimum rental  commitments on these operating leases at May 31,
2003.  Revenues  from the sale of  extended  warranties  on the EECP  system are
recognized  on a  straight-line  basis over the life of the  extended  warranty,
ranging  from one year to four  years.  Deferred  revenues  relate  to  extended
warranty  fees  that have been paid by  customers  prior to the  performance  of
extended warranty services.

     The Company follows SFAS No. 13,  "Accounting For Leases," for its sales of
EECP units  under  sales-type  leases it  presently  has with one  customer.  In
accordance  with  SFAS No.  13,  the  Company  records  the  sale and  financing
receivable at the amount of the minimum lease  payment,  less unearned  interest
income,  which is  computed at the  interest  rate  implicit  in the lease,  and
executory costs,  which are primarily related to product warranties on each unit
sold.  Unearned interest income is amortized to income in a manner that produces
a constant rate of return on the investment in the sales-type lease. The cost of
the EECP unit  acquired by the customer is recorded as cost of sales in the same
period that the sale is recorded.

     Accounts Receivable/Financing Receivables

     The Company's  accounts  receivable-trade are due from customers engaged in
the provision of medical  services.  Credit is extended based on evaluation of a
customer's  financial  condition  and,  generally,  collateral  is not required.
Accounts receivable are generally due 30 to 60 days from shipment and are stated
at amounts due from customers net of allowances for doubtful accounts,  returns,
term  discounts  and other  allowances.  Accounts  outstanding  longer  than the
contractual  payment  terms  are  considered  past  due.  Estimates  are used in
determining  our  allowance  for  doubtful  accounts  based  on  our  historical
collections  experience,  current trends,  credit policy and a percentage of our
accounts receivable by aging category. In determining these percentages, we look
at  historical  write-offs  of our  receivables.  The Company  also looks at the
credit  quality of its customer base as well as changes in its credit  policies.
The Company  continuously  monitors collections and payments from its customers.
While  credit  losses  have  historically  been  within   expectations  and  the

                                      F-7
<PAGE>

provisions  established,  the Company cannot  guarantee that it will continue to
experience the same credit loss rates that it has in the past.

     The  changes  in the  Company's  allowance  for  doubtful  accounts  are as
follows:
<TABLE>
<CAPTION>
                                                               May 31, 2003           May 31, 2002
                                                               ------------           ------------
        <S>                                                     <C>                      <C>

        Beginning balance                                       $1,099,687               $545,000
          Provision for losses on accounts receivable            1,227,324                954,000
          Direct write-offs                                     (1,543,382)              (399,313)
          Recoveries                                               (15,000)                      -
                                                                ----------             ----------
        Ending balance                                            $768,629             $1,099,687
                                                                ==========             ==========
</TABLE>
     In  addition,  the  Company  periodically  reviews  and  assesses  the  net
realizability of its receivables  arising from sales-type leases. If this review
results in a lower estimate of the net realizable  value of the  receivable,  an
allowance for the  unrealized  amount is  established in the period in which the
estimate is changed. In the first quarter of fiscal 2003,  management decided to
write-off  financing   receivables  under  sales-type  leases  of  approximately
$2,558,000  as a result of  significant  uncertainties  with  respect to a major
customer's ability to meet its financial obligations (Note C).

     The changes in the Company's  allowance for  financing  receivables,  which
primarily relates to balloon payments due at lease end, are as follows:
<TABLE>
<CAPTION>
                                                                May 31, 2003     May 31, 2002
                                                                ------------     ------------
          <S>                                                    <C>               <C>
          Beginning balance                                       $718,879
            Provision for losses on financing receivables                -          $718,879
            Direct write-offs                                     (473,885)                -
                                                                  ---------         --------
          Ending balance                                          $244,994          $718,879
                                                                  ========          ========
</TABLE>
        Concentrations of Credit Risk

     The  Company  markets  the  EECP  system   principally  to   cardiologists,
hospitals,  clinics and other 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 30 to 60 days from shipment. (See Notes C and D.)

     For the years ended May 31, 2003, 2002 and 2001, no customer  accounted for
10% or more of revenues.  For the years ended May 31, 2003 and 2002, no customer
accounted  for 10% or more of  accounts  receivable.  At May 31,  2003 and 2002,
financing receivables were due from one and two customers, respectively.

     The Company's  revenues were derived from the  following  geographic  areas
during the years ended May 31:
<TABLE>
<CAPTION>
                                      2003               2002             2001
                                  ------------       -----------     --------------
     <S>                           <C>               <C>               <C>
     Domestic (United States)      $23,701,619       $32,105,471       $26,093,388
     Non-domestic                    1,122,000         2,725,000         1,415,000
                                  --------------    -------------    --------------
                                    $24,823,619       $34,830,471      $27,508,388
                                  ==============    =============    ==============
</TABLE>
Inventories

     The Company values inventory at the lower of cost or estimated market, cost
being determined on a first-in,  first-out basis. The Company  regularly reviews
inventory  quantities on hand,  particularly  raw materials and components,  and
records a  provision  for excess  and  obsolete  inventory  based  primarily  on
existing and anticipated design and engineering  changes to our products as well
as forecasts of future product demand.

     Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation and
amortization.  Depreciation  is provided over the estimated  useful lives of the
assets,  which range from three to thirty-nine years, on a straight-line  basis.
Accelerated  methods  of  depreciation  are  used  for tax  purposes.  Leasehold
improvements  are  amortized  over  the  useful  life of the  related  leasehold
improvement or the life of the related lease, whichever is less.

                                      F-8
<PAGE>
       Warranty Costs

     Equipment sold is generally  covered by a warranty  period of one year. The
Company  accrues a warranty  reserve  for  estimated  costs to provide  warranty
services  when the  equipment  sale is  recognized.  The factors  affecting  the
Company's warranty liability include the number of units sold and historical and
anticipated  rates of claims  and  costs per  claim.  The  Company  periodically
assesses  the  adequacy  of its  warranty  liability  based on  changes in these
factors.  Warranty  reserves related to units sold under  sales-type  leases are
recorded  as  executory  costs,  which  serve to reduce the amount of  financing
receivables  reported in the  consolidated  balance sheets.  The Company records
revenue on extended  warranties  on a  straight-line  basis over the term of the
related warranty contracts. Service costs are expensed as incurred.

     Deferred  revenues  related  to  extended  warranties  are  $1,709,551  and
$991,204 at May 31, 2003 and 2002,  respectively.

     The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
                                            May 31, 2003           May 31, 2002
                                            ------------           ------------
<S>                                           <C>                  <C>
Beginning balance                             $991,000             $1,055,000
Expense for new warranties issued              724,000                780,000
Warranty claims                               (927,000)              (844,000)
                                              --------             ----------
Ending balance                                $788,000               $991,000
                                              ========             ==========
</TABLE>
        Research and Development

     Research  and  development  costs are  expensed  as  incurred.  Included in
research and development  costs is  amortization  expense related to the cost of
EECP systems under loan for clinical trials.

        Income Taxes

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

     Deferred  tax  liabilities  and assets  shall be  classified  as current or
non-current  based on the  classification  of the related asset or liability for
financial reporting. A deferred tax liability or asset that is not related to an
asset or  liability  for  financial  reporting,  including  deferred  tax assets
related to carryforwards, shall be classified according to the expected reversal
date of the temporary difference. The deferred tax asset recorded by the Company
relates  primarily to the  realization of net operating loss  carryforwards,  of
which the allocation of the current portion reflects the expected utilization of
such net  operating  losses  in  fiscal  2004.  Such  allocation  is based  upon
management's  internal  financial forecast for fiscal 2004 and may be subject to
revision based upon actual results.

        Shipping and Handling Costs

     The Company  includes  all shipping  and  handling  expenses  incurred as a
component of cost of sales.  Amounts billed to customers related to shipping and
handling costs are included as a component of sales.

        Fair Value of Financial Instruments

     The carrying amounts of cash and cash equivalents,  accounts receivable and
accounts payable approximate fair value due to the short-term  maturities of the
instruments.  The carrying amount of the financing receivables approximates fair
value as the interest  rates implicit in the leases  approximate  current market
interest rates for similar financial instruments.  The carrying amounts of notes
payable and notes receivable approximate their fair values as the interest rates
of these  instruments  approximate  the interest rates  available on instruments
with similar terms and maturities.

                                      F-9
<PAGE>

        Use of Estimates

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

        Net Earnings (Loss) Per Common Share

     Basic earnings (loss) per share are based on the weighted average number of
common  shares  outstanding  without  consideration  of potential  common stock.
Diluted earnings (loss) per share are based on the weighted number of common and
potential  common shares  outstanding.  The  calculation  takes into account the
shares that may be issued  upon the  exercise  of stock  options  and  warrants,
reduced by the shares that may be  repurchased  with the funds received from the
exercise,  based on the average price during the period. Options and warrants to
purchase  6,190,753,  2,432,167 and 893,000 shares of common stock were excluded
from the  computation of diluted  earnings  (loss) per share as of May 31, 2003,
2002 and 2001,  respectively,  because  the effect of their  inclusion  would be
antidilutive.

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
                                                           For the fiscal year ended May 31,
                                                           ---------------------------------
                                                    2003                 2002                 2001
                                                    ----                 ----                 ----
       <S>                                      <C>                   <C>                  <C>
       Numerator:
          Basic and diluted earnings (loss)     $(4,790,983)           $2,786,106         $11,694,350
                                                 ==========           ==========           ==========
       Denominator:
          Basic - weighted average shares        57,647,032           57,251,035           56,571,402
                Stock options                             -            1,624,744            2,270,094
                Warrants                                  -              592,313            1,085,703
                                                 ----------           ----------           ----------
          Diluted - weighted average shares      57,647,032           59,468,092           59,927,199
                                                 ==========           ==========           ==========
       Earnings (loss) per share - basic              $(.08)                $.05                 $.21
                                                      =====                 ====                 ====
                                 - diluted            $(.08)                $.05                 $.20
                                                      =====                 ====                 ====
</TABLE>
        Stock Compensation

     The Company has four stock-based  employee  compensation  plans,  which are
described  more  fully  in  Note  H.  The  Company   accounts  for   stock-based
compensation  using the  intrinsic  value method in accordance  with  Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations ("APB No. 25") and has adopted the disclosure provisions
of  Statement  of  Financial  Accounting  Standards  No.  148,  "Accounting  for
Stock-Based  Compensation  -  Transition  and  Disclosure,  an amendment of FASB
Statement  No. 123." under APB No. 25, when the exercise  price of the Company's
employee stock options  equals the market price of the  underlying  stock on the
date  of  grant,  no  compensation  expense  is  recognized.   Accordingly,   no
compensation   expense  has  been  recognized  in  the  consolidated   financial
statements in connection with employee stock option grants.

     The following  table  illustrates the effect on net income and earnings per
share had the Company applied the fair value recognition provisions of Statement
of  Financial  Accounting  Standards  No.  123,  "Accounting  for  Stock-  Based
Compensation," to stock-based employee compensation.
<TABLE>
<CAPTION>
                                                                    For the fiscal year ended May 31,
                                                                    ---------------------------------
                                                                2003              2002              2001
                                                                ----              ----              ----
     <S>                                                    <C>                <C>               <C>
     Net earnings (loss), as reported                       $(4,790,983)       $2,786,106        $11,694,350

     Deduct: Total stock-based employee compensation
        expense determined under fair value-based method
        for all awards                                         (917,281)       (1,143,120)        (1,311,660)
                                                            ------------       ----------        -----------
     Pro forma net earnings (loss)                          $(5,708,264)       $1,642,986        $10,382,690
                                                            ============       ==========        ===========
     Earnings (loss) per share:
         Basic - as reported                                    $(.08)              $.05             $.21
         Diluted - as reported                                  $(.08)              $.05             $.20
         Basic - pro forma                                      $(.10)              $.03             $.18
         Diluted - pro forma                                    $(.10)              $.03             $.17
</TABLE>
                                      F-10
<PAGE>
     Pro forma compensation  expense may not be indicative of future disclosures
because it does not take into effect pro forma  compensation  expense related to
grants before 1995.  For purposes of estimating the fair value of each option on
the date of grant, the Company utilized the Black-Scholes option-pricing model.


     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded options,  which have no vesting restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly  different from those of traded options and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     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,     2003            2002             2001
                 -------------------------     ----            ----             ----
                 <S>                           <C>             <C>              <C>
                 Expected life (years)            5               5                5
                 Expected volatility            89%             86%              80%
                 Risk-free interest rate       3.0%            3.9%             5.2%
</TABLE>
     Equity  instruments  issued to nonemployees in exchange for goods, fees and
services are accounted for under the fair value-based method of SFAS No. 123.

        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.

Impact of New Accounting Pronouncements

     In August 2001, the Financial  Accounting  Standards  Board ("FASB") issued
SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets"
("SFAS No.  144").  SFAS No. 144  supersedes  SFAS No. 121  "Accounting  for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
Accounting  Principles Board Opinion No. 30, "Reporting  Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and  Infrequently  Occurring  Events and  Transactions."  This statement
retains  the  fundamental  provisions  of  SFAS  No.  121  for  recognition  and
measurement of impairment, but amends the accounting and reporting standards for
segments of a business to be disposed of. The new rules were  effective  for the
Company on June 1, 2002.  The  adoption  of SFAS No. 144 did not have a material
effect on the Company's financial position or results of operations.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148") which addresses financial
accounting  and  reporting  for  recording  expenses for the fair value of stock
options.  SFAS 148 provides  alternative  methods of transition  for a voluntary
change  to fair  value  based  method of  accounting  for  stock-based  employee
compensation.  Additionally,  SFAS No.  148  requires  more  prominent  and more
frequent  disclosures in financial  statements  about the effects of stock-based
compensation.  The  provisions of this  Statement are effective for fiscal years
ending  after  December  15,  2002.  The adoption of SFAS No. 148 did not have a
material  impact on the  financial  position  or  results of  operations  of the
Company.

     In April 2003, the FASB issued Statement of Financial  Accounting Standards
No. 149 ("SFAS No. 149"),  "Amendment of Statement 133 on Derivative Instruments
and Hedging  Activities,"  which amends and clarifies  financial  accounting and
reporting for derivative  instruments,  including certain derivative instruments
embedded in other contracts and for hedging  activities under SFAS No. 133. SFAS
No. 149 is effective for contracts  entered into or modified after June 30, 2003
except for the provisions that were cleared by the FASB in prior pronouncements.
The Company is currently  evaluating  the effect of the adoption of SFAS No. 149
on its financial position and results of operations.

     In May 2003, the FASB issued  Statement of Financial  Accounting  Standards
No. 150 ("SFAS No. 150"),  "Accounting for Certain  Financial  Instruments  with
Characteristics  of both  Liabilities  and Equity." This  statement  establishes
standards  for  how an  issuer  classifies  and  measures  in its  statement  of

                                      F-11
<PAGE>
financial  position certain financial  instruments with  characteristics of both
liabilities and equity. In accordance with the standard,  financial  instruments
that  embody  obligations  for the  issuer  are  required  to be  classified  as
liabilities. This Statement shall be effective for financial instruments entered
into or modified  after May 31, 2003,  and  otherwise  shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
is  currently  evaluating  the  effect of the  adoption  of SFAS No.  150 on its
financial position and results of operations.


     In November 2002, the FASB issued FASB  Interpretation No. 45, "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others"  ("FIN 45").  FIN 45 requires that upon
issuance of a guarantee,  a guarantor  must  recognize a liability  for the fair
value  of an  obligation  assumed  under  a  guarantee.  FIN  45  also  requires
additional  disclosures  by a  guarantor  in its  interim  and annual  financial
statements  about  the  obligations   associated  with  guarantees  issued.  The
recognition  provisions  of FIN 45 are effective  for any  guarantees  issued or
modified after December 31, 2002. The disclosure  requirements are effective for
financial  statements  of interim or annual  periods  ending after  December 15,
2002.  The  adoption of FIN 45 did not have a material  impact on the  Company's
financial position or results of operations.

     In January 2003, the FASB issued FASB  Interpretation No. 46 "Consolidation
of Variable  Interest  Entities"  ("FIN 46").  In general,  a variable  interest
entity is a corporation,  partnership,  trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity  investors  that do not  provide  sufficient  financial
resources for the entity to support its activities.  A variable  interest entity
often holds financial  assets,  including  loans or receivables,  real estate or
other property.  A variable interest entity may be essentially passive or it may
engage  in  activities  on behalf  of  another  company.  Until  now,  a company
generally has included another entity in its consolidated  financial  statements
only if it controlled the entity through voting  interests.  FIN 46 changes that
by requiring a variable  interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable  interest
entity's  activities or entitled to receive a majority of the entity's  residual
returns  or both.  FIN 46's  consolidation  requirements  apply  immediately  to
variable  interest  entities  created or acquired  after  January 31, 2003.  The
consolidation  requirements  apply to older entities in the first fiscal year or
interim  period  beginning  after  June  15,  2003.  Certain  of the  disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable  interest  entity was  established.  The Company
adopted FIN 46 effective January 31, 2003. The adoption of FIN 46 did not have a
material impact on the Company's financial position or results of operations.

     In  November  2002,  the  Emerging  Issues  Task Force  reached a consensus
opinion of EITF 00-21, "Revenue Arrangements with Multiple  Deliverables".  That
consensus provides that revenue  arrangements with multiple  deliverables should
be divided into separate  units of  accounting if certain  criteria are met. The
consideration  of the  arrangement  should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair  value  is  contingent  on  delivery  of  specified  items  or  performance
conditions. Applicable revenue criteria should be considered separately for each
separate unit of  accounting.  EITF 00-21 is effective for revenue  arrangements
entered into in fiscal periods beginning after June 15, 2003. Entities may elect
to report the change as a cumulative  effect  adjustment in accordance  with APB
Opinion 20, "Accounting Changes." The Company is currently evaluating the impact
of the adoption of EITF 00-21 on its financial statements.

NOTE B - INVENTORIES
<TABLE>
<CAPTION>
                                                           May 31,
                                                           ------
        Inventories consist of the following:       2003            2002
                                                    ----            ----
                <S>                              <C>             <C>
                Raw materials                    $1,374,241      $2,661,303
                Work in progress                    634,890         547,818
                Finished goods                    1,430,436       1,693,000
                                                 ----------      ----------
                                                 $3,439,567      $4,902,121
                                                 ==========      ==========
</TABLE>

NOTE C - RECEIVABLES FROM A MAJOR CUSTOMER

     Under a multi-year sales contract,  the Company sold equipment (EECP units)
to a customer  engaged in establishing a national  network of EECP centers under
sales-type  leases  aggregating  revenues  of  $3,160,792  in  fiscal  2002.  No
additional  equipment  has been sold to this  customer  during  fiscal 2003.  At

                                      F-12
<PAGE>

August 31, 2002,  financing  receivables of approximately  $2,558,000 from these
sales-type lease transactions with this customer were outstanding.  In addition,
in March 2002, the Company provided a $500,000  unsecured loan to this customer.
This financing was part of an aggregate $3.2 million credit facility, subject to
certain   conditions,   executed  by  the  customer  with  the  Company  and  an
unaffiliated  lender in January  2002,  under  which the  Company had no further
financing  obligation.  The customer issued two notes to the Company of $250,000
each in connection with two EECP centers that bore interest at 18% per annum and
were scheduled to mature in September  2005.  Payments of principal and interest
under these  notes was  scheduled  to commence in April 2003 in varying  amounts
determined  by a formula  based  upon cash  generated,  as  defined  in the loan
agreement.

     In late August 2002,  this  customer  became  delinquent  in its  scheduled
monthly payments under its financing  obligations to the Company.  In September,
the Company was notified by this customer of recent circumstances that precluded
their  ability  to remain  current  under  their  financing  obligations  to the
Company.  Based on their  situation,  for which the customer was  attempting  to
remedy  through  a  recapitalization,   significant   uncertainties  existed  in
connection with the ongoing viability of their business. Accordingly, management
decided to write-off, in full, all funds due from this customer as of August 31,
2002, which aggregated approximately $3,000,000,  including the present carrying
amount of the  underlying  equipment  due to the  uncertainty  of the  Company's
ability to repossess the  equipment.  During the second  quarter of fiscal 2003,
the customer ceased operations and the Company was able to successfully  recover
all of the units that it had sold under  sales-type  leases to the customer back
into its finished goods  inventory and recorded a bad debt recovery of $479,000,
which represented the present carrying amount of the equipment.  The Company has
redeployed certain pieces of the equipment while other pieces have been returned
to the Company's inventory for resale.

NOTE D - FINANCING RECEIVABLES

     The  following  table shows the future  minimum  rentals  receivable  under
sales-type  leases and future  minimum  lease  payments  and  obligations  under
capital leases in effect for the fiscal years ended May 31:
<TABLE>
         <S>                                                <C>
         2004                                               $348,302
         2005                                                835,288
         2006                                                178,896
                                                           ---------
         Total minimum lease payments                      1,362,486
         Less estimated executory costs                      (46,661)
                                                           ---------
         Net minimum lease payments                        1,315,825
         Less interest                                      (127,445)
                                                           ---------
         Present value of minimum lease payments           1,188,380
         Less valuation allowance                           (244,994)
                                                           ---------
         Net financing receivables                           943,386
         Less current portion                               (264,090)
                                                           ---------
         Long-term portion                                  $679,296
                                                           =========
</TABLE>
     These  sales-type  leases are for a term of three years. The annual minimum
lease  payments are subject to adjustment  based on usage of the leased units in
accordance with the provisions of the lease agreements.

NOTE E - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
                                                                 May 31,
                                                                 ------
        Property and equipment is summarized as follows:  2003            2002
                                                          ----            ----
                <S>                                     <C>              <C>
                Land                                     $200,000        $200,000
                Building and improvements               1,376,106       1,366,855
                Office, laboratory and other equipment  1,111,827         794,801
                EECP units under operating leases or
                  under loan for clinical trials        2,617,624       2,174,000
                Furniture and fixtures                    148,164         148,164
                Leasehold improvements                    117,803         117,803
                                                        ---------      ----------
                                                        5,571,524       4,801,623
                Less accumulated depreciation and
                 amortization                          (2,338,366)     (1,549,593)
                                                       ----------      ----------
                                                       $3,233,158      $3,252,030
                                                       ==========      ==========
</TABLE>
                                      F-13
<PAGE>
NOTE F - LONG-TERM DEBT AND LINE OF CREDIT AGREEMENT
<TABLE>
<CAPTION>
                                                  May 31,
                                                  -------
                                            2003             2002
                                     ----------------- -----------------
<S>                                    <C>               <C>
Revolving credit agreement (a)                           $1,000,000
Term loans (b) (c)                     $1,286,266         1,119,161
                                     ----------------- -----------------
                                        1,286,266         2,119,161
Less current portion                     (108,462)       (1,046,445)
                                     ----------------- -----------------
                                       $1,177,804        $1,072,716
                                     ================= =================
</TABLE>
     (a) In February 2002, the Company  renegotiated a secured  revolving credit
line with its  existing  bank.  The credit line  provided for  borrowings  up to
$15,000,000, based upon eligible accounts receivable, as defined therein, at the
Libor  Rate plus 150  basis  points  (3.4% at May 31,  2002).  At May 31,  2002,
approximately  $3,600,000  of  the  line  was  available  of  which  there  were
outstanding  borrowings of $1,000,000.  Under the terms of the agreement,  which
expires in February  2005,  the Company is  required to meet  certain  quarterly
covenants,  including leverage ratio, liquidity,  capital expenditures,  minimum
net income,  minimum  interest  coverage  and  minimum  tangible  net worth.  In
addition,  the line is secured by  substantially  all the tangible assets of the
Company.  In October  2002,  the credit line was further  amended to provide for
borrowings  up to  $5,000,000  ($2,000,000,  at any time that  consolidated  net
income  for the  immediately  preceding  three-month  period  is less  than $1),
primarily based upon eligible accounts  receivable,  as defined therein,  at the
Libor  Rate plus 200  basis  points or the  published  Prime  Rate plus 50 basis
points. In April 2003, the agreement was further amended to allow for borrowings
absent  compliance  with  the  financial  covenants  as long  as  such  eligible
borrowings  are  collateralized  by cash. In April 2003,  the Company repaid all
outstanding  borrowings  under the agreement  instead of maintaining  restricted
cash  balances.  At May 31,  2003,  the  Company did not meet  minimum  interest
coverage and tangible net worth  covenants  and future  compliance  with each of
these covenants in the near term is not certain.

     (b) The Company  purchased  its  headquarters  and  warehouse  facility and
secured  notes of  $641,667  and  $500,000,  respectively,  under  two  programs
sponsored by New York State.  These notes,  which bear  interest at 7.8% and 6%,
respectively,  are payable in monthly  installments  consisting of principal and
interest  payments  over  fifteen-  year terms,  expiring in September  2016 and
January 2017, respectively, and are secured by the building. At May 31, 2003 and
2002,  $1,072,717 and $1,119,161,  respectively,  were outstanding in connection
with these notes.

     (c) In fiscal 2003, the Company financed the cost and  implementation  of a
management   information   system  and  secured   several   notes,   aggregating
approximately  $238,000.  The notes,  which bear  interest at rates ranging from
7.5% through 8.7%, are payable in monthly  installments  consisting of principal
and interest  payments over four-year  terms,  expiring at various times between
August and October 2006. At May 31, 2003, $213,549 was outstanding in connection
with these notes.

         Maturities of long-term debt are as follows at May 31, 2003:
<TABLE>
                  <S>                             <C>
                  2004                            $108,462
                  2005                             117,019
                  2006                             126,263
                  2007                              83,506
                  2008                              65,769
                  Thereafter                       785,247
                                           ----------------
                                                $1,286,266
                                           ================
</TABLE>
NOTE G - STOCKHOLDERS' EQUITY AND WARRANTS

     In fiscal 2001,  warrants to purchase  776,212  shares of common stock were
exercised,  aggregating  $1,143,000 in proceeds to the Company.  In fiscal 2002,
warrants to purchase 15,000 shares of common stock were  exercised,  aggregating
$31,200 in proceeds to the Company. In fiscal 2003, warrants to purchase 500,000
shares of common stock were exercised,  aggregating  $225,000 in proceeds to the
Company.

     The outstanding  warrants expire in October 2006.  Warrant activity for the
years ended May 31, 2001, 2002 and 2003 is summarized as follows:
<TABLE>
<CAPTION>
                                Employees       Consultants         Total           Price Range
                                ---------       -----------         -----           -----------
<S>                               <C>               <C>            <C>               <C>
Balance at June 1, 2000          750,000           868,712        1,618,712         $.45 - $2.08
  Exercised                     (250,000)         (526,212)        (776,212)        $.45 - $2.08
                                --------          --------        ---------         ------------
                                      F-14
<PAGE>
Balance at May 31, 2001          500,000           342,500          842,500         $.45 - $2.08
  Exercised                                        (15,000)         (15,000)               $2.08
                                --------          --------        ---------         ------------
Balance at May 31, 2002          500,000           327,500          827,500         $.45 - $2.08
  Exercised                     (500,000)                          (500,000)                $.45
  Canceled                                        (127,500)        (127,500)               $2.08
                                --------          --------        ---------         ------------
Balance at May 31, 2003                -           200,000          200,000                 $.91
                                ========          ========        =========         ============
Number of shares exercisable           -           200,000          200,000                 $.91
                                ========          ========        =========         ============
</TABLE>
NOTE H - 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 with respect to new
option grants.

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
with respect to new option grants.

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.  At May 31, 2003,  there were 173,168  shares  available  for
future grants under the 1997 Plan.

1999 Stock Option Plan

     In July 1999,  the  Company's  Board of  Directors  approved the 1999 Stock
Option Plan (the "1999  Plan"),  for which the Company  reserved an aggregate of
2,000,000  shares  of  common  stock.  The 1999  Plan  provides  that it will be
administered  by a committee  of the Board of  Directors of the Company and that
the  committee  will  have full  authority  to  determine  the  identity  of the
recipients  of the  options  and the number of shares  subject  to each  option.
Options  granted  under the 1999 Plan may be either  incentive  stock options or
non-qualified  stock options.  The option price shall be 100% of the fair market
value of the common  stock on the date of the grant (or in the case of incentive
stock options  granted to any individual  principal  stockholder  who owns stock
possessing  more than 10% of the total combined voting power of all voting stock
of the Company,  110% of such fair market value).  The term of any option may be
fixed by the  committee  but in no event shall exceed ten years from the date of
grant.  Options are  exercisable  upon  payment in full of the  exercise  price,
either in cash or in common  stock  valued at fair  market  value on the date of
exercise of the option. The term for which options may be granted under the 1999
Plan expires  July 12,  2009.  In July 2000,  the  Company's  Board of Directors
increased the number of shares  authorized  for issuance  under the 1999 Plan by
1,000,000 shares to 3,000,000  shares.  In December 2001, the Board of Directors
of the Company  increased the number of shares authorized for issuance under the
1999 Plan by 2,000,000 shares to 5,000,000 shares.

                                      F-15
<PAGE>
     In January  2001,  the Board of Directors  granted  stock options under the
1999 Plan to a  consultant  to  purchase  25,000  shares  of common  stock at an
exercise  price of $3.81 per share (which  represented  the fair market value of
the underlying  common stock at the time of the respective  grant).  The Company
charged  $60,000 to operations  over the one-year  period in which services were
rendered.  In December 2001, the Board of Directors  granted stock options under
the 1999 Plan to a consultant  to purchase  25,000  shares of common stock at an
exercise  price of $2.95 per share (which  represented  the fair market value of
the underlying  common stock at the time of the respective  grant).  These stock
options were fair-valued at $50,250 which the Company charged to operations over
the one-year  period in which services were rendered.  During fiscal 2003,  2002
and 2001, the Company charged  $25,000,  $50,000 and $35,000,  respectively,  to
operations for these grants.

     In fiscal 2003, the Board of Directors granted stock options under the 1999
Plan to directors and employees to purchase an aggregate of 1,175,000  shares of
common  stock,  at exercise  prices  ranging from $.71 to $1.67 per share (which
represented the fair market value of the underlying  common stock at the time of
the respective  grants).  At May 31, 2003, there were 1,265,500 shares available
for future grants under the 1999 Plan.

     Activity  under all the plans for the years  ended May 31,  2001,  2002 and
2003 is summarized as follows:
<TABLE>
<CAPTION>
                                                                               Outstanding Options
                                   Shares Available     Number of Shares               Exercise     Weighted Average
                                 ---------------------                          Price per Share      Exercise Price
                                       for Grant
                                 ---------------------- ----------------- ---------------------- ------------------------
<S>                                       <C>                 <C>                 <C>                       <C>
Balance at June 1, 2000                     905,168           4,143,734             $.75 - $5.15            $1.76
  Shares authorized                       1,000,000
  Options granted                          (798,000)            798,000            $2.66 - $5.00            $4.00
  Options exercised                               -            (497,911)            $.75 - $3.44             $.97
  Options canceled                          111,000            (111,000)            $.75 - $3.47            $1.90
                                    ----------------- ------------------- ------------------------ ----------------
 Balance at May 31, 2001                  1,218,168           4,332,823           $.78  -  $5.15            $2.26
  Shares authorized                       2,000,000
  Options granted                        (1,084,100)          1,084,100          $1.78  -  $4.02            $3.61
  Options exercised                               -             (98,667)          $.88  -  $2.44            $1.71
  Options canceled                          125,333            (125,333)          $.88  -  $5.00            $3.90
                                    ----------------- ------------------- ------------------------ ----------------
 Balance at May 31, 2002                  2,259,401           5,192,923           $.78  -  $5.15            $2.51
  Options granted                        (1,175,000)          1,175,000           $.71  -  $1.67             $.95
  Options exercised                               -             (12,903)                    $.78             $.78
  Options canceled                          354,267            (364,267)          $.88  -  $5.15            $3.77
                                    ----------------- ------------------- ------------------------ ----------------
 Balance at May 31, 2003                  1,438,668           5,990,753           $.71  -  $5.15            $2.13
                                    ================= =================== ======================== ================
</TABLE>
     The following table summarizes  information about stock options outstanding
and exercisable at May 31, 2003.
<TABLE>
<CAPTION>
                                               Options Outstanding                           Options Exercisable
                                -------------------------------------------------    --------------------------------
                                                    Weighted
                                                     Average
                                   Number           Remaining        Weighted             Number         Weighted
                               Outstanding at      Contractual       Average          Exercisable at      Average
                                May 31, 2003       Life (yrs.)    Exercise Price       May 31, 2003      Exercise
  Range of Exercise Prices                                                                                 Price
----------------------------- ------------------ ---------------- ---------------    ----------------- --------------
<S>                                   <C>              <C>                 <C>              <C>                <C>
 $.71  -  $1.00                       2,101,876        6.9                 $0.90            1,021,876          $0.86
$1.22  -  $1.78                         973,250        6.5                 $1.37              673,250          $1.40
$1.91  -  $2.78                         820,127        5.1                 $2.00              778,460          $1.97
$2.89  -  $4.28                       1,892,500        6.5                 $3.66            1,186,500          $3.62
$4.59  -  $5.15                         203,000        7.0                 $4.83              153,667          $4.87
                              ------------------ ---------------- ---------------    ----------------- --------------
                                      5,990,753        6.5                 $2.13            3,813,753          $2.20
                              ================== ================ ===============    ================= ==============
</TABLE>
     The weighted-average fair value of options granted during fiscal 2003, 2002
and 2001 was $.95,  $2.50 and $2.73,  respectively.  At May 31, 2003, there were
approximately  11,823,000  remaining  authorized  shares of common  stock  after
reserves for all stock option plans, stock warrants and shareholders' rights.

                                      F-16
<PAGE>

NOTE I - INCOME TAXES

     In fiscal  2003,  the  Company  recorded  a  benefit  for  income  taxes of
$1,634,688,  inclusive  of $256,312  in current  tax expense and a deferred  tax
benefit of  $1,891,000.  In fiscal  2002,  the  Company  recorded an expense for
income  taxes of  $1,554,000,  inclusive of $39,000 in current tax expense and a
deferred  tax expense of  $1,515,000.  In fiscal  2001,  the Company  recorded a
benefit for income  taxes of  $6,457,108,  inclusive  of $139,892 in current tax
expense  principally  resulting from the federal  alternative  minimum tax and a
deferred tax benefit of $6,597,000 resulting  principally from the change in the
valuation allowance.




         The Company's deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
                                                                          May 31,
                                                           ---------------------------------------
                                                           2003             2002              2001
                                                           ----             ----              ----
   <S>                                                  <C>              <C>               <C>
   Deferred tax assets
         Net operating loss and other carryforwards     $13,368,000      $11,344,000       $13,422,000
         Accrued compensation                               153,000                -                 -
         Bad debts                                          244,000          493,000           178,000
         Other                                            1,439,000          854,000           606,000
                                                        -----------     ------------       -----------
                 Total gross deferred tax assets         15,204,000       12,691,000        14,206,000
         Valuation allowance                               (622,000)               -                 -
                                                        -----------     ------------       -----------
                 Net deferred tax assets                $14,582,000      $12,691,000       $14,206,000
                                                        ===========      ===========       ===========
</TABLE>
     The fiscal  2003  deferred  tax  benefit  does not  include the tax benefit
associated with the current exercises of stock options and warrants, aggregating
$222,000,  which was  credited  directly to  additional  paid-in  capital in the
current year.

     The fiscal  2002 tax expense  does not  include the tax benefit  associated
with the current exercises of stock options and warrants,  aggregating  $58,000,
which was credited directly to additional paid-in capital in such year.

     The fiscal  2001  deferred  tax  benefit  does not  include the tax benefit
associated  with the current and prior  years'  exercises  of stock  options and
warrants,  aggregating  $7,209,000,  which was credited  directly to  additional
paid- in capital in such year.

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

     At May 31,  2003,  the Company had net  operating  loss  carryforwards  for
Federal income tax purposes of  approximately  $39,315,000,  expiring at various
dates from 2005 through 2021.

     The following is a  reconciliation  of the effective income tax rate to the
federal statutory rate:
<TABLE>
<CAPTION>
                                                       2003                     2002                      2001
                                                     Amount        %          Amount         %          Amount          %
                                            ---------------- -------- --------------- --------- --------------- ----------
<S>                                            <C>            <C>         <C>             <C>       <C>              <C>
Federal statutory rate                         $(2,185,000)   (34.0)      $1,475,000      34.0      $1,781,000       34.0
State taxes, net                                     34,000       .5          56,000       1.3          65,000        1.2
Permanent differences                                33,320       .5          23,000        .5          67,300        1.3
Utilization of net operating loss                         -                        -               (1,781,000)     (34.0)
Change in valuation allowance

                                      F-17
<PAGE>
  relating to operations                            622,000      9.7               -               (6,719,000)    (128.3)
Other                                             (139,008)    (2.1)               -                   129,592        2.5
                                            ---------------- -------- --------------- --------- --------------- ----------
                                               $(1,634,688)   (25.4)      $1,554,000      35.8    $(6,457,108)    (123.3)
                                            ================ ======== =============== ========= =============== ==========
</TABLE>
     Under current tax law, the utilization of tax attributes will be restricted
if an ownership change, as defined,  were to occur.  Section 382 of the Internal
Revenue Code  provides,  in general,  that if an "ownership  change" occurs with
respect to a corporation with net operating and other loss  carryforwards,  such
carryforwards  will be available to offset  taxable  income in each taxable year
after the ownership change only up to the "Section 382 Limitation" for each year
(generally,  the product of the fair market value of the corporation's  stock at
the time of the  ownership  change,  with certain  adjustments,  and a specified
long-term  tax-exempt bond rate at such time). The Company's  ability to use its
loss carryforwards would be limited in the event of an ownership change.


NOTE J - COMMITMENTS AND CONTINGENCIES

Employment Agreements

     In October 2002, the Company and its Chief Executive Officer entered into a
termination and consulting agreement,  whereby the employment agreement that had
previously  existed  between  the parties  was  terminated.  As a result of this
termination,  the Company will pay to the former employee a severance payment of
$240,000 in equal monthly  installments  through  October 31, 2003.  The Company
recorded a charge to operations during the three-month period ended November 30,
2002 to reflect this  obligation.  The  consulting  agreement,  which expires on
December 31, 2003,  provides for a consulting fee of $40,000 to be paid in equal
monthly  installments  over the term of the agreement.  Further,  the consulting
agreement  provides  for the  continued  vesting of stock  options that had been
previously  granted to the employee which would have otherwise vested during the
term of the  agreement.  The terms of the original  option  grants  provided for
vesting  throughout  the period  that the former  employee  was  employed  by or
provided  services to the Company.  There were no other  modifications to any of
the previously granted stock options. The Company measured the fair value of the
unvested options as of the date of the termination and consulting  agreement and
has recorded a charge to operations of approximately $25,000 as a result of this
modification.

     In October 2002, the Company entered into an employment  agreement with its
new President  and Chief  Operating  Officer.  The  agreement,  which expires in
October 2004,  provides for certain  settlement  benefits,  including a lump-sum
payment of twelve months of base salary in the event of a change of control,  as
defined,  or a  termination  payment  in an amount  equal to six  months of base
salary in the event of termination without cause, as defined. Such agreement was
modified on June 30, 2003 reflecting this employee's  promotion to President and
Chief Executive Officer.

     The approximate  aggregate  minimum  compensation  obligation  under active
employment agreements at May 31, 2003 are summarized as follows:
<TABLE>
<CAPTION>
                   Fiscal Year             Amount
                   -----------            -------
                        <S>               <C>
                         2004             $398,000
                         2005              204,000
                                          --------
                                          $602,000
                                          ========
</TABLE>
Leases

     The Company  leases  additional  warehouse  space  under two  noncancelable
operating  leases,  of which one  expires on October  31,  2003 and the other on
September  30, 2006.  Rent  expense was  $99,000,  $85,000 and $69,000 in fiscal
2003, 2002 and 2001, respectively.

     Approximate   aggregate  minimum  annual   obligations  under  these  lease
agreements and other equipment leasing agreements at May 31, 2003 are summarized
as follows:
<TABLE>
<CAPTION>
                   Fiscal Year                 Amount
                   -----------                 ------
                      <S>                     <C>
                      2004                    $61,000
                      2005                     42,000
                      2006                     37,000
                      2007                     12,000
                                             --------
                                             $152,000
                                             ========
</TABLE>
                                      F-18
<PAGE>

Litigation

     In June 2001, an action was commenced in the New York Supreme Court, Nassau
County,  against  the  Company  by the former  holder of a warrant  to  purchase
100,000  shares of the Company's  stock seeking  undefined  damages based upon a
claim that the Company  breached an  agreement  to  register  the common  shares
underlying  the warrant at the "earliest  practicable  date" after due demand by
the warrant  holder had been made.  In October  2002,  the Company  settled this
matter for  $600,000  through the  execution  of an  agreement  that enables the
Company to satisfy this obligation over a four-year  period  ($200,000 in fiscal
2003,  $100,000 in fiscal 2004,  $133,000 each in fiscal years 2005 and 2006 and
$34,000 in fiscal 2007). Accordingly,  the Company recorded a $600,000 charge to
operations  in fiscal 2003. In December  2002,  the Company paid $200,000 to the
warrant holder pursuant to the terms of the settlement agreement.


     In or about late June 2002,  the Company was  notified by a letter from the
domestic  counsel for Foshan Life  Sciences Co. Ltd.  ("FLSC"),  a joint venture
comprised of a Florida  company and Vamed  Medical  Instrument  Company  Limited
("Vamed"),  a  Chinese  company  with  whom  the  Company  had an  agreement  to
manufacture  the Company's  EECP Model MC2 system,  that FLSC was  initiating an
arbitration  proceeding before the Hong Kong International  Arbitration  Council
("HKIAC") to recover  compensatory  and punitive damages in excess of $1,000,000
and  injunctive  relief  based  upon  claims  of  breach  of  the  manufacturing
agreement,   tortious   interference   and   misappropriation   of  confidential
information and trade secrets.  Although possessing several substantive defenses
to these claims,  the Company initially has challenged the HKIAC's right to hear
and  determine  the dispute on the ground that FLSC is neither a legitimate  nor
recognized  party  to  the  manufacturing  agreement  which  provides  for  such
arbitration  and,  therefore,  is not entitled to enforce the same.  The Company
demanded on July 3, 2002 that FLSC deposit with the HKIAC  security to cover the
Company's  costs of  arbitration.  To date,  FLSC has neither  responded  to the
Company's  demand for security nor apparently  filed a formal statement of claim
with the HKIAC.

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.  In fiscal 2003 and
2002, the Company made discretionary  contributions of approximately $35,000 and
$20,000,  respectively,  to match a  percentage  of employee  contributions.  No
Company contributions were made for the fiscal year ended May 31, 2001.

Purchase Commitments

     At May 31, 2003, the Company had no outstanding  purchase  commitments with
FLSC, a Chinese  company that has assumed the  operational  activities of Vamed,
another Chinese  company,  for the  manufacture of its earlier-  generation EECP
Model MC2 system.  At May 31, 2002, such outstanding  commitments were $324,000.
Requirements for this  earlier-generation  system are expected to be minimal, if
any,  and the Company  believes  that FLSC will be able to meet any future needs
for this system.

NOTE K - SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following is a summary of the Company's  unaudited  quarterly operating
results for the years ended May 31, 2003 and 2002.
<TABLE>
<CAPTION>
                                                               Three months ended
                        --------------------------------------------------------------------------------------------------
(in 000s except            May 31,    Feb. 28,      Nov. 30,     Aug. 31,     May 31,    Feb. 28,    Nov. 30,    Aug. 31,
Earnings (loss) per           2003        2003          2002         2002        2002        2002        2001        2001
share data)                                              (c)          (b)         (a)         (a)         (a)         (a)
----------------------- ----------- ----------- ------------- ------------ ----------- ----------- ----------- -----------
<S>                         <C>         <C>           <C>          <C>         <C>         <C>         <C>         <C>
Revenues                    $6,488      $7,153        $6,644       $4,539      $8,641      $8,019      $8,544      $9,626
Gross Profit                $3,970      $4,383        $4,640       $2,580      $6,083      $5,382      $5,980      $6,847
Net Earnings (Loss)            $14         $26        $(597)     $(4,234)        $440         $98      $1,005      $1,243

                                      F-19
<PAGE>

Earnings (loss) per
  share - basic               $.00        $.00        $(.01)       $(.07)        $.01        $.00        $.02        $.02
        - diluted             $.00        $.00        $(.01)       $(.07)        $.01        $.00        $.02        $.02
Weighted average
  common shares
  outstanding -
           - basic          57,817      57,809        57,658       57,478      57,309      57,281      57,207      57,198
           - diluted        58,453      58,078        57,658       57,478      59,256      59,469      59,364      59,776
<FN>
     (a)  Revenues were favorably  impacted from equipment sold under sales-type
          leases in fiscal 2002, while no such sales-type leases were offered in
          fiscal 2003.  Revenues from equipment sold under sales-type leases for
          the first through  fourth  quarters of fiscal 2002 were $1,830,  $754,
          $880 and $723, respectively.

     (b)  Net Loss for the first quarter of fiscal 2003 was  adversely  affected
          by the  write-off  of  approximately  $3,000  related  to  significant
          uncertainties  related to the  ability of a major  customer to satisfy
          its financial obligations to the Company (Note C).

     (c)  Net Loss for the second quarter of fiscal 2003 was adversely  affected
          by the  settlement  of litigation  of $600 and  approximately  $300 in
          severance  obligations,  principally  to the  Company's  former  Chief
          Executive Officer.
</FN>
</TABLE>

                                      F-20