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 February 28, 2005

[ ] 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 April 14, 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 [ ]
                                   ---     --

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
                                            ---     --

                                     Page 1
<PAGE>


Vasomedical, Inc. and Subsidiaries



                                     INDEX


<TABLE>
<CAPTION>

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

                Consolidated Condensed Balance Sheets as of
                        February 28, 2005 and May 31, 2004                                              3

                Consolidated Condensed Statements of Earnings for the
                        Nine and Three Months Ended February 28, 2005 and February 29, 2004             4

                Consolidated Condensed Statement of Changes in Stockholders'
                        Equity for the Period from June 1, 2004 to February 28, 2005                    5

                Consolidated Condensed Statements of Cash Flows for the
                        Nine Months Ended February 28, 2005 and February 29, 2004                       6

                Notes to Consolidated Condensed Financial Statements                                    7

        Item 2 - Management's Discussion and Analysis of Financial Condition
                and Results of Operations                                                              15

        Item 3  Qualitative and Quantitative Disclosures About Market Risk                             29

        Item 4  Controls and Procedures                                                                29

PART II - OTHER INFORMATION                                                                            30
</TABLE>

                                     Page 2
<PAGE>

ITEM 1 - FINANCIAL STATEMENTS

                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                February 28,           May 31,
                                                                                    2005                 2004
                                                                              -----------------    -----------------
                                 ASSETS                                         (unaudited)
<S>                                                                              <C>                  <C>
CURRENT ASSETS
     Cash and cash equivalents                                                    $1,228,727           $6,365,049
     Certificates of deposit and treasury bills                                    2,764,154            1,180,540
     Accounts receivable, net of an allowance for doubtful accounts of
       $520,914 at February 28, 2005 and $699,203 at May 31, 2004                  1,589,381            5,521,853
     Inventories                                                                   3,613,082            2,373,748
     Other current assets                                                            436,636              272,513
                                                                              -----------------    -----------------
         Total current assets                                                      9,631,980           15,713,703

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,559,660 at
   February 28, 2005 and $ 2,378,576 at May 31, 2004                               2,265,307            2,430,521
DEFERRED INCOME TAXES                                                             14,582,000           14,582,000
OTHER ASSETS                                                                         318,597              297,391
                                                                              -----------------    -----------------
                                                                                 $26,797,884          $33,023,615
                                                                              =================    =================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                        $2,307,044           $3,122,184
     Current maturities of long-term debt and notes payable                          145,164              136,478
     Sales tax payable                                                               228,761              353,360
     Deferred revenues                                                             1,646,918            1,734,925
     Accrued warranty and customer support expenses                                  105,583              161,917
     Accrued professional fees                                                       114,817               91,486
     Accrued commissions                                                             105,998              341,483
                                                                              -----------------    -----------------
         Total current liabilities                                                 4,654,285            5,941,833

LONG-TERM DEBT                                                                       985,089            1,092,837
ACCRUED WARRANTY COSTS                                                                17,250               83,000
DEFERRED REVENUES                                                                    876,677            1,111,526
OTHER LIABILITIES                                                                    100,750              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 February 28, 2005 and May 31,
       2004, respectively, issued and outstanding                                     58,552               58,419
     Additional paid-in capital                                                   51,450,639           51,320,106
     Accumulated deficit                                                         (31,345,358)         (26,784,356)
                                                                              -----------------    -----------------
         Total stockholders' equity                                               20,163,833           24,594,169
                                                                              -----------------    -----------------
                                                                                 $26,797,884          $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>


                                                          Nine Months Ended                   Three Months Ended
                                                    ------------------------------     --------------------------------
                                                    February 28,      February 29,       February 28,      February 29,
                                                        2005              2004               2005              2004
                                                    ------------     -------------     ---------------    -------------
<S>                                                  <C>              <C>                <C>                <C>
Revenues
   Equipment sales                                    $8,629,026      $14,147,248         $2,131,567        $5,185,388
   Equipment rentals and services                      2,618,393        2,132,323            832,761           764,522
                                                    ------------     -------------     ---------------    -------------
                                                      11,247,419       16,279,571          2,964,328         5,949,910
Cost of sales and services
   Cost of sales, equipment                            3,034,836        4,616,671            831,936         1,628,210
   Cost of equipment rentals and services                965,413          948,427            332,646           304,965
                                                    ------------     -------------     ---------------    -------------
                                                       4,000,249        5,565,098          1,164,582         1,933,175

                                                    ------------     -------------     ---------------    -------------
   Gross Profit                                        7,247,170       10,714,473          1,799,746         4,016,735

Expenses
   Selling, general and administrative                 9,088,858        9,217,836          2,947,978         3,083,407
   Research and development                            2,521,321        2,996,970            863,476         1,043,595
   Provision for doubtful accounts                       135,156        1,147,011              2,200           161,500
   Interest expense and financing costs                   84,971          101,335             25,931            35,089
   Interest and other income, net                        (51,795)        (115,102)           (20,968)           (6,815)
                                                    ------------     -------------     ---------------    -------------
                                                      11,778,511       13,348,050          3,818,617         4,316,776

                                                    ------------     -------------     ---------------    -------------
LOSS BEFORE INCOME TAXES                              (4,531,341)      (2,633,577)        (2,018,871)         (300,041)
   Income tax expense, net                               (29,661)         (30,000)            (7,978)          (10,000)
                                                    ------------     -------------     ---------------    -------------
NET LOSS                                             $(4,561,002)     $(2,663,577)       $(2,026,849)        $(310,041)
                                                    ============     =============     ===============    =============


Net loss per common share
     - basic                                             $(0.08)          $(0.05)             $(0.03)          $(0.01)
                                                    ============     =============     ===============    =============
     - diluted                                           $(0.08)          $(0.05)             $(0.03)          $(0.01)
                                                    ============     =============     ===============    =============

Weighted average common shares outstanding
     - basic                                          58,545,850       57,847,004         58,552,688        57,886,701
                                                    ============     =============     ===============    =============
     - diluted                                        58,545,850       57,847,004         58,552,688        57,886,701
                                                    ============     =============     ===============    =============
</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                                                                               (4,561,002)       (4,561,002)
                                      ------------    ----------    --------------    ---------------    ---------------
Balance at February 28, 2005          58,552,688        $58,552       $51,450,639       $(31,345,358)      $20,163,833
                                      ============    ==========    ==============    ===============    ===============
</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>
                                                                                        Nine months ended
                                                                              --------------------------------------
                                                                                February 28,         February 29,
                                                                                    2005                 2004
                                                                              -----------------    -----------------
<S>                                                                              <C>                  <C>
Cash flows from operating activities
     Net loss                                                                    $(4,561,002)         $(2,663,577)
                                                                              -----------------    -----------------
     Adjustments to reconcile net loss to net cash (used in) provided by
       operating activities
         Depreciation and amortization                                               433,177              595,685
         Provision for doubtful accounts                                             178,289              674,175
         Allowance for inventory write-off                                            71,908               90,516
         Changes in operating assets and liabilities
              Accounts receivable                                                  3,754,183            2,606,696
              Financing receivables, net                                                  --              258,608
              Inventories                                                         (1,372,541)           1,012,606
              Other current assets                                                  (164,123)            (203,176)
              Other assets                                                           (50,530)             (52,877)
              Accounts payable, accrued expenses and other current
                liabilities                                                       (1,296,234)             114,388
              Other liabilities                                                     (400,099)            (132,346)
                                                                              -----------------    -----------------
                                                                                   1,154,030            4,964,275
                                                                              -----------------    -----------------
     Net cash (used in) provided by operating activities                          (3,406,972)           2,300,698
                                                                              -----------------    -----------------

     Cash flows from investing activities
         Purchase of property and equipment                                         (177,340)            (137,721)
         Purchase of certificates of deposit and treasury bills                   (1,583,614)                  --
                                                                              -----------------    -----------------
     Net cash used in investing activities                                        (1,760,954)            (137,721)
                                                                              -----------------    -----------------

     Cash flows from financing activities
         Proceeds from notes                                                              --               67,149
         Payments on notes                                                           (99,062)             (92,453)
         Proceeds from exercise of options and warrants                              130,666              383,084
                                                                              -----------------    -----------------
     Net cash provided by financing activities                                        31,604              357,780
                                                                              -----------------    -----------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                                                                                  (5,136,322)           2,520,757
     Cash and cash equivalents - beginning of period                               6,365,049            5,222,847
                                                                              -----------------    -----------------
     Cash and cash equivalents - end of period                                    $1,228,727           $7,743,604
                                                                              =================    =================

Non-cash investing and financing activities were as follows:
     Inventories transferred to (from) property and equipment,  attributable
       to operating leases, net                                                      $61,299            $(328,869)

</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)
                               February 28, 2005

NOTE A - BASIS OF PRESENTATION

     The consolidated  condensed  balance sheet as of February 28, 2005, and the
related  consolidated   condensed  statements  of  earnings  for  the  nine  and
three-month  periods ended  February 28, 2005 and February 29, 2004,  changes in
stockholders' equity for the nine-month period ended February 28, 2005, and cash
flows for the nine- month periods ended February 28, 2005 and February 29, 2004,
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 February 28, 2005,  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 February 28, 2005 and
February  29,  2004 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 July 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(R) therapy into the congestive  heart
failure ("CHF") indication which depends in part on results from the Prospective
Evaluation of EECP in  Congestive  Heart Failure  ("PEECH(TM)")  clinical  trial
being  sufficient  to promote  adoption  of the  therapy  in CHF.  As more fully
discussed in Note K "SUBSEQUENT EVENT", PEECH results were disclosed on March 8,
2005.  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 national reimbursement coverage decision by
the Centers for Medicare and Medicaid  Services  (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 Financial  Accounting  Standards  Board (FASB) issued
FASB Statement No. 153 ("SFAS No. 153"),  "Exchanges of  Non-monetary  Assets an
amendment  of APB Opinion No. 29".  SFAS No. 153 amends  Opinion 29 to eliminate
the  exception  for  non-monetary  exchanges  of similar  productive  assets and
replaces it with a general  exception for exchanges of non-monetary  assets that
do not have  commercial  substance.  A non-  monetary  exchange  has  commercial
substance  if the  future  cash  flows of the  entity  are  expected  to  change
significantly as a result of the exchange.  SFAS No. 153 is effective for fiscal
periods  after June 15,  2005.  The Company does not expect the adoption of SFAS
No.  153 to have a  material  impact  on the  Company's  consolidated  financial
statements.

     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

                                     Page 7
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 28, 2005

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.

     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

                                     Page 8
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 28, 2005

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,
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  nine-month  period  ended  February  28,  2005,  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 $1.19 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 nine-month  period ended February 28, 2005,  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 nine-month
period ended  February 28, 2005,  options to purchase  474,166  shares of common
stock at an exercise price of $0.91 - $3.96 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>
                                                Nine Months Ended                            Three Months
                                                                                                  Ended
                                        -----------------------------------        ----------------------------------
                                          February 28,        February 29,          February 28,        February 29,
                                              2005                2004                  2005                2004
                                        ---------------     ---------------        --------------     ---------------
<S>                                      <C>                 <C>                    <C>                  <C>
Net loss, as reported                    $(4,561,002)        $(2,663,577)           $(2,026,849)         $(310,041)
     Deduct: Total stock-based
       employee compensation expense
       determined under fair                (888,075)         (1,080,817)              (234,549)          (402,237)
       value-based method for all
       awards
                                        ---------------     ---------------        --------------     ---------------
Pro forma net loss                       $(5,449,077)        $(3,744,394)           $(2,261,398)         $(712,278)
                                        ===============     ===============        ==============     ===============

Loss per share:
    Basic - as reported                      $(0.08)             $(0.05)                $(0.03)            $(0.01)
                                        ===============     ===============        ==============     ===============
    Diluted - as reported                    $(0.08)             $(0.05)                $(0.03)            $(0.01)
                                        ===============     ===============        ==============     ===============
    Basic - pro forma                        $(0.09)             $(0.06)                $(0.04)            $(0.01)
                                        ===============     ===============        ==============     ===============
    Diluted - pro forma                      $(0.09)             $(0.06)                $(0.04)            $(0.01)
                                        ===============     ===============        ==============     ===============
</TABLE>
     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

                                     Page 9
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 28, 2005

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
the following  weighted- average  assumptions for the nine months ended February
28, 2005:





                 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 nine-month and
three-month  periods  ended  February  28, 2005 options and warrants to purchase
6,832,253 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 nine-month and three-month  periods ended February 29, 2004,
options and warrants to purchase 6,745,086 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>
                                                          Nine Months Ended                   Three Months Ended
                                                    ------------------------------      -------------------------------
                                                    February 28,     February 29,       February 28,      February 29,
                                                        2005             2004               2005              2004
                                                    -------------    -------------      -------------     -------------
<S>                                                  <C>              <C>                <C>                 <C>
Numerator:
   Basic and diluted net loss                        $(4,561,002)     $(2,663,577)       $(2,026,849)        $(310,041)
Denominator:
   Basic - weighted average common shares             58,545,850       57,847,004         58,552,688        57,886,701
     Stock options                                            --               --                 --                --
     Warrants                                                 --               --                 --                --
                                                    -------------    -------------      -------------     -------------
   Diluted - weighted average common shares           58,545,850       57,847,004         58,552,688        57,886,701
                                                    =============    =============      =============     =============


Basic and diluted loss per common share                  $(0.08)          $(0.05)            $(0.03)           $(0.01)
                                                    =============    =============      =============     =============
</TABLE>
NOTE E - INVENTORIES

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

                                                                       February 28,           May 31,
                                                                           2005                 2004
                                                                     -----------------    -----------------
   <S>                                                                    <C>                    <C>

   Raw materials                                                          $1,133,485             $928,269
   Work in process                                                         1,291,609              455,731
   Finished goods                                                          1,187,988              989,748
                                                                     -----------------    -----------------
                                                                          $3,613,082           $2,373,748
                                                                     =================    =================
</TABLE>

                                    Page 10
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 28, 2005

     At February  28, 2005 and May 31, 2004,  the Company has recorded  reserves
for obsolete inventory of $472,000 and $399,000, respectively.

NOTE F - LONG-TERM DEBT

     The following table sets forth the computation of long-term debt:
<TABLE>
<CAPTION>
                                                                       February 28,           May 31,
                                                                           2005                 2004
                                                                     -----------------    -----------------
<S>                                                                          <C>                <C>
 Facility loans (a)                                                          $983,257           $1,022,933
 Term loans (b)                                                               146,996              206,382
                                                                     -----------------    -----------------
                                                                            1,130,253            1,229,315
Less current portion                                                         (145,164)            (136,478)
                                                                     -----------------    -----------------
                                                                             $985,089           $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  in-service  and 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>
                                                          Nine Months Ended                   Three Months Ended
                                                    ------------------------------       ------------------------------
                                                    February 28,     February 29,        February 28,     February 29,
                                                        2005             2004                2005             2004
                                                    -------------    -------------       -------------    -------------
<S>                                                   <C>              <C>                 <C>              <C>
Deferred Revenue at the beginning of the period       $2,846,451       $1,709,551          $2,773,618       $2,284,166
ADDITIONS
     Deferred extended service contracts               1,473,022        1,392,588             428,658          446,650
     Deferred in-service and training                    147,500          215,000              30,000          117,500
     Deferred warranty obligations                       630,000          650,000             132,500          357,500
RECOGNIZED AS REVENUE
     Deferred extended service contracts              (1,395,461)      (1,066,682)           (512,015)        (399,109)
     Deferred in-service and training                   (230,000)        (157,500)            (60,000)        (102,500)
     Deferred warranty obligations                      (947,917)        (183,333)           (269,166)        (144,583)
                                                    -------------    -------------       -------------    -------------
Deferred revenue at end of period                      2,523,595        2,559,624           2,523,595        2,559,624
     Less: current portion                            (1,646,918)      (1,601,037)         (1,646,918)      (1,601,037)
                                                    -------------    -------------       -------------    -------------
Long-term deferred revenue at end of period             $876,677         $958,587            $876,677         $958,587
                                                    =============    =============       =============    =============
</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

                                    Page 11
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 28, 2005

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
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>
                                                          Nine Months Ended                  Three Months Ended
                                                   -------------------------------      ------------------------------
                                                   February 28,      February 29,       February 28,     February 29,
                                                       2005              2004               2005             2004
                                                   -------------     -------------      -------------    -------------
<S>                                                    <C>               <C>                <C>              <C>
Warranty liability at the beginning of the             $244,917          $788,000           $154,583         $501,000
   period
     Expense for new warranties issued                        -           164,000                  -                -
     Warranty amortization                             (122,084)         (602,000)           (31,750)        (151,000)
                                                   -------------     -------------      -------------    -------------
Warranty liability at end of period                     122,833           350,000            122,833          350,000
     Less: Current portion                             (105,583)         (241,000)          (105,583)        (241,000)
                                                   -------------     -------------      -------------    -------------
Long-term warranty liability at end of period           $17,250          $109,000            $17,250         $109,000
                                                   =============     =============      =============    =============
</TABLE>
NOTE I - INCOME TAXES

     During the  nine-months  ended  February 28, 2005 and February 29, 2004, we
recorded  a  provision   for  state   income   taxes  of  $29,661  and  $30,000,
respectively.

     As of February  28, 2005,  the Company had recorded  deferred tax assets of
$14,582,000 net of a $3,444,520  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 lower than projected. Ultimate
realization of the deferred tax assets is dependent  upon material  improvements
over present levels of  consolidated  pre-tax losses in order for us to generate
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 February 28, 2005, 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 and material  assumptions  associated
with  estimates of future  taxable income during the  carryforward  period.  The
Company's estimates are largely dependent upon achieving  considerable growth in
revenue and profits  resulting  from the  successful  commercialization  of EECP
therapy into the congestive heart failure indication,  which Management believes
will enable the Company to reverse the current  trend of  increasing  losses and
generate  pre-tax income in excess of over $42 million over the next seven years
in order to fully utilize all of the deferred tax assets.  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, as disclosed in Note K
          "SUBSEQUENT   EVENT",   as  well  as  other  cllinical   evidence  are
          sufficiently  positive for the PEECH clinical trial to be published in
          a peer review  journal and enable the 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;

                                    Page 12
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 28, 2005

     --   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  and enable  the  Company  to  achieve  material  growth in
          revenue and profits;

     --   that the EECP therapy will be accepted by the medical  community as an
          adjunctive  therapy  for the  treatment  of  patients  suffering  from
          congestive heart failure; and

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

     Additional   uncertainties  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;

     --   there  can be no  assurance  that we will be able to raise  additional
          capital necessary to implement our business plan;

     --   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;

     --   the recent history of declining revenues and profits; and

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

     Factors  considered by Management in making its assumptions and included in
the long-term business plan are the following:
     --   FDA clearance to market EECP therapy in congestive heart failure;

     --   independent  market  research  indicates  that the patient  population
          potentially  eligible for EECP  therapy in  congestive  heart  failure
          market is larger than the current refractory angina patient population
          and when the two patient  populations  are  combined  the total market
          opportunity for EECP therapy will be more than double;

     --   many physician  practices have told Management that they do not have a
          sufficient number of patients to economically  justify adoption of the
          procedure  with the  current  reimbursement  coverage  for  refractory
          angina.  The increased  market size resulting from the addition of CHF
          patients should improve the economic model for the physician practice;

     --   positive  clinical  evidence  from the PEECH  clinical  trial that was
          recently  concluded as disclosed in Note K  "SUBSEQUENT  EVENT",  plus
          other  smaller  clinical  trials and the IEPR  patient  registry  that
          demonstrates  the  clinical  effectiveness  of  EECP  therapy  in  the
          treatment of congestive heart failure to medical providers, payers and
          regulators.

     --   the PEECH clinical trial was completed this fiscal year as planned and
          the summary results of the trial were disclosed in March 2005;

     --   the Company  intends to have the results of the PEECH trial  published
          in a peer review  journal,  which is an  important  step  necessary to
          support an application to CMS to expand reimbursement coverage of EECP
          therapy to include CHF patients;

     --   the Company  sustained a period of profitability in fiscal years 2000,
          2001  and  2002  with  profits  before  income  taxes  of  $1,290,916,
          $5,237,242 and $4,240,106, respectively; and

     --   management continues to believe that the Company will be able to raise
          sufficient funds to enable it to execute its business plan.

                                     Page 13
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 28, 2005

     While  Management  believes that they will be able to execute the Company's
business  plan over the longer term and the Company  will be able to utilize its
tax loss  carryforwards,  the exact  timing of its  return to  profitability  is
uncertain,  subject  to  significant  management  judgments  and  estimates  and
dependent on a variety of external factors including:  market conditions at that
time, the reception of the EECP therapy by the medical  professionals and payers
and the  timing  of a  Medicare  reimbursement  decision.  It is  possible  that
significant  tax loss  carryforwards  from fiscal years 2005,  2006 and 2007 may
expire  before  the  Company  is  able  to  use  them.  As  a  result  of  these
uncertainties,  beginning  in  fiscal  2004,  the  Company  began to  provide  a
valuation reserve for all additional tax loss  carryforwards that were generated
by current operating losses. Management reviews this policy on a quarterly basis
and believes that the above valuation  reserve is appropriate  under the current
circumstances.

     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 $1,536,520 during the nine-months ended February 28, 2005.

NOTE J - COMMITMENTS AND CONTINGENCIES

Employment Agreements

     The approximate  aggregate  minimum  compensation  obligation  under active
employment agreements at February 28, 2005 are summarized as follows:


     Twelve month period ended February 28,                    Amount
------------------------------------------------------     --------------
                2006                                           $78,125


NOTE K - SUBSEQUENT EVENT

     On March 8,  2005,  results  of the  Prospective  Evaluation  of EECP(R) in
Congestive  Heart  Failure  ("PEECH")  trial  were  presented  by Dr.  Arthur M.
Feldman,  MD, PhD,  Principal  Investigator,  in a Late Breaking Clinical Trials
session of the American College of Cardiology ("ACC") Annual Scientific Session.
Simultaneously,  the Company  announced the positive results of the trial to the
public in a Press  Release.  The PEECH  trial  evaluated  the  efficacy  of EECP
therapy for the treatment of congestive heart failure ("CHF").

     In designing the PEECH trial,  success was  demonstrated  if the difference
between EECP therapy  combined with optimal medical therapy  compared to optimal
medical  therapy alone achieved a p-value less than 0.025 in at least one of two
pre-defined co-primary endpoints:

     1.   percentage  of  subjects  with  greater  than or equal  to 60  seconds
          improvement in exercise duration from baseline to six months, or

     2.   percentage of subjects with at least 1.25  ml/min/kg  increase in peak
          oxygen consumption from baseline to six months.

     Additional  secondary  endpoints were changes in exercise duration and peak
oxygen  consumption,  changes in New York Heart Association  ("NYHA") functional
classification,  changes in quality of life, adverse experiences and pre-defined
clinical outcomes.

     The study  demonstrated  that there were  improvements in exercise duration
for  subjects  with NYHA  Class II and III  symptoms  of CHF who were given EECP
therapy as an adjunctive  therapy.  Among those treated with EECP 35.4% achieved
an exercise  duration  increase equal to or more than 60 seconds,  compared with
only 25.3% in the control  group (p = 0.016).  Peak oxygen  consumption  was not
significantly different between the two groups at six months.

     In addition,  consistent with the improvement in exercise duration, symptom
status,  assessed by the NYHA functional  class,  improved 31% in the EECP group
compared to 16% in the control group (p = 0.01) and overall  quality of life, as
reported  on the  Minnesota  Living  with Heart  Failure  scale,  also  improved
significantly.  Furthermore,  in exercise  duration after six months the average
was an increase in 25 seconds  for the  subjects  who  underwent  EECP  therapy,
compared  with a 10 second  decline for  patients  without the EECP therapy (p =
0.01). Peak oxygen  consumption was not significantly  different between the two
groups at six  months.  Additionally,  EECP  therapy  was  deemed  safe and well
tolerated  in this  group of  patients.  The study  concluded  that the  results
suggest  EECP  provides  adjunctive  therapy in patients  with NYHA Class II-III
heart failure receiving optimal pharmacological therapy.


                                    Page 14

<PAGE>

                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


     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(R) 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 $3,955 to $7,216.  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.

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 15
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED

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 in-service and 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;

     i) when  delivery and  acceptance  occurs based on delivery and  acceptance
documentation received from independent shipping companies or customers,
     ii) for  in-service  and training  following  documented  completion of the
training, and
     iii) for  warranty  service  ratably  over  the  service  period,  which is
generally one year.  In-service and training generally occurs within three weeks
of shipment and our return policy states that no returns will be accepted  after
in-service and training has been completed.

     We  recognized  deferred  revenues  of  $230,000  and  $60,000  related  to
in-service training and $947,917 and $269,166 related to warranty service during
the nine-month and three-month periods ended February 28, 2005, 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  nine-month  and  three-month  periods ended
February  28,  2005,  we deferred  $147,500  and $30,000  related to  in-service
training and $630,000 and $132,500  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 $1,395,461 and $1,066,682 for
the  nine-month   periods  ended  February  28,  2005  and  February  29,  2004,
respectively,  and  $512,015  and $399,109  for the  three-month  periods  ended
February 28, 2005 and February 29, 2004, 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.
                                    Page 16
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED


     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
"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 February
28, 2005.

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  in-service  and 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.

                                    Page 17
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED


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
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 Financial  Accounting  Standards  Board (FASB) issued
FASB Statement No. 153 ("SFAS No. 153"),  "Exchanges of  Non-monetary  Assets an
amendment  of APB Opinion No. 29".  SFAS No. 153 amends  Opinion 29 to eliminate
the  exception  for  non-monetary  exchanges  of similar  productive  assets and
replaces it with a general  exception for exchanges of non-monetary  assets that
do not have  commercial  substance.  A non-  monetary  exchange  has  commercial
substance  if the  future  cash  flows of the  entity  are  expected  to  change
significantly as a result of the exchange.  SFAS No. 153 is effective for fiscal
periods  after June 15,  2005.  The Company does not expect the adoption of SFAS
No.  153 to have a  material  impact  on the  Company's  consolidated  financial
statements.

                                    Page 18
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED

     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.

     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.

                                    Page 19
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED


     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 February 28, 2005 and February 29, 2004

     Net   revenues   from   sales,   leases  and   service   of  our   external
counterpulsation  systems  ("EECP"  systems) for the  three-month  periods ended
February  28, 2005 and  February  29,  2004,  were  $2,964,328  and  $5,949,910,
respectively,  which  represented  a decline of $2,985,582 or 50%. We reported a
net loss of  $2,026,849  compared to a net loss of $310,041 for the  three-month
periods  ended  February 28, 2005 and February 29, 2004,  respectively.  Our net
loss per common share was $0.03 for the  three-month  period ended  February 28,
2005  compared to a net loss of $0.01 for the  three-month  period  February 29,
2004.

Revenues

     Revenues from equipment sales declined  approximately 59% to $2,131,567 for
the three-month period ended February 28, 2005 as compared to $5,185,388 for the
same period for the prior year. The decline in equipment  sales is due primarily
to a 63%  decline in  domestic  units  shipped  and a 10% decline in the average
sales prices of new EECP systems sold in the domestic market.

     We believe the decline in domestic units shipped  reflects  weakened demand
in the  refractory  angina market as existing  capacity is more fully  utilized,
coupled with increased  competition from surgical procedures,  mainly the use of
drug-eluting stents. We anticipate that demand for EECP systems will remain soft
until an  expansion of the current  Centers for  Medicare and Medicaid  Services
("CMS")  national  reimbursement  policy  for  use  of  EECP  therapy  to  treat
congestive  heart failure  patients is obtained.  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.
Lastly,  we continue to reorganize  certain  territory  responsibilities  in our
sales  department due to recently vacant and/or  unproductive  territories,  and
recently  completed  the  restructuring  of  a  major  independent   distributor
territory to direct sales.

     Our revenue from the sale of EECP systems to international  distributors in
the third  quarter  of  fiscal  2005  decreased  approximately  49% to  $145,000
compared  to  $286,500  in same  period of the prior year  reflecting  decreased
volume.

     The above decline in revenue from equipment sales was partially offset by a
9% increase in revenue  from  equipment  rental and services for the three month
period ended February 28, 2005,  from the same  three-month  period in the prior
year.  Revenue  from  equipment  rental and  services  represented  28% of total
revenue in the third quarter of fiscal 2005 compared to 13% in the third quarter
of fiscal 2004.  The increase in both absolute  amounts and  percentage of total
revenue resulted  primarily from an increase of $126,960,  or approximately 20%,
in service related revenue from $640,690 to $767,650 for the three-month periods
ended February 29, 2004 and February 28, 2005, 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
decreased  approximately  53% from  $107,915  for the  three-month  period ended
February 29, 2004 to $50,379 for the three-month period ended February 28, 2005,
reflecting  the  deferral  of  $37,098  in  rental  revenue  due  to  use of the
installment method of revenue recognition for one customer.

                                    Page 20
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED


Gross Profit

     Gross profit  declined to $1,799,746 or 61% of revenues for the three-month
period ended  February 28, 2005,  compared to  $4,016,735 or 68% of revenues for
the  three-month  period  ended  February 29,  2004.  Gross  profit  margin as a
percentage  of revenue  for the  three-month  period  ended  February  28,  2005
decreased  due to the  lower  margins  from  the  sales of EECP  systems  due to
reduction  in average  selling  prices,  a lower mix of used  systems and higher
production costs and reflecting reduced production quantities.  Many of our used
EECP 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. Rental and service related margins
declined  slightly due to the deferral of rental  revenue due to  collectibility
risks associated with our largest rental  customer.  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.

Selling, General and Administrative

     Selling,  general and administrative ("SG&A") expenses for the three-months
ended February 28, 2005 and February 29, 2004 were $2,947,978 or 99% of revenues
and  $3,083,407  or 52% of  revenues,  respectively  reflecting  a  decrease  of
$135,429 or  approximately  4%. The decrease in SG&A  expenditures  in the third
quarter of fiscal 2005  compared to fiscal 2004  resulted  primarily  from lower
sales commissions of $307,893  associated with decreased sales revenue and lower
administrative  consulting  of  $76,425.  Partially  offsetting  the above  were
increases in  marketing  consulting  and trade show related  costs $ $93,678 and
$175,889, respectively.

Research and Development

     Research and  development  ("R&D")  expenses of $863,476 or 29% of revenues
for the three months ended February 28, 2005, decreased by $180,119 or 17%, from
the prior  three  months  ended  February  29,  2004,  of  $1,043,595  or 18% of
revenues.  The  decrease  reflects  lower  spending  related to the  Prospective
Evaluation of EECP in Congestive Heart Failure ("PEECH(TM)")  clinical trial and
lower new product  development  costs. 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.  As described more fully below,  we disclosed the initial  results of the
PEECH trial in March 2005 and expect to submit an application to the Centers for
Medicare  and  Medicaid  Services  ("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.

     On March 8, 2005,  results of the PEECH trial were  presented by Dr. Arthur
M. Feldman, MD, PhD, Principal Investigator,  in a Late Breaking Clinical Trials
session of the American College of Cardiology ("ACC") Annual Scientific Session.
Simultaneously,  the Company  announced the positive results of the trial to the
public in a Press  Release.  The PEECH  trial  evaluated  the  efficacy  of EECP
therapy for the treatment of congestive heart failure ("CHF").

     In designing the PEECH trial,  success was  demonstrated  if the difference
between EECP therapy  combined with optimal medical therapy  compared to optimal
medical  therapy alone achieved a p-value less than 0.025 in at least one of two
pre-defined co-primary endpoints:

     1.   percentage  of  subjects  with  greater  than or equal  to 60  seconds
          improvement in exercise duration from baseline to six months, or

     2.   percentage of subjects with at least 1.25  ml/min/kg  increase in peak
          oxygen consumption from baseline to six months.

                                    Page 21
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED


     Additional  secondary  endpoints were changes in exercise duration and peak
oxygen  consumption,  changes in New York Heart Association  ("NYHA") functional
classification,  changes in quality of life, adverse experiences and pre-defined
clinical outcomes.

     The study  demonstrated  that there were  improvements in exercise duration
for  subjects  with NYHA  Class II and III  symptoms  of CHF who were given EECP
therapy as an adjunctive  therapy.  Among those treated with EECP 35.4% achieved
an exercise  duration  increase equal to or more than 60 seconds,  compared with
only 25.3% in the control  group (p = 0.016).  Peak oxygen  consumption  was not
significantly different between the two groups at six months.

     In addition,  consistent with the improvement in exercise duration, symptom
status,  assessed by the NYHA functional  class,  improved 31% in the EECP group
compared to 16% in the control group (p = 0.01) and overall  quality of life, as
reported  on the  Minnesota  Living  with Heart  Failure  scale,  also  improved
significantly.  Furthermore,  in exercise  duration after six months the average
was an increase in 25 seconds  for the  subjects  who  underwent  EECP  therapy,
compared  with a 10 second  decline for  patients  without the EECP therapy (p =
0.01). Peak oxygen  consumption was not significantly  different between the two
groups at six  months.  Additionally,  EECP  therapy  was  deemed  safe and well
tolerated  in this  group of  patients.  The study  concluded  that the  results
suggest  EECP  provides  adjunctive  therapy in patients  with NYHA Class II-III
heart failure receiving optimal pharmacological therapy.

Provision for Doubtful Accounts

     We collected funds from previously reserved accounts,  which largely offset
new reserve requirements. As a result, we incurred a charge to our provision for
doubtful  accounts  during the  three-month  period  ended  February 28, 2005 of
$2,200, as compared to $161,500 during the three-month period ended February 29,
2004.

Interest Expense and Financing Costs

     Interest   expense  and  financing   costs  decreased  to  $25,931  in  the
three-month  period ended February 28, 2005, from $35,089 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 third  quarters of fiscal years 2005 and
2004, was $20,968 and $6,815,  respectively.  The increase in interest and other
income  from the prior  period is  attributable  to  higher  yields on  invested
balances,  which offset the effect of lower average cash balances in the current
quarter.

Income Tax Expense, Net

     During the  three-months  ended February 28, 2005 and February 29, 2004, we
recorded a provision for state income taxes of $7,978 and $10,000, respectively.

     As of February 28, 2005, we had recorded deferred tax assets of $14,582,000
net of a $3,444,520  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 lower than projected. Ultimate realization of
the deferred tax assets is dependent  upon  material  improvements  over present
levels of  consolidated  pre-tax  losses in order for us to generate  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 and material  assumptions  associated
with  estimates of future  taxable income during the  carryforward  period.  Our
estimates are largely  dependent upon achieving  considerable  growth in revenue

                                    Page 22
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED

and profits resulting from the successful commercialization of EECP therapy into
the  congestive  heart  failure  indication,  which we  believe  to enable us to
reverse the current  trend of  increasing  losses and generate pre tax income in
excess of $42 million over the next seven years in order to fully utilize all of
the deferred tax assets.  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,  as disclosed in the
          above "Research and  Development"  section,  as well as other clinical
          evidence are sufficiently  positive for the PEECH clinical trial to be
          published  in a peer  review  journal  and enable the 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  and enable us to achieve  material  growth in revenue  and
          profits;

     --   that the EECP therapy will be accepted by the medical  community as an
          adjunctive  therapy  for the  treatment  of  patients  suffering  form
          congestive heart failure; and

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

     Additional   uncertainties  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;

     --   there  can be no  assurance  that we will be able to raise  additional
          capital necessary to implement our business plan;

     --   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;

     --   our recent financial history of declining revenues and losses; and

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

     Factors  considered  by us in making our  assumptions  and  included in our
long-term business plan are the following:
     --   we currently  have FDA  clearance to market EECP therapy in congestive
          heart failure;

     --   independent  market  research  indicates  that the patient  population
          potentially  eligible for EECP  therapy in  congestive  heart  failure
          market is larger than the current refractory angina patient population
          and when the two patient  populations  are  combined  the total market
          opportunity for EECP therapy will be more than double;

     --   many  physician  practices  have  told  us  that  they  do not  have a
          sufficient number of patients to economically  justify adoption of the
          procedure  with the  current  reimbursement  coverage  for  refractory
          angina.  The increased  market size resulting from the addition of CHF
          patents should improve the economic model for the physician practice;

     --   we have positive  clinical evidence from the PEECH clinical trial that
          was  recently  concluded  as  disclosed  in the  above  "Research  and
          Development"  section, plus other smaller clinical trials and the IEPR
          patient registry that demonstrates the clinical  effectiveness of EECP
          therapy  in the  treatment  of  congestive  heart  failure  to medical
          providers, payers and regulators;

     --   we completed the PEECH  clinical trial this fiscal year as planned and
          disclosed the summary results of the trial in March 2005;

                                    Page 23
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED


     --   we intend to have the results of the PEECH trial  published  in a peer
          review  journal,  which is an important  step  necessary to support an
          application to CMS to expand reimbursement coverage of EECP therapy to
          include CHF patients;

     --   we sustained a period of  profitability in fiscal years 2000, 2001 and
          2002 with profits  before income taxes of  $1,290,916,  $5,237,242 and
          $4,240,106, respectively; and

     --   we continue to believe that we will be able to raise  sufficient funds
          to enable us to execute our business plan.

     While we believe that we will be able to execute our business plan over the
longer term and we will be able to utilize our tax loss carryforwards, the exact
timing of our return to  profitability  is  uncertain,  subject  to  significant
management  judgments  and  estimates  and  dependent  on a variety of  external
factors  including:  market  conditions at that time,  the reception of the EECP
therapy  by the  medical  professionals  and payers and the timing of a Medicare
reimbursement  decision.  It is possible that significant tax loss carryforwards
from fiscal years 2005, 2006 and 2007 may expire before we are able to use them.
As a result  of these  uncertainties,  beginning  in  fiscal  2004,  we began to
provide a valuation reserve for all additional tax loss  carryforwards that were
generated  by current  operating  losses.  We review  this policy on a quarterly
basis and believe  that the above  valuation  reserve is  appropriate  under the
current circumstances.

     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 during the three months ended February 28, 2005 of $682,351.

Nine Months Ended February 28, 2005 and February 29, 2004

     Net   revenues   from   sales,   leases  and   service   of  our   external
counterpulsation  systems  ("EECP"  systems) for the  nine-month  periods  ended
February  28, 2005 and  February 29, 2004,  were  $11,247,419  and  $16,279,571,
respectively,  which  represented  a decline of $5,032,152 or 31%. We reported a
net loss of $4,561,002  compared to $2,663,577 for the nine-month  periods ended
February 28, 2005 and February 29, 2004,  respectively.  Our net loss per common
share was $0.08 for the nine-month period ended February 28, 2005, compared to a
net loss of $0.05 for the nine-month period February 29, 2004.

Revenues

     Revenues from equipment sales declined  approximately 39% to $8,629,026 for
the nine-month period ended February 28, 2005 as compared to $14,147,248 for the
same period for the prior year. The decline in equipment  sales is due primarily
to a 34% decline in domestic units  shipped,  a 13% 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 29%  decrease  in average  selling  price when  compared  to used
systems sold in the domestic market in the first three quarters of fiscal 2004.

     We believe the decline in domestic units shipped  reflects  weakened demand
in the  refractory  angina market as existing  capacity is more fully  utilized,
coupled with increased  competition from surgical procedures,  mainly the use of
drug-eluting stents. We anticipate that demand for EECP systems will remain soft
until an expansion of the current CMS national  reimbursement  policy for use of
EECP  therapy  to treat  congestive  heart  failure  patients  is  obtained.  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

                                    Page 24

<PAGE>


                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED


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  continue  to  reorganize  certain  territory  responsibilities  in our sales
department due to recently vacant and/or unproductive territories,  and recently
completed the  restructuring  of a major  independent  distributor  territory to
direct sales.

     Our revenue from the sale of EECP systems to international distributors for
the  nine-month  period ended February 28, 2005  decreased  approximately  4% to
$607,995  compared  to  $636,600  in same  period of the prior  year  reflecting
decreased  volume of new systems,  partially  offset by improved average selling
prices.

     The above decline in revenue from equipment sales was partially offset by a
23%  increase in revenue from  equipment  rental and services for the nine month
period ended  February 28, 2005,  from the same  nine-month  period in the prior
year.  Revenue  from  equipment  rental and  services  represented  23% of total
revenue in the first three  quarters of fiscal 2005 compared to 13% in the first
three  quarters  of fiscal  2004.  The  increase  in both  absolute  amounts and
percentage of total revenue resulted primarily from an increase of approximately
35% 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 26% following
the termination of several short-term rental agreements partially offsetting the
above.

Gross Profit

     Gross profit  declined to $7,247,170 or 64% of revenues for the  nine-month
period ended  February 28, 2005,  compared to $10,714,473 or 66% of revenues for
the  nine-month  period  ended  February  29,  2004.  Gross  profit  margin as a
percentage  of revenue  for the  nine-month  period  ended  February  28,  2005,
declined  compared  to the same  period of the prior  fiscal year due to reduced
margins from EECP equipment sales  reflecting the negative impact resulting from
the  reduction  in average  selling  prices.  The gross  profit for  rentals and
services  improved  both in  absolute  amount  and as a  percentage  of  revenue
reflecting  increased  service  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 nine-months
ended February 28, 2005 and February 29, 2004 were $9,088,858 or 81% of revenues
and  $9,217,836  or 57% of  revenues,  respectively  reflecting  a  decrease  of
$128,978 or 1%. The decrease in SG&A expenditures in the first three quarters of
fiscal 2005 compared to fiscal 2004 resulted  primarily from a $445,151 decrease
in  administrative  consulting  and severance  fees,  $93,637 lower  promotional
allowances,  and $67,098 lower advertising  costs,  partially offset by $256,670
higher market research fees and $245,272 higher trade show costs.

Research and Development

     Research and development  ("R&D") expenses of $2,521,321 or 22% of revenues
for the nine months ended February 28, 2005,  decreased by $475,649 or 16%, from
the prior nine months ended February 29, 2004, of $2,996,970 or 18% of revenues.
The  decrease  reflects  lower  spending  related to the PEECH  clinical  trial,
partially  offset by increased  expenditures for developing the new Lumenair(TM)
EECP(R) Therapy System.

                                    Page 25
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED


Provision for Doubtful Accounts

     During the nine-month  period ended February 28, 2005, we charged  $135,156
to our  provision  for doubtful  accounts as compared to  $1,147,011  during the
nine-month  period ended  February 29, 2004. 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 $84,971 in the nine-month
period ended  February 28, 2005,  from $101,335 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 three  quarters of 2005 and 2004,
was $51,795  and  $115,102,  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  nine-months  ended  February 28, 2005 and February 29, 2004, we
recorded  a  provision   for  state   income   taxes  of  $29,661  and  $30,000,
respectively.

     As of February 28, 2005, we had recorded deferred tax assets of $14,582,000
net of a $3,444,520  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. (See "Income
Tax Expense,  Net" in the "Three Months Ended February 28, 2005 and February 29,
2004"  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 nine months ended February 28, 2005 was $1,536,520.

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 July 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 in part upon the acceptance of the results of
the PEECH clinical trial by the medical community as being sufficient to promote
the adoption of the therapy in CHF. 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   national
reimbursement  coverage decision by CMS. While we are currently seeking to raise
such capital  through public or private equity or debt  financings,  there is no

                                    Page 26
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED


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 February 28, 2005, we had a cash and
cash  equivalents  balance of  $1,228,727  and working  capital of $4,977,695 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 $5,136,322 in
the nine-month period compared to May 31, 2004, primarily due to $3,406,972 used
in operating activities and $1,760,954 used in investing activities.

     The decrease in cash provided by our operating  activities during the first
three  quarters  of fiscal  year 2005  resulted  primarily  from the net loss of
$4,561,002 less  adjustments to reconcile net loss to net cash used in operating
activities  of  $1,154,030.  Changes in our  operating  assets  and  liabilities
provided cash of $470,656. The changes in the asset components primarily reflect
an increase in  inventory of  $1,372,541  plus higher  other  current  assets of
$164,123,  primarily prepaid insurance premiums offset by a $3,754,183 reduction
in  accounts  receivable  due to  the  decreased  revenue.  The  changes  in our
operating  liability  components  reflect a reduction  in  accounts  payable and
accrued  liabilities  of $1,296,234  and other  liabilities  totaling  $400,099.
Non-cash  adjustments  for  depreciation,  amortization,  allowance for doubtful
accounts and allowance for inventory write-offs of $683,374 partially offset the
above.

     Net  accounts  receivable  were 14% of revenues for the  nine-month  period
ended  February 28, 2005,  compared to 34% at the end of the  nine-month  period
ended February 29, 2004, and accounts  receivable turnover improved to 5.4 times
as of February  28,  2005,  as compared  to 3.6 times as of February  29,  2004.
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 three quarters of fiscal 2005 and 2004,  approximately
2% and 3%, respectively,  of revenues were generated from sales in which initial
payment terms were greater than 90 days, we offered no sales- type leases and 6%
and 0% of revenues  reflect cash receipts from  installment  sales.  In general,
reserves 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  $1,760,954  during the  nine-month
period ended  February 28, 2005.  The principal use of cash was for the purchase
of short-term  certificates of deposit and treasury bills totaling $1,583,614 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 $177,340 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 $31,604 during the nine-month
period ended February 28, 2005,  reflecting  $130,666 received from the exercise
of stock  options  less  payments on our  outstanding  notes and loans  totaling
$99,062.

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

                                    Page 27
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

    ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS - CONTINUED



     The following table presents our expected cash requirements for contractual
obligations outstanding as of February 28, 2005.

<TABLE>
<CAPTION>

                                                                     Due as of       Due as of
                                                       Due as of    2/28/07 and     2/28/09 and          Due
                                      Total             2/28/06       2/29/08         2/28/10         Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>              <C>             <C>             <C>
Long-Term Debt                        $1,130,253        $145,164         $182,968        $143,622        $658,499
Operating Leases                          99,835          74,918           24,917              --              --
Litigation Settlement                    233,750         133,000          100,750              --              --
Employment Agreements                     78,125          78,125               --              --              --
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Total Contractual Cash                $1,541,963        $431,207         $308,635        $143,622        $658,499
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 28
<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 - CONTROLS AND PROCEDURES

     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, as of February 28, 2005, our disclosure  controls and procedures
are effective to provide reasonable assurances that such disclosure controls and
procedures  satisfy their  objectives  and that the  information  required to be
disclosed  by us in the  reports we file  under the  Exchange  Act is  recorded,
processed,  summarized and reported within the required time periods. There were
no changes  during the fiscal  quarter  ended  February 28, 2005 in our internal
controls  or in other  factors  that  could  have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.






                                    Page 29

<PAGE>

                      Vasomedical, Inc. and Subisidiaries


                          PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS:

        None.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:

        None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:

        None

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

        None

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 January 13, 2005 to report
     an event under Items 2.02 and 9.01.

     The Registrant  filed a Report on Form 8-K dated January 26, 2005 to report
     an event under Item 8.01.



                                    Page 30
<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:  April 14, 2005