UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                   FORM 10-Q


[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934 For the quarterly period ended November 30, 2004

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________ to ______________

Commission File Number: 0-18105

                               VASOMEDICAL, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

        Delaware                                                11-2871434
--------------------------------------------------------------------------------
(State or other jurisdiction of             (IRS Employer Identification Number)
 incorporation or organization)

                   180 Linden Ave., Westbury, New York 11590
--------------------------------------------------------------------------------
                    (Address of principal executive offices)

Registrant's Telephone Number                                     (516) 997-4600

Number of Shares Outstanding of Common Stock,
    $.001 Par Value, at January 7, 2005     58,552,688


     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  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 [ ]
                                        ---        --

                                     Page 1

<PAGE>

Vasomedical, Inc. and Subsidiaries



                                     INDEX

<TABLE>
<CAPTION>
                                                                                              Page
                                                                                              ----
PART I - FINANCIAL INFORMATION
        <S>     <C>                                                                            <C>
        Item 1 - Financial Statements (unaudited)

                Consolidated Condensed Balance Sheets as of
                        November 30, 2004 and May 31, 2004                                      3

                Consolidated Condensed Statements of Earnings for the
                        Six and Three Months Ended November 30, 2004 and 2003                   4

                Consolidated Condensed Statement of Changes in Stockholders'
                        Equity for the Period from June 1, 2004 to November 30, 2004            5

                Consolidated Condensed Statements of Cash Flows for the
                        Six Months Ended November 30, 2004 and 2003                             6

                Notes to Consolidated Condensed Financial Statements                            7

        Item 2 - Management's Discussion and Analysis of Financial Condition
                 and Results of Operations                                                     14

        Item 3 - Qualitative and Quantitative Disclosures About Market Risk                    26

        Item 4 - Procedures and Controls                                                       26

PART II - OTHER INFORMATION                                                                    27
</TABLE>

                                     Page 2
<PAGE>



                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                November 30,            May 31,
                                                                                    2004                 2004
                                                                              -----------------    -----------------

                                 ASSETS                                          (unaudited)
<S>                                                                               <C>                  <C>
CURRENT ASSETS
     Cash and cash equivalents                                                    $1,913,462           $6,365,049
     Certificates of deposit and treasury bills                                    3,450,000            1,180,540
     Accounts receivable, net of an allowance for doubtful accounts of
       $609,840 at November 30, 2004 and $699,203 at May 31, 2004                  2,474,308            5,521,853
     Inventories                                                                   3,295,025            2,373,748
     Other current assets                                                            477,386              272,513
                                                                              -----------------    -----------------
         Total current assets                                                     11,610,181           15,713,703

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,451,192 at
   November 30, 2004 and $ 2,378,576 at May 31, 2004                               2,429,884            2,430,521
DEFERRED INCOME TAXES                                                             14,582,000           14,582,000
OTHER ASSETS                                                                         315,910              297,391
                                                                              -----------------    -----------------
                                                                                 $28,937,975          $33,023,615
                                                                              =================    =================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                        $1,949,402           $3,122,184
     Current maturities of long-term debt and notes payable                          142,255              136,478
     Sales tax payable                                                               305,272              353,360
     Deferred revenues                                                             1,959,910            1,734,925
     Accrued warranty and customer support expenses                                  120,083              161,917
     Accrued professional fees                                                        61,581               91,486
     Accrued commissions                                                             204,862              341,483
                                                                              -----------------    -----------------
         Total current liabilities                                                 4,743,365            5,941,833

LONG-TERM DEBT                                                                     1,021,720            1,092,837
ACCRUED WARRANTY COSTS                                                                34,500               83,000
DEFERRED REVENUES                                                                    813,708            1,111,526
OTHER LIABILITIES                                                                    134,000              200,250

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock, $.01 par value; 1,000,000 shares authorized; none
       issued and outstanding                                                             --                   --
     Common stock, $.001 par value; 110,000,000 shares authorized;
       58,552,688 and 58,419,356 shares at November 30, 2004 and May 31,
       2004, respectively, issued and outstanding                                     58,552               58,419
     Additional paid-in capital                                                   51,450,639           51,320,106
     Accumulated deficit                                                         (29,318,509)         (26,784,356)
                                                                              -----------------    -----------------
         Total stockholders' equity                                               22,190,682           24,594,169
                                                                              -----------------    -----------------
                                                                                 $28,937,975          $33,023,615
                                                                              =================    =================
</TABLE>
The accompanying notes are an integral part of these condensed statements.

                                     Page 3
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                  CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
                                   (unaudited)
<TABLE>
<CAPTION>

                                                          Six Months Ended                    Three Months Ended
                                                            November 30,                         November 30,
                                                    ------------------------------     --------------------------------
                                                        2004             2003               2004              2003
                                                    ------------     -------------     ---------------    -------------
<S>                                                   <C>              <C>                <C>               <C>
Revenues
   Equipment sales                                    $6,497,459       $8,961,860         $2,522,562        $4,173,750
   Equipment rentals and services                      1,785,632        1,367,801            939,113           729,379
                                                    ------------     -------------     ---------------    -------------
                                                       8,283,091       10,329,661          3,461,675         4,903,129

Cost of sales and services                             2,835,667        3,631,923          1,173,874         1,693,249
                                                    ------------     -------------     ---------------    -------------
   Gross Profit                                        5,447,424        6,697,738          2,287,801         3,209,880

Expenses
   Selling, general and administrative                 6,140,879        6,134,429          3,088,398         3,512,977
   Research and development                            1,657,846        1,953,375            785,948           997,830
   Provision for doubtful accounts                       132,956          985,511                  0           796,330
   Interest expense and financing costs                   59,040           66,246             28,678            32,880
   Interest and other income, net                        (30,827)        (108,287)           (17,083)          (53,195)
                                                    ------------     -------------     ---------------    -------------
                                                       7,959,894        9,031,274          3,885,941         5,286,822

                                                    ------------     -------------     ---------------    -------------
LOSS BEFORE INCOME TAXES                              (2,512,470)      (2,333,536)        (1,598,140)       (2,076,942)
   Income tax expense, net                               (21,683)         (20,000)           (11,683)          (10,000)
                                                    ------------     -------------     ---------------    -------------
NET LOSS                                             $(2,534,153)     $(2,353,536)       $(1,609,823)      $(2,086,942)
                                                    ============     =============     ===============    =============


Net loss per common share
     - basic                                             $(0.04)          $(0.04)             $(0.03)          $(0.04)
                                                    ============     =============     ===============    =============
     - diluted                                           $(0.04)          $(0.04)             $(0.03)          $(0.04)
                                                    ============     =============     ===============    =============

Weighted average common shares outstanding
     - basic                                          58,542,488       57,827,265         58,552,688        57,827,690
                                                    ============     =============     ===============    =============
     - diluted                                        58,542,488       57,827,265         58,552,688        57,827,690
                                                    ============     =============     ===============    =============
</TABLE>

The accompanying notes are an integral part of these condensed statements.

                                     Page 4
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

       CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                     Additional                              Total
                                                                       Paid-in         Accumulated       Stockholders'
                                        Shares         Amount          Capital           Deficit             Equity
                                      ------------    ----------    --------------    ---------------    ---------------
<S>                                    <C>              <C>           <C>               <C>                <C>
Balance at June 1, 2004                58,419,356       $58,419       $51,320,106       $(26,784,356)      $24,594,169
   Exercise of stock options              133,332           133           130,533                              130,666
   Net loss                                                                               (2,534,153)       (2,534,153)
                                      ------------    ----------    --------------    ---------------    ---------------
Balance at November 30, 2004          58,552,688        $58,552       $51,450,639       $(29,318,509)      $22,190,682
                                      ============    ==========    ==============    ===============    ===============
</TABLE>

The accompanying notes are an integral part of this condensed statement.

                                     Page 5
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                         Six months ended
                                                                                           November 30,
                                                                              --------------------------------------
                                                                                    2004                 2003
                                                                              -----------------    -----------------
<S>                                                                              <C>                  <C>
Cash flows from operating activities
     Net loss                                                                    $(2,534,153)         $(2,353,536)
                                                                              -----------------    -----------------
     Adjustments to reconcile net loss to net cash provided by (used in)
       operating activities
         Depreciation and amortization                                               298,127              415,003
         Provision for doubtful accounts                                             132,956              675,258
         Allowance for inventory write-off                                            27,062                   --
         Changes in operating assets and liabilities
              Accounts receivable                                                  2,914,589            2,867,497
              Financing receivables, net                                                  --              113,999
              Inventories                                                         (1,062,827)             645,361
              Other current assets                                                  (204,873)            (226,492)
              Other assets                                                           (37,749)             (53,372)
              Accounts payable, accrued expenses and other current
                liabilities                                                       (1,204,245)             456,737
              Other liabilities                                                     (412,568)             (41,250)
                                                                              -----------------    -----------------
                                                                                     450,472            4,852,741
                                                                              -----------------    -----------------
     Net cash (used in) provided by operating activities                          (2,083,681)           2,499,205
                                                                              -----------------    -----------------

     Cash flows from investing activities
         Purchase of property and equipment                                         (163,772)            (120,362)
         Purchase of certificates of deposit and treasury bills                   (2,269,460)                  --
                                                                              -----------------    -----------------
     Net cash used in investing activities                                        (2,433,232)            (120,362)
                                                                              -----------------    -----------------

     Cash flows from financing activities
         Payments on notes                                                           (65,340)             (52,429)
         Proceeds from exercise of options and warrants                              130,666                4,959
                                                                              -----------------    -----------------
     Net cash provided by (used in) financing activities                              65,326              (47,470)
                                                                              -----------------    -----------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                                                                                  (4,451,587)           2,331,373
     Cash and cash equivalents - beginning of period                               6,365,049            5,222,847
                                                                              -----------------    -----------------
     Cash and cash equivalents - end of period                                    $1,913,462           $7,554,220
                                                                              =================    =================

Non-cash investing and financing activities were as follows:
     Inventories transferred to (from) property and equipment,  attributable
       to operating leases, net                                                     $114,488            ($268,054)

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

                                     Page 6
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2004



NOTE A - BASIS OF PRESENTATION

     The consolidated  condensed  balance sheet as of November 30, 2004, and the
related   consolidated   condensed  statements  of  earnings  for  the  six  and
three-month  periods ended November 30, 2004 and 2003,  changes in stockholders'
equity for the six-month  period ended November 30, 2004, and cash flows for the
six-month  periods  ended  November  30,  2004 and 2003,  have been  prepared by
Vasomedical, Inc. and Subsidiaries (the "Company") without audit. In the opinion
of management,  all adjustments  (which include only normal,  recurring  accrual
adjustments)  necessary to present fairly the financial  position and results of
operations  as of November 30,  2004,  and for all periods  presented  have been
made.

     Certain  information  and  footnote   disclosures,   normally  included  in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted.  These
financial statements should be read in conjunction with the financial statements
and notes thereto  included in the Annual Report on Form 10-K for the year ended
May 31, 2004.  Results of operations for the periods ended November 30, 2004 and
2003  are not  necessarily  indicative  of the  operating  results  expected  or
reported for the full year.

     We believe  that our cash flow from  operations  together  with our current
cash reserves will be sufficient to fund our business plan and projected capital
requirements through at least August 2005. Although we have incurred significant
losses  during the last three  fiscal  years,  we  believe  that the  Company is
positioned for long-term growth.  Our long-term growth is largely dependent upon
the  successful  commercialization  of EECP  therapy into the  congestive  heart
failure  indication  which depends on favorable  results from the PEECH clinical
trial.  Our  long-term  ability  to  achieve  profitable  operations  is further
dependent on  successfully  completing  additional  debt or equity  financing to
provide marketing funds necessary to launch EECP therapy in the congestive heart
failure market and to bridge the period between completion of the PEECH clinical
trial and a congestive  heart  failure  coverage  decision by CMS.  While we are
currently seeking to raise such capital through public or private equity or debt
financings, there is no assurance we will be successful in these efforts. Future
capital funding, if available, may result in dilution to current shareholders.

Reclassifications

Certain  reclassifications have been made to the prior years' amounts to conform
with the current year's presentation.

NOTE B - IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

     In  December  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards  No.  123(R)  ("SFAS  No.   123(R)"),   "Accounting   for  Stock-Based
Compensation".  SFAS No. 123(R)  establishes  standards for the  accounting  for
transactions  in which an entity  exchanges its equity  instruments for goods or
services.  This Statement  focuses  primarily on accounting for  transactions in
which an entity obtains employee services in share-based  payment  transactions.
SFAS No.  123(R)  requires  that the fair value of such  equity  instruments  be
recognized  as expense in the  historical  financial  statements as services are
performed.  Prior to SFAS No. 123(R), only certain pro-forma disclosures of fair
value were  required.  SFAS No.  123(R) shall be effective for the Company as of
the beginning of the first interim  reporting  period that begins after June 15,
2005.  The adoption of this new accounting  pronouncement  is expected to have a
material impact on the financial  statements of the Company  commencing with the
quarter ending November 30, 2005.

     In  November  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 151 ("SFAS No. 151"), Inventory Costs, an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 will improve financial  reporting
by clarifying that abnormal amounts of idle facility expense,  freight, handling
costs, and wasted materials  (spoilage)  should be recognized as  current-period
charges  and by  requiring  the  allocation  of fixed  production  overheads  to
inventory  based on the normal capacity of the production  facilities.  SFAS No.
151 is effective  for inventory  costs  incurred  during fiscal years  beginning
after June 15, 2005.  Earlier  application  is  permitted  for  inventory  costs
incurred  during fiscal years  beginning after November 24, 2004. The Company is
currently  evaluating  the impact of adoption  of SFAS No. 151 on its  financial
position and results of operations.

                                     Page 7
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2004


     In December 2003, the SEC issued Staff  Accounting  Bulletin (SAB) No. 104,
"Revenue  Recognition"  (SAB No.  104),  which  codifies,  revises and  rescinds
certain sections of SAB No. 101, "Revenue Recognition in Financial  Statements",
in  order  to  make  this   interpretive   guidance   consistent   with  current
authoritative  accounting and auditing  guidance and SEC rules and  regulations.
The changes noted in SAB No. 104 did not have a material effect on the Company's
financial position or results of operations.

     In May 2003, the FASB issued  Statement of Financial  Accounting  Standards
No. 150 ("SFAS No. 150"),  "Accounting for Certain  Financial  Instruments  with
Characteristics  of both  Liabilities  and Equity." This  statement  establishes
standards  for  how an  issuer  classifies  and  measures  in its  statement  of
financial  position certain financial  instruments with  characteristics of both
liabilities and equity. In accordance with the standard,  financial  instruments
that  embody  obligations  for the  issuer  are  required  to be  classified  as
liabilities. This Statement shall be effective for financial instruments entered
into or modified  after May 31, 2003,  and  otherwise  shall be effective at the
beginning  of the first  interim  period  beginning  after  June 15,  2003.  The
adoption  of  SFAS  No.  150  has not had a  material  impact  on the  Company's
financial position and results of operations.

     In April 2003, the FASB issued Statement of Financial  Accounting Standards
No.  149  ("SFAS No.  149"),  "Amendment  of  Statement  No.  133 on  Derivative
Instruments  and  Hedging  Activities,"  which  amends and  clarifies  financial
accounting  and  reporting  for  derivative   instruments,   including   certain
derivative  instruments  embedded in other contracts and for hedging  activities
under SFAS No. 133.  SFAS No. 149 is  effective  for  contracts  entered into or
modified after June 30, 2003, except for the provisions that were cleared by the
FASB  in  prior  pronouncements.  The  adoption  of SFAS  No.  149 has not had a
material impact on the Company's financial position and results of operations.

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

     In November  2002,  the  Emerging  Issues Task  Force,  ("EITF")  reached a
consensus opinion on, "Revenue Arrangements with Multiple Deliverables",  "(EITF
00-21)".  That  consensus  provides  that  revenue  arrangements  with  multiple
deliverables  should be divided into  separate  units of  accounting  if certain
criteria are met. The  consideration  of the arrangement  should be allocated to
the separate  units of  accounting  based on their  relative  fair values,  with
different  provisions  if the fair value is  contingent on delivery of specified
items  or  performance   conditions.   Applicable  revenue  criteria  should  be
considered  separately  for each  separate  unit of  accounting.  EITF  00-21 is
effective  for revenue  arrangements  entered into in fiscal  periods  beginning
after June 15,  2003.  Effective  September 1, 2003,  the Company  prospectively
adopted the provisions of EITF 00-21.

NOTE C - STOCK-BASED COMPENSATION

     The Company has five stock-based  employee  compensation plans. The Company
accounts  for  stock-based  compensation  using the  intrinsic  value  method in
accordance  with  Accounting  Principles  Board Opinion No. 25,  "Accounting for
Stock Issued to Employees," and related  Interpretations  ("APB No. 25") and has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 148,  "Accounting for Stock-Based  Compensation - Transition and Disclosure,

                                     Page 8
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2004


an  amendment  of FASB  Statement  No. 123." Under APB No. 25, when the exercise
price of the Company's  employee  stock  options  equals the market price of the
underlying  stock on the date of grant, no  compensation  expense is recognized.
Accordingly,  no compensation  expense has been  recognized in the  consolidated
financial statements in connection with employee stock option grants.

     On October 28, 2004 the shareholders  approved the 2004 Stock  Option/Stock
Issuance Plan and authorized the issuance of 2,500,000 shares.

     During the six-month period ended November 30, 2004, the Board of Directors
granted  non-qualified  stock options under the 1997 Stock Option Plan, the 1999
Stock Option Plan and the 2004 Stock Option/Stock  Issuance Plan to 9 directors,
4 officers,  and 37 employees  to purchase an  aggregate of 2,428,000  shares of
common stock,  at exercise  prices ranging from $0.95 to $1.70 per share,  which
represented the fair market value of the underlying  common stock at the time of
the respective  grants.  These options vest immediately,  or over three-year and
four-year periods, and expire five years and ten years from the date of grant.

     During the six-month  period ended  November 30, 2004,  options to purchase
133,332  shares of common stock were exercised at an exercise price of $0.98 per
share,  aggregating  $130,666 of proceeds to the Company.  During the  six-month
period ended  November 30, 2004,  options to purchase  213,333  shares of common
stock at an exercise price of $0.91 - $3.88 were cancelled.

     The following  table  illustrates the effect on net loss and loss per share
had the Company  applied the fair value  recognition  provisions of Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation," to stock-based employee compensation.
<TABLE>
<CAPTION>
                                                  Six Months Ended                         Three Months Ended
                                                    November 30,                              November 30,
                                        -----------------------------------        ----------------------------------
                                              2004                2003                  2004                2003
                                        ---------------     ---------------        --------------     ---------------
<S>                                      <C>                 <C>                    <C>                <C>
Net loss, as reported                    $(2,534,153)        $(2,353,536)           $(1,609,823)       $(2,086,942)
     Deduct: Total stock-based
       employee compensation expense
       determined under fair                (653,526)           (678,580)              (482,605)          (349,109)
       value-based method for all
       awards
                                        ---------------     ---------------        --------------     ---------------
Pro forma net loss                       $(3,187,679)        $(3,032,116)           $(2,092,428)       $(2,436,051)
                                        ===============     ===============        ==============     ===============

Loss per share:
    Basic - as reported                      $(0.04)             $(0.04)                $(0.03)            $(0.04)
                                        ===============     ===============        ==============     ===============
    Diluted - as reported                    $(0.04)             $(0.04)                $(0.03)            $(0.04)
                                        ===============     ===============        ==============     ===============
    Basic - pro forma                        $(0.05)             $(0.05)                $(0.04)            $(0.04)
                                        ===============     ===============        ==============     ===============
    Diluted - pro forma                      $(0.05)             $(0.05)                $(0.04)            $(0.04)
                                        ===============     ===============        ==============     ===============
</TABLE>

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

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

     Equity  instruments issued to non-employees in exchange for goods, fees and
services are  accounted for under the fair  value-based  method of SFAS No. 123.
The fair value of the Company's  stock-based  awards was  estimated  assuming no
expected  dividends and the following  weighted-average  assumptions for the six
months ended November 30, 2004:

                                     Page 9
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2004


                Expected life (years)                   5
                Expected volatility                    82%
                Risk-free interest rate                4.4%
                Expected dividend yield                0.0%

NOTE D - EARNINGS (LOSS) PER COMMON SHARE

     Basic earnings (loss) per share is based on the weighted  average number of
common shares  outstanding  without  consideration  of potential  common shares.
Diluted  earnings (loss) per share is 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.  For the six-month and
three-month  periods  ended  November  30, 2004 options and warrants to purchase
180,146 and 160,148 shares, respectively, of common stock were excluded from the
computation of diluted  earnings per share because the effect of their inclusion
would be  antidilutive.  Similarly,  for the six-month and  three-month  periods
ended  November 30, 2003,  options and warrants to purchase  257,379 and 234,379
shares, respectively, were excluded from the computation of diluted earnings per
share due to their antidilutive effect.

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings (loss) per common share:
<TABLE>
<CAPTION>
                                                           Six Months Ended                 Three Months Ended
                                                             November 30,                       November 30,
                                                    ------------------------------      -------------------------------
                                                        2004             2003               2004              2003
                                                    -------------    -------------      -------------     -------------
<S>                                                  <C>              <C>                <C>               <C>
Numerator:
   Basic and diluted net loss                        $(2,534,153)     $(2,353,536)       $(1,609,823)      $(2,086,942)
Denominator:
   Basic - weighted average common shares             58,542,488       57,827,265         58,552,688        57,827,690
     Stock options                                            --               --                 --                --
     Warrants                                                 --               --                 --                --
                                                    -------------    -------------      -------------     -------------
   Diluted - weighted average common shares           58,542,488       57,827,265         58,552,688        57,827,690
                                                    =============    =============      =============     =============

Basic and diluted loss per common share                  $(0.04)          $(0.04)            $(0.03)           $(0.04)
                                                    =============    =============      =============     =============
</TABLE>

NOTE E - INVENTORIES

         Inventories consist of the following:
<TABLE>
<CAPTION>

                                                                        November 30,            May 31,
                                                                           2004                  2004
                                                                     -----------------    -----------------
   <S>                                                                    <C>                  <C>
   Raw materials                                                          $1,075,089             $928,269
   Work in process                                                         1,098,462              455,731
   Finished goods                                                          1,121,474              989,748
                                                                     -----------------    -----------------
                                                                          $3,295,025           $2,373,748
                                                                     =================    =================
</TABLE>

     At November  30, 2004 and May 31, 2004,  the Company has recorded  reserves
for obsolete inventory of $427,000 and $399,000, respectively.

                                    Page 10
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2004


NOTE F - LONG-TERM DEBT

         The following table sets forth the computation of long-term debt:
<TABLE>
<CAPTION>
                                                                        November 30,           May 31,
                                                                           2004                 2004
                                                                     -----------------    -----------------
<S>                                                                       <C>                  <C>
Facility loans (a)                                                          $996,713           $1,022,933
Term loans (b)                                                               167,262              206,382
                                                                     -----------------    -----------------
                                                                           1,163,975            1,229,315
Less current portion                                                        (142,255)            (136,478)
                                                                     -----------------    -----------------
                                                                          $1,021,720           $1,092,837
                                                                     =================    =================
</TABLE>

     (a) The Company  purchased  its  headquarters  and  warehouse  facility and
secured  notes of  $641,667  and  $500,000,  respectively,  under  two  programs
sponsored by New York State.  These notes,  which bear  interest at 7.8% and 6%,
respectively,  are payable in monthly  installments  consisting of principal and
interest  payments  over  fifteen-  year terms,  expiring in September  2016 and
January 2017, respectively, and are secured by the building.

     (b) In  fiscal  years  2003 and 2004,  the  Company  financed  the cost and
implementation  of a management  information  system and secured  several notes,
aggregating  approximately  $305,219.  The notes,  which bear  interest at rates
ranging from 7.5% through 12.5%, are payable in monthly installments  consisting
of principal and interest  payments over  four-year  terms,  expiring at various
times between August and October 2006.

NOTE G - DEFERRED REVENUES

     The Company records revenue on extended service  contracts ratably over the
term of the related warranty contracts. Effective September 1, 2003, the Company
prospectively  adopted  the  provisions  of EITF  00-21.  Upon  adoption  of the
provisions of EITF 00-21,  the Company  began to defer  revenue  related to EECP
system sales for the fair value of installation  and in-service  training to the
period when the services are rendered and for warranty  obligations ratably over
the service  period,  which is generally one year.  The changes in the Company's
deferred revenues are as follows:
<TABLE>
<CAPTION>
                                                           Six Months Ended                   Three Months Ended
                                                             November 30,                        November 30,
                                                    ------------------------------       ------------------------------
                                                         2004             2003                2004             2003
                                                    -------------    -------------       -------------    -------------
<S>                                                   <C>              <C>                 <C>              <C>
Deferred Revenue at the beginning of the period       $2,846,451       $1,709,551          $2,651,446       $1,851,585
ADDITIONS
     Deferred extended service contracts               1,044,364          945,938             724,514          500,750
     Deferred in-service training                        117,500           97,500              50,000           97,500
     Deferred warranty obligations                       497,500          292,500             187,500          292,500
RECOGNIZED AS REVENUE
     Deferred extended service contracts                (883,446)        (667,573)           (450,675)        (364,419)
     Deferred in-service training                       (170,000)         (55,000)            (42,500)         (55,000)
     Deferred warranty obligations                      (678,751)         (38,750)           (346,667)         (38,750)
                                                    -------------    -------------       -------------    -------------
Deferred revenue at end of period                      2,773,618        2,284,166           2,773,618        2,284,166
     Less: current portion                            (1,959,910)      (1,334,983)         (1,959,910)      (1,334,983)
                                                    -------------    -------------       -------------    -------------
Long-term deferred revenue at end of period             $813,708         $949,183            $813,708         $949,183
                                                    =============    =============       =============    =============
</TABLE>


NOTE H - WARRANTY COSTS

     Equipment  sold is  generally  covered  by a  warranty  period of one year.
Effective  September 1, 2003, the Company  adopted the provisions of EITF 00-21,
"Accounting  for  Revenue   Arrangements   with  Multiple   Deliverables"  on  a
prospective basis. Under EITF 00-21, for certain arrangements,  a portion of the
overall system price attributable to the first year warranty service is deferred
and  recognized  as revenue  over the service  period.  As such,  the Company no
longer  accrues  estimated  warranty  costs upon delivery but rather  recognizes
warranty and related service costs as incurred.  Prior to September 1, 2003, the


                                    Page 11
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2004

Company  accrued a warranty  reserve  for  estimated  costs to provide  warranty
services  when the  equipment  sale is  recognized.  The factors  affecting  the
Company's  warranty  liability  included the number of units sold and historical
and  anticipated  rates of claims and costs per claim.  The  warranty  provision
resulting from transactions prior to September 1, 2003 will be reduced in future
periods for  material  and labor costs  incurred as related  product is serviced
during the warranty  period or when the  warranty  period  elapses.  A review of
warranty  obligations  is performed  regularly to determine  the adequacy of the
reserve.  Based  on the  outcome  of this  review,  revisions  to the  estimated
warranty  liability  are recorded as  appropriate.

     The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                          Six Months Ended                   Three Months Ended
                                                            November 30,                         November 30,
                                                   -------------------------------      ------------------------------
                                                       2004              2003               2004             2003
                                                   -------------     -------------      -------------    -------------
<S>                                                    <C>               <C>                <C>              <C>
Warranty liability at the beginning of the             $244,917          $788,000           $188,833         $715,000
   period
     Expense for new warranties issued                        0           164,000                  0                0
     Warranty amortization                              (90,334)         (451,000)           (34,250)        (214,000)
                                                   -------------     -------------      -------------    -------------
Warranty liability at end of period                     154,583           501,000            154,583          501,000
     Less: Current portion                             (120,083)         (358,000)          (120,083)        (358,000)
                                                   -------------     -------------      -------------    -------------
Long-term warranty liability at end of period           $34,500          $143,000            $34,500         $143,000
                                                   =============     =============      =============    =============
</TABLE>
NOTE I - INCOME TAXES

     During the  six-months  ended  November  30,  2004 and 2003,  we recorded a
provision for state income taxes of $21,683 and $20,000, respectively.

     As of November  30, 2004,  the Company had recorded  deferred tax assets of
$14,582,000 (net of a $2,762,169 valuation allowance) related to the anticipated
recovery  of tax loss  carryforwards.  The  amount of the  deferred  tax  assets
considered  realizable  could be reduced in the  future if  estimates  of future
taxable income during the carryforward period are reduced.  Ultimate realization
of the deferred tax assets is dependent upon the Company  generating  sufficient
taxable income prior to the expiration of the tax loss carryforwards. Management
believes  that the  Company is  positioned  for  long-term  growth  despite  the
financial  results  achieved  through November 30, 2004, and that based upon the
weight of  available  evidence,  that it is "more  likely than not" that the net
deferred  tax assets will be realized.  The "more  likely than not"  standard is
subjective,  and is based  upon  management's  estimate  of a  greater  than 50%
probability that its long range business plan can be realized.

     Ultimate  realization  of any or all of  the  deferred  tax  assets  is not
assured,  due to significant  uncertainties  associated with estimates of future
taxable  income during the  carryforward  period.  The  Company's  estimates are
largely  dependent  upon  achieving   considerable  growth  resulting  from  the
successful  commercialization  of EECP therapy into the congestive heart failure
indication.  Such future  estimates  of future  taxable  income 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.  Certain critical
assumptions associated with the Company's estimates include:

     --   that the results from the PEECH  clinical  trial will be  sufficiently
          positive  to enable  EECP  therapy to obtain  approval  for a national
          Medicare  reimbursement  coverage policy plus other  third-party payer
          reimbursement  policies  specific  to  the  congestive  heart  failure
          indication;

     --   that the reimbursement  coverage will be both broad enough in terms of
          coverage  language  and at an amount  adequate  to  enable  successful
          commercialization  of EECP therapy into the  congestive  heart failure
          indication.

     --   that we be able to secure additional  financing to provide  sufficient
          funds  to  market  EECP  therapy  in  the  congestive   heart  failure
          indication.

     Additional factors that could cause actual results to differ materially are
     the following:

     --   the effect of the  dramatic  changes  taking  place in the  healthcare
          environment;

     --   the impact of  competitive  procedures and products and their pricing;

                                     Page 12
<PAGE>
                   Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2004

          --   other medical insurance reimbursement policies;

          --   unexpected manufacturing problems;

          --   unforeseen  difficulties  and delays in the  conduct of  clinical
               trials,  peer review  publications and other product  development
               programs;

          --   the actions of regulatory  authorities and third-party  payers in
               the United States and overseas;

          --   uncertainties   about  the  acceptance  of  a  novel  therapeutic
               modality by the medical community;

          --   and the risk factors  reported from time to time in the Company's
               SEC reports.

     The  amount of the  deferred  tax  assets  considered  realizable  could be
reduced  in the  future  if  estimates  of  future  taxable  income  during  the
carryforward  period are reduced or if the  accounting  standards are changed to
reflect a more stringent standard for evaluation of deferred tax assets.

     The  recorded  deferred  tax asset  includes an  increase to the  valuation
allowance of $854,169 during the six- months ended November 30, 2004.

NOTE J - COMMITMENTS AND CONTINGENCIES

Employment Agreements

     The approximate  aggregate  minimum  compensation  obligation  under active
employment agreements at November 30, 2004 are summarized as follows:
<TABLE>
<CAPTION>
             Twelve month period ended November 30,          Amount
             --------------------------------------          ------
                              <S>                           <C>
                              2005                          $140,625
</TABLE>

                                    Page 13
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

     Except for  historical  information  contained in this report,  the matters
discussed are  forward-looking  statements that involve risks and uncertainties.
When used in this  report,  words such as  "anticipated",  "believes",  "could",
"estimates",  "expects",  "may", "plans",  "potential" and "intends" and similar
expressions,  as  they  relate  to  the  Company  or  its  management,  identify
forward-looking  statements.  Such  forward-looking  statements are based on the
beliefs  of the  Company's  management,  as  well  as  assumptions  made  by and
information currently available to the Company's  management.  Among the factors
that could cause actual  results to differ  materially  are the  following:  the
effect of business and economic  conditions;  the effect of the dramatic changes
taking place in the healthcare environment; the impact of competitive procedures
and  products  and their  pricing;  medical  insurance  reimbursement  policies;
unexpected  manufacturing  or supplier  problems;  unforeseen  difficulties  and
delays in the conduct of clinical trials and other product development programs;
the actions of  regulatory  authorities  and third-  party  payers in the United
States and overseas;  uncertainties  about the acceptance of a novel therapeutic
modality by the medical  community;  and the risk factors  reported from time to
time in the  Company's  SEC reports.  The Company  undertakes  no  obligation to
update forward-looking statements as a result of future events or developments.

General Overview

     Vasomedical,  Inc. (the "Company"),  incorporated in Delaware in July 1987,
is primarily engaged in designing, manufacturing,  marketing and supporting EECP
external  counterpulsation systems based on our proprietary technology currently
indicated  for use in cases of stable or unstable  angina  (i.e.,  chest  pain),
cardiogenic  shock,  acute  myocardial   infarction  (i.e.,  heart  attack)  and
congestive heart failure ("CHF"). EECP therapy is currently marketed for chronic
stable  angina.  We are also  actively  engaged in  research  to  determine  the
potential  benefits  of  EECP  therapy  in the  management  of  CHF.  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.  We  provide  hospitals,  clinics  and  private  practices  with  EECP
equipment,  treatment  guidance,  and a staff training and  maintenance  program
designed to provide improved patient  outcomes.  EECP is a registered  trademark
for Vasomedical's enhanced external counterpulsation systems.

     Medicare  and  numerous  other  commercial   third-party  payers  currently
reimburse for EECP therapy in the treatment of refractory  angina.  The Medicare
reimbursement  rate in the  continental  United  States for a full  course of 35
one-hour  treatments  ranges from $3,960 to $6,926.  Although  Medicare  has not
modified its national  coverage policy for EECP therapy to specifically  include
CHF patients, we believe,  based upon data published from the International EECP
Patient Registry  ("IEPR"),  that there exists a significant  subset of patients
with CHF that also have disabling angina that qualify for Medicare reimbursement
under its present coverage policy.  However  reimbursement  for CHF as a primary
indication is not covered under national coverage policy.

     In July 2004, the Centers for Medicare and Medicaid Services (CMS) proposed
a 9% reduction in Medicare  national average physician  reimbursement  rates for
angina  for  calendar  year  2005.   However,   following   public  review  with
manufacturers  and  providers,  CMS revised the  physician  rate to reflect a 1%
increase  over the  calendar  year 2004  rate.  The  hospital  outpatient  rate,
however, was reduced by 9%.

Critical Accounting Policies

     Financial  Reporting  Release No. 60, which was released by the  Securities
and Exchange  Commission,  or SEC, in December  2001,  requires all companies to
include a  discussion  of critical  accounting  policies or methods  used in the
preparation  of  financial  statements.  Note A of  the  Notes  to  Consolidated
Financial  Statements  included  in our Annual  Report on Form 10-K for the year
ended May 31, 2004 includes a summary of our significant accounting policies and
methods used in the preparation of our financial statements.  In preparing these
financial  statements,  we have made our 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.  Our  critical  accounting
policies are as follows:

Revenue Recognition

     We recognize  revenue when  persuasive  evidence of an arrangement  exists,
delivery  has  occurred  or  service  has been  rendered,  the price is fixed or
determinable and collectibility is reasonably  assured. In the United States, we

                                    Page 14
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

recognize  revenue  from the sale of our EECP  systems in the period in which we
deliver the system to the customer. Revenue from the sale of our EECP systems to
international markets is recognized upon shipment, during the period in which we
deliver the product to a common carrier, as are supplies,  accessories and spare
parts  delivered  to both  domestic  and  international  customers.  Returns are
accepted  prior to the  installation  and in-service  training  subject to a 10%
restocking charge or for normal warranty  matters,  and we are not obligated for
post-sale upgrades to these systems. In addition,  we use the installment method
to record  revenue  based on cash  receipts  in  situations  where  the  account
receivable is collected over an extended  period of time and in our judgment the
degree of collectibility is uncertain.

     In most cases,  revenue  from direct EECP system  sales is  generated  from
multiple-element  arrangements  that  require  judgment in the areas of customer
acceptance,  collectibility,  the  separability of units of accounting,  and the
fair value of individual  elements.  Effective September 1, 2003, we adopted the
provisions of Emerging  Issues Task Force,  or EITF,  Issue No. 00-21,  "Revenue
Arrangements  with  Multiple  Deliverables",  ("EITF  00-21"),  on a prospective
basis. The principles and guidance outlined in EITF 00-21 provide a framework to
determine (a) how the arrangement  consideration  should be measured (b) whether
the arrangement should be divided into separate units of accounting, and (c) how
the  arrangement  consideration  should be allocated among the separate units of
accounting.  We determined that our multiple-element  arrangements are generally
comprised of the  following  elements  that would  qualify as separate  units of
accounting:  system sales, in-service support consisting of equipment set-up and
training  provided at the customers  facilities and warranty  service for system
sales generally covered by a warranty period of one year. Each of these elements
represent  individual  units of accounting as the delivered  item has value to a
customer on a stand-alone  basis,  objective and reliable evidence of fair value
exists for undelivered items, and arrangements normally do not contain a general
right of return relative to the delivered item. We determine fair value based on
the price of the deliverable  when it is sold separately or based on third-party
evidence.  In  accordance  with the guidance in EITF 00-21,  we use the residual
method to  allocate  the  arrangement  consideration  when it does not have fair
value of the EECP  system  sale.  Under  the  residual  method,  the  amount  of
consideration  allocated  to the  delivered  item  equals the total  arrangement
consideration less the aggregate fair value of the undelivered  items.  Assuming
all other criteria for revenue  recognition have been met, we recognize  revenue
for EECP system sales when delivery and acceptance  occurs, for installation and
in-service  training  when the services are rendered,  and for warranty  service
ratably over the service period, which is generally one year.

     We  recognized  deferred  revenues  of  $170,000  and  $42,500  related  to
in-service training and $678,751 and $346,667 related to warranty service during
the six-month and three-month periods ended November 30, 2004, respectively.  In
addition,  following  the  adoption of the  provisions  of EITF 00-21  beginning
September 1, 2003 we began to defer revenue that had previously been recorded at
the time of sale.  Previously,  in accordance with Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial  Statements," we accrued costs associated
with  these  arrangements  as  warranty  expense  in the  period  the system was
delivered and  accepted.  During the  six-month  and  three-month  periods ended
November  30,  2004,  we deferred  $117,500  and $50,000  related to  in-service
training and $497,500 and $187,500  related to warranty  service,  respectively.
The amount  related to in-service  training is recognized as revenue at the time
the in-service  training is completed and the amount related to warranty service
is recognized as service revenue ratably over the related service period,  which
is  generally  one year.  Costs  associated  with the  provision  of  in-service
training and warranty service, including salaries, benefits, travel, spare parts
and equipment, are recognized in cost of sales as incurred.

     We also recognize revenue generated from servicing EECP systems that are no
longer covered by a warranty  agreement,  or by providing  sites with additional
training,  in the period that these  services are provided.  Revenue  related to
future  commitments under separately priced extended warranty  agreements on the
EECP  system are  deferred  and  recognized  ratably  over the  service  period,
generally  ranging  from one year to four years.  Deferred  revenues  recognized
related to extended  warranty  agreements  that have been  invoiced to customers
prior to the performance of these  services,  were $883,446 and $667,573 for the
six-month periods ended November 30, 2004 and 2003,  respectively,  and $450,675
and  $364,419  for the  three-month  periods  ended  November 30, 2004 and 2003,
respectively.  Costs  associated with the provision of service and  maintenance,
including salaries,  benefits, travel, spare parts and equipment, are recognized
in cost of sales as incurred. Amounts billed in excess of revenue recognized are
included as deferred revenue in the consolidated balance sheets.

     We have also entered into lease agreements for our EECP systems,  generally
for terms of one year or less, that are classified as operating leases. Revenues
from operating leases are generally recognized,  in accordance with the terms of
the lease agreements,  on a straight-line  basis over the life of the respective
leases.  For certain operating leases in which payment terms are determined on a

                                    Page 15
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

"fee-per-use" basis,  revenues are recognized as incurred (i.e., as actual usage
occurs). The cost of the EECP system utilized under operating leases is recorded
as a component of property and  equipment and is amortized to cost of sales over
the estimated useful life of the equipment, not to exceed five years. There were
no significant  minimum rental commitments on these operating leases at November
30, 2004.

Accounts Receivable, net

     Our  accounts  receivable,  net  are  due  from  customers  engaged  in the
provision  of medical  services.  Credit is extended  based on  evaluation  of a
customer's  financial  condition  and,  generally,  collateral  is not required.
Accounts receivable are generally due 30 to 90 days from shipment and are stated
at amounts due from customers net of allowances for doubtful accounts,  returns,
term  discounts  and other  allowances.  Accounts  outstanding  longer  than the
contractual  payment  terms  are  considered  past  due.  Estimates  are used in
determining  our  allowance  for  doubtful  accounts  based  on  our  historical
collections  experience,  current trends,  credit policy and a percentage of our
accounts receivable by aging category. In determining these percentages, we look
at historical write-offs of our receivables.  We also look at the credit quality
of its customer base as well as changes in our credit policies.  We continuously
monitor  collections  and payments from its customers.  While credit losses have
historically been within expectations and the provisions established,  we cannot
guarantee that we will continue to experience the same credit loss rates that we
have in the past.

Inventories, net

     We value  inventory  at the lower of cost or estimated  market,  cost being
determined  on a  first-in,  first-out  basis.  We often  place EECP  systems at
various  field  locations for  demonstration,  training,  evaluation,  and other
similar purposes at no charge.  The cost of these EECP systems is transferred to
property  and  equipment  and is amortized  over the next two to five years.  We
record  the  cost  of  refurbished  components  of  EECP  systems  and  critical
components at cost plus the cost of refurbishment. We regularly review inventory
quantities on hand,  particularly  raw materials  and  components,  and record 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.

Deferred Revenues

     We record revenue on extended  service  contracts  ratably over the term of
the related warranty  contracts.  Effective  September 1, 2003, we prospectively
adopted the  provisions of EITF 00-21.  Upon adoption of the  provisions of EITF
00-21  effective  September 1, 2003, we began to defer  revenue  related to EECP
system sales for the fair value of installation  and in-service  training to the
period when the services are rendered and for warranty  obligations ratably over
the service period, which is generally one year.

Warranty Costs

     Equipment  sold is  generally  covered  by a  warranty  period of one year.
Effective  September  1, 2003,  we  adopted  the  provisions  of EITF 00-21 on a
prospective basis. Under EITF 00-21, for certain arrangements,  a portion of the
overall system price attributable to the first year warranty service is deferred
and recognized as revenue over the service period.  As such, we no longer accrue
warranty costs upon delivery but rather  recognize  warranty and related service
costs as incurred. Prior to September 1, 2003, we accrued a warranty reserve for
estimated  costs  to  provide  warranty  services  when the  equipment  sale was
recognized.  The factors affecting our warranty liability included the number of
units sold and historical and  anticipated  rates of claims and costs per claim.
The warranty  provision  resulting from transactions prior to September 1, 2003,
will be reduced in future  periods  for  material  and labor  costs  incurred as
related  product is returned  during the  warranty  period or when the  warranty
period elapses.

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, we generally consider 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 our judgment regarding

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                       Vasomedical, Inc. and Subsidiaries

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 our
estimate as to the  realizability  of the asset  changed that it is "more likely
than not" that all of the deferred tax assets will be realized. The "more likely
than not"  standard is  subjective,  and is based upon our estimate of a greater
than 50% probability that our long range business plan can be realized.

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

Stock Compensation

     We have five  stock-based  employee  compensation  plans.  We  account  for
stock-based  compensation  using the intrinsic  value method in accordance  with
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees,"  and related  Interpretations  ("APB No.  25") and have  adopted the
disclosure  provisions of Statement of Financial  Accounting  Standards No. 148,
"Accounting  for  Stock-Based  Compensation  -  Transition  and  Disclosure,  an
amendment of FASB  Statement No. 123." Under APB No. 25, when the exercise price
of our employee stock options equals the market price of the underlying stock on
the date of grant,  no  compensation  expense  is  recognized.  Accordingly,  no
compensation   expense  has  been  recognized  in  the  consolidated   financial
statements in connection with employee stock option grants.

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

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

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

Recently Issued Accounting Standards

     In  December  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards  No.  123(R)  ("SFAS  No.   123(R)"),   "Accounting   for  Stock-Based
Compensation".  SFAS No. 123(R)  establishes  standards for the  accounting  for
transactions  in which an entity  exchanges its equity  instruments for goods or
services.  This Statement  focuses  primarily on accounting for  transactions in
which an entity obtains employee services in share-based  payment  transactions.
SFAS No.  123(R)  requires  that the fair value of such  equity  instruments  be
recognized  as expense in the  historical  financial  statements as services are
performed.  Prior to SFAS No. 123(R), only certain pro-forma disclosures of fair
value were  required.  SFAS No.  123(R) shall be effective for the Company as of
the beginning of the first interim  reporting  period that begins after June 15,
2005.  The adoption of this new accounting  pronouncement  is expected to have a
material impact on the financial  statements of the Company  commencing with the
quarter ending November 30, 2005.

     In  November  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 151 ("SFAS No. 151"), Inventory Costs, an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 will improve financial  reporting
by clarifying that abnormal amounts of idle facility expense,  freight, handling
costs, and wasted materials  (spoilage)  should be recognized as  current-period
charges  and by  requiring  the  allocation  of fixed  production  overheads  to
inventory  based on the normal capacity of the production  facilities.  SFAS No.
151 is effective  for inventory  costs  incurred  during fiscal years  beginning
after June 15, 2005.  Earlier  application  is  permitted  for  inventory  costs

                                    Page 17
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                       Vasomedical, Inc. and Subsidiaries

incurred  during fiscal years  beginning after November 24, 2004. The Company is
currently  evaluating  the impact of adoption  of SFAS No. 151 on its  financial
position and results of operations.

     In December 2003, the SEC issued Staff  Accounting  Bulletin (SAB) No. 104,
"Revenue  Recognition"  (SAB No.  104),  which  codifies,  revises and  rescinds
certain sections of SAB No. 101, "Revenue Recognition in Financial  Statements",
in  order  to  make  this   interpretive   guidance   consistent   with  current
authoritative  accounting and auditing  guidance and SEC rules and  regulations.
The changes noted in SAB No. 104 did not have a material effect on our financial
position or results of operations.

     In May 2003, the FASB issued  Statement of Financial  Accounting  Standards
No. 150 ("SFAS No. 150"),  "Accounting for Certain  Financial  Instruments  with
Characteristics  of both  Liabilities  and Equity." This  statement  establishes
standards  for  how an  issuer  classifies  and  measures  in its  statement  of
financial  position certain financial  instruments with  characteristics of both
liabilities and equity. In accordance with the standard,  financial  instruments
that  embody  obligations  for the  issuer  are  required  to be  classified  as
liabilities. This Statement shall be effective for financial instruments entered
into or modified  after May 31, 2003,  and  otherwise  shall be effective at the
beginning  of the first  interim  period  beginning  after  June 15,  2003.  The
adoption of SFAS No. 150 has not had a material impact on our financial position
and results of operations.

     In April 2003, the FASB issued Statement of Financial  Accounting Standards
No. 149 ("SFAS No. 149"),  "Amendment of Statement 133 on Derivative Instruments
and Hedging  Activities,"  which amends and clarifies  financial  accounting and
reporting for derivative  instruments,  including certain derivative instruments
embedded in other contracts and for hedging  activities under SFAS No. 133. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except for the provisions that were cleared by the FASB in prior pronouncements.
The  adoption  of SFAS No.  149 has not had a material  impact on our  financial
position and results of operations.

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

     In November  2002,  the  Emerging  Issues Task  Force,  ("EITF")  reached a
consensus opinion on, "Revenue Arrangements with Multiple Deliverables",  "(EITF
00-21)".  That  consensus  provides  that  revenue  arrangements  with  multiple
deliverables  should be divided into  separate  units of  accounting  if certain
criteria are met. The  consideration  of the arrangement  should be allocated to
the separate  units of  accounting  based on their  relative  fair values,  with
different  provisions  if the fair value is  contingent on delivery of specified
items  or  performance   conditions.   Applicable  revenue  criteria  should  be
considered  separately  for each  separate  unit of  accounting.  EITF  00-21 is
effective  for revenue  arrangements  entered into in fiscal  periods  beginning
after June 15, 2003.  Effective September 1, 2003, we prospectively  adopted the
provisions of EITF 00-21.

Results of Operations

Three Months Ended November 30, 2004 and 2003

     Net   revenues   from   sales,   leases  and   service   of  our   external
counterpulsation  systems  ("EECP"  systems) for the  three-month  periods ended
November 30, 2004 and 2003, were $3,461,675 and $4,903,129,  respectively, which
represented a decline of $1,441,454 or 29%. We reported a net loss of $1,609,823

                                    Page 18
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                       Vasomedical, Inc. and Subsidiaries


compared to a net loss of $2,086,942 for the three-month  periods ended November
30, 2004 and 2003, respectively. Our net loss per common share was $0.03 for the
three-month  period ended  November 30, 2004 compared to a net loss of $0.04 for
the three- month period November 30, 2003.

Revenues

     Revenues from equipment sales declined  approximately 40% to $2,522,562 for
the three-month period ended November 30, 2004 as compared to $4,173,750 for the
same period for the prior year. The decline in equipment  sales is due primarily
to a 33%  decline in  domestic  units  shipped  and a 15% decline in the average
sales  prices of new EECP systems  sold in the  domestic  market,  as well as an
unfavorable product mix reflecting a higher portion of used versus new equipment
sales, which earned a lower average selling price compared to new systems.

     We believe  that the  domestic  market  for EECP  systems  continues  to be
negatively  impacted from the reduction by the Centers for Medicare and Medicaid
Services (CMS),  the federal agency that  administers  the Medicare  program for
more than 39 million  beneficiaries,  of approximately  34% in Medicare national
average  reimbursement  rates for the calendar year 2004 plus uncertainty during
much of the quarter over a proposed  rate  reduction  for calendar year 2005. We
estimate  that over 65% of the  patients  that receive EECP therapy are Medicare
patients.  We also believe that many  prospective  customers are deferring sales
decisions  pending  the  results  of  our  Prospective  Evaluation  of  EECP  in
Congestive Heart Failure, ("PEECH") clinical trial, which we expect will be made
public in early 2005. In addition,  average  domestic selling prices continue to
decline  reflecting  the  impact  in the  market  of  lower  priced  competitive
products.  We  continue to believe  that our EECP  systems  currently  sell at a
significant  price  premium to  competitive  products  reflecting  the  clinical
efficacy  and  superior  quality of the EECP  system  plus the many value  added
services  offered by us.  However,  we  anticipate  that this  current  trend of
declining  prices  will  continue  in the  immediate  future as our  competition
attempts to capture greater market share through pricing discounts. In addition,
we sold an unusually  high  percentage of used  equipment,  which  reflected the
availability  of used  EECP  systems  that  had  been  recovered  from a  former
customer,  as well as EECP systems  that had been used to treat  patients in the
PEECH clinical trial but were no longer required since the treatment  portion of
the trial has been  completed.  These used  systems  were sold at average  sales
prices  significantly  below our new systems.  Lastly,  we are in the process of
reorganizing territory  responsibilities in our sales department due to recently
vacant  and/or  unproductive  territories  plus  the  restructuring  of a  major
independent  distributor territory to direct sales. Our revenue from the sale of
EECP systems to international  distributors in the second quarter of fiscal 2005
decreased  approximately  42% to $137,995 compared to $239,000 in same period of
the prior year reflecting decreased volume.

     The above decline in revenue from equipment sales was partially offset by a
29% increase in revenue from  equipment  rental and services for the three month
period ended November 30, 2004,  from the same  three-month  period in the prior
year.  Revenue  from  equipment  rental and  services  represented  27% of total
revenue  in the  second  quarter of fiscal  2005  compared  to 15% in the second
quarter of fiscal 2004. The increase in both absolute  amounts and percentage of
total revenue resulted primarily from an increase of $194,097,  or approximately
35%, in service  related  revenue from $550,082 to $744,179 for the  three-month
periods ended November 30, 2003 and November 30, 2004, respectively.  The higher
service revenue reflects an increase in service,  spare parts and consumables as
a result of the  continued  growth of the  installed  base of EECP  systems plus
greater  marketing  focus  on the sale of  extended  service  contracts.  Rental
revenue  increased  approximately  6% from $155,855 for the  three-month  period
ended  November 30, 2003 to $164,706 for the  three-month  period ended November
30, 2004.

Gross Profit

     Gross profit  declined to $2,287,801 or 66% of revenues for the three-month
period ended  November 30, 2004,  compared to  $3,209,880 or 65% of revenues for
the  three-month  period  ended  November 30,  2003.  Gross  profit  margin as a
percentage  of revenue for the  three-month  period  ended  November  30,  2004,
improved  slightly  compared to the same period of the prior fiscal year despite
the lower  revenue and the  negative  impact  resulting  from the  reduction  in
average  selling  prices.  The  improvement  in gross profit as a percentage  of
revenue reflects the sale of our latest model EECP system,  the TS4, which has a
lower  cost to  manufacture  compared  to the  model  TS3,  which we sold in the
previous  fiscal year. In addition,  the gross profit margin  benefited from the
recognition  of  previously  deferred  installation,   in-service  training  and
warranty revenues  generated by the adoption of EITF 00-21 in the second quarter
of fiscal  year 2004,  which  increased  from  $93,750 to  $389,167 in the three
months ended November 30, 2003 and November 30, 2004,  respectively,  as well as
the sale of a higher  percentage  of used  equipment.  Many of these  used  EECP

                                    Page 19
<PAGE>
                       Vasomedical, Inc. and Subsidiaries


systems carried reduced book values since they were partially amortized and as a
result generated above average gross profit margins.  We have limited quantities
of the lower cost  systems and do not  anticipate a  significant  volume of used
equipment will be sold in the future.  The gross profit margin also improved due
to increased service related margins resulting from higher accessory and service
contract  revenues.  The decline in gross profit when compared to the prior year
in absolute dollars is a direct result of the lower revenue.

     Gross profits are dependent on a number of factors, particularly the mix of
EECP models sold and their  respective  average selling prices,  the mix of EECP
units sold,  rented or placed during the period,  the ongoing costs of servicing
such units, and certain fixed period costs,  including  facilities,  payroll and
insurance.  Gross profit margins are generally less on non-domestic business due
to the use of distributors  resulting in lower selling prices.  In addition,  we
anticipate  that  lower  than  usual  production  reflecting  efforts  to reduce
inventory  levels in next two quarters will result in higher  absorbed  overhead
costs  and can be  expected  to  negatively  impact  future  quarters'  margins.
Consequently,  the gross profit  realized  during the current  period may not be
indicative of future margins.

Selling, General and Administrative

     Selling,  general and administrative ("SG&A") expenses for the three-months
ended  November  30,  2004 and  2003  were  $3,088,398  or 89% of  revenues  and
$3,512,977 or 72% of revenues, respectively reflecting a decrease of $424,579 or
approximately  12%. The decrease in SG&A  expenditures  in the second quarter of
fiscal 2005 compared to fiscal 2004 resulted primarily from decreases of $70,000
and $149,758 in severance payments and sales commissions,  respectively, as well
as a $214,053 reduction in administrative  consulting fees. Partially offsetting
the above were increases in accounting  and market  research fees of $73,260 and
$168,000,  respectively. The Company hired its new President and Chief Executive
Officer, Thomas Glover, in October 2004.

Research and Development

     Research and  development  ("R&D")  expenses of $785,948 or 23% of revenues
for the three months ended November 30, 2004, decreased by $211,882 or 21%, from
the prior three months ended  November 30 2003,  of $997,830 or 20% of revenues.
The  decrease  reflects  lower  spending  related to the PEECH  clinical  trial,
partially  offset by increased costs associated with developing the new Lumenair
EECP  Therapy  System.  The  patient  treatment  phase of the  PEECH  study  was
completed in March 2004; as a result,  we have incurred lower levels of spending
related to subject study activity and study management aspects of the trial. The
final six-month patient examination was completed in December 2004 and the PEECH
Steering Committee,  composed of the lead physician investigators,  is currently
analyzing  the data.  We  continue  to expect to be able to release  the initial
results of the PEECH trial in March 2005 and,  provided results of the trial are
positive,  subsequently  submit an  application  to CMS for a coverage  decision
leading to  reimbursement  for use of EECP therapy in treatment of CHF. Based on
the above  timetable we anticipate a coverage  decision by CMS in early 2006. We
expect to continue to invest in product  development and clinical trials through
the  remainder  of fiscal  2005 and  beyond to further  validate  and expand the
clinical  applications of EECP,  including,  but not limited to angina and heart
failure.  In  addition,  we launched  our latest  generation  EECP  system,  the
"Lumenair EECP Therapy  System",  in November at the American Heart  Association
Scientific Sessions in New Orleans, Louisiana.

Provision for Doubtful Accounts

     We collected  funds from  previously  reserved  accounts,  which offset new
reserve  requirements.  As a result,  we did not incur a charge to our provision
for doubtful accounts during the three-month  period ended November 30, 2004, as
compared to $796,330 during the three-month period ended November 30, 2003.

Interest Expense and Financing Costs

     Interest   expense  and  financing   costs  decreased  to  $28,678  in  the
three-month  period ended November 30, 2004, from $32,880 for the same period in
the prior year. Interest expense reflects interest on loans secured to refinance
the November 2000 purchase of our headquarters and warehouse  facility,  as well
as on loans secured to finance the cost and  implementation  of a new management
information system.

Interest and Other Income, Net

     Interest and other income for the second  quarters of fiscal years 2005 and
2004, was $17,083 and $53,195,  respectively. The decrease in interest and other
income from the prior period is  attributable  to lower other  income  resulting
from  miscellaneous  customer  payments  in the second  quarter of fiscal  2005.
Although  average cash balances  invested during the quarter were lower than the

                                    Page 20
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

prior  period,  interest  income  increased  due to higher  yields  on  invested
balances, partially offsetting the above.

Income Tax Expense, Net

     During the  three-months  ended  November 30, 2004 and 2003,  we recorded a
provision for state income taxes of $11,683 and $10,000, respectively.

     As of November 30, 2004, we had recorded deferred tax assets of $14,582,000
net of a $2,762,169  valuation allowance related to the anticipated  recovery of
tax loss  carryforwards.  The  amount  of the  deferred  tax  assets  considered
realizable  could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced. Ultimate realization of the deferred
tax assets is dependent upon our generating  sufficient  taxable income prior to
the  expiration  of the tax loss  carryforwards.  We believe that the Company is
positioned for long-term  growth despite the financial  results  achieved during
fiscal  years 2005,  2004 and 2003,  and that based upon the weight of available
evidence, that it is "more likely than not" that net deferred tax assets will be
realized.  The "more likely than not" standard is subjective,  and is based upon
management's  estimate  of a greater  than 50%  probability  that its long range
business plan can be realized.

     Ultimate  realization  of any or all of  the  deferred  tax  assets  is not
assured,  due to significant  uncertainties  associated with estimates of future
taxable  income  during the  carryforward  period.  Our  estimates  are  largely
dependent  upon  achieving  considerable  growth  resulting  from the successful
commercialization  of EECP therapy into the congestive heart failure indication.
Such future estimates of future taxable income are based on our beliefs, as well
as  assumptions  made by and  information  currently  available  to us.  Certain
critical assumptions associated with our estimates include:

          --   that  the  results  from  the  PEECH   clinical   trial  will  be
               sufficiently  positive to enable EECP therapy to obtain  approval
               for a national Medicare  reimbursement coverage policy plus other
               third-party   payer   reimbursement   policies  specific  to  the
               congestive heart failure indication;

          --   that the  reimbursement  coverage  will be both  broad  enough in
               terms of coverage  language  and at an amount  adequate to enable
               successful  commercialization of EECP therapy into the congestive
               heart failure indication.

          --   that  we be  able  to  secure  additional  financing  to  provide
               sufficient  funds to market EECP therapy in the congestive  heart
               failure indication.

          Additional   factors  that  could  cause  actual   results  to  differ
               materially are the following:

          --   the effect of the dramatic changes taking place in the healthcare
               environment;

          --   the  impact of  competitive  procedures  and  products  and their
               pricing;

          --   other medical insurance reimbursement policies;

          --   unexpected manufacturing problems;

          --   unforeseen  difficulties  and delays in the  conduct of  clinical
               trials,  peer review  publications and other product  development
               programs;

          --   the actions of regulatory  authorities and third-party  payers in
               the United States and overseas;

          --   uncertainties   about  the  acceptance  of  a  novel  therapeutic
               modality by the medical community;

          --   and  the  risk  factors  reported  from  time  to time in our SEC
               reports.

     The  amount of the  deferred  tax  assets  considered  realizable  could be
reduced  in the  future  if  estimates  of  future  taxable  income  during  the
carryforward  period are reduced or if the  accounting  standards are changed to
reflect a more stringent standard for evaluation of deferred tax assets.

     The recorded  deferred tax asset and  increase to the  valuation  allowance
during the three months ended November 30, 2004 was $539,161.

Six Months Ended November 30, 2004 and 2003

     Net   revenues   from   sales,   leases  and   service   of  our   external
counterpulsation  systems  ("EECP"  systems)  for the  six-month  periods  ended
November 30, 2004 and 2003, were $8,283,091 and $10,329,661, respectively, which
represented a decline of $2,046,570 or 20%. We reported a net loss of $2,534,153

                                    Page 21
<PAGE>
                       Vasomedical, Inc. and Subsidiaries


compared to  $2,353,536  for the six-month  periods ended  November 30, 2004 and
2003,  respectively.  Our net loss per common share was $0.04 for the  six-month
period ended November 30, 2004, matching our net loss of $0.04 for the six-month
period November 30, 2003.

Revenues

     Revenues from equipment sales declined  approximately 27% to $6,497,459 for
the six-month  period ended  November 30, 2004 as compared to $8,961,860 for the
same period for the prior year. The decline in equipment  sales is due primarily
to a 16% decline in domestic units  shipped,  a 15% decline in the average sales
prices of new EECP  systems  sold in the  domestic  market,  and an  unfavorable
product mix reflecting a higher portion of used versus new equipment sales. Used
systems  earned a lower  average  selling  price  compared to new  systems,  and
experienced  a 35%  decrease  in average  selling  price when  compared  to used
systems sold in the domestic market in the first half of fiscal 2004.

     We believe  that the  domestic  market  for EECP  systems  continues  to be
negatively  impacted from the reduction by the Centers for Medicare and Medicaid
Services (CMS),  the federal agency that  administers  the Medicare  program for
more than 39 million  beneficiaries,  of approximately  34% in Medicare national
average  reimbursement  rates for the calendar year 2004 plus uncertainty during
much of the first half over a proposed rate reduction for calendar year 2005. We
estimate  that over 65% of the  patients  that receive EECP therapy are Medicare
patients.  We also believe that many  prospective  customers are deferring sales
decisions  pending  the  results  of  our  Prospective  Evaluation  of  EECP  in
Congestive Heart Failure, ("PEECH") clinical trial, which we expect will be made
public in early 2005. In addition,  average  domestic selling prices continue to
decline  reflecting  the  impact  in the  market  of  lower  priced  competitive
products.  We  continue to believe  that our EECP  systems  currently  sell at a
significant  price  premium to  competitive  products  reflecting  the  clinical
efficacy  and  superior  quality of the EECP  system  plus the many value  added
services  offered by us.  However,  we  anticipate  that this  current  trend of
declining  prices  will  continue  in the  immediate  future as our  competition
attempts to capture greater market share through pricing discounts. In addition,
we sold an unusually  high  percentage of used  equipment,  which  reflected the
availability  of used  EECP  systems  that  had  been  recovered  from a  former
customer,  as well as EECP systems  that had been used to treat  patients in the
PEECH clinical trial but were no longer required since the treatment  portion of
the trial has been  completed.  These used  systems  were sold at average  sales
prices significantly below our new systems.  Furthermore,  we are in the process
of  reorganizing  territory  responsibilities  in our  sales  department  due to
recently vacant and/or  unproductive  territories  plus the  restructuring  of a
major independent  distributor territory to direct sales.  Finally,  revenue was
adversely  impacted by bad weather in Florida,  which  caused some EECP  systems
orders to be delayed.

     Our revenue from the sale of EECP systems to international  distributors in
the first half of fiscal 2005 increased  approximately  32% to $462,995 compared
to $350,100 in same period of the prior year reflecting  increased volume of new
systems.

     The above decline in revenue from equipment sales was partially offset by a
31%  increase in revenue  from  equipment  rental and services for the six month
period  ended  November 30, 2004,  from the same  six-month  period in the prior
year.  Revenue  from  equipment  rental and  services  represented  22% of total
revenue in the first half of fiscal  2005  compared  to 13% in the first half of
fiscal  2004.  The increase in both  absolute  amounts and  percentage  of total
revenue  resulted  primarily  from an increase of  approximately  45% in service
related  revenue.  The higher service  revenue  reflects an increase in service,
spare parts and consumables as a result of the continued growth of the installed
base of EECP  systems  plus  greater  marketing  focus on the  sale of  extended
service  contracts.  Rental  revenue  declined  approximately  18% following the
termination of several  short-term  rental agreements  partially  offsetting the
above.

Gross Profit

     Gross profit  declined to  $5,447,424  or 66% of revenues for the six-month
period ended  November 30, 2004,  compared to  $6,697,738 or 65% of revenues for
the  six-month  period  ended  November  30,  2003.  Gross  profit  margin  as a
percentage of revenue for the six-month period ended November 30, 2004, improved
slightly  compared to the same period of the prior fiscal year despite the lower
revenue and the negative impact  resulting from the reduction in average selling
prices.  The improvement in gross profit as a percentage of revenue reflects the
sale of our  latest  model  EECP  system,  the TS4,  which  has a lower  cost to
manufacture  compared  to the model TS3,  which we sold in the  previous  fiscal
year. In addition,  the gross profit margin  benefited  from the  recognition of
previously  deferred  installation,  in-service  training and warranty  revenues

                                    Page 22
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                       Vasomedical, Inc. and Subsidiaries


generated  by the  adoption  of EITF 00-21 in the second  quarter of fiscal year
2004,  which  increased  from $93,750 to $848,751 in the six month periods ended
November 30, 2003 and November 30, 2004,  respectively.  The gross profit margin
also improved due to increased  service related margins resulting from accessory
and service contract revenue increases exceeding associated cost increases.  The
decline in gross profit when compared to the prior year in absolute dollars is a
direct result of the lower revenue.

     Gross profits are dependent on a number of factors, particularly the mix of
EECP models sold and their  respective  average selling prices,  the mix of EECP
units sold,  rented or placed during the period,  the ongoing costs of servicing
such units, and certain fixed period costs,  including  facilities,  payroll and
insurance.  Gross profit margins are generally less on non-domestic business due
to the use of distributors resulting in lower selling prices. Consequently,  the
gross profit  realized during the current period may not be indicative of future
margins.

Selling, General and Administrative

     Selling,  general and  administrative  ("SG&A") expenses for the six-months
ended  November  30,  2004 and  2003  were  $6,140,879  or 74% of  revenues  and
$6,134,429 or 59% of revenues,  respectively reflecting an increase of $6,450 or
less than 1%. The increase in SG&A  expenditures in both absolute amounts and as
a  percentage  of revenues in first half of fiscal 2005  compared to fiscal 2004
resulted primarily from increased market research and sales travel expenditures,
largely offset by decreased administrative consulting and severance fees.

Research and Development

     Research and development  ("R&D") expenses of $1,657,846 or 20% of revenues
for the six months ended  November 30, 2004,  decreased by $295,529 or 15%, from
the prior six months ended  November 30 2003,  of $1,953,375 or 19% of revenues.
The  decrease  reflects  lower  spending  related to the PEECH  clinical  trial,
partially offset by increased  expenditures for developing the new Lumenair EECP
Therapy System.

Provision for Doubtful Accounts

     During the six-month period ended November 30, 2004, we charged $132,956 to
our provision for doubtful accounts as compared to $985,511 during the six-month
period ended  November 30,  2003.  The decrease was due  primarily to a $680,000
provision made in the prior fiscal period  associated  with the write-off of all
funds due from a major customer that ceased operations in December 2003.

Interest Expense and Financing Costs

     Interest  expense and financing costs decreased to $59,040 in the six-month
period ended  November  30, 2004,  from $66,246 for the same period in the prior
year.  Interest  expense  reflects  interest on loans  secured to refinance  the
November 2000 purchase of our headquarters and warehouse facility, as well as on
loans  secured  to  finance  the cost  and  implementation  of a new  management
information system.

Interest and Other Income, Net

     Interest and other income for the first half of 2005 and 2004,  was $30,827
and $108,287,  respectively.  The decrease in interest and other income from the
prior period is the direct result of the absence of interest  income  related to
certain equipment sold under sales-type leases incurred in fiscal 2004 and lower
miscellaneous customer payments,  partially offset by higher interest income due
to improved yields.

Income Tax Expense, Net

     During the  six-months  ended  November  30,  2004 and 2003,  we recorded a
provision for state income taxes of $21,683 and $20,000, respectively.

     As of November 30, 2004, we had recorded deferred tax assets of $14,582,000
net of a $2,762,169  valuation allowance related to the anticipated  recovery of
tax loss  carryforwards.  The  amount  of the  deferred  tax  assets  considered
realizable  could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced. Ultimate realization of the deferred
tax assets is dependent upon our generating  sufficient  taxable income prior to
the  expiration  of the tax loss  carryforwards.  We believe that the Company is
positioned for long-term  growth despite the financial  results  achieved during
fiscal  years 2005,  2004 and 2003,  and that based upon the weight of available
evidence, that it is "more likely than not" that net deferred tax assets will be

                                    Page 23
<PAGE>
                       Vasomedical, Inc. and Subsidiaries


realized.  The "more likely than not" standard is subjective,  and is based upon
management's  estimate  of a greater  than 50%  probability  that its long range
business plan can be realized.

     Ultimate  realization  of any or all of  the  deferred  tax  assets  is not
assured,  due to significant  uncertainties  associated with estimates of future
taxable  income  during the  carryforward  period.  Our  estimates  are  largely
dependent  upon  achieving  considerable  growth  resulting  from the successful
commercialization  of EECP therapy into the congestive heart failure indication.
Such future estimates of future taxable income are based on our beliefs, as well
as assumptions made by and information  currently  available to us. (See "Income
Tax Expense, Net" in the "Three Months Ended November 30, 2004 and 2003" section
of this "Management's Discussion and Analysis of Financial Condition and Results
of Operation").

     The recorded  deferred tax asset and  increase to the  valuation  allowance
during the six months ended November 30, 2004 was $854,169.

Liquidity and Capital Resources

     We believe  that our cash flow from  operations  together  with our current
cash reserves will be sufficient to fund our business plan and projected capital
requirements through at least August 2005. Although we have incurred significant
losses  during the last three  fiscal  years,  we  believe  that the  Company is
positioned for long-term growth.  Our long-term growth is largely dependent upon
the  successful  commercialization  of EECP  therapy into the  congestive  heart
failure  indication  which depends on favorable  results from the PEECH clinical
trial.  Our  long-term  ability  to  achieve  profitable  operations  is further
dependent on  successfully  completing  additional  debt or equity  financing to
provide marketing funds necessary to launch EECP therapy in the congestive heart
failure market and to bridge the period between completion of the PEECH clinical
trial and a congestive  heart  failure  coverage  decision by CMS.  While we are
currently seeking to raise such capital through public or private equity or debt
financings, there is no assurance we will be successful in these efforts. Future
capital funding, if available, may result in dilution to current shareholders.

     We have  financed our  operations  in fiscal 2005 and 2004  primarily  from
working capital and operating  results.  At November 30, 2004, we had a cash and
cash  equivalents  balance of  $1,913,462  and working  capital of $6,866,816 as
compared  to a cash and cash  equivalents  balance  of  $6,365,049  and  working
capital of $9,771,870 at May 31, 2004. Our cash balances decreased $4,451,587 in
the six-month period compared to May 31, 2004,  primarily due to $2,433,232 used
in investing activities and $2,083,681 used in operating activities.

     The decrease in cash provided by our operating  activities during the first
half of fiscal year 2005 resulted primarily from the net loss of $2,534,153 less
adjustments  to reconcile  net loss to net cash used in operating  activities of
$450,472.  Changes in our operating assets and liabilities totaled a cash use of
$7,673.  The changes in the asset  components  primarily  reflect an increase in
inventory of $1,062,827 plus higher other current assets of $204,873,  primarily
prepaid  insurance  premiums  offset  by  a  $2,914,589  reduction  in  accounts
receivable due to the revenue. The changes in our operating liability components
reflect a reduction in accounts  payable and accrued  liabilities  of $1,204,245
and other liabilities totaling $412,568.  Non-cash adjustments for depreciation,
amortization,  allowance  for doubtful  accounts  and  allowance  for  inventory
write-offs of $458,145 partially offset the above.

     Net accounts receivable were 30% of revenues for the six-month period ended
November  30,  2004,  compared to 44% at the end of the  six-month  period ended
November 30, 2003, and accounts  receivable turnover improved to 5.8 times as of
November  30, 2004,  as compared to 3.4 times as of November 30, 2003.  Standard
payment  terms on our domestic  equipment  sales are generally net 30 to 90 days
from  shipment  and do  not  contain  "right  of  return"  provisions.  We  have
historically  offered a variety of extended payment terms,  including sales-type
leases,  in certain  situations and to certain  customers in order to expand the
market  for our  EECP  products  in the US and  internationally.  Such  extended
payment  terms  were  offered  in  lieu of  price  concessions,  in  competitive
situations,  when opening new markets or geographies  and for repeat  customers.
Extended payment terms cover a variety of negotiated terms, including payment in
full - net 120, net 180 days or some fixed or variable  monthly  payment  amount
for a six to twelve month period followed by a balloon  payment,  if applicable.
If in our  judgment  the degree of  collectibility  is  uncertain at the time of
shipment,  we use the installment  sales method and record revenue based on cash
receipt. During the first half of fiscal 2005 and 2004, approximately 2% and 1%,
respectively,  of revenues were  generated  from sales in which initial  payment
terms were greater than 90 days,  we offered no sales- type leases and 2% and 0%
of revenues reflect cash receipts from installment sales . In general,  reserves

                                    Page 24
<PAGE>
                       Vasomedical, Inc. and Subsidiaries


are calculated on a formula basis  considering  factors such as the aging of the
receivables,  time past due, and the customer's credit history and their current
financial status. In most instances where reserves are required, or accounts are
ultimately  written-off,  customers have been unable to  successfully  implement
their  EECP  program.  As we are  creating a new  market  for EECP  therapy  and
recognizing the challenges that some customers may encounter,  we have opted, at
times,  on a  customer-by-customer  basis,  to recover our equipment  instead of
pursuing other legal remedies,  which has resulted in our recording of a reserve
or a write-off.

     Investing  activities  used net cash of  $2,433,232  during  the  six-month
period ended  November 30, 2004.  The principal use of cash was for the purchase
of short-term  certificates of deposit and treasury bills totaling $2,269,460 to
improve  the yield on our  unused  cash  balances.  All of our  certificates  of
deposit have original maturities of greater than three months and mature in less
than twelve  months.  Additionally,  we used $163,772 in cash  primarily for the
purchase of equipment to be used in the manufacture of our EECP systems.

     Our financing  activities provided net cash of $65,326 during the six-month
period ended November 30, 2004,  reflecting  $130,666 received from the exercise
of stock  options  less  payments on our  outstanding  notes and loans  totaling
$65,340.

     We cancelled our line of credit in August 2004 and do not currently have an
available line of credit.

     The following table presents our expected cash requirements for contractual
obligations outstanding as of November 30, 2004.
<TABLE>
<CAPTION>
                                                                     Due as of       Due as of
                                                     Due as of      11/30/06 and    11/30/08 and         Due
                                      Total          11/30/05         11/30/07        11/30/09       Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>              <C>             <C>             <C>
Long-Term Debt                        $1,163,975        $142,255         $201,020        $111,982        $708,718
Operating Leases                         123,103          87,507           35,596              --              --
Litigation Settlement                    267,000         133,000          134,000              --              --
Employment Agreements                    140,625         140,625               --              --              --
--------------------------------------------------------------------------------------------------------------------
Total Contractual Cash                $1,694,703        $503,387         $370,616        $111,982        $708,718
Obligations
====================================================================================================================
</TABLE>

Effects of Inflation

     We believe 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.

                                    Page 25
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4 - PROCEDURES AND CONTROLS

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

                                    Page 26
<PAGE>
                       Vasomedical, Inc. and Subsidiaries


                          PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS:

        None.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS:

        None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:

        None

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          A.   The Registrant held its Annual Meeting of Stockholders on October
               28, 2004.

          B.   Not Applicable

          C.   Three  directors were elected.  Alexander G. Bearn,  MD; David S.
               Blumenthal,  MD; and Kenneth W. Rind,  PhD were  elected to serve
               until the 2007  Annual  Meeting of  Stockholders  or until  their
               successors are duly elected and qualified.  The minimum number of
               votes cast in favor of their elections was 50,725,523.

                    Another  matter voted upon was the approval of the Company's
               2004 Stock Option/Stock  Issuance Plan covering 2,500,000 shares.
               The votes  cast were as  follows:  Votes  for:  6,691,309;  Votes
               against: 3,522,908; and Votes abstained: 294,138.

                    The third  matter  voted  upon was the  ratification  of the
               appointment  of Grant  Thornton LLP as the Company's  independent
               registered  public  accounting firm for the fiscal year ended May
               31, 2005. The votes cast were as follows:  Votes for: 51,698,837;
               Votes against: 412,999; and Votes abstained: 164,287.


ITEM 5 - OTHER INFORMATION:

        None

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:

Exhibits

31   Certifications  pursuant to Rules 13a-14(a) as adopted  pursuant to Section
     302 of the Sarbanes-Oxley Act of 2002.

32   Certifications  pursuant to 18 U.S.C.  Section 1350 as adopted  pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002.

Reports on Form 8-K

     The  Registrant  filed a Report on Form 8-K dated October 4, 2004 to report
     an event under Items 5.01 and 9.01.

                                    Page 27
<PAGE>
                       Vasomedical, Inc. and Subsidiaries



     In accordance with to the  requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                     VASOMEDICAL, INC.

             By:     /s/ Thomas Glover
                     ---------------------------------
                     Thomas Glover
                     Chief Executive Officer and Director (Principal Executive
                     Officer)

                     /s/ Thomas W. Fry
                     ---------------------------------
                     Thomas W. Fry
                     Chief Financial Officer (Principal Financial and Accounting
                     Officer)

Date:  January 13, 2005

                                    Page 28