UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                   FORM 10-Q


[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934 For the quarterly period ended November 30, 2003

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

Commission File Number: 0-18105

                               VASOMEDICAL, INC.
--------------------------------------------------------------------------------

             (Exact name of registrant as specified in its charter)

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

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

Registrant's Telephone Number                                     (516) 997-4600

Number of Shares Outstanding of Common Stock,
$.001 Par Value, at January 9, 2004                                   57,827,690


     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 [ ]
                                   ---     --
                                       1
<PAGE>


                       Vasomedical, Inc. and Subsidiaries



                                     INDEX



PART I - FINANCIAL INFORMATION

        Item 1 - Financial Statements (unaudited)                           Page
                                                                            ----
                Consolidated Condensed Balance Sheets as of
                        November 30, 2003 and May 31, 2003                     3

                Consolidated Condensed Statements of Earnings for the
                        Six and Three Months Ended November 30, 2003 and 2002  4

                Consolidated Condensed Statement of Changes in Stockholders'
                        Equity for the Period from June 1, 2003 to November
                        30, 2003                                               5

                Consolidated Condensed Statements of Cash Flows for the
                        Six Months Ended November 30, 2003 and 2002            6

                Notes to Consolidated Condensed Financial Statements           7

        Item 2 - Management's Discussion and Analysis of Financial Condition
                and Results of Operations                                     16

        Item 3  Qualitative and Quantitative Disclosures About Market Risk    27

        Item 4  Procedures and Controls                                       27

PART II - OTHER INFORMATION                                                   28

                                       2
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                November 30,           May 31,
                                                                                    2003                 2003
                                                                              -----------------    -----------------
                                 ASSETS                                         (unaudited)           (audited)
<S>                                                                              <C>                  <C>
CURRENT ASSETS
     Cash and cash equivalents                                                    $7,554,220           $5,222,847
     Accounts receivable, net of an allowance for doubtful accounts of
       $763,888 at November 30, 2003 and $768,629 at May 31, 2003                  4,514,363            7,377,118
     Inventories                                                                   3,062,260            3,439,567
     Deferred income taxes                                                                --              303,000
     Financing receivables, net                                                      149,387              264,090
     Other current assets                                                            494,723              268,231
                                                                              -----------------    -----------------
         Total current assets                                                     15,774,953           16,874,853

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,584,511 at
   November 30, 2003 and $ 2,338,366 at May 31, 2003                               2,686,638            3,233,158
FINANCING RECEIVABLES, net                                                                --              679,296
DEFERRED INCOME TAXES                                                             14,582,000           14,279,000
OTHER ASSETS                                                                         298,440              261,243
                                                                              -----------------    -----------------
                                                                                 $33,342,031          $35,327,550
                                                                              =================    =================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                        $3,218,925           $2,667,861
     Current maturities of long-term debt and notes payable                          112,658              108,462
     Sales tax payable                                                               342,913              461,704
     Deferred revenues                                                             1,334,983              789,118
     Accrued warranty and customer support expenses                                  358,000              575,000
     Accrued professional fees                                                       107,654              207,793
     Accrued commissions                                                             382,561              586,823
                                                                              -----------------    -----------------
         Total current liabilities                                                 5,857,694            5,396,761

LONG-TERM DEBT                                                                     1,121,179            1,177,804
ACCRUED WARRANTY COSTS                                                               143,000              213,000
DEFERRED REVENUES                                                                    949,183              920,433
OTHER LIABILITIES                                                                    300,250              300,250

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock, $.01 par value; 1,000,000 shares authorized; none
       issued and outstanding                                                             --                   --
     Common stock, $.001 par value; 110,000,000 shares authorized;
       57,827,690 and 57,822,023 shares at November 30, 2003 and May 31,
       2003, respectively, issued and outstanding                                     57,828               57,822
     Additional paid-in capital                                                   50,628,269           50,623,316
     Accumulated deficit                                                         (25,715,372)         (23,361,836)
                                                                              -----------------    -----------------
         Total stockholders' equity                                               24,970,725           27,319,302
                                                                              -----------------    -----------------
                                                                                 $33,342,031          $35,327,550
                                                                              =================    =================
</TABLE>
The accompanying notes are an integral part of these condensed statements.

                                       3
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

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

                                                         Six Months Ended                     Three Months Ended
                                                            November 30,                         November 30,
                                                    ------------------------------      ------------------------------
                                                        2003             2002               2003             2002
                                                    -------------    -------------      -------------    -------------
<S>                                                   <C>             <C>                 <C>              <C>
Revenues
   Equipment sales                                    $8,961,860      $10,414,340         $4,173,750       $6,209,831
   Equipment rentals and services                      1,367,801          769,098            729,379          433,437
                                                    -------------    -------------      -------------    -------------

                                                      10,329,661       11,183,438          4,903,129        6,644,268

Cost of sales and services                             3,631,923        3,963,889          1,693,249        2,004,537
                                                    -------------    -------------      -------------    -------------
   Gross Profit                                        6,697,738        7,219,549          3,209,880        4,639,731

Expenses
   Selling, general and administrative                 6,134,429        7,863,844          3,512,977        4,176,948
   Research and development                            1,953,375        2,517,626            997,830        1,326,640
   Provision for doubtful accounts                       985,511        3,260,708            796,330           11,834
   Interest and financing costs                           66,246           97,067             32,880           48,215
   Interest and other income, net                       (108,287)        (104,704)           (53,195)         (28,214)
                                                    -------------    -------------      -------------    -------------
                                                       9,031,274       13,634,541          5,286,822        5,535,423

                                                    -------------    -------------      -------------    -------------
LOSS BEFORE INCOME TAXES                              (2,333,536)      (6,414,992)        (2,076,942)        (895,692)
   Income tax (expense) benefit, net                     (20,000)       1,583,922            (10,000)         298,900
                                                    -------------    -------------      -------------    -------------
NET LOSS                                             ($2,353,536)     ($4,831,070)       ($2,086,942)       ($596,792)
                                                    =============    =============      =============    =============

Net loss per common share
     - basic                                              ($0.04)          ($0.08)            ($0.04)          ($0.01)
                                                    =============    =============      =============    =============
     - diluted                                            ($0.04)          ($0.08)            ($0.04)          ($0.01)
                                                    =============    =============      =============    =============

Weighted average common shares outstanding
     - basic                                          57,827,265       57,567,317         57,827,690       57,658,021
                                                    =============    =============      =============    =============
     - diluted                                        57,827,265       57,567,317         57,827,690       57,658,021
                                                    =============    =============      =============    =============
</TABLE>
The accompanying notes are an integral part of these condensed statements.

                                       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, 2003                57,822,023       $57,822       $50,623,316       ($23,361,836)      $27,319,302
Exercise of stock options                   5,667             6             4,953                                4,959
Net loss                                                                                  (2,353,536)       (2,353,536)
                                      ------------    ----------    --------------    ---------------    --------------
Balance at November 30, 2003           57,827,690       $57,828       $50,628,269       ($25,715,372)      $24,970,725
                                      ============    ==========    ==============    ===============    ==============
</TABLE>

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

                                       5

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                        Six months ended
                                                                                          November 30,
                                                                              --------------------------------------
                                                                                    2003                 2002
                                                                              -----------------    -----------------
<S>                                                                               <C>                 <C>
Cash flows from operating activities
     Net loss                                                                    ($2,353,536)         ($4,831,070)
                                                                              -----------------    -----------------
     Adjustments to reconcile net loss to net cash provided by operating
       activities
         Depreciation and amortization                                               415,003              589,998
         Provision for doubtful accounts, net of write-offs                          675,258            3,001,708

         Deferred income taxes                                                            --           (1,643,900)
         Stock options granted for services                                               --               25,125
         Changes in operating assets and liabilities
              Accounts receivable                                                  2,867,497            2,819,302
              Financing receivables, net                                             113,999              112,892
              Inventories                                                            645,361             (174,093)
              Other current assets                                                  (226,492)              67,793
              Other assets                                                           (53,372)             (41,589)
              Accounts payable, accrued expenses and other current
                liabilities                                                          456,737             (198,536)
              Other liabilities                                                      (41,250)             493,912
                                                                              -----------------    -----------------
                                                                                   4,852,741            5,052,612
                                                                              -----------------    -----------------
     Net cash provided by operating activities                                     2,499,205              221,542
                                                                              -----------------    -----------------

     Cash flows from investing activities
         Purchase of property and equipment                                         (120,362)            (217,716)
                                                                              -----------------    -----------------
     Net cash used in investing activities                                          (120,362)            (217,716)
                                                                              -----------------    -----------------

     Cash flows from financing activities
         Proceeds from notes                                                              --              126,967
         Payments on notes                                                           (52,429)             (29,904)
         Proceeds from exercise of options and warrants                                4,959              225,000
                                                                              -----------------    -----------------
     Net cash provided by (used in) financing activities                             (47,470)             322,063
                                                                              -----------------    -----------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                          2,331,373              325,889
     Cash and cash equivalents - beginning of period                               5,222,847            2,967,627
                                                                              -----------------    -----------------
     Cash and cash equivalents - end of period                                    $7,554,220           $3,293,516
                                                                              =================    =================

Non-cash investing and financing activities were as follows:
     Inventories transferred to (from) property and equipment,  attributable
       to operating leases - net                                                   ($268,054)            $312,405

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

                                       6
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2003

NOTE A - BASIS OF PRESENTATION

     The consolidated  condensed  balance sheet as of November 30, 2003, and the
related   consolidated   condensed  statements  of  earnings  for  the  six  and
three-month  periods ended November 30, 2003 and 2002,  changes in stockholders'
equity for the six-month  period ended November 30, 2003, and cash flows for the
six-month  periods  ended  November  30,  2003 and 2002,  have been  prepared by
Vasomedical, Inc. and Subsidiaries (the "Company") without audit. In the opinion
of management,  all adjustments  (which include only normal,  recurring  accrual
adjustments)  necessary to present fairly the financial  position and results of
operations  as of November 30,  2003,  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, 2003.  Results of operations for the periods ended November 30, 2003 and
2002  are not  necessarily  indicative  of the  operating  results  expected  or
reported for the full year.

NOTE B  IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

     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 the  Company's
financial position and results of operations.

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

                                       7
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2003

items  or  performance   conditions.   Applicable  revenue  criteria  should  be
considered  separately  for each  separate  unit of  accounting.  EITF  00-21 is
effective  for revenue  arrangements  entered into in fiscal  periods  beginning
after June 15,  2003.  Effective  September 1, 2003,  the Company  prospectively
adopted the  provisions of EITF 00-21.  Upon adoption of the  provisions of EITF
00-21,  the  Company  deferred  $42,500 of revenue  related to the fair value of
installation  and in- service  training and  $253,750 of revenue  related to the
warranty service for EECP system sales  recognized  during the second quarter of
fiscal 2004.

NOTE C  STOCK-BASED COMPENSATION

     The Company has four 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.

     During the six-month period ended November 30, 2003, the Board of Directors
granted  stock  options  under the 1999 Stock  Option Plan (the "1999  Plan") to
three  employees to purchase an aggregate of 500,000 shares of common stock,  at
an exercise price of $0.92 to $1.04 per share (which represented the fair market
value of the  underlying  common  stock at the time of the  respective  grants).
These  options vest over a three-year  period and expire ten years from the date
of grant.

     The following  table  illustrates the effect on net loss and loss per share
had the Company  applied the fair value  recognition  provisions of Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation," to stock-based employee compensation.
<TABLE>
<CAPTION>

                                                         Six Months Ended                    Three Months Ended
                                                            November 30,                         November 30,
                                                    ------------------------------      ------------------------------
                                                        2003             2002               2003             2002
                                                    -------------    -------------      -------------    -------------
<S>                                                  <C>              <C>                <C>                <C>
Net loss, as reported                                ($2,353,536)     ($4,831,070)       ($2,086,942)       ($596,792)
     Deduct: Total stock-based employee
       compensation expense determined under fair
       value-based method for all awards                (678,580)        (433,919)          (349,109)        (140,915)
                                                    -------------    -------------      -------------    -------------
Pro forma net loss                                   ($3,032,116)     ($5,264,989)       ($2,436,051)       ($737,707)
                                                    =============    =============      =============    =============

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

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

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

                                       8
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2003

     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.

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. Options and warrants to
purchase  6,685,086 and 5,765,000  shares of common stock were excluded from the
computation  of diluted  earnings per share for the three months ended  November
30, 2003 and 2002, respectively,  because the effect of their inclusion would be
antidilutive.

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings (loss) per common share:
<TABLE>
<CAPTION>
                                                          Six Months Ended                  Three Months Ended
                                                            November 30,                        November 30,
                                                    ------------------------------      ------------------------------
                                                        2003             2002               2003             2002
                                                    -------------    -------------      -------------    -------------
<S>                                                  <C>               <C>               <C>               <C>
Numerator:
   Basic and diluted net loss                        ($2,353,536)     ($4,831,070)       ($2,086,942)       ($596,792)
Denominator:
   Basic - weighted average common shares             57,827,265       57,567,317         57,827,690       57,658,021
     Stock options                                            --               --                 --               --
     Warrants                                                 --               --                 --               --
                                                    -------------    -------------      -------------    -------------
   Diluted - weighted average common shares           57,827,265       57,567,317         57,827,690       57,658,021
                                                    =============    =============      =============    =============
Basic and diluted loss per common share                  ($0.04)          ($0.08)            ($0.04)          ($0.01)
                                                    =============    =============      =============    =============
</TABLE>
NOTE E - INVENTORIES
<TABLE>
<CAPTION>
                                                                   November 30,             May 31,
                                                                       2003                  2003
                                                                 ----------------    ------------------
<S>                                                                  <C>                  <C>
Inventories consist of the following:
   Raw materials                                                     $1,095,056           $1,374,241
   Work in progress                                                     744,719              634,890
   Finished goods                                                     1,222,485            1,430,436
                                                                 ----------------    ------------------
                                                                     $3,062,260           $3,439,567
                                                                 ================    ==================
</TABLE>
     The fair value of the Company's  stock-based  awards was estimated assuming
no expected dividends and the following weighted-average assumptions for the six
months ended November 30:
<TABLE>
<CAPTION>
                                                                 2003
                                                                 ----
                 <S>                                             <C>
                 Expected life (years)                              5
                 Expected volatility                              84%
                 Risk-free interest rate                         3.6%
</TABLE>
NOTE F  - FINANCING RECEIVABLES FROM MAJOR CUSTOMERS

     In fiscal  2002,  the Company sold its  external  counterpulsation  systems
("EECP"  units) to two  major  customers  engaged  in  establishing  independent
networks  of EECP  centers  under  sales-type  leases  aggregating  revenues  of
$4,187,009 in fiscal 2002. No additional  equipment was sold to these  customers
during fiscal 2003 or 2004.

     In  late  August  2002,  the  largest  customer  became  delinquent  in its
scheduled  monthly payments under its financing  obligations to the Company.  In
September   2002,   the  Company  was  notified  by  this   customer  of  recent
circumstances  that  precluded  their  ability  to remain  current  under  their
financing  obligations  to  the  Company.  Accordingly,  management  decided  to
write-off,  in full,  all funds due from this  customer  as of August 31,  2002,
which aggregated approximately $3,000,000, including the present carrying amount

                                       9
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2003

of the underlying  equipment due to the uncertainty of the Company's  ability to
repossess the equipment.  During the second quarter of fiscal 2003, the customer
ceased  operations and the Company was able to  successfully  recover all of the
units that it had sold under  sales-type  leases to the  customer  back into its
finished  goods  inventory and recorded a bad debt  recovery of $479,000,  which
represented the present carrying amount of the equipment. The Company redeployed
certain  pieces  of the  equipment  while  other  pieces  were  returned  to the
Company's inventory for resale.

     The second customer  became  delinquent in its scheduled  monthly  payments
during the fourth quarter of fiscal 2003.  During the first and second  quarters
of fiscal 2004 the customer  attempted to remedy the situation and made payments
totaling $70,000. In December 2003, the customer ceased operations. Accordingly,
management  decided to write-off all funds due from this customer as of November
30,  2003,  less the  anticipated  recovery of  equipment  and the  reduction of
related  liabilities  for sales tax, which totals $149,387 at November 30, 2003.
The  write-off of $680,000 is included as a component of provision  for doubtful
accounts in the  accompanying  Statement of  Earnings.  The Company is currently
negotiating  with other  third  parties and  anticipates  that it may be able to
redeploy  certain pieces of the equipment while other pieces will be returned to
the Company's inventory for resale. Additionally,  the Company is evaluating its
ability to seek additional recovery from the customer.

     The Company is no longer offering sales-type leases.

NOTE G - LONG-TERM DEBT AND LINE OF CREDIT AGREEMENT
<TABLE>
<CAPTION>

                                                                  November 30,            May 31,
                                                                      2003                 2003
                                                                  ------------          -----------

<S>                                                              <C>                      <C>
Revolving credit agreement (a)                                             --                     --
Term loans (b) (c)                                                 $1,233,837             $1,286,266
Less current portion                                                 (112,658)              (108,462)
                                                                 ----------------    ------------------
                                                                   $1,121,179             $1,177,804
                                                                 ================    ==================
</TABLE>

     (a) In February 2002, the Company  renegotiated a secured  revolving credit
line with its  existing  bank.  The credit line  provided for  borrowings  up to
$15,000,000, based upon eligible accounts receivable, as defined therein, at the
Libor  Rate plus 150  basis  points  (3.4% at May 31,  2002).  At May 31,  2002,
approximately  $3,600,000  of  the  line  was  available  of  which  there  were
outstanding  borrowings of $1,000,000.  Under the terms of the agreement,  which
expires in February  2005,  the Company is  required to meet  certain  quarterly
covenants,  including leverage ratio, liquidity,  capital expenditures,  minimum
net income,  minimum  interest  coverage  and  minimum  tangible  net worth.  In
addition,  the line is secured by  substantially  all the tangible assets of the
Company.  In October  2002,  the credit line was further  amended to provide for
borrowings  up to  $5,000,000  ($2,000,000,  at any time that  consolidated  net
income  for the  immediately  preceding  three-month  period  is less  than $1),
primarily based upon eligible accounts  receivable,  as defined therein,  at the
Libor  Rate plus 200  basis  points or the  published  Prime  Rate plus 50 basis
points. In April 2003, the agreement was further amended to allow for borrowings
absent  compliance  with  the  financial  covenants  as long  as  such  eligible
borrowings  are  collateralized  by cash. In April 2003,  the Company repaid all
outstanding  borrowings  under the agreement  instead of maintaining  restricted
cash balances and there are currently no outstanding borrowings. At November 30,
2003, the Company did not meet the minimum interest coverage, tangible net worth
and minimum net  earnings  covenants  and future  compliance  with each of these
covenants in the near term is not certain.

     (b) The Company  purchased  its  headquarters  and  warehouse  facility and
secured  notes of  $641,667  and  $500,000,  respectively,  under  two  programs
sponsored by New York State.  These notes,  which bear  interest at 7.8% and 6%,
respectively,  are payable in monthly  installments  consisting of principal and
interest  payments  over  fifteen-  year terms,  expiring in September  2016 and
January 2017,  respectively,  and are secured by the  building.  At November 30,
2003, $1,049,030 was outstanding in connection with these notes.

     (c) In fiscal 2003, the Company  financed the cost of  implementation  of a
management   information   system  and  secured   several   notes,   aggregating
approximately  $238,000.  The notes,  which bear  interest at rates ranging from

                                       10
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2003

7.5% through 8.7%, are payable in monthly  installments  consisting of principal
and interest  payments over four-year  terms,  expiring at various times between
August and October  2006.  At November 30, 2003,  $184,807  was  outstanding  in
connection with these notes.


NOTE H  DEFERRED REVENUES

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

        The changes in the Company's deferred revenues are as follows:
<TABLE>
<CAPTION>
                                                                              Six months
                                                                                ended
                                                                             November 30,
                                                                      2003                 2002
                                                                      ----                 ----
<S>                                                                <C>                      <C>
Deferred Revenue at the beginning of the period                    $1,709,551               $991,204
   ADDITIONS
     Deferred extended service contracts                              945,938                774,425
     Deferred in-service training                                      97,500                     --
     Deferred warranty obligations                                    292,500                     --
   DELETIONS
     Deferred extended service contracts recognized as
       revenue                                                       (667,573)              (320,100)
     Deferred in-service training recognized as revenue               (55,000)                    --
     Deferred warranty obligations recognized as revenue
                                                                      (38,750)                    --
                                                                 ----------------    ------------------
Deferred revenue at end of period                                   2,284,166              1,445,529
Less current portion                                               (1,334,983)              (536,746)
                                                                 ----------------    ------------------
                                                                     $949,183               $908,783
                                                                 ================    ==================
</TABLE>

NOTE I  WARRANTY COSTS

     Equipment  sold is  generally  covered  by a  warranty  period of one year.
Effective  September 1, 2003, the Company  adopted the provisions of EITF 00-21,
"Accounting  for  Revenue   Arrangements   with  Multiple   Deliverables"  on  a
prospective basis. Under EITF 00-21, for certain arrangements,  a portion of the
overall system price attributable to the first year warranty service is deferred
and  recognized  as revenue  over the service  period.  As such,  the Company no
longer accrues 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 returned  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.  Warranty  reserves related to units sold
under sales-type  leases are recorded as executory costs,  which serve to reduce
the amount of financing receivables reported in the consolidated balance sheets.

     The changes in the Company's product warranty liability are as follows:

                                       11
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2003
<TABLE>
<CAPTION>
                                                                              Six months
                                                                                 ended
                                                                             November 30,
                                                                       2003                  2002
                                                                       ----                  ----
<S>                                                                  <C>                    <C>
Warranty liability at the beginning of the period                    $788,000               $991,000
   Expense for new warranties issued                                  164,000                336,000
   Warranty amortization                                             (451,000)              (458,000)
                                                                 ----------------    ------------------
Warranty liability at end of period                                  $501,000               $869,000
                                                                 ================    ==================
</TABLE>

NOTE J - INCOME TAXES

     During the  six-months  ended  November  30, 2003,  the Company  recorded a
provision  for state income  taxes of $20,000.  This is in contrast to an income
tax benefit of $1,583,922  reported  during the  six-months  ended  November 30,
2002.

     As of November  30, 2003,  the Company had recorded  deferred tax assets of
$14,582,000  (net  of  a  ($1,357,000)   valuation  allowance)  related  to  the
anticipated  recovery of tax loss carryforwards.  The amount of the deferred tax
assets  considered  realizable  could be reduced in the future if  estimates  of
future  taxable  income  during the  carryforward  period are reduced.  Ultimate
realization of the deferred tax assets is dependent upon the Company  generating
sufficient taxable income prior to the expiration of the tax loss carryforwards.
In  accordance  with the  Statement  of  Financial  Accounting  Standard No. 109
"Accounting for Income Taxes" ("SFAS 109"),  management  concluded at the end of
fiscal 2003,  based upon the weight of available  evidence at that time, that it
was more likely than not that all of the  deferred tax assets would be realized.
It was  management's  belief that  realization of the deferred tax asset was not
dependent  on material  improvements  over the  average of fiscal  2000  through
fiscal 2002 levels of pre-tax  income,  and that the Company is  positioned  for
long-term  growth despite the results achieved in fiscal 2003, much of which was
unexpected and non-recurring.  Management is currently  evaluating the impact of
the average 34% reduction in Medicare reimbursement rates for EECP treatments in
2004 that was  recently  announced  by The Centers  for  Medicare  and  Medicaid
Services  ("CMS"),  a Federal  agency  within the U.S.  Department of Health and
Human Services  responsible for the  administration of the Medicare and Medicaid
programs,  plus other factors currently  influencing market conditions including
the impact of increased competition,  declining sales prices and lower volume on
the  Company's  estimates  of  future  taxable  income.  Due to the  uncertainty
associated  with  estimates of future  taxable  income  during the  carryforward
period and the net value of the  recorded  deferred  tax asset  relative  to the
Company's  historical  taxable  income,  management  has  decided  to  provide a
valuation  allowance  for all  potential  deferred tax assets  generated  during
fiscal  2004.  The recorded  deferred  tax asset and  increase to the  valuation
allowance during the six-month period ended November 30, 2003 was $735,000.

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

     A.   A   large   and   increasing   worldwide   patient   population   with
          cardiovascular  disease  demanding new choices of therapy,  leading to
          increased  reimbursement  coverage  in the  United  States  and  other
          countries.  The estimated US patient population for angina patients is
          approximately  6.2 million and  approximately  5 million  patients for
          heart failure.
     B.   Approval of Medicare  coverage and other  third-party  payer  policies
          specific to the congestive  heart failure  indication.  The results of
          the  Company's  ongoing  PEECH  trial are likely a  pre-requisite  for
          significant  coverage  policies.  The  Company  anticipates  that  the
          results from the PEECH trial will be favorable (based upon a published
          feasibility study and other analyses). The results should be available
          for  submission  to  CMS in  late  2004  and a  coverage  decision  is
          anticipated  in mid 2005.  The  combination  of favorable  PEECH trial
          results  and  Medicare  reimbursement  would  likely be a  significant
          catalyst for significant Company growth.
     C.   Potential  extension  of  Medicare  coverage to include all classes of
          angina  (beyond the present  Class III/IV  indication  for  refractory
          angina,  for which the Company estimates the annual patient population
          in the US alone is 150,000).
     D.   A cardiology  community  with a mandate to offer  patients new disease
          management   solutions   providing  effective  clinical  and  economic
          outcomes.  The Company has cultivated  relationships  with many of the
          leading  institutions and cardiologists (as evidenced in its roster of
          PEECH study sites).

                                       12
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2003

     E.   The accumulation of EECP clinical  validation and removal of obstacles
          to  third-party  insurance   reimbursement.   Numerous  abstracts  and
          publications  are  presented  each year at major  scientific  meetings
          worldwide. The Company estimates that more than 300 third-party payers
          reimburse for EECP therapy, many on a routine basis.
     F.   Expanded base of future  FDA-cleared  indications to more  effectively
          penetrate  the  hospital  market,  particularly  with respect to heart
          failure (for which FDA  clearance  was  received in June 2002),  acute
          coronary  syndromes (also cleared by FDA),  diabetes  management,  and
          peripheral and cerebrovascular diseases.
     G.   Initiatives  planned to lower the cost of the Company's  EECP systems,
          thus  improving  margins or helping to preserve  margins  from further
          price erosion.
     H.   The  Company  has a large,  non-domestic  market  opportunity  that it
          intends   to   develop   through  a  network   of  local   independent
          distributors.  The Company  has  received  the CE Mark  (FDA-clearance
          equivalent) and is ISO 13485 certified.
     I.   Continuing to prove more definitively the mechanism of action by which
          EECP operates.  Smaller scale clinical studies are aimed at convincing
          those with lingering doubt about EECP's effectiveness that the therapy
          is,  indeed,  safe and  effective  and  serves to expand  the  market.
          Studies have been presented and published in this area.
     J.   Increased  hardware  utility  to  allow  for  the  use of  EECP  in an
          increasing  number of  patient  environments.  The EECP TS4  system is
          mobile,   quieter  and  can  be  used  more  easily  in  the  hospital
          environment.  Future  system  modifications  could allow for emergency
          room use.

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

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

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

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

     D.   Technological  obsolescence of EECP by newly developed process, device
          or therapy.  There is no assurance that such technology couldn't exist
          in the future to make EECP obsolete.  Several companies are evaluating
          devices  and  drugs  for  heart  failure  but  there is  presently  no
          consensus treatment for those patients.  Even in the event one or more
          drugs  are  developed,  it is  unlikely  that EECP  would be  replaced

                                       13
<PAGE>

          completely  as many ill patients  suffer a myriad of  conditions  with
          co-morbid disease states that would make them contraindicated for use.
          The Company  believes  that the  cardiovascular  disease  market is so
          large and the  disease  so  complex  that  numerous  technologies  can
          aggressively and successfully compete in the marketplace.

     E.   Competition,  through acquisition or development,  from companies with
          superior financial resources and marketing capabilities.  The barriers
          of entry for external  counterpulsation  therapy are relatively  small
          however,  there are  presently  only two  competitors  with a marketed
          external counterpulsation system. The Company believes that neither is
          well capitalized or positioned within the medical  community  (neither
          have done significant  clinical trials). The Company estimates that it
          has a 75% plus market share and does not foresee significant changes.

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

     G.   New or  changed  insurance  reimbursement  criteria  that  create,  or
          reinstate,  obstacles to physician acceptance of EECP. With respect to
          Medicare, CMS raised rates for EECP treatment by 35% in March 2003 and
          then  effective  January 2004 lowered EECP  treatment  rates by 32% to
          levels that are  significantly  below the  pre-March  2003 rates.  The
          Company  believes that the 2004 Medicare rates were dropped to a level
          that may adversely  effect the Company's  future prospects and will be
          evaluating  the impact of the lower rates on its future  prospects and
          its ability to fully realize the deferred tax asset.

     Ultimate  realization of all deferred tax assets is not assured, due to the
uncertainty  associated  with  estimates  of future  taxable  income  during the
carryforward  period.  Management is  evaluating  the amount of the deferred tax
asset in  accordance  with SFAS 109, to determine  that based upon the weight of
available evidence,  whether or not it is more likely than not that the deferred
tax asset will be realized.  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.

NOTE K - COMMITMENTS AND CONTINGENCIES

Litigation

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

Employment Agreements

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

     In October 2003, the Company entered into an employment  agreement with its
new Chief  Financial  Officer.  The agreement,  which expires in September 2005,
provides for certain settlement benefits, including a lump-sum payment of twelve

                                       14
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               November 30, 2003

months of base  salary in the event of a change of  control,  as  defined,  or a
termination payment in an amount equal to six months of base salary in the event
of termination without cause, as defined.

     The approximate  aggregate  minimum  compensation  obligation  under active
employment agreements at November 30, 2003 are summarized as follows:
<TABLE>
<CAPTION>

                           Fiscal Year            Amount
                           -----------            ------
<S>                          <C>                 <C>
                             2004                $529,167
                             2005                 140,479
                                                 --------
                                                 $669,646
                                                 ========
</TABLE>

Consulting Agreements

     In September 2003, the Company and its then Chief Financial Officer entered
into a termination and consulting  agreement.  As a result of this  termination,
the Company will pay to the former  employee a severance  payment of $140,000 in
equal monthly installments through September 2004. The Company recorded a charge
to operations  during the three-month  period ended November 30, 2003 to reflect
this obligation.  Further,  the consulting  agreement provides for the continued
vesting of stock options that had been previously granted to the employee, which
would have otherwise  vested during the term of the agreement.  The terms of the
original  option  grants  provided  for vesting  throughout  the period that the
former employee was employed by or provided services to the Company.  There were
no other modifications to any of his previously granted stock options.

                                       15
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION


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

General Overview

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

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

Critical Accounting Policies

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

Revenue Recognition

     The Company recognizes  revenue 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,
the Company  recognizes  revenue from the sale of its EECP systems in the period
in which the Company delivers the system to the customer.  Revenue from the sale
of its EECP  systems to  international  markets are  recognized  upon  shipment,
during the period in which the Company delivers the product to a common carrier,
as  well  as  supplies,  accessories  and  spare  parts  to  both  domestic  and

                                       16
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

international  customers. The sale of EECP systems are not subject to a right of
return, other than for normal warranty matters, and the Company is not obligated
for post-sale upgrades to these systems.

     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,  the Company
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.   The  Company   determined  that  its   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. The Company  determines  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, the Company uses 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, the Company  recognizes revenue for EECP system sales
when delivery and acceptance  occurs,  for installation and in- service training
when the  services  are  rendered,  and for  warranty  service  ratably over the
service period, which is generally one year.

     Upon adoption of the provisions of EITF 00-21, the Company deferred $42,500
of revenue related to the fair value of installation and in-service training and
$253,750  of revenue  related to the  warranty  service  for EECP  system  sales
delivered  during  the  second  quarter of fiscal  2004.  The amount  related to
warranty  service will be recognized as service revenue ratably over the related
service  period,  which is generally one year.  Previously,  in accordance  with
Staff   Accounting   Bulletin  No.  101,   "Revenue   Recognition  in  Financial
Statements,"  the Company accrued costs  associated  with these  arrangements as
warranty expense in the period the system was delivered and accepted.

     The Company also recognizes  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
related to extended  warranty  agreements that have been paid by customers prior
to the performance of extended  warranty services were $1,987,916 as of November
30,  2003.  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 condensed consolidated balance sheets.

     The Company has also  entered  into lease  agreements  for its EECP system,
generally  for  terms of one year or less,  that  are  classified  as  operating
leases.  Revenues from operating leases are generally recognized,  in accordance
with the terms of the lease agreements,  on a straight-line  basis over the life
of the respective  leases.  For certain  operating leases in which payment terms
are  determined on a  "fee-per-use"  basis,  revenues are recognized as incurred
(i.e.,  as actual  usage  occurs).  The cost of the EECP system  utilized  under
operating  leases is recorded as a component  of property and  equipment  and is
amortized to cost of sales over the estimated useful life of the equipment,  not
to exceed five years.  There are no significant  minimum  rental  commitments on
these operating leases at November 30, 2003.

     The Company follows SFAS No. 13,  "Accounting For Leases," for its sales of
EECP units  under  sales-type  leases it  presently  has with one  customer.  In
accordance  with  SFAS No.  13,  the  Company  records  the  sale and  financing
receivable at the amount of the minimum lease  payment,  less unearned  interest
income,  which is  computed  at the  interest  rate  implicit  in the lease,  an
allowance  for bad debt and  executory  costs,  which are  primarily  related to

                                       17
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

product  warranties on each unit sold.  Unearned interest income is amortized to
income in a manner that produces a constant rate of return on the  investment in
the  sales-type  lease.  The cost of the EECP unit  acquired by the  customer is
recorded as cost of sales in the same period that the sale is recorded.

Accounts Receivable/Financing Receivables

     The Company's  accounts  receivable trade are due from customers engaged in
the provision of medical  services.  Credit is extended based on evaluation of a
customer's  financial  condition  and,  generally,  collateral  is not required.
Accounts receivable are generally due 30 to 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.  The Company  also looks at the
credit  quality of its customer base as well as changes in its credit  policies.
The Company  continuously  monitors collections and payments from its customers.
While  credit  losses  have  historically  been  within   expectations  and  the
provisions  established,  the Company cannot  guarantee that it will continue to
experience the same credit loss rates that it has in the past.

     In  addition,  the  Company  periodically  reviews  and  assesses  the  net
realizability of its receivables  arising from sales-type leases. If this review
results in a lower estimate of the net realizable  value of the  receivable,  an
allowance for the  unrealized  amount is  established in the period in which the
estimate is changed.  In the first quarter of fiscal 2003 and the second quarter
of fiscal 2004,  management  decided to write-off  financing  receivables  under
sales-type leases of approximately $2,558,000 and $680,000,  respectively,  as a
result of significant  uncertainties with respect to these customers' ability to
meet their financial obligations.

Inventories

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

Warranty Costs

     Equipment  sold is  generally  covered  by a  warranty  period of one year.
Effective September 1, 2003, the Company 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, the Company
no longer accrues  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 returned  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.  Warranty  reserves related to units sold
under sales-type  leases are recorded as executory costs,  which serve to reduce
the amount of financing receivables reported in the consolidated balance sheets.
The Company records revenue on extended warranties on a straight-line basis over
the term of the  related  warranty  contracts.  Service  costs are  expensed  as
incurred.

     Deferred  revenues  related  to  extended  warranties  are  $1,987,916  and
$1,186,450 at November 30, 2003, and 2002, respectively.

                                       18
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

Income Taxes

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

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

Stock Compensation

     The Company has four stock-based employee compensation plans. . 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.

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

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

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

Recently Issued Accounting Standards

     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 the  Company's
financial position and results of operations.

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

                                       19
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

that  embody  obligations  for the  issuer  are  required  to be  classified  as
liabilities. This Statement shall be effective for financial instruments entered
into or modified  after May 31, 2003,  and  otherwise  shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
is  currently  evaluating  the  effect of the  adoption  of SFAS No.  150 on its
financial position and results of operations.

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

     In November  2002,  the  Emerging  Issues Task  Force,  ("EITF")  reached a
consensus opinion on, "Revenue Arrangements with Multiple Deliverables",  "(EITF
00-21)".  That  consensus  provides  that  revenue  arrangements  with  multiple
deliverables  should be divided into  separate  units of  accounting  if certain
criteria are met. The  consideration  of the arrangement  should be allocated to
the separate  units of  accounting  based on their  relative  fair values,  with
different  provisions  if the fair value is  contingent on delivery of specified
items  or  performance   conditions.   Applicable  revenue  criteria  should  be
considered  separately  for each  separate  unit of  accounting.  EITF  00-21 is
effective  for revenue  arrangements  entered into in fiscal  periods  beginning
after June 15,  2003.  Effective  September 1, 2003,  the Company  prospectively
adopted the  provisions of EITF 00-21.  Upon adoption of the  provisions of EITF
00-21,  the  Company  deferred  $42,500 of revenue  related to the fair value of
installation  and in- service  training and  $253,750 of revenue  related to the
warranty service for EECP system sales  recognized  during the second quarter of
fiscal 2004.

Results of Operations

Three Months Ended November 30, 2003 and 2002
---------------------------------------------

     Net  revenue  from  sales,  leases and  service of the  Company's  external
counterpulsation  systems  ("EECP"  systems) for the  three-month  periods ended
November 30, 2003 and 2002, were $4,903,129 and $6,644,268  which  represented a
decline of  $1,741,139  or 26%. The  Company's  loss before income taxes for the
three-month  periods  ended  November  30,  2003 and 2002 was  ($2,076,942)  and
($895,692),  respectively.  The Company  reported a net loss of ($2,086,942) and
($596,792)  for the  three-month  periods  ended  November  30,  2003 and  2002,
respectively.

     The decline in revenues is due  primarily to lower sales of EECP systems in
both the domestic and international  markets.  Domestic  equipment sales for the
three-month period ended November 30, 2003, were down approximately 24% compared
to the same  three-month  period in the prior  year.  The  decline  in  domestic
equipment  sales  reflects a 16% reduction in EECP system volume plus the impact
from lower  average  selling  prices of  approximately  11% when compared to the
average  selling  prices  for the same  three-month  period in the  prior  year.
Domestic  sales  of EECP  systems  were  negatively  impacted  by the  announced
reduction by CMS of  approximately  34% in Medicare  rates for the calendar year
2004 plus the impact of increased  competition,  and a longer selling cycle.  In
addition,  the Company has recently  rebuilt its sales force and filled a number
of US  sales  territory  vacancies.  The  Company  estimates  that  a new  sales
representative will need between six and nine months from date of hire to become
fully  effective and 15 of the Company's 24 sales  territories  have been filled
with representatives less than nine months.  International sales of EECP systems
declined  approximately  58% to $279,000 due to lower volume.  In addition,  the
Company adopted EITF 00-21 during the period. Upon adoption of the provisions of
EITF 00-21, the Company deferred $42,500 of revenue related to the fair value of
installation  and  in-service  training and  $253,750 of revenue  related to the

                                       20
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

warranty  service for EECP system sales  delivered  during the second quarter of
fiscal  2004.  This amount  related to warranty  service will be  recognized  as
service revenue ratably over the related service period,  which is generally one
year. Previously, in accordance with Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial  Statements," the Company accrued costs associated with
these  arrangements  as warranty  expense in the period the system was delivered
and accepted.

     The above was partially  offset by a 68% increase in revenue from equipment
rental and services  reflecting  primarily an increase of  approximately  90% 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  and  greater  marketing  focus  on the sale of
extended service contracts.

     The  gross  profit  decreased  to  $3,209,880  or 65% of  revenues  for the
three-month  period ended  November 30, 2003,  compared to  $4,639,731 or 70% of
revenues for the three-month  period ended November 30, 2002.  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,  which results in lower selling  prices.  Consequently,  the gross
profit  realized  during  the  current  period may not be  indicative  of future
margins.  The reduction in gross profit as a percentage of sales for the quarter
primarily  reflects the impact of lower average domestic selling prices for EECP
systems plus the lower volume resulting in increased overhead absorption rates.

     Selling,  general and administrative ("SG&A") expenses for the three-months
ended  November  30,  2003 and  2002  were  $3,512,977  or 72% of  revenues  and
$4,176,948  or 63% of revenues,  respectively.  The decrease of SG&A in absolute
amount  resulted  primarily  from  lower  selling  and  marketing   expenditures
primarily for international travel, outside services,  commissions,  promotional
spending for  advertising  and  printing  partially  offset by higher  personnel
expenses during the  three-month  period ended November 30, 2003, as compared to
the same  period for the prior year.  Administrative  expenses  reflected  lower
expenses for consulting  services and legal fees  partially  offset by increased
fees for accounting services.

     Research and  development  ("R&D")  expenses of $997,830 or 20% of revenues
for the three months ended November 30, 2003, decreased by $328,810 or 25%, from
the prior  three  months  ended  November  30,  2002,  of  $1,326,640  or 20% of
revenues.  The decrease is due  primarily to reduced  expenditures  for clinical
consulting services, the completion of several smaller clinical trials and lower
outside  services  related to new product  development.  Expenses related to the
prospective  evaluation of EECP in congestive heart failure,  ("PEECH") clinical
trial  increased  for the  three  months  ended  November  30,  2003,  partially
offsetting the above. R&D expenses are primarily  impacted by the PEECH clinical
trial  in  heart  failure  and  other   clinical   initiatives   (including  the
International  EECP Patient  Registry),  as well as continued product design and
development  costs.  The Company  expects to continue its investments in product
development  and clinical  trials in fiscal 2004 and beyond to further  validate
and expand the clinical  applications  of EECP,  including,  but not limited to,
heart failure and acute coronary  syndromes.  As of December 31, 2003, the PEECH
trial was 95% enrolled.

     During the three-month  period ended November 30, 2003, the Company charged
$796,830 to its  provision for doubtful  accounts as compared to $11,834  during
the three-month period ended November 30, 2002. In fiscal 2002, the Company sold
its  EECP  systems  to a major  customer  engaged  in  establishing  independent
networks  of EECP  centers  under a  sales-type  lease  aggregating  revenues of
$1,271,888. No additional equipment was sold to this customer during fiscal 2003
or 2004.  This customer  became  delinquent in its  scheduled  monthly  payments
during the fourth quarter of fiscal 2003.  During the first and second  quarters
of fiscal 2004 the customer  attempted to remedy the situation and made payments
to  the  Company  totaling  $70,000.  In  December  2003,  the  customer  ceased
operations.  Accordingly,  management  decided to record an additional  $680,000
provision to the allowance for doubtful accounts, which represents all funds due
from this  customer as of November 30, 2003,  less the  anticipated  recovery of
equipment  and  the  reduction  of  related   liabilities   for  sales  tax  and
commissions.  The Company is currently  negotiating with other third parties and
anticipates  that it may be able to redeployed  certain  pieces of the equipment
while  other  pieces will be returned  to the  Company's  inventory  for resale.
Additionally,  the Company is evaluating its ability to seek additional recovery
from the  customer.  In fiscal 2003 the Company  recorded a bad debt recovery of
$470,408  related to the successful  recovery of equipment that it had sold to a
different  customer under a sales-type lease that was written off in full during
the first quarter of fiscal 2003.  This recovery  partially  offset a charge for
$482,242  primarily  related to  specific  reserves  that were  established  for
international accounts for which extended credit terms were offered.

                                       21
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

     Interest   expense  and  financing   costs  decreased  to  $32,880  in  the
three-month  period ended November 30, 2003, from $48,215 for the same period in
the prior  year due to  repayment  of the  Company's  revolving  secured  credit
facility in May 2003.  Interest  expense  reflects  interest on loans secured to
refinance the November 2000 purchase of the Company's 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 for the  three-month  period ended  November 30,
2003 and 2002, were $53,195 and $28,214,  respectively. The increase in interest
income from the prior  periods is the direct  result of the higher  average cash
balances  invested during the quarter compared to the prior period.  The absence
of interest  income related to certain  equipment sold under  sales-type  leases
reported in fiscal 2002, as well as declining interest rates this year over last
year earned on the average cash balances partially offset the above.

     During the  three-months  ended November 30, 2003,  the Company  recorded a
provision  for state income  taxes of $10,000.  This is in contrast to an income
tax benefit of $298,900  reported  during the  three-months  ended  November 30,
2002. As of November 30, 2003,  the Company had recorded  deferred tax assets of
$14,582,000 net of a $1,357,000  valuation  allowance related to the anticipated
recovery  of tax loss  carryforwards.  The  amount of the  deferred  tax  assets
considered  realizable  could be reduced in the  future if  estimates  of future
taxable income during the carryforward period are reduced.  Ultimate realization
of the deferred tax assets is dependent upon the Company  generating  sufficient
taxable  income  prior  to the  expiration  of the tax  loss  carryforwards.  In
accordance  with  the  Statement  of  Financial   Accounting  Standard  No.  109
"Accounting for Income Taxes" ("SFAS 109"),  management  concluded at the end of
fiscal 2003,  based upon the weight of available  evidence at that time, that it
was more likely than not that all of the  deferred tax assets would be realized.
It was  management's  belief that  realization of the deferred tax asset was not
dependent  on material  improvements  over the  average of fiscal  2000  through
fiscal 2002 levels of pre-tax  income,  and that the Company is  positioned  for
long-term  growth despite the results achieved in fiscal 2003, much of which was
unexpected and non-recurring.  Management is currently  evaluating the impact of
the average 34% reduction in Medicare reimbursement rates for EECP treatments in
2004 that was recently announced by CMS plus other factors currently influencing
market conditions including the impact of increased competition, declining sales
prices and lower volume on the Company's estimates of future taxable income. Due
to the uncertainty associated with estimates of future taxable income during the
carryforward  period  and the net  value  of the  recorded  deferred  tax  asset
relative to the Company's  historical taxable income,  management has decided to
provide a valuation  allowance for all potential  deferred tax assets  generated
during  fiscal  2004.  The  recorded  deferred  tax  asset and  increase  to the
valuation allowance during the second quarter for fiscal 2004 was $460,000.

Six Months Ended November 30, 2003 and 2002
-------------------------------------------

     The  Company  generated  revenues  from the sale,  lease and service of its
EECP" systems of $10,329,661  and  $11,183,438  for the six-month  periods ended
November 30, 2003 and 2002,  respectively,  reflecting a decrease of $853,777 or
8%. The Company's loss before income taxes was ($2,333,536) and ($6,414,992) for
the  six-month  periods  ended  November  30, 2003 and 2002,  respectively.  The
Company  reported a net loss of ($2,353,536)  and ($4,831,070) for the six-month
periods ended November 30, 2003 and 2002, respectively.

     The decline in  revenues is due to lower sales of EECP  systems in both the
domestic and international  markets.  Domestic equipment sales for the six-month
period ended November 30, 2003, were down  approximately 8% compared to the same
six-month  period in the prior year. The decline in domestic  equipment sales is
primarily  due to a  reduction  in the average  sales price for EECP  systems of
approximately  13%  when  compared  to the  average  sales  price  for the  same
six-month  period last year.  EECP system  volume  increased  over the period by
approximately  3%  when  compared  to  the  same  period  for  the  prior  year.
International  shipments of EECP systems declined  approximately 50% to $390,000
due to a higher sales rate in the previous  year upon receipt of the CE Mark. In
addition, the Company adopted EITF 00-21 during the period. Upon adoption of the
provisions of EITF 00-21, the Company deferred $42,500 of revenue related to the
fair value of  installation  and  in-service  training  and  $253,750 of revenue
related to the  warranty  service for EECP  system  sales  delivered  during the
second quarter of fiscal 2004.  The impact of lower prices  resulting from price
compaction  from  competitive  products  continues to have a negative  impact on
revenue when  compared  with prior  periods.  Management  believes that the EECP
systems  currently sell at a significant  price premium to competitive  products


                                       22
<PAGE>

reflecting  the clinical  efficacy  and superior  quality of the system plus the
many value added services offered by the Company. The above was partially offset
by a 78%  increase in revenue  from  equipment  rental and  services  reflecting
primarily an increase of  approximately  101% 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 and greater marketing focus on the sale of extended service contracts.

     The  gross  profit  declined  to  $6,697,738  or 65% of  revenues  for  the
six-month  period  ended  November 30, 2003,  compared to  $7,219,549  or 65% of
revenues  for the  six-month  period ended  November 30, 2002.  The gross profit
margin as a percentage  of revenue for the six-month  period ended  November 30,
2003,  remained  unchanged  compared to the same  six-month  period of the prior
fiscal year despite the lower revenue due  primarily to planned cost  reductions
in manufacturing overhead reflecting decreased personnel cost and lower expenses
for service travel and spare parts, which offset the impact of lower unit volume
and reduced average selling prices.

     Selling,  general and  administrative  expenses  for the  six-months  ended
November 30, 2003 and 2002, were $6,134,429 or 59% of revenues and $7,863,844 or
70% of revenues,  respectively. The decrease of SG&A in both absolute amount and
as a percentage of sales  resulted  primarily from a one-time  $600,000  accrual
arising  from  the  settlement  of  litigation  plus  a  severance  charges  for
approximately $300,000 in the prior year, as well as lower selling and marketing
expenditures   primarily  for  outside   services,   promotional   spending  for
advertising  and printing  plus lower travel costs during the  six-month  period
ended  November 30, 2003 as compared to the same period for the prior year.  The
above decreases were partially offset by higher administrative  expenses,  which
reflected increased personnel and insurance expenses.

     Research and development  ("R&D") expenses of $1,953,375 or 19% of revenues
for the six-month period ended November 30, 2003, decreased by $564,251, or 22%,
from the prior six-month period ended November 30, 2002, of $2,517,626 or 23% of
revenues.  The decrease is due  primarily to reduced  expenditures  for clinical
consulting services related several smaller clinical studies that were completed
plus lower product development costs.

     During the six-month  period ended November 30, 2003,  the Company  charged
$985,511 to its provision for doubtful accounts as compared to $3,260,708 during
the  six-month  period ended  November 30, 2002.  In fiscal 2004,  these charges
reflect management  decision to record a $680,000 provision to the allowance for
doubtful  accounts,  which  represents all funds due from a major customer as of
November 30,  2003,  as detailed  above under  management's  discussion  for the
three-month  period ended November 30, 2003 plus  additional  provisions for all
other  accounts  totaling  $305,511.  In fiscal 2003,  these  charges  primarily
resulted  from a  approximately  $2.5 million for the capital lease and $500,000
for the notes receivable write-off of receivables, with respect to another major
customer,  as well as specific reserves against certain  international  accounts
for which extended credit terms were offered.

     Interest  expense and financing costs decreased to $66,246 in the six-month
period ended  November  30, 2003,  from $97,067 for the same period in the prior
year due to repayment of the Company's  revolving secured credit facility in May
2003.  Interest income and other income for the six-month  period ended November
30, 2003 and 2002, was $108,287 and $104,704,  respectively.  The small increase
reflects an increase in the average  cash  balances  invested  during the period
which were partially offset by the absence of interest income related to certain
equipment sold under sales-type lease reported in fiscal 2003.

     During the six-month period ended November 30, 2003, the Company recorded a
provision  for state income  taxes of $20,000.  This is in contrast to an income
tax benefit of $1,583,922  reported  during the six-month  period ended November
30, 2002. As of November 30, 2003, the Company had recorded  deferred tax assets
of  $14,582,000  net  of  a  $1,357,000   valuation  allowance  related  to  the
anticipated  recovery of tax loss carryforwards.  The amount of the deferred tax
assets  considered  realizable  could be reduced in the future if  estimates  of
future  taxable  income  during the  carryforward  period are reduced.  Ultimate
realization of the deferred tax assets is dependent upon the Company  generating
sufficient taxable income prior to the expiration of the tax loss carryforwards.
In  accordance  with the  Statement  of  Financial  Accounting  Standard No. 109
"Accounting for Income Taxes" ("SFAS 109"),  management  concluded at the end of
fiscal 2003,  based upon the weight of available  evidence at that time, that it
was more likely than not that all of the  deferred tax assets would be realized.
It was  management's  belief that  realization of the deferred tax asset was not
dependent  on material  improvements  over the  average of fiscal  2000  through
fiscal 2002 levels of pre-tax  income,  and that the Company is  positioned  for
long-term  growth despite the results achieved in fiscal 2003, much of which was
unexpected and non-recurring.  Management is currently  evaluating the impact of
the average 34% reduction in Medicare reimbursement rates for EECP treatments in
2004 that was recently announced by CMS plus other factors currently influencing
market conditions including the impact of increased competition, declining sales


                                       23
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

prices and lower volume on the Company's estimates of future taxable income. Due
to the uncertainty associated with estimates of future taxable income during the
carryforward  period  and the net  value  of the  recorded  deferred  tax  asset
relative to the Company's  historical taxable income,  management has decided to
provide a valuation  allowance for all potential  deferred tax assets  generated
during  fiscal  2004.  The  recorded  deferred  tax  asset and  increase  to the
valuation allowance during first six months of fiscal 2004 was $735,000.

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

     A.   A   large   and   increasing   worldwide   patient   population   with
          cardiovascular  disease  demanding new choices of therapy,  leading to
          increased  reimbursement  coverage  in the  United  States  and  other
          countries.  The estimated US patient population for angina patients is
          approximately  6.2 million and  approximately  5 million  patients for
          heart failure.

     B.   Approval of Medicare  coverage and other  third-party  payer  policies
          specific to the congestive  heart failure  indication.  The results of
          the  Company's  ongoing  PEECH  trial are likely a  pre-requisite  for
          significant  coverage  policies.  The  Company  anticipates  that  the
          results from the PEECH trial will be favorable (based upon a published
          feasibility study and other analyses). The results should be available
          for  submission  to  CMS in  late  2004  and a  coverage  decision  is
          anticipated  in mid 2005.  The  combination  of favorable  PEECH trial
          results  and  Medicare  reimbursement  would  likely be a  significant
          catalyst for significant Company growth.

     C.   Potential  extension  of  Medicare  coverage to include all classes of
          angina  (beyond the present  Class III/IV  indication  for  refractory
          angina,  for which the Company estimates the annual patient population
          in the US alone is 150,000.

     D.   A cardiology  community  with a mandate to offer  patients new disease
          management   solutions   providing  effective  clinical  and  economic
          outcomes.  The Company has cultivated  relationships  with many of the
          leading  institutions and cardiologists (as evidenced in its roster of
          PEECH study sites).

     E.   The accumulation of EECP clinical  validation and removal of obstacles
          to  third-party  insurance   reimbursement.   Numerous  abstracts  and
          publications  are  presented  each year at major  scientific  meetings
          worldwide. The Company estimates that more than 300 third-party payers
          reimburse for EECP therapy, many on a routine basis.

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

     G.   Initiatives  planned to lower the cost of the Company's  EECP systems,
          thus  improving  margins or helping to preserve  margins  from further
          price erosion.

     H.   The  Company  has a large,  non-domestic  market  opportunity  that it
          intends   to   develop   through  a  network   of  local   independent
          distributors.  The Company  has  received  the CE Mark  (FDA-clearance
          equivalent) and is ISO 13485 certified.

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

     J.   Increased  hardware  utility  to  allow  for  the  use of  EECP  in an
          increasing  number of  patient  environments.  The EECP TS4  system is
          mobile,   quieter  and  can  be  used  more  easily  in  the  hospital
          environment.  Future  system  modifications  could allow for emergency
          room use.

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

     A.   Dependence  on  outcome  of  PEECH  trial  and  related  reimbursement
          coverage  policies.  Presently,  the  Company  is engaged in the PEECH
          trial, a pivotal study to evaluate the  effectiveness  of EECP therapy
          for congestive heart failure  patients.  The Company  anticipates that
          the results of this study will be the  catalyst for Medicare and other
          third-party reimbursement coverage policies specific to heart failure.
          Although the Company has received clearance from the FDA to market for
                                       24
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

          heart failure, the medical community,  market acceptance and insurance
          coverage  policies  are highly  influenced  by  scientifically  proven
          technologies.   The  Company  had  designed  its  PEECH   protocol  in
          cooperation  with the FDA and had reached a formal  agreement with the
          FDA that the key parameters of its investigational plan for this trial
          were appropriate to determine the  effectiveness of EECP as an adjunct
          therapy for heart failure.  The Company  believes that its PEECH trial
          is robust and will provide  favorable  results  that should  provide a
          reasonable basis for market acceptance and insurance reimbursement.

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

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

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

     E.   Competition,  through acquisition or development,  from companies with
          superior financial resources and marketing capabilities.  The barriers
          of entry for external  counterpulsation  therapy are relatively  small
          however,  there are  presently  only two  competitors  with a marketed
          external counterpulsation system. The Company believes that neither is
          well capitalized or positioned within the medical  community  (neither
          have done significant  clinical trials). The Company estimates that it
          has a 75% plus market share and does not foresee  significant  changes
          in the immediate future.

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

     G.   New or  changed  insurance  reimbursement  criteria  that  create,  or
          reinstate,  obstacles to physician acceptance of EECP. With respect to
          Medicare, CMS raised rates for EECP treatment by 35% in March 2003 and
          then  effective  January 2004 lowered EECP  treatment  rates by 32% to
          levels that are  significantly  below the  pre-March  2003 rates.  The
          Company  believes that the 2004 Medicare rates were dropped to a level
          that may adversely  effect the Company's  future prospects and will be
          evaluating  the impact of the lower rates on its future  prospects and
          its ability to fully realize the deferred tax asset.

     Ultimate  realization of all deferred tax assets is not assured, due to the
uncertainty  associate  with  estimates  of future  taxable  income  during  the
carryforward  period.  Management is  evaluating  the amount of the deferred tax
asset,  in accordance  with SFAS 109, to determine that based upon the weight of
available evidence,  whether or not it is more likely than not that the deferred
tax asset will be realized.  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.

                                       25
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

Liquidity and Capital Resources

     The Company has financed its  operations in fiscal 2004 and 2003  primarily
from working  capital and operating  results.  At November 30, 2003, the Company
had a cash balance of $7,554,220 and working capital of $9,917,259 compared to a
cash balance of $5,222,847  and working  capital of $11,478,092 at May 31, 2003.
The  Company's  cash  balances  increased  $2,331,373  in the  six-month  period
compared to May 31, 2003 primarily due to $2,499,205  cash provided by operating
activities.

     The  increase  in  cash  provided  by the  Company's  operating  activities
resulted  primarily  from lower  accounts  receivable,  which  provided  cash of
$2,867,497  for the  six-month  period ended  November  30,  2003.  Net accounts
receivable  were 92% of  quarterly  revenues  for the  three-month  period ended
November 30, 2003, compared to 113% at the end of the six-month period ended May
31, 2003, and accounts  receivable turnover improved to 3.5 times as of November
30, 2003 compared to 3.2 times as of May 31, 2003. The Company's  management has
tightened its sales credit policy,  reduced  extended payment terms and provides
routine oversight with respect to its accounts  receivable credit and collection
efforts.

     The Company's  standard  payment terms on its equipment sales are generally
net 30 to 90 days from shipment and do not contain "right of return" provisions.
The  Company  has  historically  offered a variety of  extended  payment  terms,
including  sales-type  leases, in certain situations and to certain customers in
order to expand the market for its EECP products in the US and  internationally.
Such  extended  payment  terms  were  offered in lieu of price  concessions,  in
competitive  situations,  when opening new markets or geographies and for repeat
customers. Extended payment terms cover a variety of negotiated terms, including
payment  in full - net 120,  net 180  days or some  fixed  or  variable  monthly
payment amount for a six to twelve month period  followed by a balloon  payment,
if  applicable.  During the six-month  periods ended November 30, 2003 and 2002,
less than 1% and 3% of  revenues,  respectively,  were  generated  from sales in
which  payment  terms were  greater than 90 days and no  sales-type  leases were
offered by the Company during either period. At November 30, 2003, approximately
$270,867 or 35% of the allowance  for doubtful  accounts was related to specific
accounts  that had been  offered  extended  credit terms and $688,653 or 13%, of
gross accounts receivable  represent accounts offered extended payment terms. 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 the  Company is creating a new
market for EECP and recognizes the challenges that some customers may encounter,
it has  opted,  at  times,  on a  customer-by-customer  basis,  to  recover  its
equipment  instead of pursuing  other legal  remedies  against these  customers,
which necessitated the recording of a reserve or a write-off by the Company.

     Additionally,  the lower revenue for the three-month  period ended November
30, 2003,  compared to the three-  month period ended May 31, 2003,  resulted in
reduced  accounts  receivable  and  financing   receivables  of  $2,867,497  and
$113,999,  respectively at the end of the period.  Other key factors causing the
increase  in  cash  provided  by the  Company's  operating  activities  included
inventories,   which  decreased  by  $645,361   reflecting  efforts  to  improve
procurement  of its raw materials and  management  of finished  goods  inventory
levels,  an increase in accounts  payable,  accrued  expenses and other  current
liabilities  of $456,737 and non-cash  adjustments  to reconcile the net loss of
$2,353,536  to net cash  provided by operating  activities  totaling  $1,090,261
primarily for  depreciation,  amortization and allowance for doubtful  accounts.
Partially  offsetting  the above was an increase  of  $226,492 in other  current
assets reflecting the prepayment of the Company's annual insurance  policies and
a  decrease  in other  assets and other  liabilities  of  $53,372  and  $41,250,
respectively.

     Investing  activities used net cash of $120,362 during the six-month period
ended November 30, 2003. The principal use of cash was for the implementation of
the Company's new enterprise resource planning software.

     Financing  activities used net cash of $47,470 during the six-month  period
ended November 30, 2003, reflecting principal payments on loans partially offset
by proceeds from the exercise of stock options.

     In fiscal 2002,  the Company  refinanced  its long-term  obligations on the
purchase of its  headquarters  and  warehouse  facility.  In October  2002,  the
Company  amended its existing  credit  facility to provide for  borrowings up to
$5,000,000  ($2,000,000,  at any  time  that  consolidated  net  income  for the
immediately  preceding  six-month period is less than $1),  primarily based upon
eligible  accounts  receivable,  as defined therein,  at the Libor Rate plus 200
basis points or the published  Prime Rate plus 50 basis points.  Under the terms
of the  agreement,  which expires in February  2005,  the Company is required to
meet certain quarterly covenants,  including leverage ratio, liquidity,  capital
expenditures, minimum net income, minimum interest coverage and minimum tangible
net worth.  Although the Company was not in  compliance  with certain  financial
covenants  during each of its first  three  fiscal  quarters  of 2003,  the bank
                                       26
<PAGE>
issued  waivers to the Company for those  periods.  In April 2003, the agreement
was further amended to allow for borrowings absent compliance with the financial
covenants as long as cash  collateralizes  such  eligible  borrowings.  In April
2003, the Company repaid all outstanding  borrowings under the agreement instead
of maintaining  restricted cash balances.  At November 30, 2003, the Company did
not meet the  minimum  interest  coverage,  tangible  net worth and  minimum net
earnings  covenants and future  compliance  with each of these  covenants in the
near term is not certain.  Management  believes,  based upon its cash balance at
November  30,  2003  and its  internal  forecasts,  that any  limitation  on the
Company's  ability to borrow against this credit facility  through the remainder
of fiscal  2004 and the first  quarter of fiscal  2005 would not have an adverse
effect on the Company's operations.

     Management believes that its working capital position at November 30, 2003,
the ongoing  commercialization of the EECP system, and the effect of initiatives
undertaken to improve our cash position by managing operating expense levels and
by  strengthening  our sales and credit  policies  will make it possible for the
Company to support its operating  expenses and to implement  its business  plans
for at least the next twelve months.

     The following table presents the Company's  expected cash  requirements for
contractual obligations outstanding as of November 30, 2003:
<TABLE>
<CAPTION>
                                                                         Due as of       Due as of
                                                         Due as of      11/30/05 and    11/30/07 and         Due
                                         Total           11/30/04         11/30/06        11/30/08       Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                    <C>                <C>             <C>             <C>              <C>
Long-Term Debt                         $1,233,837         $112,658        $238,187        $131,619         $751,373
Operating Leases                          113,500           46,400          67,100              --               --
Litigation Settlement                     400,000          100,000         300,000              --               --
Severance obligations                     105,000          105,000              --              --               --
Employment Agreements                     669,646          529,167         140,479              --               --
--------------------------------------------------------------------------------------------------------------------
Total Contractual Cash                 $2,521,983         $893,225        $745,766        $131,619         $751,373
Obligations
====================================================================================================================
</TABLE>

Effects of Inflation

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


ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4 - PROCEDURES AND CONTROLS

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


                                       27
<PAGE>
                       Vasomedical, Inc. and Subsidiaries


                          PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS:

        Previously reported.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS:

        None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:

        None

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

     A.   The registrant  held its Annual Meeting of Stockholders on October 30,
          2003.
     B.   Not applicable
     C.   Five directors were elected. Abraham E. Cohen, John C. K. Hui, Photios
          T. Paulson,  and Forrest R.  Whittaker were elected to serve until the
          2006 Annual Meeting of Stockholders or until their successors are duly
          elected  and  qualified  and Mr.  Gregory D. Cash was elected to serve
          until the 2004 Annual Meeting of  Stockholders  or until his successor
          is duly  elected and  qualified.  The minimum  number of votes cast in
          favor of their elections was  50,719,799.

               The  other  matter  voted  upon  was  the   ratification  of  the
          appointment  of  Grant  Thornton,  LLP  as the  Company's  independent
          certified  public  accountants for the fiscal year ended May 31, 2003.
          The votes cast were as follows Votes for:  51,650,527;  Votes Against:
          323,533; Votes Abstained: 124,863.

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

None


                                       28
<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/ Gregory D. Cash
                                      ------------------------------------
                                      Gregory D. Cash
                                      Chief Executive Officer and Director
                                      (Principal Executive Officer)

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

Date:  January 14, 2004