UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                   FORM 10-Q


[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934 For the quarterly period ended February 29, 2004

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

Commission File Number: 0-18105

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

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

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

Registrant's Telephone Number                                     (516) 997-4600

Number of Shares Outstanding of Common Stock,
$.001 Par Value, at April 8, 2004                                     58,407,690


     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 [ ]
                                      ---         --

                                     Page 1
<PAGE>
                       Vasomedical, Inc. and Subsidiaries



                                     INDEX



PART I - FINANCIAL INFORMATION

   Item 1 - Financial Statements (unaudited)                                Page
                                                                            ----
            Consolidated Condensed Balance Sheets as of
                   February 29, 2004 and May 31, 2003                          3

            Consolidated Condensed Statements of Earnings for the
                   Nine and Three Months Ended February 29, 2004 and
                   February 28, 2003                                           4

            Consolidated Condensed Statement of Changes in Stockholders'
                   Equity for the Period from June 1, 2003 to
                   February 29, 2004                                           5

            Consolidated Condensed Statements of Cash Flows for the
                   Nine Months Ended February 29, 2004 and
                   February 28, 2003                                           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         29

   Item 4  Procedures and Controls                                            29

PART II - OTHER INFORMATION                                                   30

                                     Page 2
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                February 29,           May 31,
                                                                                    2004                 2003
                                                                              -----------------    -----------------
<S>                                                                               <C>                  <C>
                                 ASSETS                                         (unaudited)           (audited)
CURRENT ASSETS
     Cash and cash equivalents                                                    $7,743,604           $5,222,847
     Accounts receivable, net of an allowance for doubtful accounts of
       $758,026 at February 29, 2004 and $768,629 at May 31, 2003                  4,781,025            7,377,118
     Inventories                                                                   2,665,314            3,439,567
     Deferred income taxes                                                                --              303,000
     Financing receivables, net                                                           --              264,090
     Other current assets                                                            471,407              268,231
                                                                              -----------------    -----------------
         Total current assets                                                     15,661,350           16,874,853

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,513,348 at
   February 29, 2004 and $ 2,338,366 at May 31, 2003                               2,471,085            3,233,158
FINANCING RECEIVABLES, net                                                                --              679,296
DEFERRED INCOME TAXES                                                             14,582,000           14,279,000
OTHER ASSETS                                                                         289,360              261,243
                                                                              -----------------    -----------------
                                                                                 $33,003,795          $35,327,550
                                                                              =================    =================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                        $2,791,755           $2,667,861
     Current maturities of long-term debt and notes payable                          133,617              108,462
     Sales tax payable                                                               330,943              461,704
     Deferred revenues                                                             1,601,037              789,118
     Accrued warranty and customer support expenses                                  241,000              575,000
     Accrued professional fees                                                        90,926              207,793
     Accrued commissions                                                             347,026              586,823
                                                                              -----------------    -----------------
         Total current liabilities                                                 5,536,304            5,396,761

LONG-TERM DEBT                                                                     1,127,345            1,177,804
ACCRUED WARRANTY COSTS                                                               109,000              213,000
DEFERRED REVENUES                                                                    958,587              920,433
OTHER LIABILITIES                                                                    233,750              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;
       58,157,690 and 57,822,023 shares at February 29, 2004 and May 31,
       2003, respectively, issued and outstanding                                     58,158               57,822
     Additional paid-in capital                                                   51,006,064           50,623,316
     Accumulated deficit                                                         (26,025,413)         (23,361,836)
                                                                              -----------------    -----------------
         Total stockholders' equity                                               25,038,809           27,319,302
                                                                              -----------------    -----------------
                                                                                 $33,003,795          $35,327,550
                                                                              =================    =================
</TABLE>
The accompanying notes are an integral part of these condensed statements.

                                     Page 3
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

                                                         Nine Months Ended                   Three Months Ended
                                                    ------------------------------      ------------------------------
                                                      February        February 28,        February       February 28,
                                                      29, 2004            2003            29, 2004           2003
                                                    -------------    -------------      -------------    -------------
<S>                                                  <C>              <C>                 <C>              <C>
Revenues
   Equipment sales                                   $14,147,248      $16,995,678         $5,185,388       $6,581,338
   Equipment rentals and services                      2,132,323        1,340,344            764,522          571,246
                                                    -------------    -------------      -------------    -------------
                                                      16,279,571       18,336,022          5,949,910        7,152,584

Cost of sales and services                             5,565,098        6,733,743          1,933,175        2,769,854
                                                    -------------    -------------      -------------    -------------
   Gross Profit                                       10,714,473       11,602,279          4,016,735        4,382,730

Expenses
   Selling, general and administrative                 9,217,836       10,877,174          3,083,407        3,013,330
   Research and development                            2,996,970        3,520,928          1,043,595        1,003,302
   Provision for doubtful accounts                     1,147,011        3,541,627            161,500          280,919
   Interest and financing costs                          101,335          143,997             35,089           46,930
   Interest and other income, net                       (115,102)        (135,766)            (6,815)         (31,062)
                                                    -------------    -------------      -------------    -------------
                                                      13,348,050       17,947,960          4,316,776        4,313,419

                                                    -------------    -------------      -------------    -------------
EARNINGS (LOSS) BEFORE INCOME TAXES                   (2,633,577)      (6,345,681)          (300,041)          69,311
   Income tax (expense) benefit, net                     (30,000)       1,540,442            (10,000)         (43,480)
                                                    -------------    -------------      -------------    -------------
NET EARNINGS (LOSS)                                  ($2,663,577)     ($4,805,239)         $(310,041)         $25,831
                                                    =============    =============      =============    =============


Net earnings (loss) per common share
     - basic                                             ($0.05)          ($0.08)            ($0.01)           $0.00
                                                    =============    =============      =============    =============
     - diluted                                           ($0.05)          ($0.08)            ($0.01)           $0.00
                                                    =============    =============      =============    =============

Weighted average common shares outstanding
     - basic                                          57,847,004       57,647,032         57,886,701       57,809,120
                                                    =============    =============      =============    =============
     - diluted                                        57,847,004       57,647,032         57,886,701       58,078,334
                                                    =============    =============      =============    =============
</TABLE>
The accompanying notes are an integral part of these condensed statements.

                                     Page 4
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

       CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                   (unaudited)

                                                                     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                 335,667           336           382,748                              383,084
Net loss                                                                                  (2,663,577)       (2,663,577)
                                      ------------    ----------    --------------    ---------------    --------------
Balance at February 29, 2004          58,157,690        $58,158       $51,006,064       ($26,025,413)      $25,038,809
                                      ============    ==========    ==============    ===============    ==============

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

                                     Page 5
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (unaudited)
<TABLE>
<CAPTION>

                                                                                       Nine Months ended
                                                                              --------------------------------------
                                                                                February 29,         February 28,
                                                                                    2004                 2003
                                                                              -----------------    -----------------
<S>                                                                               <C>                  <C>
Cash flows from operating activities
     Net loss                                                                    ($2,663,577)         ($4,805,239)
                                                                              -----------------    -----------------
     Adjustments to reconcile net loss to net cash provided by operating
       activities
         Depreciation and amortization                                               595,685              879,375
         Provision for doubtful accounts, net of write-offs                          674,175            3,306,627
         Allowance for inventory write-off                                            90,516                   --
         Deferred income taxes                                                            --           (1,619,420)
         Stock options granted for services                                               --               50,681
         Changes in operating assets and liabilities
              Accounts receivable                                                  2,606,696            2,932,790
              Financing receivables, net                                             258,608              132,708
              Inventories                                                          1,012,606              709,978
              Other current assets                                                  (203,176)             295,354
              Other assets                                                           (52,877)             (53,270)
              Accounts payable, accrued expenses and other current
                liabilities                                                          114,388           (1,059,187)
              Other liabilities                                                     (132,346)             380,650
                                                                              -----------------    -----------------
                                                                                   4,964,275            5,956,286
                                                                              -----------------    -----------------
     Net cash provided by operating activities                                     2,300,698            1,151,047
                                                                              -----------------    -----------------

     Cash flows from investing activities
         Purchase of property and equipment                                         (137,721)            (223,625)
                                                                              -----------------    -----------------
     Net cash used in investing activities                                          (137,721)            (223,625)
                                                                              -----------------    -----------------

     Cash flows from financing activities
         Proceeds from notes                                                          67,149              126,960
         Payments on notes                                                           (92,453)             (48,270)
         Proceeds from exercise of options and warrants                              383,084              225,000
                                                                              -----------------    -----------------
     Net cash provided by financing activities                                       357,780              303,690
                                                                              -----------------    -----------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                          2,520,757            1,231,112
     Cash and cash equivalents - beginning of period                               5,222,847            2,967,627
                                                                              -----------------    -----------------
     Cash and cash equivalents - end of period                                    $7,743,604           $4,198,739
                                                                              =================    =================

Non-cash investing and financing activities were as follows:
     Inventories transferred to (from) property and equipment,  attributable
       to operating leases - net                                                   ($328,869)            $754,519

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

                                     Page 6
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 29, 2004


NOTE A - BASIS OF PRESENTATION

     The consolidated  condensed  balance sheet as of February 29, 2004, and the
related  consolidated   condensed  statements  of  earnings  for  the  nine  and
three-month  periods ended  February 29, 2004 and February 28, 2003,  changes in
stockholders' equity for the nine-month period ended February 29, 2004, and cash
flows for the nine- month periods ended February 29, 2004 and February 28, 2003,
have been prepared by Vasomedical, Inc. and Subsidiaries (the "Company") without
audit. In the opinion of management, all adjustments (which include only normal,
recurring  accrual  adjustments)  necessary  to  present  fairly  the  financial
position and results of operations as of February 29, 2004,  and for all periods
presented have been made.

     Certain  information  and  footnote   disclosures,   normally  included  in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted.  These
financial statements should be read in conjunction with the financial statements
and notes thereto  included in the Annual Report on Form 10-K for the year ended
May 31, 2003.  Results of operations for the periods ended February 29, 2004 and
February  28,  2003 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"),  as  interpreted  by FIN 46R. In
general, a variable interest entity is a corporation, partnership, trust, or any
other legal  structure used for business  purposes that either (a) does not have
equity  investors  with voting  rights or (b) has equity  investors  that do not
provide sufficient financial resources for the entity to support its activities.
A variable  interest  entity often holds  financial  assets,  including loans or
receivables,  real estate or other property.  A variable  interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Until now, a company  generally has included  another entity in its consolidated
financial  statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable  interest  entity to be consolidated
by a company if that  company is subject to a majority  of the risk of loss from
the variable interest  entity's  activities or entitled to receive a majority of
the entity's residual returns or both. FIN 46's consolidation requirements apply
immediately to variable  interest entities created or acquired after January 31,
2003.  The  consolidation  requirements  apply to older  entities  in the  first
interim  period  beginning  after  June  15,  2003.  Certain  of the  disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable  interest  entity was  established.  The Company
adopted FIN 46 effective January 31, 2003. The adoption of FIN 46 did not have a
material impact on the Company's financial position or results of operations.

     In November  2002,  the  Emerging  Issues Task  Force,  ("EITF")  reached a
consensus opinion on, "Revenue Arrangements with Multiple Deliverables",  "(EITF
00-21)".  That  consensus  provides  that  revenue  arrangements  with  multiple
deliverables  should be divided into  separate  units of  accounting  if certain
criteria are met. The  consideration  of the arrangement  should be allocated to
the separate  units of  accounting  based on their  relative  fair values,  with

                                     Page 7
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 29, 2004


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 $57,500 and $15,000 of revenue related to the fair
value of  installation  and  in-service  training  and  $466,667 and $212,917 of
revenue related to the warranty service for EECP system sales recognized for the
nine-month and three-month periods ended February 29, 2004, respectively.

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

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  nine-month  period  ended  February  29,  2004,  the  Board of
Directors granted  non-qualified  stock options under the 1999 Stock Option Plan
(the "1999 Plan") to three employees and nine directors to purchase an aggregate
of 725,000  shares of common  stock,  at exercise  prices  ranging from $0.92 to
$1.31 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.

     During the nine-month  period ended February 29, 2004,  options to purchase
335,667  shares of common stock were  exercised at exercise  prices ranging from
$0.88 to $1.22 per share,  aggregating  $383,084  of  proceeds  to the  Company.
During the nine-month period ended February 29, 2004, options to purchase 35,000
shares of common  stock at  exercise  prices  ranging  from  $0.91 to $2.97 were
cancelled.

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

                                                         Nine Months Ended                   Three Months Ended
                                                    ------------------------------      ------------------------------
                                                     February 29,     February 28,       February 29,     February 28,
                                                         2004             2003               2004             2003
                                                    -------------    -------------      -------------    -------------
<S>                                                  <C>              <C>                  <C>                <C>
Net earnings (loss), as reported                     ($2,663,577)     ($4,805,239)         $(310,041)         $25,831
     Deduct: Total stock-based employee
       compensation expense determined under fair
       value-based method for all awards              (1,080,817)        (671,516)          (402,237)        (237,597)
                                                    -------------    -------------      -------------    -------------
Pro forma net loss                                   ($3,744,394)     ($5,476,755)         ($712,278)       ($211,766)
                                                    =============    =============      =============    =============

Earnings (loss) per share:
    Basic - as reported                                  ($0.05)          ($0.08)            ($0.01)           $0.00
                                                    =============    =============      =============    =============
    Diluted - as reported                                ($0.05)          ($0.08)            ($0.01)           $0.00
                                                    =============    =============      =============    =============
    Basic - pro forma                                    ($0.06)          ($0.09)            ($0.01)          ($0.00)
                                                    =============    =============      =============    =============
    Diluted - pro forma                                  ($0.06)          ($0.09)            ($0.01)          ($0.00)
                                                    =============    =============      =============    =============
</TABLE>

                                     Page 8
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 29, 2004



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

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

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

     The fair value of the Company's  stock-based  awards was estimated assuming
no expected  dividends and the following  weighted-average  assumptions  for the
nine months ended February 29, 2004:

                 Expected life (years)                              5
                 Expected volatility                              89%
                 Risk-free interest rate                         3.4%
                 Expected dividend yield                         0.0%


NOTE D  EARNINGS (LOSS) PER COMMON SHARE

     Basic earnings (loss) per share is based on the weighted  average number of
common shares  outstanding  without  consideration  of potential  common shares.
Diluted  earnings (loss) per share is based on the weighted number of common and
potential  common shares  outstanding.  The  calculation  takes into account the
shares that may be issued  upon the  exercise  of stock  options  and  warrants,
reduced by the shares that may be  repurchased  with the funds received from the
exercise,  based on the average price during the period. Options and warrants to
purchase  6,545,086 and 4,708,000  shares of common stock were excluded from the
computation  of diluted  earnings per share for the three months ended  February
29,  2004,  and February  28,  2003,  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>

                                                         Nine Months Ended                    Three Months Ended
                                                    ------------------------------      --------------------------------
                                                    February 29,     February 28,       February 29,      February 28,
                                                        2004             2003               2004              2003
                                                    -------------    -------------      -------------    ---------------
<S>                                                   <C>              <C>                <C>              <C>
Numerator:
   Basic and diluted net earnings (loss)             ($2,663,577)     ($4,805,239)         $(310,041)         $25,831
Denominator:
   Basic - weighted average common shares             57,847,004       57,647,032         57,886,701       57,809,120
     Stock options                                            --               --                 --           26,721
     Warrants                                                 --               --                 --          242,493
                                                    -------------    -------------      -------------    ---------------
   Diluted - weighted average common shares           57,847,004       57,647,032         57,886,701       58,078,334
                                                    =============    =============      =============    ===============
Basic and diluted earnings (loss) per common
   share                                                 ($0.05)          ($0.08)            ($0.01)           $0.00
                                                    =============    =============      =============    ===============
</TABLE>

                                     Page 9
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 29, 2004

NOTE E - INVENTORIES

         Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                    February 29,           May 31,
                                                                        2004                 2003
                                                                    ------------          ---------
<S>                                                                  <C>                  <C>
   Raw materials                                                       $985,496           $1,374,241
   Work in progress                                                     648,418              634,890
   Finished goods                                                     1,031,400            1,430,436
                                                                 ----------------    ------------------
                                                                     $2,665,314           $3,439,567
                                                                 ================    ==================
</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
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. The write-off of  approximately  $680,000 is
included as a component of provision for doubtful  accounts in the  accompanying
Statement of Earnings for the nine-month  period ended February 29, 2004. In the
third quarter of fiscal 2004, the Company recovered all of the EECP systems that
had been leased to this  customer.  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>

                                                    February 29,            May 31,
                                                       2004                  2003
                                                  --------------       ---------------
<S>                                                  <C>                   <C>
Revolving credit agreement (a)                               --                    --
Term loans (b) (c)                                   $1,260,962            $1,286,266
Less current portion                                   (133,617)             (108,462)
                                                  ----------------    ------------------
                                                     $1,127,345            $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,

                                    Page 10
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 29, 2004

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 February 29,
2004, 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 February 29,
2004, $1,035,705 was outstanding in connection with these notes.

     (c)  In  fiscal  2003  and  2004,   the  Company   financed   the  cost  of
implementation  of a management  information  system and secured  several notes,
aggregating  approximately  $305,000.  The notes,  which bear  interest at rates
ranging from 7.5% through 12.4%, 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 February  29,  2004,  $225,257 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>
                                                           Nine Months Ended                    Three Months Ended
                                                     ------------------------------       ------------------------------
                                                     February 29,     February 28,        February 29,     February 28,
                                                         2004             2003                2004             2003
                                                     -------------    -------------       -------------    -------------
<S>                                                    <C>                <C>               <C>              <C>
Deferred Revenue at the beginning of the period        $1,709,551         $991,204          $2,284,166       $1,445,529
ADDITIONS
     Deferred extended service contracts                1,392,588        1,119,744             446,650          345,319
     Deferred in-service training                         215,000               --             117,500               --
     Deferred warranty obligations                        650,000               --             357,500               --
RECOGNIZED AS REVENUE
     Deferred extended service contracts               (1,066,682)        (522,454)           (399,109)        (202,354)
     Deferred in-service training                        (157,500)              --            (102,500)              --
     Deferred warranty obligations                       (183,333)              --            (144,583)              --
                                                     -------------    -------------       -------------    -------------
Deferred revenue at end of period                       2,559,624        1,588,494           2,559,624        1,588,494
     Less: current portion                             (1,601,037)        (610,973)         (1,601,037)        (610,973)
                                                     -------------    -------------       -------------    -------------
Long-term deferred revenue at end of period              $958,587         $977,521            $958,587         $977,521
                                                     =============    =============       =============    =============
</TABLE>
                                    Page 11
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 29, 2004


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  estimated  warranty  costs upon delivery but rather  recognizes
warranty and related service costs as incurred.  Prior to September 1, 2003, the
Company  accrued a warranty  reserve  for  estimated  costs to provide  warranty
services  when the  equipment  sale is  recognized.  The factors  affecting  the
Company's  warranty  liability  included the number of units sold and historical
and  anticipated  rates of claims and costs per claim.  The  warranty  provision
resulting from transactions prior to September 1, 2003 will be reduced in future
periods for  material  and labor costs  incurred as related  product is serviced
during the warranty  period or when the  warranty  period  elapses.  A review of
warranty  obligations  is performed  regularly to determine  the adequacy of the
reserve.  Based  on the  outcome  of this  review,  revisions  to the  estimated
warranty  liability are recorded as appropriate.  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:
<TABLE>
<CAPTION>
                                                           Nine Months Ended                    Three Months Ended
                                                     ------------------------------       ------------------------------
                                                     February 29,     February 28,        February 29,     February 28,
                                                         2004             2003                2004             2003
                                                     -------------    -------------       -------------    -------------
<S>                                                      <C>              <C>                 <C>              <C>
Warranty liability at the beginning of the
   period                                                $788,000         $991,000            $501,000         $869,000
     Expense for new warranties issued                    164,000          540,000                  --          204,000
     Warranty amortization                               (602,000)        (689,000)           (151,000)        (231,000)
                                                     -------------    -------------       -------------    -------------
Warranty liability at end of period                      $350,000         $842,000            $350,000         $842,000
                                                     =============    =============       =============    =============
</TABLE>

NOTE J - INCOME TAXES

     During the  nine-months  ended  February 29, 2004,  the Company  recorded a
provision  for state income  taxes of $30,000.  This is in contrast to an income
tax benefit of $1,540,442  reported  during the  nine-months  ended February 28,
2003.

     As of February  29, 2004,  the Company had recorded  deferred tax assets of
$14,582,000  (net  of  a  ($1,360,000)   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

                                    Page 12
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 29, 2004

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 nine-month period ended February 29, 2004 was $738,000.

     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.  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

                                    Page 13
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 29, 2004



          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.

     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.

                                    Page 14
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                               February 29, 2004



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, Gregory D. Cash. (See Note L)

     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
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 all active
employment agreements at February 29, 2004 are summarized as follows:
<TABLE>
<CAPTION>

               Twelve Months Ended         Amount
               -------------------         ------
               <S>                        <C>
               February 28, 2005          $454,167
               February 28, 2006            78,493
                                          --------
                                          $532,660
                                          ========
</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.

NOTE L  SUBSEQUENT EVENT

     On March 23, 2004,  Gregory D. Cash the Company's  then President and Chief
Executive  Officer resigned to pursue other business  interests and all monetary
compensation   under  the  employment   agreement  were  terminated.   Effective
immediately,  the board of directors  appointed Photios T. Paulson the Company's
former  President and Chief  Executive  Officer and a director of the Company to
the interim  position of President  and Chief  Executive  Officer and  initiated
plans to begin a search for a new President and Chief Executive Officer.

                                    Page 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", "plans",  "potential" and "intends" and similar
expressions,  as  they  relate  to  the  Company  or  its  management,  identify
forward-looking  statements.  Such  forward-looking  statements are based on the
beliefs  of the  Company's  management,  as  well  as  assumptions  made  by and
information currently available to the Company's  management.  Among the factors
that could cause actual  results to differ  materially  are the  following:  the
effect of 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 CHF. EECP is a non-invasive,  outpatient  therapy for the treatment of
diseases  of  the   cardiovascular   system.  The  therapy  serves  to  increase
circulation  in areas of the heart with less than adequate  blood supply and may
restore systemic vascular function. 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 is 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 international

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           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

customers. Returns are accepted prior the installation and in-service subject to
a 10% restocking charge or 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 beginning  September 1, 2003,
the Company deferred $57,500 and $15,000 of revenue related to the fair value of
installation  and  in-service  training  plus  $466,667  and $212,917 of revenue
related to the  warranty  service for EECP  system  sales  delivered  during the
nine-month and three-month  periods ended February 29, 2004,  respectively.  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 $2,035,457 as of February
29,  2004.  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 February 29, 2004.

     The Company follows SFAS No. 13,  "Accounting For Leases," for its sales of
EECP units under sales-type  leases. 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

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           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION


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

Accounts Receivable/Financing Receivables

     The Company's  accounts  receivable trade are due from customers engaged in
the provision of medical  services.  Credit is extended based on evaluation of a
customer's  financial  condition  and,  generally,  collateral  is not required.
Accounts receivable are generally due 30 to 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.  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  $2,034,957  and
$1,588,494 at February 29, 2004, and February 28, 2003, respectively.

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           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

                                    Page 19
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           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

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

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

     In November  2002,  the  Emerging  Issues Task  Force,  ("EITF")  reached a
consensus opinion on, "Revenue Arrangements with Multiple Deliverables",  "(EITF
00-21)".  That  consensus  provides  that  revenue  arrangements  with  multiple
deliverables  should be divided into  separate  units of  accounting  if certain
criteria are met. The  consideration  of the arrangement  should be allocated to
the separate  units of  accounting  based on their  relative  fair values,  with
different  provisions  if the fair value is  contingent on delivery of specified
items  or  performance   conditions.   Applicable  revenue  criteria  should  be
considered  separately  for each  separate  unit of  accounting.  EITF  00-21 is
effective  for revenue  arrangements  entered into in fiscal  periods  beginning
after June 15,  2003.  Effective  September 1, 2003,  the Company  prospectively
adopted the  provisions of EITF 00-21.  After adoption of the provisions of EITF
00-21,  the Company has deferred $57,500 of revenue related to the fair value of
installation  and  in-service  training and  $466,667 of revenue  related to the
warranty  service for EECP system sales  recognized  during the second and third
quarters of fiscal 2004.

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


Results of Operations

Three Months Ended February 29, 2004 and February 28, 2003
----------------------------------------------------------

     Net  revenue  from  sales,  leases and  service of the  Company's  external
counterpulsation  systems  ("EECP"  systems) for the  three-month  periods ended
February 29,  2004,  and February 28,  2003,  were  $5,949,910  and  $7,152,584,
respectively,  which  represented  a decline of $1,202,674 or 17%. The Company's
loss before income taxes for the three-month period ended February 29, 2004, was
$300,041  as  compared  to  income  before  income  taxes  of  $69,311  for  the
three-month  period  ended  February 28,  2003.  The Company  reported a loss of
$310,041 for the three-month  period ended February 29, 2004, as compared to net
income of $ 25,831 for the three-month period ended February 28, 2003.

     Equipment   sales  declined   approximately   21%  to  $5,185,388  for  the
three-month  period ended  February 29, 2004 as compared to  $6,581,338  for the
same period for the prior year. The decline in equipment  sales is due primarily
to: a 10%  decline in the total  sales  volume of EECP  systems in the  domestic
market;  the impact of reduced  selling  prices for the sales of EECP systems in
the domestic market; an unfavorable  product mix resulting from a higher portion
of used versus new equipment  sales,  which earn a lower  average  selling price
compared  to new  systems;  plus  adoption  of the  provisions  of  EITF  00-21.
Shipments  of EECP  systems in the third  quarter  of fiscal  2004  included  an

                                    Page 20
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                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

unusually  high  percentage  of used  equipment as the Company sold EECP systems
that had been used to treat  patients in the  Prospective  Evaluation of EECP in
Congestive Heart Failure,  ("PEECH")  clinical trial but were no longer required
in the trial at some of the clinical sites since the treatment  portion at those
sites had previously been completed. The Company believes that domestic sales of
EECP systems  continue to be  negatively  impacted  from the 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
adopted EITF 00-21 during the second  quarter of fiscal 2004.  As a result,  the
company  deferred  approximately  $228,000,  net of reversals  from the previous
quarter,  of  revenue  related  to the fair  value of  installation,  in-service
training and warranty  service which will be recognized as revenue  ratably over
the related service period, which is generally one year. Previously, the Company
accrued costs  associated  with these  arrangements  as warranty  expense in the
period the system was delivered and accepted.  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 needs between six and nine months from
date of hire to become  fully  effective.  As of February  29,  2004,  11 of the
Company's 24 sales  territories  were filled with  representatives  who had been
with the Company for less than nine months.  International sales of EECP systems
in the third  quarter of fiscal 2004  increased  approximately  147% to $312,000
compared to the same period of the prior year reflecting to increased volume.

     The above decline in equipment sales was partially offset by a 34% increase
in revenue  from  equipment  rental and services  resulting  from an increase of
approximately  88% 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.  Rental  revenue  declined
following the  termination of several  short-term  rental  agreements  partially
offsetting the above.

     The  gross  profit  declined  to  $4,016,735  or 68% of  revenues  for  the
three-month  period ended  February 29, 2004,  compared to  $4,382,730 or 61% of
revenues for the three-month  period ended February 28, 2003.  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,  new or used 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 improvement in gross profit as a percentage of
sales  for the  quarter  primarily  reflects  the  impact  from  the  sale of an
unusually high  percentage of used equipment when compared to the same period of
the prior year.  These systems  reflected a lower than normal cost of sale since
they were partially  amortized and as a result  generated above average margins.
The  Company  has  limited  quantities  of the lower cost  systems  and does not
anticipate a significant volume of used equipment will be sold in the future. In
addition,  the Company  began  during the quarter to ship its newest  model EECP
system,  the TS4. The TS4 has a lower direct  material cost when compared to the
previous model TS3 as a result of the Company's cost  reduction  program.  Also,
the gross profit  margin  reflects  lower  spending for service  parts,  travel,
personnel  and lower  manufacturing  overhead for the  three-month  period ended
February 29, 2004,  compared to the same  three-month  period of the prior year.
Partially  offsetting the above was the impact from lower average selling prices
for EECP systems.

     Selling,  general and administrative ("SG&A") expenses for the three-months
ended  February 29, 2004,  and February  28,  2003,  were  $3,083,407  or 52% of
revenues and $3,013,330 or 42% of revenues,  respectively.  The increase in SG&A
resulted primarily from increased personnel  expenditures in sales and marketing
plus higher travel and advertising expenditures.  Partially offsetting the above
were  reduced  expenditures  for  consulting  services  plus  lower  promotional
materials  and events costs  during the  three-month  period ended  February 29,
2004, as compared to the same period for the prior year. The Company anticipates
increased sales and marketing  expenditures in the immediate  future compared to
the third quarter of fiscal 2004. Total  administrative  expenses were virtually
unchanged from the prior year period.

     Research and development  ("R&D") expenses of $1,043,595 or 18% of revenues
for the three months ended  February 29, 2004,  increased by $40,293 or 4%, from
the prior  three  months  ended  February  28,  2003,  of  $1,003,302  or 14% of
revenues.  The increase  reflects  higher  spending for consulting  services and
product development,  which were partially offset by lower spending for clinical
trials  following the completion of several smaller  clinical trials and reduced
spending  related to the PEECH clinical  trial.  The Company expects to continue
its investments in product development and clinical trials through the remainder


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           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

of  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  February  29,  2004,  the PEECH trial was over 100%
enrolled.  The  PEECH  trial  will  continue  to  consume  the  majority  of R&D
expenditures allocated for clinical research projects,  however the Company will
continue and/or initiate  additional projects to further validate the use of the
Company's  EECP  System to support  on- going  efforts  to expand  reimbursement
coverage and to explore new clinical applications of the its technology.

     During the three-month  period ended February 29, 2004, the Company charged
$161,500 to its provision for doubtful  accounts as compared to $280,919  during
the three-month period ended February 28, 2003.

     Interest   expense  and  financing   costs  decreased  to  $35,089  in  the
three-month  period ended February 29, 2004, from $46,930 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 February 29, 2004 and
ended February 28, 2003, were $6,815 and $31,062,  respectively. The decrease in
interest  income  from the prior  period is the direct  result of the absence of
interest  income  related to certain  equipment  sold  under  sales-type  leases
incurred in fiscal 2003, as well as declining interest rates this year over last
year earned on the average cash balances.  Higher average cash balances invested
during the quarter compared to the prior period partially offset the above.

     During the  three-months  ended February 29, 2004,  the Company  recorded a
provision  for state income taxes of $10,000.  This compares to a tax expense of
$43,480 reported during the three-months ended February 28, 2003. As of February
29, 2004, the Company had recorded  deferred tax assets of $14,582,000  net of a
$1,360,000  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  that  became  effective  in
January  2004  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  decrease  to the
valuation allowance during the third quarter for fiscal 2004 was $3,000.

Nine Months Ended February 29, 2004 and February 28, 2003
---------------------------------------------------------

     The Company generated revenues from the sale, lease and service of its EECP
systems of $16,279,571 and $18,336,022 for the nine-month periods ended February
29,  2004,  and  February  28,  2003,  respectively,  reflecting  a decrease  of
$2,056,451 or 11%. The Company's  loss before  income taxes was  $2,633,577  and
$6,345,681 for the nine-month  periods ended February 29, 2004, and February 28,
2003, respectively. The Company reported a net loss of $2,663,577 and $4,805,239
for the  nine-month  periods  ended  February 29,  2004,  and February 28, 2003,
respectively.

     The decline in revenues is due  primarily to lower sales of EECP systems in
the domestic market.  Domestic  equipment sales for the nine-month  period ended
February 29, 2004, were down  approximately  15% compared to the same nine-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
11%; a lower sales volume of EECP systems,  which decreased by approximately 2%;
plus a higher  proportion of used equipment versus new equipment sold during the
nine-month  period ended February 29, 2004,  which earn a lower average  selling
price  compared to new systems;  plus adoption of the  provisions of EITF 00-21.
The impact of lower  prices  resulting  from lower priced  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

                                    Page 22
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                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION


premium to competitive  products  reflecting the clinical  efficacy and superior
quality of the system plus the many value added services offered by the Company.
In  addition,  the  Company  adopted  EITF 00-21  during the  period.  Following
adoption of the  provisions  of EITF  00-21,  the  Company  deferred  $57,500 of
revenue  related to the fair value of installation  and in-service  training and
$466,667  of revenue  related to the  warranty  service  for EECP  system  sales
delivered  during the second and third  quarters of fiscal  2004.  International
shipments of EECP systems declined approximately 26% to $676,000 due to a higher
sales  rate in the  previous  year upon  receipt  of the CE Mark.  The above was
partially offset by a 59% increase in revenue from equipment rental and services
reflecting  primarily  an  increase  of  approximately  94% 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  $10,714,473  or 66% of  revenues  for the
nine-month  period ended  February 29, 2004,  compared to  $11,602,279 or 63% of
revenues for the  nine-month  period ended  February 28, 2003.  The gross profit
margin as a percentage of revenue for the  nine-month  period ended February 29,
2004,  improved  compared to the same nine-month period of the prior fiscal year
despite the lower revenue and the impact from the  reduction in average  selling
prices.  The  improvement  in gross profit as a percentage of sales reflects the
decline in expenditures for service related parts,  travel and personnel for the
nine-month  period ended February 29, 2004,  when compared to same period of the
prior year. In addition,  the gross profit margin  benefited form the sale of an
unusually high percentage of used equipment when compared to the same nine-month
period of the prior year.  These  systems  carried  lower book values since they
were partially  amortized and as a result generated above average  margins.  The
Company has limited quantities of the lower cost systems and does not anticipate
a significant volume of used equipment will be sold in the future.

     Selling,  general and  administrative  expenses  for the nine months  ended
February  29,  2004 and 2003 were  $9,217,836  or 57% of revenues as compared to
$10,877,174  or 59% 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 charge arising from the settlement of litigation in the prior year plus
a severance  charge 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  nine-month  period ended  February 29, 2004, 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 $2,996,970 or 18% of revenues
for the  nine-month  period ended February 29, 2004,  decreased by $523,958,  or
15%, from the prior nine-month  period ended February 28, 2003, of $3,520,928 or
19% of revenues.  The  decrease is due  primarily  to reduced  expenditures  for
clinical  consulting  services  related to several smaller clinical studies that
were completed plus lower product development costs.

     During the nine-month  period ended February 29, 2004, the Company  charged
$1,147,011  to its  provision  for doubtful  accounts as compared to  $3,541,627
during the  nine-month  period ended  February 28, 2003.  In fiscal 2004,  these
charges  reflect  management  decision  in the second  quarter of fiscal 2004 to
record a $680,000  provision  to the  allowance  for  doubtful  accounts,  which
represents all funds due from a sales-type lease customer.  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.  The Company
is  evaluating  its  ability  to seek  additional  recovery  from the  customer.
Additional  provisions for all other accounts totals approximately  $467,011. 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  $101,335  in  the
nine-month  period ended February 29, 2004, from $143,997 for the same period in
the prior  year due to  repayment  of the  Company's  revolving  secured  credit
facility in May 2003.

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                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

     Interest  income and other income for the nine-month  period ended February
29, 2004 and  February 28 2003,  was $115,102 and  $135,766,  respectively.  The
decrease in interest  income from the prior  period is the direct  result of the
absence of interest  income related to certain  equipment sold under  sales-type
leases  incurred in fiscal 2003, as well as declining  interest  rates this year
over last year earned on the average cash balances. Higher average cash balances
invested during the nine-month  period ended February 29, 2004,  compared to the
prior period partially offset the above.

     During the nine-month  period ended February 29, 2004, the Company recorded
a provision for state income taxes of $30,000.  This is in contrast to an income
tax benefit of $1,540,442  reported during the nine-month  period ended February
28, 2003. As of February 29, 2004, the Company had recorded  deferred tax assets
of  $14,582,000  net  of  a  $1,360,000   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 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 first nine months of fiscal 2004 was $738,000.

     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

                                    Page 24
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                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

          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
          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

                                    Page 25
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

          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  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.

Liquidity and Capital Resources

     The Company has financed its  operations in fiscal 2004 and 2003  primarily
from working  capital and operating  results.  At February 29, 2004, the Company
had a cash balance of $7,743,604 and working  capital of $10,125,046 as 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  $2,520,757 in the nine-month period
compared to May 31, 2003, primarily due to $2,300,698 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
$2,606,696  for the  nine-month  period ended  February  29, 2004.  Net accounts
receivable  were 80% of  quarterly  revenues  for the  three-month  period ended
February 29, 2004,  compared to 126% at the end of the three-month  period ended
February 28, 2003, and accounts  receivable turnover improved to 3.6 times as of
February 29, 2004,  as 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  nine-month  periods  ended  February 29, 2004,  and
February  28, 2003,  approximately  3% and 4% 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. 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 the
EECP therapy 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.

     Other key factors  causing the increase in cash  provided by the  Company's
operating  activities included the reduction in inventories,  which decreased by
$1,012,606 for the nine-month period ended February 29, 2004, reflecting efforts

                                    Page 26
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                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

to improve  procurement  of its raw materials and  management of finished  goods
inventory  levels,  a reduction in  financing  receivables  of $258,608,  and an
increase in accounts payable,  accrued expenses and other current liabilities of
$114,388.  Additionally,  non-cash  adjustments for depreciation,  amortization,
allowance  for doubtful  accounts and  allowance  for  inventory  write-offs  to
reconcile  the  net  loss  of  $2,663,577  to net  cash  provided  by  operating
activities total $1,360,376.  Partially  offsetting the above was an increase of
$203,176 in other  current  assets  reflecting  the  prepayment of the Company's
annual  insurance  policies  and an  increase  in other  assets of $52,877 and a
decrease in other liabilities of $132,346.

     Investing activities used net cash of $137,721 during the nine-month period
ended February 29, 2004. The principal use of cash was for the implementation of
the Company's new enterprise resource planning software.

     Financing  activities  provided net cash of $357,780  during the nine-month
period ended February 29, 2004,  reflecting  $383,084 received form the exercise
of stock options plus new borrowings of $67,149 related to the Company's new ERP
system.  Payments  of  principal  on notes  and  loans  were  $92,453  partially
offsetting the above.

     In fiscal 2002,  the Company  refinanced  its long-term  obligations on the
purchase of its headquarters and  manufacturing  facility.  In October 2002, the
Company  amended its existing  credit  facility to provide for  borrowings up to
$5,000,000  ($2,000,000,  at any  time  that  consolidated  net  income  for the
immediately  preceding three-month period is less than $1), primarily based upon
eligible  accounts  receivable,  as defined therein,  at the Libor Rate plus 200
basis points or the published  Prime Rate plus 50 basis points.  Under the terms
of the  agreement,  which expires in February  2005,  the Company is required to
meet certain quarterly covenants,  including leverage ratio, liquidity,  capital
expenditures, minimum net income, minimum interest coverage and minimum tangible
net worth.  Although the Company was not in  compliance  with certain  financial
covenants  during each of its first  three  fiscal  quarters  of 2003,  the bank
issued  waivers to the Company for those  periods.  In April 2003, the agreement
was further amended to allow for borrowings absent compliance with the financial
covenants as long as cash  collateralizes  such  eligible  borrowings.  In April
2003, the Company repaid all outstanding  borrowings under the agreement instead
of maintaining  restricted cash balances.  At February 29, 2004, the Company did
not meet the minimum interest coverage,  tangible net worth,  leverage ratio 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  February  29,  2004  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 three quarters of fiscal 2005
would not have an adverse effect on the Company's operations.

     Management believes that its working capital position at February 29, 2004,
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 February 29, 2004:
<TABLE>
<CAPTION>
                                                                       Due as of       Due as of
                                                          Due as of    2/28/06 and     2/28/08 and          Due
                                      Total               2/28/05        2/28/07         2/29/09        Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                    <C>                <C>             <C>             <C>              <C>
Long-Term Debt                         $1,260,962         $133,617        $260,361        $116,153         $750,831
Operating Leases                          135,609           63,434          72,175              --               --
Litigation Settlement                     366,750          133,000         233,750              --               --
Severance obligations                      70,000           70,000              --              --               --
Employment Agreements (a)                 532,660          454,167          78,493              --               --
--------------------------------------------------------------------------------------------------------------------
Total Contractual Cash                 $2,365,981         $854,218        $644,779        $116,153         $750,831
Obligations
====================================================================================================================

                                    Page 27
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

<FN>
(a) Includes  $166,667 in  contractual  cash  requirements  under an  employment
agreement as of February 29, 2004,  with the Company's  then President and Chief
Executive  Officer,  Mr.  Gregory D. Cash. On March 23, 2004,  Mr. Cash resigned
and,  as a result,  the  Company  was  relieved  of its  obligation  under  this
agreement.  The Company may incur a contractual  cash  requirement in the future
when a new President and Chief Executive Officer is hired.
</FN>
</TABLE>

Effects of Inflation

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

                                    Page 28
<PAGE>
                       Vasomedical, Inc. and Subsidiaries



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 its cash and cash equivalent balances and
the line of credit agreement.  The majority of our investments are in short-term
instruments and subject to fluctuations in US interest rates.  Due to the nature
of our  short-term  investments,  we  believe  that  there is no  material  risk
exposure.

ITEM 4 - PROCEDURES AND CONTROLS

     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.



                                    Page 29
<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

None

ITEM 5 - OTHER INFORMATION:

        None

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

10.1 Employment  Agreement between the Company and Thomas W. Fry dated September
     8, 2003.

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


                                    Page 30
<PAGE>
                       Vasomedical, Inc. and Subsidiaries



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


                     VASOMEDICAL, INC.

               By:   /s/ Photios T. Paulson
                     Photios T. Paulson
                     Chief Executive Officer and Director (Principal Executive
                     Officer)

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

Date:  April 14, 2004

                                    Page 31