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 August 31, 2003

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

Commission File Number: 0-18105

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

             (Exact name of registrant as specified in its charter)

         Delaware                                             11-2871434
--------------------------------------------------------------------------------

(State or other jurisdiction of             (IRS Employer Identification Number)
 incorporation or organization)

                    180 Linden Ave., Westbury, New York 11590
--------------------------------------------------------------------------------

                    (Address of principal executive offices)

Registrant's Telephone Number                              (516) 997-4600

Number of Shares Outstanding of Common Stock,
$.001 Par Value, at October 10, 2003                         57,827,690


     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No [ ]
                                   ---     --



<PAGE>

                       Vasomedical, Inc. and Subsidiaries



                                      INDEX



PART I - FINANCIAL INFORMATION

         Item 1 - Financial Statements (unaudited)                          Page
                                                                            ----

                  Consolidated Condensed Balance Sheets as of
                           August 31, 2003 and May 31, 2003                   3

                  Consolidated Condensed Statements of Earnings for the
                           Three Months Ended August 31, 2003 and 2002        4

                  Consolidated Condensed Statement of Changes in Stockholders'
                           Equity for the Period from June 1, 2003 to August
                           31, 2003                                            5

                  Consolidated Condensed Statements of Cash Flows for the
                           Three Months Ended August 31, 2003 and 2002         6

                  Notes to Consolidated Condensed Financial Statements         7

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

         Item 3 - Qualitative and Quantitative Disclosures About Market Risk  24

         Item 4 - Procedures and Controls                                     24

PART II - OTHER INFORMATION                                                   25



<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                            August 31,       May 31,
                                                                               2003           2003
                                                                               ----           ----
                                                                            (unaudited)     (audited)
<S>                                                                         <C>            <C>
      ASSETS
CURRENT ASSETS
      Cash and cash equivalents                                              $7,192,074     $5,222,847
      Accounts receivable, net of an allowance for doubtful accounts of
       $834,975 at August 31, 2003 and $768,629 at May 31, 2003               5,129,373      7,377,118
      Inventories                                                             3,065,245      3,439,567
      Deferred income taxes                                                     382,000        303,000
      Financing receivables, net                                                858,840        264,090
      Other current assets                                                      652,830        268,231
                                                                            -----------    -----------
              Total current assets                                           17,280,362     16,874,853

PROPERTY AND EQUIPMENT, net of accumulated depreciation of
       $2,434,364 at August 31, 2003 and $ 2,338,366 at May 31, 2003          3,035,111      3,233,158
FINANCING RECEIVABLES, net                                                       53,055        679,296
DEFERRED INCOME TAXES                                                        14,200,000     14,279,000
OTHER ASSETS                                                                    294,108        261,243
                                                                            -----------    -----------
                                                                            $34,862,636    $35,327,550
                                                                            ===========    ===========
      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
      Accounts payable and accrued expenses                                  $2,644,641     $2,667,861
      Current maturities of long-term debt and notes payable                    110,540        108,462
      Sales tax payable                                                         448,948        461,704
      Deferred revenues                                                         968,758        789,118
      Accrued warranty and customer support expenses                            537,000        575,000
      Accrued professional fees                                                  91,038        207,793
      Accrued commissions                                                       493,079        586,823
                                                                            -----------    -----------
              Total current liabilities                                       5,294,004      5,396,761

LONG-TERM DEBT                                                                1,149,889      1,177,804
ACCRUED WARRANTY COSTS                                                          178,000        213,000
DEFERRED REVENUES                                                               882,826        920,433
OTHER LIABILITIES                                                               300,250        300,250

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
      Preferred stock, $.01 par value; 1,000,000 shares authorized;
       none issued and outstanding                                                   --             --
      Common stock, $.001 par value; 110,000,000 shares authorized;
       57,827,690 and 57,822,023 shares at August 31, 2003 and
       May 31, 2003, respectively, issued and outstanding                        57,828         57,822
      Additional paid-in capital                                             50,628,269     50,623,316
      Accumulated deficit                                                   (23,628,430)   (23,361,836)
                                                                            -----------    -----------
            Total stockholders' equity                                       27,057,667     27,319,302
                                                                            -----------    -----------
                                                                            $34,862,636    $35,327,550
                                                                            ===========    ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                  CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                         Three months ended
                                                                         ------------------
                                                                             August 31,
                                                                             ----------
                                                                       2003             2002
                                                                       ----             ----
<S>                                                                 <C>             <C>
Revenues
  Equipment sales                                                   $4,788,110      $4,204,509
  Equipment rentals and services                                       638,422         334,661
                                                                    ----------      ----------
                                                                     5,426,532       4,539,170

Cost of sales and services                                           1,938,674       1,959,352
                                                                    ----------      ----------
  Gross Profit                                                       3,487,858       2,579,818

Expenses
  Selling, general and administrative                                2,621,452       3,686,896
  Research and development                                             955,545       1,190,986
  Provision for doubtful accounts                                      189,181       3,248,874
  Interest and financing costs                                          33,366          48,852
  Interest and other income, net                                       (55,092)        (76,490)
                                                                    ----------      ----------
                                                                     3,744,452       8,099,118
                                                                    ----------      ----------
LOSS BEFORE INCOME TAXES                                              (256,594)     (5,519,300)
   Income tax (expense) benefit, net                                   (10,000)      1,285,022
                                                                    ----------      ----------
NET LOSS                                                             $(266,594)    $(4,234,278)
                                                                    ==========      ==========
Net loss per common share
      - basic                                                          $(0.00)         $(0.07)
                                                                       ======          ======
      - diluted                                                        $(0.00)         $(0.07)
                                                                       ======          ======
Weighted average common shares
  outstanding - basic                                               57,826,844      57,477,598
                                                                    ==========      ==========
              - diluted                                             57,826,844      57,477,598
                                                                    ==========      ==========

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

                       Vasomedical, Inc. and Subsidiaries

       CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                               Total
                                                                Additional       Accum-         stock-
                                             Common Stock         paid-in        ulated        holders'
                                           Shares    Amount       capital        deficit        equity
                                         ----------   -------   -----------   -------------   -----------
<S>                                      <C>          <C>       <C>           <C>             <C>
Balance at June 1, 2003                  57,822,023   $57,822   $50,623,316   $(23,361,836)   $27,319,302
Exercise of stock options                     5,667         6         4,953                         4,959
Net loss                                                                          (266,594)      (266,594)
                                         ----------   -------   -----------   -------------   -----------
Balance at August 31, 2003               57,827,690   $57,828   $50,628,269   $(23,628,430)   $27,057,667
                                         ==========   =======   ===========   =============   ===========
</TABLE>

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



<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                          Three months ended
                                                                          ------------------
                                                                               August 31,
                                                                               ----------
                                                                        2003             2002
                                                                        ----             ----
<S>                                                                   <C>            <C>
Cash flows from operating activities
 Net loss                                                             $(266,594)     $(4,234,278)
 Adjustments to reconcile net loss to net cash                       -----------     ------------
  provided by (used in) operating activities
   Depreciation and amortization                                        205,054          286,968
   Provision for doubtful accounts, net of write-offs                    66,346        3,248,874
   Deferred income taxes                                                     --       (1,255,000)
   Stock options granted for services                                        --           12,562
   Changes in operating assets and liabilities
    Accounts receivable                                               2,181,399        2,472,719
    Financing receivables, net                                           31,491           90,952
    Inventories                                                         465,443         (438,108)
    Other current assets                                               (384,599)        (264,726)
    Other assets                                                        (40,531)        (161,531)
    Accounts payable, accrued expenses and other current liabilities   (104,835)        (755,983)
    Other liabilities                                                  ( 72,607)         462,147
                                                                     ----------      -----------
                                                                      2,347,161        3,698,874
                                                                     ----------      -----------
   Net cash provided by (used in) operating activities                2,080,567         (535,404)
                                                                     ----------      -----------
Cash flows from investing activities
 Purchase of property and equipment                                     (90,462)         (44,489)
                                                                     ----------      -----------
  Net cash used in investing activities                                 (90,462)         (44,489)
                                                                     ----------      -----------
Cash flows from financing activities
 Payments on notes                                                      (25,837)         (11,310)
  Proceeds from exercise of options and warrants                          4,959          112,500
                                                                     ----------      -----------
   Net cash provided by (used in) financing activities                  (20,878)         101,190
                                                                     ----------      -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS                                                  1,969,227         (478,703)
Cash and cash equivalents - beginning of period                       5,222,847        2,967,627
                                                                     ----------      -----------
Cash and cash equivalents - end of period                            $7,192,074       $2,488,924
                                                                     ==========      ===========

Non-cash investing and financing activities were as follows:
Inventories transferred to (from) property and equipment,
 attributable to operating leases - net                               $(91,121)        $148,205
</TABLE>
The accompanying notes are an integral part of these condensed statements.

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2003




NOTE A - BASIS OF PRESENTATION

     The  consolidated  condensed  balance  sheet as of August 31,  2003 and the
related  consolidated  condensed  statements  of  earnings  for the  three-month
periods ended August 31, 2003 and 2002, changes in stockholders'  equity for the
three-month  period  ended  August 31,  2003 and cash flows for the  three-month
periods ended August 31, 2003 and 2002 have been prepared by  Vasomedical,  Inc.
and  Subsidiaries  (the "Company")  without audit. In the opinion of management,
all  adjustments  (which  include only normal,  recurring  accrual  adjustments)
necessary to present fairly the financial  position and results of operations as
of August 31, 2003 and for all periods presented have been made.

     Certain  information  and  footnote   disclosures,   normally  included  in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted.  These
financial statements should be read in conjunction with the financial statements
and notes thereto  included in the Annual Report on Form 10-K for the year ended
May 31, 2003.  Results of  operations  for the periods ended August 31, 2003 and
2002  are not  necessarily  indicative  of the  operating  results  expected  or
reported for the full year.

NOTE B  IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

In November 2002, the Emerging Issues Task Force, ("EITF") reached a consensus
opinion of EITF 00-21, "Revenue Arrangements with Multiple Deliverables. 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

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2003

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. Entities may elect
to report the change as a cumulative effect adjustment in accordance with APB
Opinion 20, "Accounting Changes." The Company is currently evaluating the impact
of the adoption of EITF 00-21 on its financial statements.

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 three-month period ended August 31, 2003, the Board of Directors
granted  stock  options under the 1999 Stock Option Plan (the "1999 Plan") to an
employee to purchase  an  aggregate  of 300,000  shares of common  stock,  at an
exercise  price of $0.92 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.
Subsequent to August 31, 2003, stock options under the 1999 Plan were granted to
two  employees  to purchase an  aggregate  of 200,000  shares of common stock at
exercise prices ranging from $.97 to $1.04 per share (which represented the fair
market  value of the  underlying  common  stock  at the  time of the  respective
grants).

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

                                                           For the three months ended
                                                           --------------------------
                                                                    August 31,
                                                                    ----------
                                                             2003                2002
                                                             ----                ----
<S>                                                        <C>               <C>
Net loss, as reported                                      $(266,594)        $(4,234,278)
Deduct: Total stock-based employee compensation
   expense determined under fair value-based method
   for all awards                                           (329,471)           (293,004)
                                                       ----------------    -----------------

Pro forma net loss                                         $(596,065)        $(4,527,282)
                                                       ================    =================

Loss per share:
    Basic - as reported                                         $(.00)              $(.07)
    Diluted - as reported                                       $(.00)              $(.07)
    Basic - pro forma                                           $(.01)              $(.08)
    Diluted - pro forma                                         $(.01)              $(.08)
</TABLE>
     Pro forma compensation  expense may not be indicative of future disclosures
because it does not take into effect pro forma  compensation  expense related to
grants before 1995.  For purposes of estimating the fair value of each option on
the date of grant, the Company utilized the Black-Scholes option-pricing model.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded options,  which have no vesting restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2003


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 nonemployees in exchange for goods, fees
and services are accounted for under the fair value-based method of SFAS No.
123.

NOTE D  EARNINGS (LOSS) PER COMMON SHARE

     Basic earnings (loss) per share is based on the weighted  average number of
common shares  outstanding  without  consideration  of potential  common shares.
Diluted  earnings (loss) per share is based on the weighted number of common and
potential  common shares  outstanding.  The  calculation  takes into account the
shares that may be issued  upon the  exercise  of stock  options  and  warrants,
reduced by the shares that may be  repurchased  with the funds received from the
exercise,  based on the average price during the period. Options and warrants to
purchase  6,485,086 and 5,765,000  shares of common stock were excluded from the
computation of diluted  earnings per share for the three months ended August 31,
2003 and 2002,  respectively,  because  the effect of their  inclusion  would be
antidilutive.

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings (loss) per common share:
<TABLE>
<CAPTION>
                                                                    Three months ended
                                                                         August 31,
                                                                   2003             2002
                                                                   ----             ----
<S>                                                              <C>             <C>
Numerator:
   Basic and diluted net loss                                    $(266,594)     ($4,234,278)
                                                                ==========      ===========
Denominator:
   Basic - weighted average common shares                       57,826,844       57,477,598
     Stock options                                                       -               --
     Warrants                                                            -               --
                                                                ----------       ----------
   Diluted - weighted average common shares                     57,826,844       57,477,598
                                                                ==========      ===========
Basic and diluted loss per common share                              $(.00)           ($.07)
                                                                     =====            =====
</TABLE>
NOTE E - INVENTORIES
<TABLE>
<CAPTION>
                                                                 August 31,        May 31,
         Inventories consist of the following:                     2003             2003
                                                                   ----             ----
                  <S>                                           <C>              <C>

                  Raw materials                                 $1,129,458       $1,374,241
                  Work in progress                                 879,507          634,890
                  Finished goods                                 1,056,280        1,430,436
                                                                ----------       ----------
                                                                $3,065,245       $3,439,567
                                                                ==========      ===========
</TABLE>
NOTE F  RECEIVABLES FROM A MAJOR CUSTOMER

     Under  a  multi-year   sales  contract,   the  Company  sold  its  external
counterpulsation  systems ("EECP" units) to a customer engaged in establishing a
national network of EECP centers under sales-type leases aggregating revenues of
$3,160,792  in fiscal 2002.  No  additional  equipment was sold to this customer
during  fiscal  2003 or 2004.  At August  31,  2002,  financing  receivables  of
approximately  $2,558,000 from these  sales-type  lease  transactions  with this
customer were  outstanding.  In addition,  in March 2002, the Company provided a
$500,000  unsecured  loan  to  this  customer.  This  financing  was  part of an
aggregate $3.2 million credit facility, subject to certain conditions,  executed
by the customer  with the Company and an  unaffiliated  lender in January  2002,
under which the Company had no further financing obligation. The customer issued
two notes to the Company of $250,000  each in  connection  with two EECP centers
that bore  interest at 18% per annum and were  scheduled  to mature in September
2005.  Payments of  principal  and interest  under these notes was  scheduled to
commence in April 2003 in varying  amounts  determined  by a formula  based upon
cash generated, as defined in the loan agreement.
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2003

     In late August 2002,  this  customer  became  delinquent  in its  scheduled
monthly payments under its financing  obligations to the Company.  In September,
the Company was notified by this customer of recent circumstances that precluded
their  ability  to remain  current  under  their  financing  obligations  to the
Company.  Based on their  situation,  for which the customer was  attempting  to
remedy  through  a  recapitalization,   significant   uncertainties  existed  in
connection with the ongoing viability of their business. 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 has
redeployed certain pieces of the equipment while other pieces have been returned
to the Company's inventory for resale.

NOTE G  FINANCING RECEIVABLES

     The following  table shows the future minimum  rentals  receivable  under a
sales-type  lease and future  minimum  lease  payments and  obligations  under a
capital lease with a single customer in effect as of August 31, 2003:

<TABLE>
<S>                                                                <C>
2004                                                                $939,572
2005                                                                 307,819
2006                                                                  55,458
                                                                   ---------
Total minimum lease payments                                       1,302,849
Less estimated executory costs                                       (40,661)
                                                                   ---------
Net minimum lease payments                                         1,262,188
Less interest                                                       (105,300)
                                                                   ---------
Present value of minimum lease payments                            1,156,888
Less valuation allowance                                            (244,993)
                                                                   ---------
Net financing receivables                                            911,895
Less current portion                                                (858,840)
                                                                   ---------
Long-term portion                                                    $53,055
                                                                   =========
</TABLE>

     This  sales-type  lease is for a term of three  years.  The annual  minimum
lease  payments are subject to adjustment  based on usage of the leased units in
accordance with the provisions of the lease agreements.

     Given the recent payment delinquency experienced with this customer,  which
was subsequently  resolved, the Company is in the initial discussion stages with
this customer  regarding the terms of the  arrangement.  At this time, it is too
early to know the outcome.

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


                                               August 31,             May 31,
                                                  2003                 2003
                                                  ----                 ----
<S>                                            <C>                  <C>
Revolving credit agreement (a)                         --                   --
Term loans (b) (c)                             $1,260,429           $1,286,266
Less current portion                             (110,540)            (108,462)
                                               ----------           ----------
                                               $1,149,889           $1,177,804
                                               ==========           ==========
</TABLE>
     (a) In February 2002, the Company  renegotiated a secured  revolving credit
line with its  existing  bank.  The credit line  provided for  borrowings  up to
$15,000,000, based upon eligible accounts receivable, as defined therein, at the
Libor  Rate plus 150  basis  points  (3.4% at May 31,  2002).  At May 31,  2002,
approximately  $3,600,000  of  the  line  was  available  of  which  there  were
outstanding  borrowings of $1,000,000.  Under the terms of the agreement,  which

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2003


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 August 31,
2003, the Company did not meet the minimum interest coverage, tangible net worth
and  minimum  net  worth  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 August 31, 2003,
$1,060,593 was outstanding in connection with these notes.

     (c) In fiscal 2003, the Company  financed the cost of  implementation  of a
management   information   system  and  secured   several   notes,   aggregating
approximately  $238,000.  The notes,  which bear  interest at rates ranging from
7.5% through 8.7%, are payable in monthly  installments  consisting of principal
and interest  payments over four- year terms,  expiring at various times between
August and  October  2006.  At August 31,  2003,  $199,846  was  outstanding  in
connection with these notes.

NOTE I  WARRANTY COSTS

     Equipment sold is generally  covered by a warranty  period of one year. The
Company  accrues a warranty  reserve  for  estimated  costs to provide  warranty
services  when the  equipment  sale is  recognized.  The factors  affecting  the
Company's warranty liability include the number of units sold and historical and
anticipated rates of claims and costs per claim.  Warranties 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
financial  statements.  The Company  periodically  assesses  the adequacy of its
warranty liability based on changes in these factors.

     The Company records revenue on extended warranties on a straight-line basis
over the term of the related warranty  contracts.  Deferred  revenues related to
extended warranties are $1,851,584 and $1,709,551 at August 31, 2003 and May 31,
2002, respectively. Service costs are expensed as incurred.

     The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
                                                                        Three months ended
                                                                            August 31,

                                                                     2003                   2002
                                                                     ----                   ----
        <S>                                                        <C>                    <C>
        Warranty liability at the beginning of the period          $788,000               $991,000
        Expense for new warranties issued                           164,000                132,000
        Warranty claims                                            (237,000)              (227,000)
                                                                   --------               --------
        Warranty liability at end of period                        $715,000               $896,000
                                                                   ========               ========
</TABLE>

NOTE J - INCOME TAXES

     During the  three-months  ended  August 31,  2003,  the Company  recorded a
provision  for state income  taxes of $10,000.  This is in contrast to an income
tax benefit of  $1,285,022  reported  during the  three-months  ended August 31,
2002.
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2003

     As of August 31,  2003,  the Company had  recorded  deferred  tax assets of
$14,582,000  net of a $706,000  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, based upon the
weight of  available  evidence,  that it is more likely than not that all of the
deferred  tax  assets  would  be  realized.   It  is  management's  belief  that
realization of the deferred tax asset is 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 and the first quarter of fiscal 2004, (much of which was
unexpected  and   non-recurring,   including  the  write-off  of   approximately
$2,600,000 in financing receivables and loan from the default of one customer, a
$600,000  litigation  settlement and $400,000 in employee severance payments and
related expenses in fiscal 2003).

     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  coverage  by CMS (in the US) and other  foreign  regulatory
          bodies.  The estimated US patient  population  for angina  patients is
          approximately  6.2 million and  approximately  5 million  patients for
          heart failure.
     B.   Medicare  coverage  rates  for EECP have  risen in each  year  since a
          national  rate  was  established  in  January  2000,   increasing  60%
          cumulatively.
     C.   Potential  extension  of  Medicare  coverage to include all classes of
          angina  (beyond the present  Class  III/IV  indication,  for which the
          Company  estimates  the annual  patient  population in the US alone is
          150,000, necessitating an installed base in excess of 3,000 systems).
     D.   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 PEECH trial results are expected to
          be  favorable  (based  upon a  published  feasibility  study and other
          analyses) and should be available in early 2005.  The  combination  of
          favorable PEECH trial results and Medicare  reimbursement would likely
          be a significant catalyst for significant Company growth.
     E.   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).  The Company's  Scientific Council is comprised of
          leading  academic  cardiologists,  many of whom are past presidents of
          the American College of Cardiology,  the American Heart Association or
          the Heart Failure Society of America.
     F.   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.
     G.   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.
     H.   Initiatives  planned to lower the standard cost of the Company's  EECP
          systems, improving margins or preserving them from further erosion.
     I.   The  Company  has a large,  non-domestic  market  opportunity  that is
          developing  through  a  network  of  local  independent  distributors,
          primarily  in Europe for which the  Company has  received  the CE Mark
          (FDA-clearance equivalent).
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2003

     J.   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.
     K.   Increased  hardware  utility  to  allow  for  the  use of  EECP  in an
          increasing  number of  patient  environments.  The EECP TS3  system is
          mobile 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 results of this study are
          likely  to  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,  medical community 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.
     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
          (5,000 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  date 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.  However,  there is  presently
          little  evidence  to suggest  it.  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  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.  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 extensive  clinical trials).  The Company estimates having a 75%+
          market share and doesn't foresee significant changes.
     F.   New  or  changed   regulatory   environment  that  creates  unforeseen
          obstacles,  or costs,  to continue to market and sell the EECP system.

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2003

          None are known at this time.  Such  changes in this  industry  are 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,  the Company is confident that rates are now and will remain
          at sufficient  levels to support the Company's  growth.  In fact,  CMS
          raised  rates for EECP  treatment by 35% in March 2003 while all other
          cardiovascular procedures were adjusted downward by 4%. It is unlikely
          that Medicare  rates would drop to a level that would  adversely  harm
          the   Company's   future   prospects   as  EECP  is  proven  to  be  a
          cost-effective solution in the management of angina.

        Although ultimate realization of all deferred tax assets is not assured,
management has concluded, in accordance with SFAS 109, that based upon the
weight of available evidence, it is more likely than not that the deferred tax
asset will be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the future if estimates of future
taxable income during the carryforward period are reduced.

NOTE K - COMMITMENTS AND CONTINGENCIES

Consulting Agreements

     In September 2003, the Company and its 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 will record 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 the  previously  granted stock  options.  The
Company will determine the fair value of the unvested  options as of the date of
the  termination  and  consulting  agreement  and record a charge to  operations
during the second quarter of fiscal 2004.

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.

NOTE L  NASDAQ COMPLIANCE

     On February 14, 2003,  the Company was notified by The Nasdaq Stock Market,
Inc. that it was not in compliance with the minimum $1.00 per share  requirement
for  continued  inclusion  and  that it  would be  provided  180 days to  regain
compliance. On June 16, 2003, Nasdaq notified the Company that since the closing
bid price of the  Company's  common stock had been at $1.00 per share or greater
for at least ten consecutive  trading days, the Company regained  compliance and
that the issue of  non-compliance  has been closed.  Ultimately,  non-compliance
could result in Nasdaq  delisting the Company's  common  stock.  Such  delisting
could have an adverse effect on the liquidity of the Company's  common stock and
could also impact the Company's ability to raise additional  equity capital,  if
necessary.
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

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

General Overview

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

     EECP  therapy is  currently  reimbursed  by  Medicare  and  numerous  other
commercial  third-party  payers for the  treatment  of  refractory  angina.  The
reimbursement  rate for a full  course of 35  one-hour  treatments  ranges  from
$6,000 to $10,500.  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,  giving due  consideration to materiality.  The application of these
accounting  policies involves the exercise of judgment and use of assumptions as
to future uncertainties and, as a result, actual results could differ from these
estimates. The Company's critical accounting policies are as follows:

Revenue Recognition

     The Company  recognizes  revenue  from the sale of its EECP  systems in the
United  States in the  period in which the  Company  delivers  the system to the
customer and receives customer acceptance of delivery.  Revenue from the sale of
its EECP systems to international  markets as well as supplies,  accessories and
spare parts are recognized upon shipment, during the period in which the Company
delivers  the  product to a common  carrier.  The sale of EECP  systems  are not

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

subject to a right of return,  other than for normal warranty  matters,  and the
Company is not obligated for post-sale  upgrades to these  systems.  The cost of
in-service  support consisting of equipment set- up and training provided at the
customers  facilities  are  accrued  at the time the  revenue is  recorded.  The
Company also  recognizes  revenue  generated  from  servicing  units that are no
longer  covered  under by a  warranty,  or by  providing  sites with  additional
training,  in the period that these services are provided.  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 May 31,
2003.  Revenues  from the sale of  extended  warranties  on the EECP  system are
recognized  on a  straight-line  basis over the life of the  extended  warranty,
ranging  from one year to four  years.  Deferred  revenues  relate  to  extended
warranty  fees  that have been paid by  customers  prior to the  performance  of
extended warranty services.

     The Company follows SFAS No. 13,  "Accounting For Leases," for its sales of
EECP units  under  sales-type  leases it  presently  has with one  customer.  In
accordance  with  SFAS No.  13,  the  Company  records  the  sale and  financing
receivable at the amount of the minimum lease  payment,  less unearned  interest
income,  which is  computed  at the  interest  rate  implicit  in the lease,  an
allowance  for bad debt and  executory  costs,  which are  primarily  related to
product  warranties on each unit sold.  Unearned  interest income is (Warranties
are recorded  straight-line  and not by the interest  methods as described here)
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,  management decided to
write-off  financing   receivables  under  sales-type  leases  of  approximately
$2,558,000  as a result of  significant  uncertainties  with  respect to a major
customer's ability to meet its 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 in 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

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

components,  and records a provision  for excess and  obsolete  inventory  based
primarily  on existing and  anticipated  design and  engineering  changes to our
products as well as forecasts of future product demand.

Warranty Costs

     Equipment sold is generally  covered by a warranty  period of one year. The
Company  accrues a warranty  reserve  for  estimated  costs to provide  warranty
services  when the  equipment  sale is  recognized.  The factors  affecting  the
Company's warranty liability include the number of units sold and historical and
anticipated  rates of claims  and  costs per  claim.  The  Company  periodically
assesses  the  adequacy  of its  warranty  liability  based on  changes in these
factors.  Warranty  reserves related to units sold under  sales-type  leases are
recorded  as  executory  costs,  which  serve to reduce the amount of  financing
receivables  reported in the  consolidated  balance sheets.  The Company records
revenue on extended  warranties  on a  straight-line  basis over the term of the
related warranty contracts. Service costs are expensed as incurred.

        Deferred revenues related to extended warranties are $1,851,584 and
$1,186,450 at for the three-month periods ended August 31, 2003, and 2002,
respectively.

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.
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

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

Recently Issued Accounting Standards

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

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

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

     In November  2002,  the  Emerging  Issues Task  Force,  ("EITF")  reached a
consensus   opinion  of  EITF  00-21   "Revenue   Arrangements   with   Multiple
Deliverables".  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.  Entities  may elect to report the change as a  cumulative
effect adjustment in accordance with APB Opinion 20,  "Accounting  Changes." The
Company is currently  evaluating the impact of the adoption of EITF 00-21 on its
financial statements.

Results of Operations

Three Months Ended August 31, 2003 and 2002
-------------------------------------------

     The  Company  generated  revenues  from the sale,  lease and service of its
external  counterpulsation systems ("EECP" systems) of $5,426,532 and $4,539,170
for the  three-month  periods  ended  August  31,  2003 and 2002,  respectively,
reflecting  an increase of $887,372 or 20%.  The  Company's  loss before  income
taxes was $(256,594) and $(5,519,300) for the three-month periods ended August

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


31, 2003 and 2002,  respectively.  The Company reported a net loss of $(266,594)
and $(4,234,278)  for the  three-months  periods ended August 31, 2003 and 2002,
respectively.

     The increase in revenues for the three-month periods ended August 31, 2003,
as compared to August 31, 2002, is a result of the following:

     1.   Revenue  from sales of EECP  equipment  increased  $583,601  or 14% to
          $4,788,110 for the three-month period ended August 31, 2003,  compared
          to  $4,204,509  for the  same  period  of  2002.  The  higher  revenue
          primarily  reflected  a 30%  increase  in unit  shipments  to domestic
          customers,  which was  partially  offset by a 12%  decline  in average
          domestic  selling  prices.  The  reduced  average  sales  prices had a
          $617,000   negative   impact  on  equipment  sales  revenues  for  the
          three-month  period ended August 31, 2003 compared to the  three-month
          period ended August 31, 2002. Factors that have contributed to reduced
          average selling prices result primarily from increased  competition in
          the  domestic  market and an  increase in product mix toward the lower
          priced MC2 system. Sales of EECP systems were also negatively impacted
          by  increased  competition,  a longer  selling  cycle  and a number of
          vacancies in US sales territories.  Factors positively impacting sales
          include  the 35%  Medicare  rate  increase  effective  in March  2003,
          continued  publication of data supporting the clinical use of EECP and
          the generation of sales leads from direct  marketing  programs as well
          as the Company's presence at trade shows.  International  shipments of
          EECP equipment were $111,000 for the  three-month  period ended August
          31, 2003 compared to $115,000 for the  comparable  period of the prior
          year.

     2.   Revenue from equipment rentals and services were $638,422 and $334,661
          for the  three-months  period  ended  August 31,  2003,  respectively,
          reflecting an increase of $303,761 or 91% over the  comparable  period
          of the prior year. The higher 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.  In addition  rental revenue for EECP
          systems  increased  49% compared to the same period for prior year and
          now  represents  9% of gross  sales.  The  increase in rental  revenue
          primarily  reflects  a  short-term  rental  agreement  with  a  single
          customer.

     The  gross  profit  increased  to  $3,487,858  or 64% of  revenues  for the
three-month  period  ended  August 31, 2003,  compared to  $2,579,818  or 57% of
revenues for the  three-month  period ended August 31, 2002.  Gross  profits are
dependent on a number of factors,  particularly  the mix of EECP models sold and
their respective  average selling prices,  the mix of EECP units sold, rented or
placed during the period, the ongoing costs of servicing such units, and certain
fixed period costs,  including facilities,  payroll and insurance.  Gross profit
margins  are  generally  less  on  non-  domestic  business  due to  the  use of
distributors,  which results in lower selling  prices.  Consequently,  the gross
profit  realized  during  the  current  period may not be  indicative  of future
margins.  The  improvement  in gross  profit  margin for the  quarter  primarily
reflects the impact of the higher revenue  combined with planned cost reductions
in manufacturing overhead,  which were due primarily to decreased personnel cost
and lower  expenses for service  travel and spare  parts.  The decrease in lower
average domestic selling prices for EECP systems partially offset the above.

     Selling,  general and administrative ("SG&A") expenses for the three-months
ended August 31, 2003 and 2002 were $2,621,452 or 48% of revenues and $3,686,896
or 81% of revenues,  respectively.  The decrease of SG&A in both absolute amount
and as a percentage of sales resulted primarily from a one-time $600,000 accrual
arising from the  settlement  of  litigation  in the first  quarter of 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  three-month  period  ended August 31, 2003 as compared to the
same period for the prior year. The above  decreases  were  partially  offset by
higher administrative expenses, which reflected increased personnel,  consulting
services and insurance expenses.

     Research and  development  ("R&D")  expenses of $955,545 or 18% of revenues
for the three months ended August 31, 2003  decreased by $235,441,  or 20%, from
the prior three months ended August 31, 2002 of  $1,190,986  or 26% of revenues.
The decrease is due primarily to reduced  expenditures  for consulting  services
related to the  Prospective  Evaluation  of EECP in  Congestive  Heart  Failure,
("PEECH")  clinical trial and lower product  development costs. R&D expenses are
primarily  impacted  by the  PEECH  clinical  trial in heart  failure  and other
clinical  initiatives  (including the International EECP Patient  Registry),  as
well as continued  product design  and development costs. The Company expects to

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

continue its  investments in product  development  and clinical trials in fiscal
2004 and beyond to further  validate  and expand the  clinical  applications  of
EECP, including, but not limited to, heart failure and acute coronary syndromes.

     During the  three-month  period ended August 31, 2003, the Company  charged
$189,181 to its provision for doubtful accounts as compared to $3,248,874 during
the  three-month  period ended August 31, 2002.  These charges,  in fiscal 2003,
primarily  resulted  from of a full  write-off  of  receivables,  including  the
present  carrying  amount of the underlying  equipment due to the uncertainty of
the  Company's  ability to  repossess  the  equipment,  with  respect to a major
customer,  as well as specific reserves against certain  international  accounts
for which  extended  credit  terms were  offered.  During the second  quarter of
fiscal 2003, the Company was able to successfully  recover all of the units that
it had sold under sales-type  leases to the  aforementioned  major customer back
into its finished goods  inventory and recorded a bad debt recovery of $479,408,
which  represented  the present  carrying  amount of the equipment.  The Company
redeployed  certain pieces of the equipment while certain other pieces have been
returned to the Company's inventory.

     Interest   expense  and  financing   costs  decreased  to  $33,366  in  the
three-month period ended August 31, 2003 from $48,852 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.

     The decrease in interest income from the prior periods is the direct result
of absence of interest income related to certain equipment sold under sales-type
leases  reported in fiscal 2002, as well as declining  interest  rates this year
over last year,  offset by the  increase in the average cash  balances  invested
during the quarter compared to the prior period.

     During the  three-months  ended  August 31,  2003,  the Company  recorded a
provision  for state income  taxes of $10,000.  This is in contrast to an income
tax benefit of  $1,285,022  reported  during the  three-months  ended August 31,
2002.  As of August 31, 2003,  the Company had  recorded  deferred tax assets of
$14,582,000  net of a $706,000  valuation  allowance  related to the anticipated
recovery of tax loss carryforwards.  In addition, 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, based upon the
weight of  available  evidence,  that it is more likely than not that all of the
deferred  tax  assets  would  be  realized.   It  is  management's  belief  that
realization of the deferred tax asset is not dependent on material  improvements

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

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 and the first quarter of fiscal 2004, (much of which was
unexpected  and   non-recurring,   including  the  write-off  of   approximately
$2,600,000 in financing receivables and loan from the default of one customer, a
$600,000  litigation  settlement and $400,000 in employee severance payments and
related expenses in fiscal 2003).

     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  coverage  by CMS (in the US) and other  foreign  regulatory
          bodies.  The estimated US patient  population  for angina  patients is
          approximately  6.2 million and  approximately  5 million  patients for
          heart failure.
     B.   Medicare  coverage  rates  for EECP have  risen in each  year  since a
          national  rate  was  established  in  January  2000,   increasing  60%
          cumulatively.
     C.   Potential  extension  of  Medicare  coverage to include all classes of
          angina  (beyond the present  Class  III/IV  indication,  for which the
          Company  estimates  the annual  patient  population in the US alone is
          150,000, necessitating an installed base in excess of 3,000 systems).
     D.   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 PEECH trial results are expected to
          be  favorable  (based  upon a  published  feasibility  study and other
          analyses) and should be available in early 2005.  The  combination  of
          favorable PEECH trial results and Medicare  reimbursement would likely
          be a significant catalyst for significant Company growth.
     E.   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).  The Company's  Scientific Council is comprised of
          leading  academic  cardiologists,  many of whom are past presidents of
          the American College of Cardiology,  the American Heart Association or
          the Heart Failure Society of America.
     F.   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.
     G.   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.
     H.   Initiatives  planned to lower the standard cost of the Company's  EECP
          systems, improving margins or preserving them from further erosion.
     I.   The  Company  has a large,  non-domestic  market  opportunity  that is
          developing  through  a  network  of  local  independent  distributors,
          primarily  in Europe for which the  Company has  received  the CE Mark
          (FDA-clearance equivalent).
     J.   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.
     K.   Increased  hardware  utility  to  allow  for  the  use of  EECP  in an
          increasing  number of  patient  environments.  The EECP TS3  system is
          mobile 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:
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


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 results of this study are likely to 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,  medical  community  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.
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 (5,000 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 date 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.  However,  there is presently little evidence
     to suggest it. 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 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.   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 extensive clinical trials).
     The  Company  estimates  having a 75%+  market  share and  doesn't  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 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,  the
     Company  is  confident  that  rates are now and will  remain at  sufficient
     levels to support the Company's  growth. In fact, CMS raised rates for EECP
     treatment  by 35% in March 2003 while all other  cardiovascular  procedures
     were adjusted downward by 4%. It is unlikely that Medicare rates would drop
     to a level that would adversely harm the Company's future prospects as EECP
     is proven to be a cost-effective solution in the management of angina.

     Although  ultimate  realization  of all deferred tax assets is not assured,
management  has  concluded,  in  accordance  with SFAS 109,  that based upon the
weight of available  evidence,  it is more likely than not that the deferred tax

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

asset  will be  realized.  The  amount of the  deferred  tax  assets  considered
realizable,  however,  could be  reduced in the  future if  estimates  of future
taxable income during the carryforward period are reduced.

Liquidity and Capital Resources

     The Company has financed its  operations in fiscal 2004 and 2003  primarily
from working capital and operating results.  At August 31, 2003, the Company had
a cash balance of $7,192,074 and working  capital of  $11,986,358  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 in the current three-month period compared
to May  31,  2003  primarily  due  to  $2,080,567  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
$2,181,399  for the  three-month  period  ended  August 31,  2003.  Net accounts
receivables  were 95% of  quarterly  revenues for the  three-month  period ended
August 31, 2003, compared to 113% at the end of the three-month period ended May
31,  2003,  and  accounts  receivable  turnover  improved  to 3.5  times  in the
three-month  period  ended  August  31,  2003  compared  to  3.2  times  in  the
three-month  period ended May 31, 2003.  The Company's  management has tightened
its sales and credit  policies,  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 three-month period ended August 31, 2003, less than 1%
of revenues  were  generated  from sales in which  payment terms greater than 90
days were offered  compared to  approximately  3% during the three-month  period
ended  August 31,  2002,  and no  sales-type  leases were offered by the Company
during either period. At August 31, 2003,  approximately  $385,000 or 46% of the
allowance for doubtful  accounts was related to specific  accounts that had been
offered  extended  credit  terms  and  $1,027,000  or  17%,  of  gross  accounts
receivable  represent  accounts  offered  extended  payment  terms.  In general,
reserves are calculated on a formula basis considering factors such as the aging
of the receivables,  time past due, and the customer's  credit history and their
current  financial  status.  In most instances  where reserves are required,  or
accounts are ultimately written-off,  customers have been unable to successfully
implement  their EECP program.  As the Company is creating a new market for EECP
and recognizes the challenges  that some customers may encounter,  it has opted,
at times, on a  customer-by-customer  basis, to recover its equipment instead of
pursuing other legal remedies  against these customers,  which  necessitated the
recording of a reserve or a write-off by the Company.

     Additionally, the lower revenue for the three-month period ended August 31,
2003, compared to the three-month period ended May 31, 2003, resulted in reduced
accounts  receivable  at the  end of the  period.  Other  key  factors  included
inventories,   which  decreased  by  $465,443   reflecting  efforts  to  improve
procurement  of its raw materials and  management  of finished  goods  inventory
levels.  Partially  offsetting  the above was an  increase  of $384,599 in other
current  assets  reflecting  the  prepayment of the Company's  annual  insurance
policies and a decrease in accounts payable,  accrued expenses and other current
liabilities of $104,835.

     Investing activities used net cash of $90,462 during the three-month period
ended August 31,  2003.  The  principal  use of cash was for the purchase of the
Company's new enterprise resource planning software.

     Financing activities used net cash of $20,878 during the three-month period
ended August 31, 2003,  reflecting  principal payments on loans partially offset
by proceeds from the exercise of stock options.

     In fiscal 2002,  the Company  refinanced  its long-term  obligations on the
purchase of its  headquarters  and  warehouse  facility.  In October  2002,  the
Company  amended its existing  credit  facility to provide for  borrowings up to
$5,000,000  ($2,000,000,  at any  time  that  consolidated  net  income  for the
immediately  preceding 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

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

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 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. At August 31, 2003, the Company
did not meet the minimum interest  coverage,  tangible net worth and minimum net
earnings  covenants and future  compliance  with each of these  covenants in the
near term is not certain.  Management  believes,  based upon its cash balance at
August 31, 2003 and its internal forecasts, that any limitation on the Company's
ability to borrow against this credit  facility  through the remainder of fiscal
2004 and the first  quarter of fiscal  2005 would not have an adverse  effect on
the Company's operations.

     On February 14, 2003,  the Company was notified by The Nasdaq Stock Market,
Inc. that it was not in compliance with the minimum $1.00 per share  requirement
for  continued  inclusion  and  that it  would be  provided  180 days to  regain
compliance. On June 16, 2003, Nasdaq notified the Company that since the closing
bid price of the  Company's  common stock had been at $1.00 per share or greater
for at least ten consecutive  trading days, the Company regained  compliance and
that the issue of  non-compliance  has been closed.  Ultimately,  non-compliance
could result in Nasdaq  delisting the Company's  common  stock.  Such  delisting
could have an adverse effect on the liquidity of the Company's  common stock and
could also impact the Company's ability to raise additional  equity capital,  if
necessary.

     Management  believes that its working capital  position at August 31, 2003,
the ongoing  commercialization of the EECP system, and the effect of initiatives
undertaken to improve our cash position by managing operating expense levels and
by  strengthening  our sales and credit  policies  will make it possible for the
Company to support its operating  expenses and to implement  its business  plans
for at least the next twelve months.

     The following table presents the Company's  expected cash  requirements for
contractual obligations outstanding as of August 31, 2003:
<TABLE>
<CAPTION>

                                                  Due as of   Due as of 8/31/05    Due as of 8/31/07        Due
                                        Total       8/31/04         and 8/31/06          and 8/31/08     Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>                 <C>                  <C>            <C>
Long-Term Debt                     $1,260,000      $111,000            $248,000             $133,000       $768,000
Operating Leases                      131,000        54,000              74,000                3,000             --
Litigation Settlement                 400,000       100,000             300,000                   --             --
Severance obligations                  40,000        40,000                  --                   --             --
Employment Agreements                 504,000       400,000             104,000                   --             --
--------------------------------------------------------------------------------------------------------------------
Total Contractual Cash             $2,335,000      $705,000            $726,000             $136,000       $768,000
Obligations
====================================================================================================================
</TABLE>
Effects of Inflation

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

ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

           MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

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>
                          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

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

        Current Report on Form 8-K dated June 16, 2003.
        Current Report on Form 8-K dated June 30, 2003.
        Current Report on Form 8-K dated August 13, 2003.

<PAGE>


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


                                VASOMEDICAL, INC.

                             By: /s/ Gregory D. Cash
                                 --------------------------------
                                 Gregory D. Cash
                                 Chief Executive Officer and Director
                                 (Principal Executive Officer)

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


Date:  October 15, 2003