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, 2002

[ ]  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 12, 2002,  based on the average price on that date,
was  $116,980,000.  At August 12, 2002, the number of shares  outstanding of the
issuer's common stock was 57,559,120.

                      DOCUMENTS INCORPORATED BY REFERENCE

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

<PAGE>

                                     PART I

ITEM ONE - BUSINESS

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

General 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,  cardiogenic  shock,  acute
myocardial  infarction and, most recently,  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  and  diabetes.  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 system.

     EECP is currently  reimbursed by Medicare and numerous  private  payers for
the treatment of refractory angina The  reimbursement  rate for a full course of
35 one-hour  treatments ranges from $5,500 to $7,000.  Although Medicare 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 EECP Enhanced External Counterpulsation System
General Discussion

     Cardiovascular disease (CVD) is the leading cause of death in the world and
is among the top three diseases in terms of healthcare  spending in nearly every
country.  CVD claimed  approximately  950,000 lives in the United States in 1999
and was  responsible for 1 of every 2.5 deaths.  The American Heart  Association
(AHA)  reports in its 2002 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, 12.7 million have coronary artery
disease,  6.4 million of whom suffer from angina  pectoris,  a painful and often
debilitating  complication  caused by  obstruction  of the arteries  that supply
blood to the  myocardium or heart muscle,  with an additional  350,000 new cases
seen annually.  Medications,  including  vasodilators,  are often  prescribed to
increase  blood  flow to the  coronary  arteries.  When  drugs  fail or cease to
correct the problem, invasive  revascularization  procedures such as angioplasty
and coronary stent placement,  as well as coronary artery bypass grafting (CABG)
are employed. Despite the success of these procedures in lowering the death rate
from cardiovascular  disease and allowing many to live longer lives,  restenosis
or  reocclusion  of the affected  vessels  remains a problem.  Restenosis  rates
currently reported in the literature for angioplasty and stenting range from 18%
- 30%.  Half of all vein grafts in coronary  artery  bypass  procedures  exhibit
localized or diffuse narrowings within approximately ten years.

     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
people over age 50. Symptoms include shortness of breath,  fatigue,  swelling of
the abdomen,  legs and ankles, rapid or irregular heartbeat,  low blood pressure

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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 2002 AHA data, 2.4 million men and 2.4 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 145% from 1979 to 1999. 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.  Additionally,  since
CHF at times must be  treated in  acute-care  settings,  EECP can gain  valuable
exposure and entre into the hospital market through this  initiative.  There are
more than 30,000 acute care facilities in the industrialized world, according to
a recent  Datek-Ohmeda study, a huge market opportunity that cannot be addressed
with a therapy viewed as efficacious  only with angina.  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  International  EECP Patient Registry (IEPR) currently shows
that  one-third  of  patients  treated  also  have a  history  of CHF  and  have
demonstrated positive outcomes from EECP therapy.

The System

     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 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

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<PAGE>

already  failed  previous  attempts  at  revascularization.  In  addition,  data
collected  by the  International  EECP  Patient  Registry at the  University  of
Pittsburgh  Graduate  School of Public  Health  points to sustained  lowering of
anginal severity and frequency of attacks at six, twelve and twenty-four  months
post-treatment.

     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 placebo control group, showed that
EECP therapy was a safe and effective  treatment  option for patients  suffering
from  angina  pectoris,  including  those  on  maximal  medication  and for whom
invasive  revascularization  procedures were no longer an option. The results of
the MUST-EECP  study confirmed the clinical  benefits  described in earlier open
trials,  namely a decline in anginal  frequency,  an  increase in the ability to
exercise and a decrease in exercise-induced  signs of myocardial ischemia.  Data
collected by the 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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<PAGE>

     As part of its program to expand the therapy's  indications  for use beyond
the  treatment of angina,  the Company  applied for and received FDA approval in
April 1998 to study, under an  Investigational  Device Exemption (IDE) protocol,
the  application  of EECP in the treatment of congestive  heart failure (CHF). A
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  was  beneficial  to left  ventricular
function  in heart  failure  patients  and may be a useful  adjunct  to  current
medical  therapy.

     In summer  2000,  an IDE  supplement  to  proceed  with a pivotal  study to
demonstrate the efficacy of EECP therapy in most types of heart failure patients
was  approved.  This study,  known as PEECH  (Prospective  Evaluation of EECP in
Congestive  Heart Failure),  began patient  enrollment in March 2001 and results
are expected to be released no earlier than the end of calendar  2003. The PEECH
trial,  which  presently  involves more than twenty  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, Temple
University,  Texas Heart  Institute,  the  University of California at San Diego
Medical  Center,  the  University of California at Los Angeles  Medical  Center,
University  Hospital at the UMDNJ/New  Jersey Medical School,  the University of
Pittsburgh Medical Center and the Cardiovascular Research Institute.

     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.  As of this  publication,  more than one hundred centers
participate  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  may  assist  clinicians  in  delivering  optimal  care to
patients.  Recently  released data from the IEPR show that patients  continue to
receive  dramatic  benefit at six, twelve and twenty-four  months  following the
completion of their course of EECP  therapy.

     Over the last  several  years,  the  Company's  clinical  bibliography  has
expanded to include numerous abstracts presented a major medical conferences, as
well as publications in major peer-review journals.  Notable among these studies
were 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) Launch EECP in the CHF market  through the  initiation  of campaigns to
market the benefits of EECP therapy directly to clinicians,  third-party  payors
and patients.
     (b) Enlarge the market opportunity,  short and long-term,  by (i) advancing
the progress of marketplace  acceptance of EECP as a viable  treatment  modality
for CHF  (principally  the chronic  patient with NYHA Class III and IV) and as a
common  treatment for the early and mid-stage  (Canadian  Class I and II) angina
populations, (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,  diabetes disease  management,  peripheral vascular and cerebrovascular
conditions  and (iv) renew the exposure of EECP as an already  approved  therapy
for acute coronary  conditions,  such as myocardial  infarction and  cardiogenic
shock.
     (c) Continue the development of EECP in international markets,  principally
through the establishment of a distribution network, and appoint distributors in
South  America  and Japan.
     (d) Continue to establish  and support  academic  reference  centers in the
United  States and  overseas in order to  accelerate  the growth and prestige of
EECP  therapy  and  to  increase  the  number  and  diversity  of  clinical  and
mode-of-action  studies,  as well as the number of presentations,  publications,
speakers and advocates.

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     (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 and publish the results in a major
peer-review medical journal.
     (h)  Invest in  creative  partnerships  with  others  who have  distinctive
competencies or delivery capabilities for serving the cardiovascular and disease
management marketplace.
     (i)  Continue to provide an ongoing  grant to fund the  International  EECP
Patient  Registry at the  University  of  Pittsburgh  Graduate  School of Public
Health to publicize key information relating to patient outcomes.
     (j) Secure the CE mark for the Company's TS3 system.


Glossary of Terms

     Acute Myocardial Infarction - heart attack
     Angina Pectoris - literally "chest pain"
     Cardiogenic  shock -  severe  reduction  in  blood  pressure  owing to weak
pumping action of the heart
     Collateral  circulation  - the use  (recruitment)  of  small  supplemental,
usually  unused  channels  through  which  blood can be made to flow when normal
blood supply is impeded because of obstructions in coronary arteries
     Congestive Heart Failure or CHF-A condition in which the heart is unable to
pump  blood  efficiently  enough to meet the  body's  demands.  The  circulatory
systems  of CHF  patients  become  congested  when the heart  fails to empty its
chambers sufficiently, leading to an accumulation in the chest and lower limbs
     Coronary  Artery Bypass Graft or CABG - a surgical  transplant of a vein to
connect the aorta with an obstructed  coronary artery
     Coronary arteries - those that supply blood to the heart muscle
     Diastole - rest period during which the heart  chambers fill with blood and
the heart muscle receives most of its supply of oxygen and other nutrients
     Enhanced  External  Counterpulsation  or EECP -  "Enhanced"  describes  the
Company's proprietary system which increases the level of diastolic augmentation
by 40-50% over that of earlier devices
     Ischemia - lack of blood supply
     Occlusion - blockage of blood vessels
     Percutaneous  Transluminal  Coronary  Angioplasty  or PTCA - insertion of a
wire into a coronary  artery to which a balloon or other  instrument is attached
for the purpose of widening a narrowed vessel
     Stenosis - the narrowing of a blood vessel's diameter
     Systole - contracting period during which the heart is pumping blood to the
rest of the body
     Thallium - an imaging  medium used to detect  areas of ischemia  within the
heart muscle

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 more than twenty sales
representatives,  including management. In July 2002, the Company entered into a
strategic  alliance  with  Palo  Verde  Technologies  Inc.  (PVT)  as a means of
dramatically  expanding the  Company's  sales  coverage  beyond its direct sales
force. PVT is a national  cardiovascular  independent agent network with over 85
independent sales representatives in pacemaker and cardiovascular product sales.
PVT  expects 30 - 50  independent  representatives  to be  specially  trained in
selling the Company's  EECP system by the end of fiscal 2003.

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

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     The expanded  sales force has allowed the Company to focus more intently on
sales to  National  Accounts.  The  Company  plans to  continue  developing  its
relationships  with such major U.S. hospital groups as Tenet Healthcare,  Kaiser
Permanente,  Health South,  Columbia HCA and with other cardiac care  operations
that have plans for nationwide expansion.  To date, the Company has entered into
agreements  with three  group  purchasing  organizations:  Amerinet,  Magnet and
MedAxiom.

     Vasomedical's continuing transformation to a more commercial, market-driven
company  will be  reflected  in its  marketing  activities  planned  for 2003 to
heighten  awareness  among  clinicians,  patients and third-party  payers.  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.

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

International Operations

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

     To date,  revenues from international  operations have not been significant
(fiscal 2002  revenues  approximated  8%) but are expected to increase in future
years.  Toward that end, in June 2001, the Company hired a Director of Sales and
Marketing for Europe.  Marketing activities planned include, among other things,
increasing our participation in medical  conferences to create greater awareness
and acceptance of EECP therapy by clinicians. International sales may be subject
to  certain  risks,  including  export/import  licenses,  tariffs,  other  trade
regulations and local medical regulations.  Tariff and trade policies,  domestic
and  foreign  tax  and  economic   policies,   exchange  rate  fluctuations  and
international  monetary conditions have not significantly affected the Company's
business to date.

Competition

     Presently,  Vasomedical  is  aware  of at  least  two  competitors  with an
external  counterpulsation  device on the market, namely Cardiomedics,  Inc. and
Nicore,  Inc. While the Company believes that these competitors'  involvement in
the market is limited,  there can be no assurance that these  companies will not
become a  significant  competitive  factor.  The  Company  believes  it competes
favorably  in  value  with  these  companies,  as  EECP  is  the  only  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

                                       6
<PAGE>

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

     If substantial  equivalence  cannot be established or if the FDA determines
that more extensive  efficacy and safety data are in order, the FDA will require
the  manufacturer  to submit a premarket  application  (PMA) for full review and
approval.  Management  does not believe  that the EECP  system  will  ultimately
require PMA approval for continued commercialization under its present labeling;
however,  the Company so designed the  protocol  for  MUST-EECP as to be able to
generate  some of the data  needed in the event that a PMA is  required  at some
future date. The Company received notice in June 2000 that its EECP system, when
used to treat congestive heart failure patients, would be classified by FDA as a
Class III PMA device.  However,  the FDA  reversed  that  determination  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 system's safety profile.  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.  Presently,  the Company is in the process of  obtaining  regulatory
approval of the EECP system in non-domestic markets.

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

     In June 1998,  the Company's EECP System Model MC2 was awarded the CE Mark,
which  satisfies the regulatory  provisions for marketing in all 15 countries of
the  European  Union.  The CE Mark was  awarded by DGM of  Denmark,  an official
notified  regulatory  body,  under the  European  Council  Directive  concerning
medical  devices.  The CE Mark, in combination  with the ISO 9001  certification
awarded by Underwriter's  Laboratories (UL) in February 1998, places the Company
in full  compliance with  requirements  for the marketing of this EECP system in
the  countries  of the  European  Union.  The ISO 9001  Certificate  covers  the
Company's design and manufacturing  operation for the EECP system and recognizes
that the Company has established and operates a world-class  quality system.  In
addition,  in July 2000,  the Company  received its license for Level II devices
from the Canadian Health  authority.  In July 2001, the Company  received the UL
classified mark, an electrical certification, for its new TS3 system and intends
to pursue the CE Mark for the TS3 in fiscal 2003.

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

                                       7
<PAGE>

Third-Party Reimbursements

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

     In February  1999,  the Centers for Medicare and  Medicaid  Services  (CMS)
(formerly known as the Health Care Financing Administration (HCFA)), the federal
agency  that   administers  the  Medicare  program  for  more  than  39  million
beneficiaries,  issued a national coverage policy for the use of the EECP system
for  patients  with  disabling   angina  pectoris  who,  in  the  opinion  of  a
cardiologist or  cardiothoracic  surgeon,  are not readily  amenable to surgical
interventions, such as balloon angioplasty and cardiac bypass. In July 1999, 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 approximates $150 per hourly session.  Effective January 1,
2001,  CMS approved an 11% increase in the  reimbursement  rate for EECP therapy
which raised the average  Medicare payment from $130 to $144 per hourly session.
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.

     Some private  insurance  carriers  continue to adjudicate  EECP claims on a
case-by-case  basis.  Since the  establishment  of  reimbursement by the federal
government,  however,  an  increasing  number  of  these  private  carriers  now
routinely  pay for use of EECP for the  treatment  of  angina  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  in Spring  2003 and results
announced  no earlier  than the end of calendar  2003.

     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 three US patents that issued in June 1988,  September 1996
and  December  1999  which  expire  in 2005,  2013 and  2013,  respectively.  In
addition,  foreign  patents  have issued  which  expire in 2013,  and others are
pending.  In fiscal 2002, the Company filed three patent  applications in the US
regarding aspects of the TS3 system, potential improvements,  and new methods of

                                       8
<PAGE>


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.

     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, 2002,  the Company  employed  110  full-time  persons and 3
part-time  persons  with 27 in direct  sales and sales  support,  11 in clinical
applications,  45 in manufacturing,  quality control and technical service, 8 in
marketing  and customer  support,  12 in  engineering,  regulatory  and clinical
research  and  10  in  administration.  None  of  the  Company's  employees  are
represented by a labor union. The Company  believes that its employee  relations
are satisfactory.

Manufacturing

     The Company  manufactures  its EECP Model TS3 at its plant in Westbury,  NY
and  believes its  manufacturing  facility,  in addition to the other  warehouse
facilities  presently  under  lease,  are  adequate  to  meet  the  current  and
immediately  foreseeable future demand for the production of these systems.  The
Company's  EECP  Model MC2  system  was  manufactured  for the  Company by VAMED
Medical  Instrument  Company Ltd.  ("VAMED"),  a Chinese company,  pursuant to a
certain 1993  manufacturing  agreement.  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 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  9,500  square  feet of  additional  warehouse  space  under three
noncancelable  operating  leases  with  non-affiliated  landlords,  two of which
expire  in  October  2002  and  one in  September  2006,  at an  annual  cost of
approximately $100,000. Management believes that the Company can renegotiate its
leases that will expire in October  2002 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 February  1999,  an action was commenced in the  Massachusetts  Superior
Court, Essex County,  against the Company.  The action sought damages in the sum
of $1,000,000 based upon an alleged breach of a sales contract. In January 2002,
this matter was dismissed by the court.

     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.  The Company  believes  that it fulfilled its
obligations  under the warrant to the plaintiff in a timely fashion and that the
complaint is without  merit.  Accordingly,  the Company is defending  the action
vigorously.  Although discovery has been completed, the Company is yet unable to
establish the likelihood of an unfavorable outcome or the existence or amount of
any potential loss.

     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

                                       9
<PAGE>

("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
also has  demanded  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 6, 2002 was 1,000,  which does not include
approximately  34,250 beneficial owners of shares held in the name of brokers or
other  nominees.  The  table  below  sets  forth the range of high and low trade
prices of the Common Stock as reported by the Nasdaq SmallCap Market tier of The
Nasdaq Stock MarketSM for the fiscal periods specified.

<TABLE>
<CAPTION>
                                        Fiscal 2002             Fiscal 2001
                                       High      Low           High      Low
                                       ----      ---           ----      ---
<S>                                   <C>       <C>           <C>       <C>
First Quarter                         $4.32     $3.51         $5.50     $3.56
Second Quarter                        $3.75     $2.26         $5.50     $2.53
Third Quarter                         $4.02     $2.65         $5.63     $2.00
Fourth Quarter                        $3.30     $1.65         $5.00     $2.94
</TABLE>

     The last bid price of the  Company's  Common  Stock on August 12,  2002 was
$2.19 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.


                                       10
<PAGE>


ITEM SIX - SELECTED FINANCIAL DATA

     The following table summarizes selected financial data for each of the five
years  ended May 31, 2002 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,
                                               2002         2001          2000         1999         1998
                                               ----         ----          ----         ----         ----
<S>                                         <C>           <C>           <C>           <C>          <C>
Statements of Earnings
Revenues                                    $34,830,471   $27,508,338   $13,673,632   $6,024,263   $5,225,064
Cost of sales and services                   10,538,731     7,910,359     3,277,700    2,035,578    1,654,979
                                            ------------------------------------------------------------------
   Gross profit                              24,291,740    19,597,979    10,395,932    3,988,685    3,570,085
Selling, general & administrative expenses   13,686,958    11,634,965     7,383,567    6,207,924    5,941,675
Research and development expenses             5,112,258     2,554,470     1,413,464      706,934    1,595,970
Provision for doubtful accounts               1,304,000       325,000       400,000
Interest and financing costs                     98,140        48,294         7,302       11,880        4,057
Interest and other income, net                 (249,722)     (201,992)      (99,317)    (115,064)    (169,422)
                                            ------------------------------------------------------------------
                                             19,951,634    14,360,737     9,105,016    6,811,674    7,372,280
                                            ------------------------------------------------------------------
Earnings (loss) before income taxes           4,340,106     5,237,242     1,290,916   (2,822,989)  (3,802,195)

Income tax (expense) benefit, net            (1,554,000)    6,457,108       400,000         -            -
                                            ------------------------------------------------------------------
Net earnings (loss)                           2,786,106    11,694,350     1,690,916   (2,822,989)  (3,802,195)

Deemed dividend on preferred stock                 -             -             -        (864,000)  (1,132,000)
Preferred stock dividend requirement               -             -          (94,122)    (205,163)     (96,717)
                                            ------------------------------------------------------------------
Earnings (loss) applicable to
 common stockholders                         $2,786,106   $11,694,350    $1,596,794  $(3,892,152) $(5,030,912)
                                            ==================================================================
Net earnings (loss) per common share
    - basic                                        $.05          $.21          $.03        $(.08)       $(.11)
                                            ==================================================================
    - diluted                                      $.05          $.20          $.03        $(.08)       $(.11)
                                            ==================================================================
Weighted average common shares
  outstanding - basic                        57,251,035    56,571,402    52,580,623   49,371,574   47,873,711
                                            ==================================================================
              - diluted                      59,468,092    59,927,199    57,141,949   49,371,574   47,873,711
                                            ==================================================================
Balance Sheet

Working capital                             $17,225,434   $16,214,655   $ 7,380,236   $2,174,774   $5,046,202
Total assets                                $41,418,258   $36,518,974   $10,588,962   $5,198,172   $7,345,246
Long-term debt                              $ 1,072,716   $ 1,108,593   $      -      $     -      $     -
Stockholders' equity (1)                    $31,602,604   $28,508,729   $ 7,943,770   $ 3,153,533  $ 5,752,993

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

                                       11
<PAGE>

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

Results of Operations
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.

     The number of cardiology  practices  and  hospitals  interested in becoming
providers  of EECP  therapy has  increased  following  the  announcement  by the
Centers for Medicare  and  Medicaid  Services  (CMS)  (formerly  the Health Care
Financing  Administration  (HCFA)) in  February  1999 of its  decision to extend
Medicare coverage nationally to the Company's noninvasive,  outpatient treatment
for coronary  artery  disease.  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.

     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. In fiscal 2002, the Company shipped
263 systems (a 23%  increase  over the prior year) under  various  domestic  and
non-domestic  commercial  arrangements,   including  direct  sales,  rental  and
"fee-per-use"  placements,  sales-type leases and sales to foreign distributors.
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.

     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.

     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 margins are furthermore affected by the
location  of  the  Company's  customers  (including   non-domestic  business  or
distributorship  arrangements  which, for discounted  equipment purchase prices,
co-invest in establishing a market for EECP equipment) and the amount and nature
of training and other initial costs required to place the EECP system in service
for customer use.  Consequently,  the gross profit  realized  during the current
period may not be  indicative  of future  margins.  The decrease in gross profit
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, is 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

                                       12
<PAGE>

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.

     In fiscal  2002,  the  Company  charged  $1,304,000  to its  provision  for
doubtful accounts,  substantially  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.

     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
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  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.

     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.

     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.

Fiscal Years Ended May 31, 2001 and 2000

     The Company  generated  revenues from the sale and lease of EECP systems of
$27,508,000  and  $13,674,000  for fiscal  2001 and fiscal  2000,  respectively,
representing a 101% increase. The Company generated earnings before income taxes
of $5,237,000 and $1,291,000 for fiscal 2001 and fiscal 2000, respectively.  The
Company  generated  earnings of  $11,694,000  and $1,597,000 for fiscal 2001 and
fiscal 2000, respectively (after recognition of a deferred income tax benefit of
$6.6  million for fiscal 2001 and after  deducting  $94,000 in  preferred  stock
dividend requirements related to its June 1997 financing for fiscal 2000).

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

     In fiscal 2001,  the Company  shipped 168% more systems over the prior year
under  various  domestic and  non-domestic  commercial  arrangements,  including
direct  sales,  rental  and  "fee-per-use"   placements  and  sales  to  foreign
distributors.  Revenues from non-domestic  business were $1,441,000,  accounting
for 5% of total revenues compared to $155,000 or 1%, in 2000.

                                       13
<PAGE>

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

     Selling,  general and  administrative  (SG&A)  expenses for fiscal 2001 and
2000  were  $11,635,000  and  $7,384,000,  respectively.  The  increase  in SG&A
expenses of $4,251,000 from the comparable prior fiscal year resulted  primarily
from increases in personnel in sales,  marketing and  administrative  functions,
increases in selling and marketing expenses,  including commissions,  related to
increased revenues,  as well as increases in insurance and other  administrative
expenses.

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

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

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

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

Liquidity and Capital Resources

     The Company has financed its fiscal 2002 and 2001 operations primarily from
working capital and operating  results.  At May 31, 2002, the Company had a cash
balance of $2,968,000  and working  capital of  $17,225,000,  compared to a cash
balance of $3,785,000  and working  capital of  $16,215,000 at May 31, 2001. The
Company's operating activities (used) provided cash of $(2,317,000) and $679,000
for  fiscal  2002 and fiscal  2001,  respectively.  Net cash used in  operations
during  fiscal 2002  consisted  primarily of  increases in accounts  receivable,
financing receivables and inventories,  offset by increases in accounts payable,

                                       14
<PAGE>

accrued expenses and other  liabilities.  The increase in financing  receivables
resulted  from  sales of  equipment  under  sales-type  leases,  the first  such
commercial  contracts  entered into by the Company in fiscal 2002. Cash receipts
under  sales-type  leases are expected over terms ranging  between three and six
years.  The increase in inventories  resulted from an increase in finished goods
of the  Company's  Model TS3 system,  which began  commercial  shipments  in the
fourth  quarter of fiscal  2001.  The increase in accounts  receivable  resulted
primarily  from  extended  credit  terms  offered  to  customers,   particularly
non-domestic  customers,  in the current year. The Company's management 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 used in operations  during fiscal year
2002, particularly as they relate to financing receivables,  are not necessarily
indicative of the results  expected in future years.

     Investing activities used net cash of $820,000 and $1,578,000 during fiscal
2002 and fiscal 2001,  respectively.  In fiscal 2002,  the principal use of cash
was a $500,000  loan made by the  Company,  through  the  issuance of notes to a
customer engaged in the establishment of a national network of EECP centers.  In
fiscal  2001,  the  principal  use of cash was for the  purchase of property and
equipment,  notably the purchase of the  Company's  headquarters  and  operating
facility.

     Financing  activities  provided cash of $2,319,000  and  $1,627,000  during
fiscal  2002 and fiscal  2001,  respectively.  In  September  2001,  the Company
refinanced  a $641,667  outstanding  short-term  note  payable  (which  arose in
connection  with the November 2000 purchase of the  Company's  headquarters  and
operating  facility) with the New York Business  Development  Corporation.  This
transaction released $641,667 of cash previously  restricted as collateral under
the original note. The cash  restricted as collateral on the second  outstanding
note for $500,000 was released in January 2002 upon its refinancing. The balance
of the financing activities during fiscal 2002 and 2001 consisted primarily from
the sale of common  stock and  receipt of cash  proceeds  upon the  exercise  of
Company common stock warrants by officers, directors, employees and consultants.
In February 2002, the Company  increased its existing credit facility to provide
for borrowings up to $15,000,000,  based upon eligible  accounts  receivable and
raw materials  inventory,  as defined therein,  at the Libor Rate plus 150 basis
points. At May 31, 2002,  approximately  $3,600,000 of the line was available of
which there were outstanding borrowings of $1,000,000.

     Management  believes that its working capital position at May 31, 2002, the
availability of its credit facility,  and the ongoing  commercialization  of the
EECP  system will make it  possible  for the  Company to support  its  operating
expenses  and to  implement  its  business  plans for at least  the next  twelve
months.

     The following table presents the Company's  expected cash  requirements for
contractual obligations outstanding as of May 31, 2002:
<TABLE>
<CAPTION>
                        Total       Due in FY 2003      Due in FY 2004 - 2005       Due in FY 2006 - 2007     Due Thereafter
                      ------------------------------------------------------------------------------------------------------
<S>                    <C>            <C>                    <C>                          <C>                    <C>
Line-of Credit (1)     $1,000,000     $1,000,000
Long-Term Debt          1,119,161         46,445             $103,151                     $118,551               $851,014
Operating Leases          226,000         87,000               90,000                       49,000                      -
Employment Agreements     520,000        270,000              150,000                      100,000                      -
Purchase Obligations      324,000        324,000                    -                            -                      -
                      ------------------------------------------------------------------------------------------------------
Total Contractual
   Cash Obligations    $3,189,161     $1,727,445             $343,151                     $267,551               $851,014
                      ======================================================================================================
<FN>
     (1) The Company  maintains a revolving  credit agreement which provides for
borrowings of up to $15,000,000,  based upon eligible  accounts  receivable,  as
defined  therein.  Approximately  $3,600,000  is available  under the  revolving
credit  agreement,  of which  $1,000,000  is  outstanding  at May 31, 2002.  The
revolving credit agreement expires in February 2005.
</FN>
</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.

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.

                                       15
<PAGE>

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 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  does  not  believe  there is a great  likelihood  that
materially  different  amounts would be reported under  different  conditions or
using different  assumptions.  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,
including  delivery and customer  acceptance.  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
recognized  on a  straight-line  basis over the life of the  respective  leases.
Revenues from the sale of extended  warranties on the EECP system are recognized
on a straight-line  basis over the life of the extended  warranty,  ranging from
one year to four years.  Deferred revenues relate to extended warranty fees that
have  been paid by  customers  prior to the  performance  of  extended  warranty
services.

     The Company follows SFAS No. 13,  "Accounting For Leases," for its sales of
EECP units under sales  type-leases with two customers.  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.  The cost of the
EECP unit  acquired  by the  customer  is  recorded as cost of sales in the same
period.

Accounts Receivable/Financing Receivables

     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  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.

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.  The estimate of costs to service our warranty obligations is based on
historical  experience  and an  expectation  of future  conditions.  While these
warranty costs have historically been within the Company's  expectations and the
provisions established, to the extent the Company experiences increased warranty
claim activity or increased costs  associated  with servicing those claims,  the
warranty accrual will increase, and the Company would experience decreased gross
profit.

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

                                       16
<PAGE>


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.

Stock Compensation

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

Recently Issued Accounting Standards

     In August 2001, the Financial  Accounting  Standards  Board 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 are  effective for the Company on June
1, 2002. The Company is currently  evaluating the impact of the adoption of SFAS
No. 144, which the Company expects will not be material.

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.

                                       17
<PAGE>

                                    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 2002 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 2002 Annual Meeting of Stockholders,
and is incorporated herein by reference.

ITEM TWELVE - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT

     The information required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 2002 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 2002 Annual Meeting of Stockholders,
and is incorporated herein by reference.

ITEM FOURTEEN-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Financial Statements and Financial Statement Schedules

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

     (2)  The following Consolidated Financial Statement Schedule is included in
          Part IV of this report:

          Schedule II  Valuation and Qualifying Accounts (15)

     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

                                       18
<PAGE>


(c)  Exhibits

     (3)(a)   Restated Certificate of Incorporation (2)
        (b)   By-Laws (1)
     (4)(a)   Specimen Certificate for Common Stock (1)
        (b)   Certificate of Designation of the Preferred Stock, Series A (3)
        (c)   Certificate of Designation of the Preferred Stock, Series B (8)
        (d)   Form of Rights Agreement dated as of March 9, 1995 between
              Registrant and American Stock Transfer & Trust Company (5)
        (e)   Certificate of Designation of the Preferred Stock, Series C (9)
        (f)   Stock Purchase  Agreement dated April 30, 1998 between Registrant
              and  JNC  Opportunity  Fund,  Ltd.  (9)
        (g)   Registration  Rights Agreement  dated  April  30,  1998  between
              Registrant  and  JNC Opportunity  Fund,  Ltd. (9)
        (h)   Form of Warrant  dated April 30, 1998 (9)
   (10) (a)   1995 Stock Option Plan (6)
        (b)   Outside Director Stock Option Plan (6)
        (c)   Employment  Agreement dated February 1, 1995,  as amended
              March 12, 1998 and October 10,  2001,  between Registrant
              and John C.K.  Hui (4) (9) (15)
        (d)   1997 Stock Option Plan, as amended (10)
        (e)   Employment  Agreement  dated January 6, 2000,  and  amended
              November  2000,  between  Registrant  and
              D. Michael  Deignan (11) (13)
        (f)   1999 Stock Option Plan, as amended (12)
        (g)   Credit  Agreement  dated  February  21,  2002 between
              Vasomedical,   Inc.  and  Fleet   National  Bank  (14)
        (h)   Loan Modification   Agreement   dated  March  4,  2002  by
              and  among Vasomedical,  Inc.,  HeartGen  Centers,  Inc., RLA
              1993 Trust and Richard Abrahams (14)
        (i)   Loan Modification Agreement dated March 4, 2002 by and among
              Vasomedical,  Inc., HeartGen Centers,  Inc., RLA  1993  Trust
              and  Richard  Abrahams (14)
        (j)   Subordinated Security Agreement dated March 4, 2002 between
              Vasomedical,  Inc. and HeartGen Centers, Inc. (14)
        (k)   Warrant Agreement dated March 4, 2002 issued to  Vasomedical, Inc.
              by HeartGen  Centers,  Inc.(14)
        (l)   Center  Financing  Note dated  March 5, 2002  issued by
              HeartGen  Centers,  Inc.  to  Vasomedical,  Inc.  (14)
        (m)   Center Financing  Note dated March 20, 2002 issued by HeartGen
              Centers, Inc.  to  Vasomedical,   Inc.  (14)
    (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  (15)
    (99)      Certification of Periodic Report (15)

------------------
(1)  Incorporated by reference to Registration  Statement on Form
     S-18, No. 33-24095.
(2)  Incorporated by reference to Registration Statement  on Form S-1,
     No. 33-46377  (effective  7/12/94).
(3)  Incorporated  by reference  to Report on Form 8-K dated  November
     14, 1994.
(4)  Incorporated  by reference to Report on Form 8-K dated  January  24,  1995.
(5)  Incorporated  by  reference  to Registration  Statement  on Form  8-A
     dated  May 12,  1995.
(6)  Incorporated   by  reference  to  Notice  of  Annual  Meeting  of
     Stockholders   dated  December  5,  1995.
(7)  Incorporated  by reference  to  Report  on Form  8-K  dated  June  25,
     1997.
(8)  Incorporated  by  reference to Report on Form 8-K dated April 30, 1998.
(9)  Incorporated  by reference to Report on Form 10-K for the  fiscal  year
     ended  May  31,  1998.
(10) Incorporated  by reference  to Report on Form 10-K for the  fiscal  year
     ended May 31, 1999.
(11) Incorporated by reference to Report on Form 10-Q for  the  quarterly
     period  ended   February  29,  2000.
(12) Incorporated  by  reference to Report on Form 10-K for the fiscal
     year ended May 31, 2000.
(13) Incorporated by reference to Report on Form 10-Q for the  quarterly
     period ended  November 30, 2000.
(14) Incorporated  by  reference  to Report on Form 10-Q for the quarterly
     period ended February 28, 2002.
(15) Filed herewith.

                                       19

<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 fifteenth day of August,
2002.
                                        VASOMEDICAL, INC.

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

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below on August 15, 2002 by the following  persons in the
capacities indicated:

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

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

/s/ Abraham E. Cohen                    Chairman of the Board
----------------------------
Abraham E. Cohen
                                        President, Chief Executive
/s/ D. Michael Deignan                  Officer and Director
----------------------------            (Principal Executive Officer)
D. Michael Deignan

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

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

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

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

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

/s/ Anthony Viscusi                     Director
----------------------------
Anthony Viscusi

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

/s/ Martin Zeiger                       Director
----------------------------
Martin Zeiger

<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, 2002 and 2001             F-3

  Consolidated Statements of Earnings for the
    years ended May 31, 2002, 2001 and 2000                           F-4

  Consolidated Statement of Changes in Stockholders'
    Equity for the years ended May 31, 2002, 2001 and 2000            F-5

  Consolidated Statements of Cash Flows for the
    years ended May 31, 2002, 2001 and 2000                           F-6

  Notes to Consolidated Financial Statements                          F-7 - F-18


<PAGE>

                        REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS


Stockholders and Board of Directors of
  Vasomedical, Inc.

We have audited the  accompanying  consolidated  balance sheets of  Vasomedical,
Inc.  and  Subsidiaries  (the  "Company")  as of May 31, 2002 and 2001,  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, 2002.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of the
Company  as of May 31,  2002 and 2001,  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,  2002,  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, 2002.  In our opinion,  this
schedule presents fairly, in all material respects,  the information required to
be set forth therein.


/s/ Grant Thornton LLP
GRANT THORNTON LLP

Melville, New York
July 26, 2002

                                      F-2

<PAGE>


                       Vasomedical, Inc. and Subsidiaries

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                            May 31,
                                                      2002           2001
                                                      ----           ----
<S>                                                <C>            <C>
  ASSETS
CURRENT ASSETS
  Cash and cash equivalents                        $2,967,627     $3,785,456
  Restricted cash                                           -      1,141,667
  Accounts receivable, net of an allowance
    for doubtful accounts of $1,099,687 and
    $545,000 at May 31, 2002 and 2001,
    respectively                                   12,682,725      9,731,749
  Inventories                                       4,902,121      4,367,943
  Deferred income taxes                             3,033,000      2,908,000
  Financing receivables, net                          633,786              -
  Other current assets                                627,243        443,887
                                                  -----------    -----------
     Total current assets                          24,846,502     22,378,702
PROPERTY AND EQUIPMENT, net                         3,252,030      2,606,037
CAPITALIZED COST IN EXCESS OF FAIR
  VALUE OF NET ASSETS ACQUIRED, net of
     accumulated amortization
     of $1,349,613 at May 31, 2001                          -        142,085
FINANCING RECEIVABLES, net                          2,941,587              -
NOTES RECEIVABLE                                      512,329              -
DEFERRED INCOME TAXES                               9,658,000     11,298,000
OTHER ASSETS                                          207,810         94,150
                                                  -----------    -----------
                                                  $41,418,258    $36,518,974
                                                  ===========    ===========
  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable and accrued expenses           $3,645,846      $4,041,243
  Current maturities of long-term debt and
    notes payable                                  1,046,445          33,074
  Sales tax payable                                  732,362         532,548
  Deferred revenues                                  272,000               -
  Accrued warranty and customer support expenses     588,334         567,000
  Accrued professional fees                          362,083         320,854
  Accrued commissions                                973,998         669,328
                                                  -----------    -----------
     Total current liabilities                     7,621,068       6,164,047
LONG-TERM DEBT                                     1,072,716       1,108,593
ACCRUED WARRANTY COSTS                               402,666         488,000
DEFERRED REVENUES                                    719,204         243,151
OTHER LONG-TERM LIABILITIES                                -           6,454

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; 57,309,120
     and 57,195,453 shares at May 31, 2002 and
     2001, respectively, issued and outstanding       57,309          57,195
  Additional paid-in capital                      50,116,148      49,808,493
        Accumulated deficit                      (18,570,853)    (21,356,959)
                                                 -----------     -----------
                                                  31,602,604      28,508,729
                                                 -----------     -----------
                                                 $41,418,258     $36,518,974
                                                 ===========     ===========
<FN>
        The accompanying notes are an integral part of these statements.
</FN>

</TABLE>

                                      F-3
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                              Year ended May 31,
                                                 ------------------------------------------
                                                     2002           2001            2000
                                                     ----           ----            ----
<S>                                              <C>             <C>             <C>
Revenues
   Equipment sales                               $29,304,349     $26,912,373     $13,120,144
   Equipment rentals and services                  1,339,113         595,965         553,488
   Equipment sold under sales-type leases          4,187,009               -               -
                                                 -----------     -----------     -----------
                                                  34,830,471      27,508,338      13,673,632
   Cost of sales and services                     10,538,731       7,910,359       3,277,700
                                                 -----------     -----------     -----------
   Gross profit                                   24,291,740      19,597,979      10,395,932
Expenses
   Selling, general and administrative            13,686,958      11,634,965       7,383,567
   Research and development                        5,112,258       2,554,470       1,413,464
   Provision for doubtful accounts                 1,304,000         325,000         400,000
   Interest and financing costs                       98,140          48,294           7,302
   Interest and other income, net                  (249,722)       (201,992)        (99,317)
                                                 -----------     -----------     -----------
                                                  19,951,634      14,360,737       9,105,016
                                                 -----------     -----------     -----------
   EARNINGS BEFORE INCOME TAXES                    4,340,106       5,237,242       1,290,916
   Income tax (expense) benefit, net              (1,554,000)      6,457,108         400,000
                                                 -----------     -----------     -----------
   NET EARNINGS                                    2,786,106      11,694,350       1,690,916
Preferred stock dividend requirement                       -               -         (94,122)
                                                 -----------     -----------     -----------
   EARNINGS APPLICABLE TO
   COMMON STOCKHOLDERS                            $2,786,106     $11,694,350      $1,596,794
                                                 ===========     ===========     ===========
Net earnings per common share
   - basic                                              $.05            $.21            $.03
                                                        ====            ====            ====
   - diluted                                            $.05            $.20            $.03
                                                        ====            ====            ====
Weighted average common shares
   outstanding - basic                            57,251,035      56,571,402      52,580,623
                                                 ===========     ===========     ===========
               - diluted                          59,468,092      59,927,199      57,141,949
                                                 ===========     ===========     ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
                                      F-4
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                  Additional                        Total
                                       Preferred stock         Common stock        paid-in        Accumulated    stockholders'
                                       Shares   Amount     Shares       Amount     capital           deficit       equity
                                       ------   ------     ------       ------    ----------      ------------   -------------
<S>                                   <C>       <C>      <C>           <C>        <C>             <C>             <C>
Balance at June 1, 1999               175,000   $1,750   50,402,687    $50,403    $37,749,483     $(34,648,103)   $3,153,533

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

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

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
                                    ==========  =======  ===========  ========    ===========     ============   ===========

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

                                      F-5
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                    Year ended May 31,
                                                         ------------------------------------------
                                                             2002             2001            2000
                                                             ----             ----            ----
<S>                                                       <C>             <C>             <C>
Cash flows from operating activities
  Net earnings                                            $2,786,106      $11,694,350     $1,690,916
                                                        ------------      ------------  ------------
  Adjustments to reconcile net earnings
    to net cash provided by (used in) operating
    activities
  Depreciation and amortization                              962,167           587,541       483,627
  Provision for doubtful accounts, net of write-offs         904,687           145,000       400,000
  Reserve for inventory obsolescence                          30,000           150,000             -
  Deferred income taxes                                    1,573,000        (6,597,000)     (400,000)
  Stock options granted for services                          50,126            35,000        87,000
  Changes in operating assets and liabilities
  Accounts receivable                                     (3,855,663)       (5,043,939)   (3,647,378)
  Financing receivables, net                              (3,575,373)                -             -
  Inventories                                             (1,694,198)       (4,460,572)     (281,337)
  Other current assets                                      (183,356)           35,380      (301,555)
  Other assets                                              (142,062)          (90,251)       15,077
  Accounts payable, accrued expenses and other
    current liabilities                                      443,649         3,833,781       630,164
  Other liabilities                                          384,265           389,605       164,000
                                                        ------------      ------------  ------------
                                                          (5,102,758)      (11,015,455)   (2,850,402)
                                                        ------------      ------------  ------------
  Net cash provided by (used in) operating activities     (2,316,652)          678,895    (1,159,486)
                                                        ------------      ------------  ------------
Cash flows from investing activities
  Issuance of notes                                         (500,000)                -             -
  Purchase of property and equipment                        (319,981)       (1,578,415)     (279,033)
                                                        ------------      ------------  ------------
  Net cash used in investing activities                     (819,981)       (1,578,415)     (279,033)
                                                        ------------      ------------  ------------
Cash flows from financing activities
  Proceeds from notes                                      2,141,667         1,141,667             -
  Payments on notes                                       (1,164,173)                -             -
  Restricted cash                                          1,141,667        (1,141,667)            -
  Proceeds from exercise of options and warrants             199,643         1,626,609     2,818,711
                                                        ------------      ------------  ------------
     Net cash provided by financing activities             2,318,804         1,626,609     2,818,711
                                                        ------------      ------------  ------------
     NET INCREASE (DECREASE) IN
      CASH AND CASH EQUIVALENTS                             (817,829)          727,089     1,380,192
Cash and cash equivalents - beginning of year              3,785,456         3,058,367     1,678,175
                                                        ------------      ------------  ------------
Cash and cash equivalents - end of year                   $2,967,627        $3,785,456    $3,058,367
                                                        ============      ============  ============

Non-cash investing and financing activities
 were as follows:
  Issuance of common stock in lieu of preferred
    dividends                                                                                $94,122
  Inventories transferred to property and equipment
     attributable to operating leases, net                $1,130,020          $849,613       $31,554

Supplemental disclosures:
  Interest paid                                              $98,139           $48,294        $7,302
  Income taxes paid                                         $304,263           $10,749        $9,224


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

                                      F-6
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          May 31, 2002, 2001 and 2000

NOTE A - BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company was incorporated in Delaware in July 1987.  During fiscal 1996,
the  Company  commenced  the  commercialization  of its EECP  enhanced  external
counterpulsation system ("EECP"), a microprocessor-based  medical device for the
noninvasive,  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  majority-owned  subsidiary.  Significant
intercompany accounts and transactions have been eliminated.

     Inventories

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

     Property and Equipment

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

     Capitalized Cost in Excess of Fair Value of Net Assets Acquired

     The capitalized cost in excess of the fair value of the net assets acquired
("goodwill") was being amortized on a straight-line basis over a period of seven
years. The goodwill was fully amortized at May 31, 2002 and written off.

     Revenue Recognition

     The  Company  recognizes  revenue  from the sale of its EECP  system in the
period in which the Company  fulfills its obligations  under the sale agreement,
including  delivery and customer  acceptance.  The Company has also entered into
lease  agreements for its EECP system,  generally for terms of one year or less,
that are  classified as operating  leases.  Revenues from  operating  leases are
recognized  on a  straight-line  basis over the life of the  respective  leases.
Revenues from the sale of extended  warranties on the EECP system are recognized
on a straight-line  basis over the life of the extended  warranty,  ranging from
one year to four years.  Deferred revenues relate to extended warranty fees that
have  been paid by  customers  prior to the  performance  of  extended  warranty
services.

     The Company follows SFAS No. 13,  "Accounting For Leases," for its sales of
EECP units under sales  type-leases with two customers.  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.  The cost of the
EECP unit  acquired  by the  customer  is  recorded as cost of sales in the same
period.

     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.

                                      F-7
<PAGE>
     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 within 60-90 days. (See Note E.)

     Warranty Costs

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

     Research and  Development

     Research and  development  costs are expensed as incurred.

     Income Taxes

     Deferred  income taxes are  recognized  for temporary  differences  between
financial  statement  and income tax bases of assets  and  liabilities  and loss
carryforwards  for which  income tax  benefits  are  expected  to be realized in
future years. A valuation  allowance 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.

     Shipping and Handling Costs

     The Company  includes  all shipping  and  handling  expenses  incurred as a
component of cost 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 fair value of the financing receivables approximate fair value
as they are  discounted  using the  interest  rates  implicit in the lease.  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.

     Use of Estimates

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

     Net Earnings Per Common Share

     Basic  earnings  per common  share are  computed by dividing  net  earnings
available  to  common  stockholders  by the  weighted  average  number of shares
outstanding  during the period.  Diluted  earnings per common share  reflect the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were  exercised  or converted  into common stock or resulted in the
issuance of common stock.

     Stock Compensation

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

                                      F-8
<PAGE>

     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 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 are  effective for the Company on June
1, 2002. The Company is currently  evaluating the impact of the adoption of SFAS
No. 144, which the Company expects will not be material.

NOTE B - INVENTORIES

<TABLE>
<CAPTION>
                                                               May 31,
                                                         2002         2001
                                                         ----         ----
<S>                                                 <C>             <C>
Inventories consist of the following:
       Raw materials                                $2,661,303      $3,364,276
       Work in progress                                547,818         497,667
       Finished goods                                1,693,000         506,000
                                                    ----------      ----------
                                                    $4,902,121      $4,367,943
                                                    ==========      ==========
</TABLE>

NOTE C - FINANCING RECEIVABLES

     In fiscal 2002, the Company  entered into sales-type  lease  agreements for
certain  EECP units with two  customers.  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 twelve months
ended May 31:

<TABLE>

        <S>                                            <C>
        2003                                           $960,990
        2004                                            859,560
        2005                                          1,683,329
        2006                                            628,680
        2007                                            774,086
        Thereafter                                    1,121,850
                                                     ----------
        Total minimum lease payments                  6,028,495
        Less estimated executory costs                 (493,684)
                                                     ----------
        Net minimum lease payments                    5,534,811
        Less interest                                (1,240,559)
                                                     ----------
        Present value of minimum lease payments       4,294,252
        Less valuation allowance                       (718,879)
                                                     ----------
        Net financing receivables                     3,575,373
        Less current portion                           (633,786)
                                                     ----------
        Long-term portion                            $2,941,587
                                                     ==========
</TABLE>


     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.

                                      F-9

<PAGE>
NOTE D - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
                                                               May 31,
                                                         2002         2001
                                                         ----         ----
<S>                                                    <C>          <C>
Property and equipment is summarized as follows:
   Land                                                $200,000     $200,000
   Building and improvements                          1,366,855    1,252,423
   Office, laboratory and other equipment               794,801      617,875
   EECP units under operating leases or
     under loan for clinical trials                   2,174,000    1,176,500
   Furniture and fixtures                               148,164      124,764
   Leasehold improvements                               117,803      112,578
                                                     ----------   ----------
                                                      4,801,623    3,484,140
   Less accumulated depreciation and amortization    (1,549,593)    (878,103)
                                                     ----------   ----------
                                                     $3,252,030   $2,606,037
                                                     ==========   ==========
</TABLE>
NOTE E - NOTES RECEIVABLE

     In March 2002, the Company provided a $500,000 unsecured loan to a customer
engaged in establishing a national  network of EECP centers.  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 has no further  financing  obligation.
The customer issued two notes to the Company of $250,000 each in connection with
two EECP  centers  that bear  interest at 18% per annum and mature in  September
2005.  Payments of  principal  and interest  under these notes will  commence in
April 2003 in varying amounts determined by a formula based upon cash generated,
as  defined  in the loan  agreement.  In  connection  with this  financing,  the
customer issued to the Company a warrant to purchase 52,620 of its common shares
at $2.20 per share expiring in January 2007.  The warrant  contains a repurchase
option for a 30-day  period  beginning  December  1, 2006  (assuming  no earlier
liquidity  event has taken place,  as defined)  that allows the Company,  at its
option, to require the customer to redeem the warrant for $249,945.  The warrant
value is  collateralized  by a subordinated  security interest in the customer's
accounts receivable.

     Under a  multiyear  sales  contract,  the  Company  sold  to this  customer
equipment  (EECP  units)  under  sales-type  leases   aggregating   revenues  of
$3,160,792  in  fiscal  2002.  At  May  31,  2002,   financing   receivables  of
approximately  $2,563,000 from these  sales-type  lease  transactions  with this
customer  are  outstanding  (Note  C). In  fulfilling  the  requirements  of the
multi-year sales contract, the Company's  concentration of credit risk with this
customer may increase significantly.

NOTE F - LONG-TERM DEBT AND LINE OF CREDIT AGREEMENT
<TABLE>
<CAPTION>
                                                      May 31,
                                                2002           2001
                                                ----           ----
<S>                                          <C>
Revolving credit agreement (a)               $1,000,000          -
Term loans (b)                                1,119,161      $1,141,667
                                             ----------      ----------
                                              2,119,161       1,141,667
Less current portion                         (1,046,445)        (33,074)
                                             ----------      ----------
                                             $1,072,716      $1,108,593
                                             ==========      ==========
</TABLE>
     (a) In February 2002, the Company  renegotiated a secured  revolving credit
line with its  existing  bank.  The credit line  provides 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  covenants,
including, among others, maintenance of minimum tangible net worth. In addition,
the line is secured by substantially all the tangible assets of the Company.
     (b) In November 2000, the Company  purchased its headquarters and warehouse
facility and secured two notes payable from a financial institution for $641,667
and $500,000, respectively, which bore interest at the Libor Rate plus 150 basis
points and were  payable in monthly  installments  of  interest  payments  only.
Concurrent  with the  building  purchase,  the  Company had  received  long-term
financing  commitments  under  two  programs  sponsored  by New York  State.  In
September 2001, the Company refinanced $641,667 of the notes under the first New
York  State  sponsored  program  at  a  fixed  interest  rate  of  7.8%  over  a
fifteen-year  term. In January 2002, the second note for $500,000 was refinanced
under the other  program with a fixed  interest  rate of 6% over a  fifteen-year
term.  These notes are payable in monthly  installments  consisting of principal
and interest payments and are secured by the building.

                                      F-10
<PAGE>

        Maturities of long-term debt are as follows at May 31, 2002:

        2003                                    $46,445
        2004                                     49,784
        2005                                     53,367
        2006                                     57,212
        2007                                     61,339
        Thereafter                              851,014
                                             ----------
                                             $1,119,161
                                             ==========

NOTE G - STOCKHOLDERS' EQUITY AND WARRANTS

     In  fiscal  2000,  all  175,000  shares  outstanding  of  the 5%  Series  C
Cumulative  Convertible Preferred Stock issued in April 1998 were converted into
3,095,612  shares of common stock. In addition,  warrants to purchase  1,435,000
shares of common stock were  exercised (net of 101,910 shares offered in payment
in lieu of cash), aggregating $1,272,000 in proceeds to the Company.

     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. Subsequent to May 31,
2002,  warrants  to  purchase  250,000  shares of common  stock were  exercised,
aggregating $112,500 in proceeds to the Company.

     Warrants  expire at varying  dates  between  April 2003 and  October  2006.
Warrant  activity for the years ended May 31, 2000,  2001 and 2002 is summarized
as follows:

<TABLE>
<CAPTION>
                                    Non-employee
                                     Directors       Employees      Consultants       Total      Price Range
                                    ------------     ---------      -----------       -----      -----------
<S>                                  <C>             <C>              <C>          <C>            <C>    <C>
Balance at June 1, 1999              400,000         1,275,000        1,378,712    3,053,712      $.38 - $2.18
  Exercised                         (400,000)         (525,000)        (510,000)  (1,435,000)     $.38 - $2.18
                                   ----------       ----------       ----------   ----------      ------------
Balance at May 31, 2000                    -           750,000          868,712    1,618,712      $.45 - $2.08
  Exercised                                           (250,000)        (526,212)    (776,212)     $.45 - $2.08
                                   ----------       ----------       ----------   ----------      ------------
Balance at May 31, 2001                    -           500,000          342,500      842,500      $.45 - $2.08
  Exercised                                                             (15,000)     (15,000)            $2.08
                                   ----------       ----------       ----------   ----------      ------------
Balance at May 31, 2002                    -           500,000          327,500      827,500      $.45 - $2.08
                                   ==========       ==========       ==========   ==========      ============
Number of shares exercisable               -           500,000          327,500      827,500      $.45 - $2.08
                                   ==========       ==========       ==========   ==========      ============

</TABLE>

     The following table summarizes  information about warrants  outstanding and
exercisable at May 31, 2002:

<TABLE>
<CAPTION>
                                      Warrants Outstanding and Exercisable
                               -------------------------------------------------
                                                    Weighted
                                   Number            Average
                               Outstanding and      Remaining        Weighted
                               Exercisable at      Contractual       Average
                                May 31, 2002       Life (yrs.)    Exercise Price
  Range of Exercise Prices
----------------------------- ------------------ ---------------- --------------
<C>                                     <C>            <C>                  <C>
$.45                                    500,000        1.1                  $.45
$.91                                    200,000        4.4                  $.91
$2.08                                   127,500        0.9                 $2.08
                               ----------------- ---------------- --------------
                                        827,500        1.9                  $.81
                               ================= ================ ==============
</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.

                                      F-11
<PAGE>

Outside Director Stock Option Plan

     In May 1995, the Company's  stockholders approved an Outside Director Stock
Option Plan for  non-employee  directors of the  Company,  for which the Company
reserved an aggregate of 300,000  shares of common stock.  In December 1997, the
Company's Board of Directors terminated the Outside Director Stock Option Plan.

1997 Stock Option Plan

     In December 1997, the Company's stockholders approved the 1997 Stock Option
Plan (the "1997 Plan") for officers, directors, employees and consultants of the
Company,  for which the Company has reserved an aggregate of 1,800,000 shares of
common stock. The 1997 Plan provides that it will be administered by a committee
of the Board of Directors of the Company and that the  committee  will have full
authority to determine  the  identity of the  recipients  of the options and the
number of shares subject to each option. Options granted under the 1997 Plan may
be either  incentive stock options or  non-qualified  stock options.  The option
price shall be 100% of the fair market  value of the common stock on the date of
the grant (or in the case of incentive  stock options  granted to any individual
principal  stockholder  who owns  stock  possessing  more  than 10% of the total
combined  voting  power of all voting  stock of the  Company,  110% of such fair
market  value).  The term of any option may be fixed by the  committee but in no
event shall  exceed ten years from the date of grant.  Options  are  exercisable
upon  payment in full of the exercise  price,  either in cash or in common stock
valued at fair market value on the date of exercise of the option.  The term for
which  options may be granted  under the 1997 Plan  expires  August 6, 2007.

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

1999 Stock Option Plan

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

     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 will charge to operations
over the one-year period in which services are rendered.  During fiscal 2002 and
2001, the Company charged $50,126 and $35,000,  respectively,  to operations for
these grants.

     In fiscal 2002, the Board of Directors granted stock options under the 1999
Plan to directors and employees to purchase an aggregate of 1,059,100  shares of
common stock,  at exercise  prices  ranging from $1.78 to $4.02 per share (which
represented the fair market value of the underlying  common stock at the time of
the respective grants).

                                      F-12
<PAGE>

     Activity  under all the plans for the years  ended May 31,  2000,  2001 and
2002 is summarized as follows:

<TABLE>
<CAPTION>
                                                                           Outstanding Options
                                                        -----------------------------------------------------------
                                   Shares Available                                Exercise        Weighted Average
                                      for Grant         Number of Shares        Price per Share     Exercise Price
                                 ---------------------- ----------------- ---------------------- ------------------

<S>                                           <C>              <C>                 <C>      <C>              <C>
Balance at June 1, 1999                       40,500           3,855,143           $.75  -  $3.44            $1.70
  Shares authorized                        2,000,000
  Options granted                        (1,270,000)           1,270,000           $1.22  - $5.15            $1.95
  Options exercised                                -           (836,741)           $.75  -  $3.44            $1.85
  Options canceled                           134,668           (144,668)           $.88  -  $1.91            $1.47
                                    ----------------- ------------------- ------------------------ ----------------

Balance at May 31, 2000                      905,168           4,143,734           $.75  -  $5.15            $1.76
  Shares authorized                        1,000,000
  Options granted                          (798,000)             798,000            $2.66 - $5.00            $4.00
  Options exercised                                -           (497,911)             $.75 - $3.44             $.97
  Options canceled                           111,000           (111,000)             $.75 - $3.47            $1.90

                                    ----------------- ------------------- ------------------------ ----------------
Balance at May 31, 2001                    1,218,168           4,332,823           $.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
                                    ================= =================== ======================== ================

</TABLE>

                                      F-13

<PAGE>

     The following table summarizes  information about stock options outstanding
and exercisable at May 31, 2002:

<TABLE>
<CAPTION>
                                               Options Outstanding                           Options Exercisable
                                -------------------------------------------------   --------------------------------
                                                    Weighted
                                                     Average
                                   Number           Remaining        Weighted             Number         Weighted
                               Outstanding at      Contractual       Average          Exercisable at      Average
                                May 31, 2002       Life (yrs.)    Exercise Price       May 31, 2002      Exercise
  Range of Exercise Prices                                                                                 Price
----------------------------- ------------------ ---------------- ---------------   ----------------- --------------
<S>      <C>                            <C>            <C>                  <C>               <C>               <C>
$.75  -  $.88                           979,779        4.6                  $.87              980,779           $.87
$1.22  -  $1.78                         968,250        7.5                 $1.37              484,918          $1.41
$1.91  -  $2.78                         842,727        6.1                 $2.01              762,461          $1.94
$2.89  -  $4.28                       2,144,667        7.6                 $3.69              836,000          $3.60
$4.59  -  $5.15                         257,500        7.7                 $4.82              132,500          $4.92
                              ------------------ ---------------- ---------------    ----------------- --------------
                                      5,192,923        6.8                 $2.51            3,196,658          $2.09
                              ================== ================ ===============    ================= ==============
</TABLE>

     As permitted  under  Statement of Financial  Accounting  Standards No. 123,
"Accounting  for  Stock-Based  Compensation"  ("SFAS No. 123"),  the Company has
elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") in accounting for stock-based awards. Pursuant to APB 25, the Company
generally  recognizes no compensation  expense with respect to such awards.  Pro
forma  information  regarding  net income and earnings per share is required for
awards granted as if the Company had accounted for its stock-based  awards under
the  fair  value  method  of SFAS No.  123.  The  fair  value  of the  Company's
stock-based awards was estimated using the Black-Scholes option valuation model.
The fair value of the Company's  stock-based  awards was  estimated  assuming no
expected dividends and the following weighted-average assumptions:

<TABLE>
<CAPTION>

Fiscal year ended May 31,         2002              2001               2000
-------------------------         ----              ----               ----
<S>                                  <C>               <C>                <C>
Expected life (years)                5                 5                  5
Expected volatility                 86%               80%                80%
Risk-free interest rate            3.9%              5.2%               6.0%
</TABLE>

     The  following  are the pro forma net  earnings  and net earnings per share
basic and diluted  amounts for fiscal 2002,  2001 and 2000,  as if  compensation
expense for stock-based awards had been determined based on their estimated fair
value at the date of grant:

<TABLE>
<CAPTION>
                                        2002              2001               2000
                                        ----              ----               ----
<S>                                  <C>              <C>                   <C>
Pro forma net earnings               $1,642,986       $10,382,690           $576,435
Pro forma net earnings per share
    - basic                                $.03              $.18               $.01
    - diluted                              $.03              $.17               $.01
</TABLE>

     The weighted-average fair value of options granted during fiscal 2002, 2001
and 2000 was $2.50, $2.73 and $2.75,  respectively.  At May 31, 2002, there were
approximately  11,617,000  remaining  authorized  shares of common  stock  after
reserves for all stock option plans, stock warrants and shareholders' rights.

NOTE I - EARNINGS PER COMMON SHARE

     Basic earnings per share are based on the weighted average number of common
shares  outstanding  without  consideration of potential  common stock.  Diluted
earnings  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
2,432,000 and 893,000 shares of common stock were excluded from the  computation
of diluted earnings per share as of May 31, 2002 and 2001, respectively, because
the effect of their inclusion would be antidilutive.

                                      F-14
<PAGE>
     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share:
<TABLE>
<CAPTION>
                                                     For the fiscal year ended May 31,
                                             2002                  2001                 2000
                                             ----                  ----                 ----
<S>                                       <C>                  <C>                   <C>
Numerator:
   Basic earnings                         $2,786,106           $11,694,350           $1,690,916
   Preferred stock dividends                    -                     -                 (94,122)
                                          ----------           -----------           ----------
   Diluted earnings                       $2,786,106           $11,694,350           $1,596,794
                                          ==========           ===========           ==========
Denominator:
   Basic - weighted average shares        57,251,035            56,571,402           52,580,623
     Stock options                         1,624,744             2,270,094            1,389,607
     Warrants                                592,313             1,085,703            1,428,678
     Convertible preferred stock                   -                     -            1,743,041
                                          ----------           -----------           ----------
   Diluted - weighted average shares      59,468,092            59,927,199           57,141,949
                                          ==========           ===========           ==========
Earnings per share - basic                      $.05                  $.21                $0.03
                                                ====                  ====                =====
                   - diluted                    $.05                  $.20                $0.03
                                                ====                  ====                =====
</TABLE>

NOTE J - INCOME TAXES

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

        The Company's deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
                                                                         May 31,
                                                   -----------------------------------------------
                                                       2002             2001              2000
                                                       ----             ----              ----
<S>                                                 <C>              <C>               <C>
Deferred tax assets
  Net operating loss and other carryforwards        $11,344,000      $13,422,000       $14,627,000
  Accrued compensation                                        -                -            12,500
  Bad debts                                             493,000          178,000           187,000
  Other                                                 854,000          606,000           238,500
                                                    -----------      -----------      ------------
     Total gross deferred tax assets                 12,691,000       14,206,000        15,065,000
  Valuation allowance                                         -                -       (14,665,000)
                                                    -----------      -----------      ------------
     Net deferred tax assets                        $12,691,000      $14,206,000      $    400,000
                                                    ===========      ===========      ============
</TABLE>
     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 the current 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.

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

                                      F-15
<PAGE>
     As of May 31, 2001,  management  determined that no valuation allowance was
required based upon its financial performance,  which was positively affected by
the  availability  of Medicare  coverage and  reimbursement  and the  increasing
acceptance  by  the  medical  community  of  the  Company's  cost-effective  and
noninvasive  therapy  system.  In  addition,  the  Company's  assessment  of the
cardiovascular   disease   marketplace,   which   includes   favorable   patient
demographics  and  unmet  clinical  needs,   provides  a  substantial   economic
opportunity and  anticipated  future earnings stream with respect to current and
prospective clinical applications for its products.  Ultimate realization of the
deferred tax assets is dependent upon the Company generating  sufficient taxable
income prior to the expiration of the loss carryforwards.  Although  realization
is not  assured,  management  believes  it is more  likely than not that the net
deferred  tax assets will be  realized.  The amount of the  deferred  tax assets
considered  realizable,  however, could be reduced in the future if estimates of
future taxable income during the carryforward period are reduced.

     At May 31,  2002,  the Company had net  operating  loss  carryforwards  for
Federal income tax purposes of  approximately  $33,366,000,  expiring at various
dates from 2005 through 2020.

     The following is a  reconciliation  of the effective income tax rate to the
federal statutory rate:
<TABLE>
<CAPTION>
                                                     2002                      2001                       2000
                                                   Amount          %         Amount          %          Amount          %
                                            -------------- ---------- -------------- ---------- --------------- ----------
<S>                                            <C>              <C>      <C>              <C>         <C>            <C>
Federal statutory rate                         $1,475,000       34.0     $1,781,000       34.0        $387,911       34.0
State taxes, net                                   56,000        1.3         65,000        1.2          83,451        7.3
Permanent differences                              23,000         .5         67,300        1.3          89,756        7.8
Utilization of net operating loss                       -               (1,781,000)     (34.0)       (561,118)     (49.1)
Change in valuation allowance
  relating to operations                                -               (6,719,000)    (128.3)       (400,000)     (35.0)
Other                                                   -                   129,592        2.5              -
                                            -------------- ---------- -------------- ---------- --------------- ----------
                                               $1,554,000       35.8   $(6,457,108)    (123.3)      $(400,000)     (35.0)
                                            ============== ========== ============== ========== =============== ==========
</TABLE>
     Under current tax law, the utilization of tax attributes will be restricted
if an ownership change, as defined,  were to occur.  Section 382 of the Internal
Revenue Code  provides,  in general,  that if an "ownership  change" occurs with
respect to a corporation with net operating and other loss  carryforwards,  such
carryforwards  will be available to offset  taxable  income in each taxable year
after the ownership change only up to the "Section 382 Limitation" for each year
(generally,  the product of the fair market value of the corporation's  stock at
the time of the  ownership  change,  with certain  adjustments,  and a specified
long-term  tax-exempt bond rate at such time). The Company's  ability to use its
loss carryforwards would be limited in the event of an ownership change.

NOTE K - COMMITMENTS AND CONTINGENCIES

Employment Agreements

     The  Company  maintains   employment   agreements  with  certain  executive
officers,  expiring at various dates through January 2005. One of the employment
agreements  contains a provision that provides for automatic one-year extensions
through  November  2005  provided  no  non-renewal  notice  is  given.  All such
employment agreements provide,  among other things, that in the event there is a
change in the  control  of the  Company,  as defined  therein,  or in any person
directly or indirectly  controlling the Company,  as also defined  therein,  the
employee has the option, exercisable within six months of becoming aware of such
event,  to  terminate  the  employment  agreement.  Upon such  termination,  the
employee has the right to receive, as a lump-sum payment,  certain  compensation
remaining  to be  paid  for  the  balance  of the  term  of the  agreement.

     The approximate  aggregate  minimum  compensation  obligation  under active
employment  agreements at May 31, 2002 are  summarized  as follows:
<TABLE>
<CAPTION>
                Fiscal Year              Amount
                -----------              ------
                   <S>                  <C>
                   2003                 $270,000
                   2004                  150,000
                   2005                  100,000
                                        --------
                                        $520,000
                                        ========
</TABLE>
                                      F-16
<PAGE>

Leases

     The Company leases  additional  warehouse  space under three  noncancelable
operating  leases,  two of which expire on October 31, 2002 and one on September
30, 2006.  Rent expense was $85,000,  $69,000 and $130,000 in fiscal 2002,  2001
and 2000, respectively.

     Approximate   aggregate  minimum  annual   obligations  under  these  lease
agreements and other equipment leasing agreements at May 31, 2002 are summarized
as follows:

<TABLE>
<CAPTION>
                Fiscal Year              Amount
                -----------              ------
                   <S>                  <C>
                   2003                 $87,000
                   2004                  48,000
                   2005                  42,000
                   2006                  37,000
                   2007                  12,000
                                       --------
                                       $226,000
                                       ========
</TABLE>


Litigation

     In February  1999,  an action was commenced in the  Massachusetts  Superior
Court, Essex County,  against the Company.  The action sought damages in the sum
of $1,000,000 based upon an alleged breach of a sales contract. In January 2002,
this matter was dismissed by the court.

                                      F-17
<PAGE>

     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.  The Company  believes  that it fulfilled its
obligations  under the warrant to the plaintiff in a timely fashion and that the
complaint is without  merit.  Accordingly,  the Company is defending  the action
vigorously.  Although discovery has been completed, the Company is yet unable to
establish the likelihood of an unfavorable outcome or the existence or amount of
any potential loss.

     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
also has  demanded  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 2002, the
Company made  contributions  of  approximately  $20,000 to match a percentage of
employee contributions.  No Company contributions were made for the fiscal years
ended May 31, 2001 and 2000.

Purchase Commitments

     At May 31,  2002,  the  Company had  outstanding  purchase  commitments  of
$324,000 with Foshan Life Sciences Co. Ltd. ("FLSC"), a Chinese company that has
assumed the operational  activities of Vamed,  another Chinese company,  for the
manufacture of its EECP Model MC2 system. The Company believes that FLSC will be
able to meet the Company's future need for this system.

NOTE L - 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, 2002 and 2001.

<TABLE>
<CAPTION>
                                                              Three months ended
                     -----------------------------------------------------------------------------------------------------
(in   000s   except
earnings per share        May 31,     Feb. 28,      Nov. 30,     Aug. 31,     May 31,    Feb. 28,    Nov. 30,    Aug. 31,
data)                        2002         2002          2001         2001        2001        2001        2000        2000
-------------------- ------------- ------------ ------------- ------------ ----------- ----------- ----------- -----------

<S>                        <C>          <C>           <C>          <C>         <C>         <C>         <C>         <C>
Revenues                   $8,641       $8,019        $8,544       $9,626      $8,741      $7,068      $6,454      $5,245
Gross Profit               $6,083       $5,382        $5,980       $6,847      $6,115      $4,836      $4,765      $3,882
Net Earnings                 $440          $98        $1,005       $1,243      $6,814      $1,785      $1,695      $1,400
Earnings per
  share - basic              $.01         $.00          $.02         $.02        $.12        $.03        $.03        $.02
        - diluted            $.01         $.00          $.02         $.02        $.11        $.03        $.03        $.02
Weighted average
  common shares
  outstanding -
           - basic         57,309       57,281        57,207       57,198      57,068      56,711      56,383      56,129
           - diluted       59,256       59,469        59,364       59,776      60,299      59,891      59,852      59,694

</TABLE>

                                      F-18


<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                     Balance at
                                       beginning of    costs and        other                       end of period
                                         period        expenses       accounts       Deductions
-----------------------------------------------------------------------------------------------------------------

<S>                                     <C>             <C>                          <C>              <C>
Allowance for doubtful accounts (a)
  Year ended May 31, 2002               $545,000        $954,000                     $399,313 (a)     $1,099,687
  Year ended May 31, 2001               $400,000        $325,000                     $180,000 (a)       $545,000
  Year ended May 31, 2000                     $-        $400,000                                        $400,000

Valuation Allowance- Financing
Receivables
  Year ended May 31, 2002                     $-        $718,879                                        $718,879

Reserve for obsolete inventory
  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, 2002                     $-                                                              $-
  Year ended May 31, 2001            $14,665,000                                  $14,665,000                 $-
  Year ended May 31, 2000            $12,252,000                     $2,413,000                      $14,665,000

Provision for warranty obligations
  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
  Year ended May 31, 2000               $496,000        $316,000                     $425,000           $387,000



(a)     accounts receivable written off
</TABLE>

                                      S-1
<PAGE>