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, 2004

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

        For the transition period from _______________ to ______________

Commission File Number: 0-18105

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

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

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

          Registrant's Telephone Number         (516) 997-4600

Number of Shares Outstanding of Common Stock,
$.001 Par Value, at October 1, 2004   58,552,688


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

<PAGE>


Vasomedical, Inc. and Subsidiaries


                                     INDEX

PART I - FINANCIAL INFORMATION

  Item 1 - Financial Statements (unaudited)                          Page

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

     Consolidated Condensed Statements of Earnings for the
        Three Months Ended August 31, 2004 and 2003                     4

     Consolidated Condensed Statement of Changes in Stockholders'
        Equity for the Period from June 1, 2004 to August 31, 2004      5

     Consolidated Condensed Statements of Cash Flows for the
        Three Months Ended August 31, 2004 and 2003                     6

     Notes to Consolidated Condensed Financial Statements               7

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

  Item 3 - Qualitative and Quantitative Disclosures About
           Market Risk                                                 23

  Item 4 - Procedures and Controls                                     23

PART II - OTHER INFORMATION                                            24






                                     Page 2

<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                     CONSOLIDATED CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                  August 31,           May 31,
                                                                                    2004                 2004
                                                                              ----------------    -----------------
                                 ASSETS                                         (unaudited)           (audited)
<S>                                                                               <C>                  <C>
CURRENT ASSETS
     Cash and cash equivalents                                                    $3,605,066           $6,365,049
     Certificates of deposit and treasury bills                                    2,655,014            1,180,540
     Accounts receivable, net of an allowance for doubtful accounts of
       $836,171 at August 31, 2004 and $699,203 at May 31, 2004                    4,516,756            5,521,853
     Inventories                                                                   2,596,834            2,373,748
     Other current assets                                                            662,567              272,513
                                                                              -----------------    -----------------

         Total current assets                                                     14,036,237           15,713,703

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,372,031 at
   August 31, 2004 and $ 2,378,576 at May 31, 2004                                 2,496,925            2,430,521
DEFERRED INCOME TAXES                                                             14,582,000           14,582,000
OTHER ASSETS                                                                         312,988              297,391
                                                                              -----------------    -----------------
                                                                                 $31,428,150          $33,023,615
                                                                              =================    =================


                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                        $2,664,329           $3,122,184
     Current maturities of long-term debt and notes payable                          139,263              136,478
     Sales tax payable                                                               333,649              353,360
     Deferred revenues                                                             1,672,713            1,734,925
     Accrued warranty and customer support expenses                                  131,833              161,917
     Accrued professional fees                                                        56,039               91,486
     Accrued commissions                                                             369,110              341,483
                                                                              -----------------    -----------------
         Total current liabilities                                                 5,366,936            5,941,833

LONG-TERM DEBT                                                                     1,057,726            1,092,837
ACCRUED WARRANTY COSTS                                                                57,000               83,000
DEFERRED REVENUES                                                                    978,733            1,111,526
OTHER LIABILITIES                                                                    167,250              200,250

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock, $.01 par value; 1,000,000 shares authorized; none
       issued and outstanding                                                             --                   --
     Common stock, $.001 par value; 110,000,000 shares authorized;
       58,552,688 and 58,419,356 shares at August 31, 2004 and May 31,
       2004, respectively, issued and outstanding                                     58,552               58,419
     Additional paid-in capital                                                   51,450,639           51,320,106
     Accumulated deficit                                                         (27,708,686)         (26,784,356)
                                                                              -----------------    -----------------
         Total stockholders' equity                                               23,800,505           24,594,169
                                                                              -----------------    -----------------
                                                                                 $31,428,150          $33,023,615
                                                                              =================    =================

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

                                     Page 3
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                           Three months
                                                                                          ended August 31,
                                                                              --------------------------------------
                                                                                    2004                 2003
                                                                              -----------------    -----------------
<S>                                                                             <C>                  <C>
Revenues
   Equipment sales                                                              $3,974,897           $4,788,110
   Equipment rentals and services                                                  846,519              638,422
                                                                              -----------------    -----------------
                                                                                 4,821,416            5,426,532

Cost of sales and services                                                       1,661,793            1,938,674
                                                                              -----------------    -----------------
   Gross Profit                                                                  3,159,623            3,487,858

Expenses
   Selling, general and administrative                                           3,052,481            2,621,452
   Research and development                                                        871,898              955,545
   Provision for doubtful accounts                                                 132,956              189,181
   Interest expense and financing costs                                             30,362               33,366
   Interest and other income, net                                                  (13,744)             (55,092)
                                                                              -----------------    -----------------
                                                                                 4,073,953            3,744,452

                                                                              -----------------    -----------------
LOSS BEFORE INCOME TAXES                                                          (914,330)            (256,594)
   Income tax expense, net                                                         (10,000)             (10,000)
                                                                              -----------------    -----------------
NET LOSS                                                                         $(924,330)           $(266,594)
                                                                              =================    =================

Net loss per common share
     - basic                                                                       $(0.02)               $0.00
                                                                              =================    =================
     - diluted                                                                     $(0.02)               $0.00
                                                                              =================    =================
Weighted average common shares outstanding
     - basic                                                                    58,532,398           57,826,844
                                                                              =================    =================
     - diluted                                                                  58,532,398           57,826,844
                                                                              =================    =================
The accompanying notes are an integral part of these condensed statements.
</TABLE>
                                     Page 4
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

      CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                  (unaudited)

<TABLE>
<CAPTION>

                                                                     Additional                              Total
                                                                       Paid-in         Accumulated       Stockholders
                                        Shares         Amount          Capital           Deficit            Equity
                                      ------------    ----------    --------------    ---------------    --------------
<S>             <C>                    <C>              <C>           <C>               <C>                <C>
Balance at June 1, 2004                58,419,356       $58,419       $51,320,106       $(26,784,356)      $24,594,169
   Exercise of stock options              133,332           133           130,533                              130,666
   Net loss                                                                                 (924,330)         (924,330)
                                      ------------    ----------    --------------    ---------------    --------------
Balance at August 31, 2004            58,552,688        $58,552       $51,450,639       $(27,708,686)      $23,800,505
                                      ============    ==========    ==============    ===============    ==============

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


                                     Page 5
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                           Three months
                                                                                         ended August 31,
                                                                              --------------------------------------
                                                                                    2004                 2003
                                                                              -----------------    -----------------
<S>                                                                                <C>                  <C>
Cash flows from operating activities
     Net loss                                                                      $(924,330)           $(266,594)
                                                                              -----------------    -----------------
     Adjustments to reconcile net loss to net cash (used in) provided
       by operating activities
         Depreciation and amortization                                               149,660              205,054
         Provision for doubtful accounts                                             132,956              189,181
         Allowance for inventory write-off                                             8,583                   --
         Changes in operating assets and liabilities
              Accounts receivable                                                    872,142            2,058,564
              Financing receivables, net                                                  --               31,491
              Inventories                                                           (299,527)             465,443
              Other current assets                                                  (390,054)            (384,599)
              Other assets                                                           (25,236)             (40,531)
              Accounts payable, accrued expenses and other current
                liabilities                                                         (577,682)            (104,835)
              Other liabilities                                                     (191,793)             (72,607)
                                                                              -----------------    -----------------
                                                                                    (320,951)           2,347,161
                                                                              -----------------    -----------------
     Net cash (used in) provided by operating activities                          (1,245,281)           2,080,567
                                                                              -----------------    -----------------

     Cash flows from investing activities
         Purchase of property and equipment                                         (138,568)             (90,462)
         Purchase of certificates of deposit and treasury bills, net              (1,474,474)                  --
                                                                              -----------------    -----------------
     Net cash used in investing activities                                        (1,613,042)             (90,462)
                                                                              -----------------    -----------------

     Cash flows from financing activities
         Payments on notes                                                           (32,326)             (25,837)
         Proceeds from exercise of options and warrants                              130,666                4,959
                                                                              -----------------    -----------------
     Net cash provided by (used in) financing activities                              98,340              (20,878)
                                                                              -----------------    -----------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                                                                                  (2,759,983)           1,969,227
     Cash and cash equivalents - beginning of period                               6,365,049            5,222,847
                                                                              -----------------    -----------------
     Cash and cash equivalents - end of period                                    $3,605,066           $7,192,074
                                                                              =================    =================

Non-cash investing and financing activities were as follows:
     Inventories transferred to (from) property and equipment,  attributable
       to operating leases, net                                                      $67,858             $(91,121)


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

                                     Page 6
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2004

NOTE A - BASIS OF PRESENTATION

     The  consolidated  condensed  balance sheet as of August 31, 2004,  and the
related  consolidated  condensed  statements  of  earnings  for the  three-month
periods ended August 31, 2004 and 2003, changes in stockholders'  equity for the
three-month  period ended August 31,  2004,  and cash flows for the  three-month
periods ended August 31, 2004 and 2003, have been prepared by Vasomedical,  Inc.
and  Subsidiaries  (the "Company")  without audit. In the opinion of management,
all  adjustments  (which  include only normal,  recurring  accrual  adjustments)
necessary to present fairly the financial  position and results of operations as
of August 31, 2004, and for all periods presented have been made.

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

Reclassifications

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

NOTE B -  IMPACT  OF  NEW  ACCOUNTING PRONOUNCEMENTS

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

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

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

     In January 2003, the FASB issued FASB  Interpretation No. 46 "Consolidation
of  Variable  Interest  Entities"  ("FIN  46"),  as  interpreted  by FIN 46R. In
general, a variable interest entity is a corporation, partnership, trust, or any
other legal  structure used for business  purposes that either (a) does not have
equity  investors  with voting  rights or (b) has equity  investors  that do not
provide sufficient financial resources for the entity to support its activities.
A variable  interest  entity often holds  financial  assets,  including loans or
receivables,  real estate or other property.  A variable  interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Until now, a company  generally has included  another entity in its consolidated
financial  statements only if it controlled the entity through voting interests.

                                     Page 7
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2004


FIN 46 changes that by requiring a variable  interest  entity to be consolidated
by a company if that  company is subject to a majority  of the risk of loss from
the variable interest  entity's  activities or entitled to receive a majority of
the entity's residual returns or both. FIN 46's consolidation requirements apply
immediately to variable  interest entities created or acquired after January 31,
2003.  The  consolidation  requirements  apply to older  entities  in the  first
interim  period  beginning  after  June  15,  2003.  Certain  of the  disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable  interest  entity was  established.  The Company
adopted FIN 46 effective January 31, 2003. The adoption of FIN 46 did not have a
material impact on the Company's financial position or results of operations.

     In November  2002,  the  Emerging  Issues Task  Force,  ("EITF")  reached a
consensus opinion on, "Revenue Arrangements with Multiple Deliverables",  "(EITF
00-21)".  That  consensus  provides  that  revenue  arrangements  with  multiple
deliverables  should be divided into  separate  units of  accounting  if certain
criteria are met. The  consideration  of the arrangement  should be allocated to
the separate  units of  accounting  based on their  relative  fair values,  with
different  provisions  if the fair value is  contingent on delivery of specified
items  or  performance   conditions.   Applicable  revenue  criteria  should  be
considered  separately  for each  separate  unit of  accounting.  EITF  00-21 is
effective  for revenue  arrangements  entered into in fiscal  periods  beginning
after June 15,  2003.  Effective  September 1, 2003,  the Company  prospectively
adopted the  provisions  of EITF 00-21.  The Company  recorded  $60,000,  net of
amortization,  of  revenue  related  to  the  fair  value  of  installation  and
in-service training and $29,584, net of amortization,  of revenue related to the
warranty  service for EECP system sales  recognized for the  three-month  period
ended August 31, 2004.

NOTE C - STOCK-BASED COMPENSATION

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

     During the three-month period ended August 31, 2004, the Board of Directors
granted  non-qualified stock options under the 1999 Stock Option Plan (the "1999
Plan") to 39  employees  to purchase an  aggregate  of 818,000  shares of common
stock,  at  exercise  prices  ranging  from  $1.11 to  $1.70  per  share,  which
represented the fair market value of the underlying  common stock at the time of
the respective grants.  These options vest over three-year and four-year periods
and expire ten years from the date of grant.

     During the  three-month  period ended August 31, 2004,  options to purchase
133,332  shares of common stock were exercised at an exercise price of $0.98 per
share,  aggregating $130,666 of proceeds to the Company.  During the three-month
period ended August 31, 2004,  options to purchase 56,666 shares of common stock
at an  exercise  price of $0.91 - $3.88  were  cancelled.


                                     Page 8

<PAGE>

                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2004

     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>
                                                                                  Three months
                                                                                ended August 31,
                                                                     --------------------------------------
                                                                            2004                 2003
                                                                     -----------------    -----------------
<S>                                                                     <C>                  <C>
Net loss, as reported                                                   $(924,330)           $(266,594)
     Deduct: Total stock-based employee compensation expense
       determined under fair value-based method for all awards
                                                                         (170,921)            (329,471)
                                                                     -----------------    -----------------
Pro forma net loss                                                    $(1,095,251)           $(596,065)
                                                                     =================    =================
Loss per share:
    Basic - as reported                                                   $(0.02)              $(0.00)
                                                                     =================    =================
    Diluted - as reported                                                 $(0.02)              $(0.00)
                                                                     =================    =================
    Basic - pro forma                                                     $(0.02)              $(0.01)
                                                                     =================    =================
    Diluted - pro forma                                                   $(0.02)              $(0.01)
                                                                     =================    =================

</TABLE>

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

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

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

     The fair value of the Company's  stock-based  awards was estimated assuming
no expected  dividends and the following  weighted-average  assumptions  for the
three months ended August 31, 2004:

        Expected life (years)                5
        Expected volatility                 81%
        Risk-free interest rate            4.8%
        Expected dividend yield            0.0%

NOTE D - EARNINGS (LOSS) PER COMMON SHARE

     Basic earnings (loss) per share is based on the weighted  average number of
common shares  outstanding  without  consideration  of potential  common shares.
Diluted  earnings (loss) per share is based on the weighted number of common and
potential  common shares  outstanding.  The  calculation  takes into account the
shares that may be issued  upon the  exercise  of stock  options  and  warrants,
reduced by the shares that may be  repurchased  with the funds received from the
exercise,  based on the average price during the period. Options and warrants to
purchase  5,639,753 and 6,485,086  shares of common stock were excluded from the
computation of diluted  earnings per share for the three months ended August 31,
2004 and 2003,  respectively,  because  the effect of their  inclusion  would be
antidilutive.


                                     Page 9
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2004


     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings (loss) per common share:

<TABLE>
<CAPTION>
                                                                                  Three months
                                                                                 ended August 31,
                                                                     --------------------------------------
                                                                           2004                 2003
                                                                     -----------------    -----------------
<S>                                                                     <C>                  <C>
Numerator:
   Basic and diluted net loss                                           $(924,330)           $(266,594)
Denominator:
   Basic - weighted average common shares                              58,532,398           57,826,844
     Stock options                                                             --                   --
     Warrants                                                                  --                   --
                                                                     -----------------    -----------------
   Diluted - weighted average common shares                            58,532,398           57,826,844
                                                                     =================    =================
Basic and diluted loss per common share                                    $(0.02)              $(0.00)
                                                                     =================    =================
</TABLE>

NOTE E - INVENTORIES

         Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                        August 31,             May 31,
                                                                           2004                 2004
                                                                     -----------------    -----------------
<S>                                                                        <C>                   <C>
   Raw materials                                                           $911,713              $928,269
   Work in process                                                          680,764               455,731
   Finished goods                                                         1,004,357               989,748
                                                                     -----------------    -----------------
                                                                         $2,596,834            $2,373,748
                                                                     =================    =================
</TABLE>

     At August 31, 2004 and May 31, 2004, the Company has recorded  reserves for
obsolete inventory of $397,000 and $399,000, respectively.

NOTE F - LONG-TERM DEBT

     The following table sets forth the computation of long-term debt:

<TABLE>
<CAPTION>
                                                                        August 31,            May 31,
                                                                          2004                 2004
                                                                     -----------------    -----------------
<S>                                                                    <C>                     <C>
Facility loans (a)                                                     $1,009,937              $1,022,933
Term loans (b)                                                            187,052                 206,382
                                                                     -----------------    -----------------
                                                                        1,196,989               1,229,315
Less current portion                                                     (139,263)               (136,478)
                                                                     -----------------    -----------------
                                                                       $1,057,726              $1,092,837
                                                                     =================    =================
</TABLE>
     (a) The Company  purchased  its  headquarters  and  warehouse  facility and
secured  notes of  $641,667  and  $500,000,  respectively,  under  two  programs
sponsored by New York State.  These notes,  which bear  interest at 7.8% and 6%,
respectively,  are payable in monthly  installments  consisting of principal and
interest  payments  over  fifteen-  year terms,  expiring in September  2016 and
January 2017, respectively, and are secured by the building.

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

                                    Page 10
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2004


NOTE G - DEFERRED REVENUES

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

     The changes in the Company's deferred revenues are as follows:
<TABLE>
<CAPTION>
                                                                                  Three months
                                                                                 ended August 31,
                                                                     --------------------------------------
                                                                           2004                 2003
                                                                     -----------------    -----------------
<S>                                                                    <C>                  <C>
Deferred Revenue at the beginning of the period                        $2,846,451           $1,709,551
ADDITIONS
     Deferred extended service contracts                                  319,850              445,187
     Deferred in-service training                                          67,500                   --
     Deferred warranty obligations                                        310,000                   --
RECOGNIZED AS REVENUE
     Deferred extended service contracts                                 (432,771)            (303,154)
     Deferred in-service training                                        (127,500)                  --
     Deferred warranty obligations                                       (332,084)                  --
                                                                     -----------------    -----------------
Deferred revenue at end of period                                       2,651,446            1,851,584
     Less: current portion                                             (1,672,713)            (968,758)
                                                                     -----------------    -----------------
Long-term deferred revenue at end of period                              $978,733             $882,826
                                                                     =================    =================
</TABLE>


NOTE H - WARRANTY COSTS

     Equipment  sold is  generally  covered  by a  warranty  period of one year.
Effective  September 1, 2003, the Company  adopted the provisions of EITF 00-21,
"Accounting  for  Revenue   Arrangements   with  Multiple   Deliverables"  on  a
prospective basis. Under EITF 00-21, for certain arrangements,  a portion of the
overall system price attributable to the first year warranty service is deferred
and  recognized  as revenue  over the service  period.  As such,  the Company no
longer  accrues  estimated  warranty  costs upon delivery but rather  recognizes
warranty and related service costs as incurred.  Prior to September 1, 2003, the
Company  accrued a warranty  reserve  for  estimated  costs to provide  warranty
services  when the  equipment  sale is  recognized.  The factors  affecting  the
Company's  warranty  liability  included the number of units sold and historical
and  anticipated  rates of claims and costs per claim.  The  warranty  provision
resulting from transactions prior to September 1, 2003 will be reduced in future
periods for  material  and labor costs  incurred as related  product is serviced
during the warranty  period or when the  warranty  period  elapses.  A review of
warranty  obligations  is performed  regularly to determine  the adequacy of the
reserve.  Based  on the  outcome  of this  review,  revisions  to the  estimated
warranty liability are recorded as appropriate.

     The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
                                                                          Three months
                                                                              ended
                                                                           August 31,
                                                               -----------------------------------
                                                                    2004                2003
                                                               ---------------     ---------------
<S>                                                                <C>                 <C>
Warranty liability at the beginning of the period                  $244,917            $788,000
     Expense for new warranties issued                                   --             164,000
     Warranty amortization                                          (56,084)           (237,000)
                                                               ---------------     ---------------
Warranty liability at end of period                                 188,833             715,000
     Less: Current portion                                         (131,833)           (537,000)
                                                               ---------------     ---------------
Long-term warranty liability at end of period                       $57,000            $178,000
                                                               ===============     ===============
</TABLE>


                                    Page 11
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2004


NOTE I - INCOME TAXES

     During the  three-months  ended  August 31,  2004 and 2003,  we  recorded a
provision for state income taxes of $10,000.

     As of August 31,  2004,  the Company had  recorded  deferred  tax assets of
$14,582,000 (net of a $2,223,008 valuation allowance) related to the anticipated
recovery  of tax loss  carryforwards.  The  amount of the  deferred  tax  assets
considered  realizable  could be reduced in the  future if  estimates  of future
taxable income during the carryforward period are reduced.  Ultimate realization
of the deferred tax assets is dependent upon the Company  generating  sufficient
taxable income prior to the expiration of the tax loss carryforwards. Management
believes  that the  Company is  positioned  for  long-term  growth  despite  the
financial  results  achieved  through  August 31, 2004,  and that based upon the
weight of  available  evidence,  that it is "more  likely than not" that the net
deferred  tax assets will be realized.  The "more  likely than not"  standard is
subjective,  and is based  upon  management's  estimate  of a  greater  than 50%
probability that its long range business plan can be realized.

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

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

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

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

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

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

     --   other medical insurance reimbursement policies;

     --   unexpected manufacturing problems;

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

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

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

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

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

     The  recorded  deferred  tax asset  includes an  increase to the  valuation
allowance of $314,747 during the three-months ended August 31, 2004.



                                    Page 12
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2004

NOTE J - COMMITMENTS AND CONTINGENCIES

Employment Agreements

     The approximate  aggregate  minimum  compensation  obligation  under active
employment agreements at August 31, 2004 are summarized as follows:

<TABLE>
<CAPTION>
        Twelve month period ended August 31,                    Amount
        ------------------------------------                    -------
                <S>                                            <C>
                2005                                           $209,375
                2006                                              3,125
                                                               --------
                                                               $212,500
                                                               ========
</TABLE>






                                    Page 13
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


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

General Overview

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

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

Critical Accounting Policies

     Financial  Reporting  Release No. 60, which was released by the  Securities
and Exchange  Commission,  or SEC, in December  2001,  requires all companies to
include a  discussion  of critical  accounting  policies or methods  used in the
preparation  of  financial  statements.  Note A of  the  Notes  to  Consolidated
Financial  Statements  included  in our Annual  Report on Form 10-K for the year
ended May 31, 2004 includes a summary of our significant accounting policies and
methods used in the preparation of our financial statements.  In preparing these
financial  statements,  we have made our best estimates and judgments of certain
amounts  included  in the  financial  statements,  giving due  consideration  to
materiality.  The application of these accounting policies involves the exercise
of judgment and use of assumptions as to future  uncertainties and, as a result,
actual  results  could  differ from these  estimates.  Our  critical  accounting
policies are as follows:

Revenue Recognition

     We recognize  revenue when  persuasive  evidence of an arrangement  exists,
delivery  has  occurred  or  service  has been  rendered,  the price is fixed or
determinable and collectibility is reasonably  assured. In the United States, we
recognize  revenue  from the sale of our EECP  systems in the period in which we
deliver the system to the customer. Revenue from the sale of our EECP systems to
international markets is recognized upon shipment, during the period in which we
deliver the product to a common carrier, as are supplies,  accessories and spare

                                    Page 14
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


parts  delivered  to both  domestic  and  international  customers.  Returns are
accepted  prior to the  installation  and in-service  training  subject to a 10%
restocking charge or for normal warranty  matters,  and we are not obligated for
post-sale  upgrades to these  systems.

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

     We recognized  deferred revenues of $127,500 related to in-service training
and $332,084  related to warranty  service during the  three-month  period ended
August 31, 2004. In addition,  following the adoption of the  provisions of EITF
00-21 beginning  September 1, 2003 we began to defer revenue that had previously
been  recorded  at the  time of  sale.  Previously,  in  accordance  with  Staff
Accounting Bulletin No. 101, "Revenue  Recognition in Financial  Statements," we
accrued costs  associated  with these  arrangements  as warranty  expense in the
period the system was  delivered  and accepted.  During the  three-month  period
ended August 31, 2004, we deferred  $67,500  related to in-service  training and
$310,000 related to warranty service.  The amount related to in-service training
is  recognized as revenue at the time the  in-service  training is completed and
the amount related to warranty  service is recognized as service revenue ratably
over the related service period,  which is generally one year.  Costs associated
with the  provision  of  in-service  training and  warranty  service,  including
salaries, benefits, travel, spare parts and equipment, are recognized in cost of
sales as incurred.

     We also recognize revenue generated from servicing EECP systems that are no
longer covered by a warranty  agreement,  or by providing  sites with additional
training,  in the period that these  services are provided.  Revenue  related to
future  commitments under separately priced extended warranty  agreements on the
EECP  system are  deferred  and  recognized  ratably  over the  service  period,
generally  ranging  from one year to four years.  Deferred  revenues  recognized
during  the  period  related  to  extended  warranty  agreements  that have been
invoiced to customers  prior to the  performance of these services were $432,771
and $303,154 as of August 31, 2004 and 2003, respectively. Costs associated with
the provision of service and maintenance,  including salaries, benefits, travel,
spare parts and equipment, are recognized in cost of sales as incurred.  Amounts
billed in excess of revenue  recognized are included as deferred  revenue in the
consolidated balance sheets.

     We have also entered into lease agreements for our EECP systems,  generally
for terms of one year or less, that are classified as operating leases. Revenues
from operating leases are generally recognized,  in accordance with the terms of
the lease agreements,  on a straight-line  basis over the life of the respective
leases.  For certain operating leases in which payment terms are determined on a
"fee-per-use" basis,  revenues are recognized as incurred (i.e., as actual usage
occurs). The cost of the EECP system utilized under operating leases is recorded
as a component of property and  equipment and is amortized to cost of sales over
the estimated useful life of the equipment, not to exceed five years. There were
no significant  minimum rental  commitments on these operating  leases at August
31, 2004.

                                    Page 15
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

Accounts Receivable, net

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

Inventories, net

     We value  inventory  at the lower of cost or estimated  market,  cost being
determined  on a  first-in,  first-out  basis.  We often  place EECP  systems at
various  field  locations for  demonstration,  training,  evaluation,  and other
similar purposes at no charge.  The cost of these EECP systems is transferred to
property  and  equipment  and is amortized  over the next two to five years.  We
record  the  cost  of  refurbished  components  of  EECP  systems  and  critical
components at cost plus the cost of refurbishment. We regularly review inventory
quantities on hand,  particularly  raw materials  and  components,  and record a
provision  for excess and  obsolete  inventory  based  primarily on existing and
anticipated design and engineering  changes to our products as well as forecasts
of future product demand.

Deferred Revenues

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

Warranty Costs

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

Income Taxes

     Deferred  income taxes are  recognized  for temporary  differences  between
financial  statement  and income tax bases of assets  and  liabilities  and loss
carryforwards  for which  income tax  benefits  are  expected  to be realized in
future years. A valuation  allowance is established,  when necessary,  to reduce
deferred tax assets to the amount expected to be realized.  In estimating future
tax consequences, we generally consider all expected future events other than an
enactment  of  changes  in the tax laws or  rates.  The  deferred  tax  asset is
continually  evaluated for  realizability.  To the extent our judgment regarding
the  realization  of the  deferred  tax  assets  change,  an  adjustment  to the
allowance is recorded,  with an offsetting increase or decrease, as appropriate,
in income tax expense.  Such adjustments are recorded in the period in which our
estimate as to the  realizability  of the asset  changed that it is "more likely
than not" that all of the deferred tax assets will be realized. The "more likely

                                    Page 16
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

than not"  standard is  subjective,  and is based upon our estimate of a greater
than 50% probability that our long range business plan can be realized.

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

Stock Compensation

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

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

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

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

Recently Issued Accounting Standards

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

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

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

                                    Page 17
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


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

     In November  2002,  the  Emerging  Issues Task  Force,  ("EITF")  reached a
consensus opinion on, "Revenue Arrangements with Multiple Deliverables",  "(EITF
00-21)".  That  consensus  provides  that  revenue  arrangements  with  multiple
deliverables  should be divided into  separate  units of  accounting  if certain
criteria are met. The  consideration  of the arrangement  should be allocated to
the separate  units of  accounting  based on their  relative  fair values,  with
different  provisions  if the fair value is  contingent on delivery of specified
items  or  performance   conditions.   Applicable  revenue  criteria  should  be
considered  separately  for each  separate  unit of  accounting.  EITF  00-21 is
effective  for revenue  arrangements  entered into in fiscal  periods  beginning
after June 15, 2003.  Effective September 1, 2003, we prospectively  adopted the
provisions  of EITF 00-21.  Upon adoption of the  provisions  of EITF 00-21,  we
deferred  net of  amortization  $60,000 of revenue  related to the fair value of
installation  and in- service  training  and  $29,584 of revenue  related to the
warranty  service for EECP system sales  recognized for the  three-month  period
ended August 31, 2004.

Results of Operations

Three Months Ended August 31, 2004 and 2003

     Net   revenues   from   sales,   leases  and   service   of  our   external
counterpulsation  systems  ("EECP"  systems) for the  three-month  periods ended
August 31, 2004 and 2003,  was $4,821,416 and  $5,426,532,  respectively,  which
represented  a decline of  $605,116  or 11%.  We reported a net loss of $924,330
compared to $266,594  for the three-  month  periods  ended  August 31, 2004 and
2003, respectively.  Our net loss per common share was $0.02 for the three-month
period  ended  August 31, 2004  compared to a net loss of less than one cent per
share for the three-month period August 31, 2003.

Revenues

     Revenues from equipment sales declined  approximately 17% to $3,974,897 for
the  three-month  period ended August 31, 2004 as compared to $4,788,110 for the
same period for the prior year. The decline in equipment  sales is due primarily
to a 14% decline in the average  sales  prices of new EECP  systems  sold in the
domestic  market plus an unfavorable  product mix reflecting a higher portion of
used versus new  equipment  sales,  which earned a lower  average  selling price
compared to new  systems.  The total  number of  shipments  of new and used EECP
systems in the  domestic  markets  remained  unchanged  in the first  quarter of
fiscal 2005 compared to the first quarter of fiscal 2004.

     We believe  that the  domestic  market  for EECP  systems  continues  to be
negatively  impacted from the reduction by the Centers for Medicare and Medicaid
Services (CMS),  the federal agency that  administers  the Medicare  program for
more than 39 million  beneficiaries,  of approximately  34% in Medicare national
average reimbursement rates for the calendar year 2004 plus uncertainty over the
current  proposed  rate  reduction for calendar year 2005. We estimate that over
65% of the  patients  that  receive  EECP  therapy  are  Medicare  patients.  In
addition,  average  domestic  selling prices continue to decline  reflecting the
impact in the  market of lower  priced  competitive  products.  We  continue  to
believe that our EECP systems  currently sell at a significant  price premium to

                                    Page 18
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

competitive  products  reflecting the clinical  efficacy and superior quality of
the EECP system plus the many value added services  offered by us.  However,  we
anticipate  that this  current  trend of declining  prices will  continue in the
immediate  future as our  competition  attempts to capture  greater market share
through pricing discounts.  In addition, we sold an unusually high percentage of
used equipment,  which reflected the  availability of used EECP systems that had
been  recovered  from a former  customer,  as well as EECP systems that had been
used to treat patients in the Prospective Evaluation of EECP in Congestive Heart
Failure,  ("PEECH")  clinical  trial  but  were no  longer  required  since  the
treatment portion of the trial has been completed.  These used systems were sold
at average sales prices  significantly below our new systems.  Finally,  revenue
was adversely  impacted by the recent bad weather in Florida,  which caused some
EECP systems orders to be delayed and as well as non-market  related problems in
a  major  sales  territory.

     Our revenue from the sale of EECP systems to international  distributors in
the first  quarter  of fiscal  2005  increased  approximately  201% to  $334,792
compared  to  $111,100  in same  period of the prior year  reflecting  increased
volume.

     The above decline in revenue from equipment sales was partially offset by a
33% increase in revenue from  equipment  rental and services for the three month
period  ended  August 31, 2004,  from the same  three-month  period in the prior
year.  Revenue  from  equipment  rental and  services  represented  18% of total
revenue in the first quarter of fiscal 2005 compared to 12% in the first quarter
of fiscal 2004.  The increase in both absolute  amounts and  percentage of total
revenue  resulted  primarily  from an increase of  approximately  58% in service
related  revenue.  The higher service  revenue  reflects an increase in service,
spare parts and consumables as a result of the continued growth of the installed
base of EECP  systems  plus  greater  marketing  focus on the  sale of  extended
service  contracts.  Rental  revenue  declined  approximately  37% following the
termination of several  short-term  rental agreements  partially  offsetting the
above.

Gross Profit

     Gross profit  declined to $3,159,623 or 66% of revenues for the three-month
period ended August 31, 2004,  compared to $3,487,858 or 64% of revenues for the
three-month period ended August 31, 2003. Gross profit margin as a percentage of
revenue for the  three-month  period ended August 31,  2004,  improved  slightly
compared to the same year of the prior fiscal year despite the lower revenue and
the negative impact resulting from the reduction in average selling prices.  The
improvement in gross profit as a percentage of revenue  reflects the sale of our
latest  model  EECP  system,  the TS4,  which  has a lower  cost to  manufacture
compared  to the  model  TS3,  which we sold in the  previous  fiscal  year.  In
addition,  the gross profit margin  benefited from the sale of an unusually high
percentage of used  equipment.  Many of these used EECP systems  carried reduced
book values since they were partially  amortized and as a result generated above
average  gross  profit  margins.  We have limited  quantities  of the lower cost
systems and do not  anticipate a significant  volume of used  equipment  will be
sold in the future.  The gross  profit  margin also  improved  due to  increased
service  related margins  resulting from the higher revenue  combined with lower
costs.  The decline in gross profit when  compared to the prior year in absolute
dollars is a direct result of the lower revenue.

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

Selling, General and Administrative

     Selling,  general and administrative ("SG&A") expenses for the three-months
ended August 31, 2004 and 2003 were $3,052,481 or 63% of revenues and $2,621,452
or  48%  of  revenues,  respectively  reflecting  an  increase  of  $431,029  or
approximately  16%. The increase in SG&A  expenditures in both absolute  amounts
and as a  percentage  of  revenues in first  quarter of fiscal 2005  compared to
fiscal 2004 resulted primarily from increased personnel  expenditures and travel
expenditures due to an expanded sales force compared to the previous fiscal year
plus  increased  expenditures  for outside  consulting  services  and  marketing
promotion   programs.   Partially   offsetting  the  above  were  reduced  sales
commissions due to the lower revenue from sales of domestic equipment.


                                    Page 19
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

Research and Development

     Research and  development  ("R&D")  expenses of $871,898 or 18% of revenues
for the three months ended August 31, 2004, decreased by $83,647 or 9%, from the
prior three  months ended  August 31 2003,  of $955,545 or 18% of revenues.  The
decrease  reflects  lower  spending  related to the PEECH  clinical  trial.  The
patient  treatment  phase of the PEECH study was  completed in March 2004;  as a
result,  we have incurred  lower levels of spending  related to subject  patient
activity  and study  management  aspects of the  trial.  We expect to be able to
release  the  initial  results of the PEECH  trial in March  2005 and,  provided
results  of the trial are  positive,  submit an  application  to CMS to  provide
reimbursement  for use of the EECP  therapy in  treatment  of CHF in early 2005.
Based on the above  timetable we  anticipate a coverage  decision by CMS in late
2005 or early 2006. We expect to continue to invest in product  development  and
clinical  trials  through  the  remainder  of fiscal  2005 and beyond to further
validate  and expand  the  clinical  applications  of EECP,  including,  but not
limited to angina, heart failure and acute coronary syndromes.

Provision for Doubtful Accounts

     During the  three-month  period ended August 31, 2004, the Company  charged
$132,956 to its provision for doubtful  accounts as compared to $189,181  during
the three-month period ended August 31, 2003.

Interest Expense and Financing Costs

     Interest   expense  and  financing   costs  decreased  to  $30,362  in  the
three-month  period ended  August 31, 2004,  from $33,366 for the same period in
the prior year. Interest expense reflects interest on loans secured to refinance
the November 2000 purchase of the Company's headquarters and warehouse facility,
as well as on loans  secured to  finance  the cost and  implementation  of a new
management information system.

Interest and Other Income, Net

     Interest  and other  income for the first  quarter  of 2005 and 2004,  were
$13,744 and  $55,092,  respectively.  The  decrease in interest  income from the
prior period is the direct result of the absence of interest  income  related to
certain  equipment sold under sales-type  leases incurred in fiscal 2004. Higher
average cash balances  invested during the quarter  compared to the prior period
partially offset the above.

Income Tax Expense, Net

     During the  three-months  ended  August 31,  2004 and 2003,  we  recorded a
provision for state income taxes of $10,000.

     As of August 31, 2004, we had recorded  deferred tax assets of  $14,582,000
net of a $2,223,008  valuation allowance related to the anticipated  recovery of
tax loss  carryforwards.  The  amount  of the  deferred  tax  assets  considered
realizable  could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced. Ultimate realization of the deferred
tax assets is dependent upon our generating  sufficient  taxable income prior to
the  expiration  of the tax loss  carryforwards.  We believe that the Company is
positioned for long-term  growth despite the financial  results  achieved during
fiscal  years  2004 and  2003,  and that  based  upon the  weight  of  available
evidence, that it is "more likely than not" that net deferred tax assets will be
realized.  The "more likely than not" standard is subjective,  and is based upon
management's  estimate  of a greater  than 50%  probability  that its long range
business plan can be realized.

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

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

                                    Page 20
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


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

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

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

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

     --   other   medical   insurance   reimbursement    policies;

     --   unexpected manufacturing problems;

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

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

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

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

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

     The recorded  deferred tax asset and  increase to the  valuation  allowance
during the three months ended August 31, 2004 was $314,747.

Liquidity and Capital Resources

     We have  financed our  operations  in fiscal 2005 and 2004  primarily  from
working  capital and  operating  results.  At August 31, 2004, we had a cash and
cash  equivalent  balance of  $3,605,066  and working  capital of  $8,669,301 as
compared to cash balance of $6,365,049 and working  capital of $9,771,870 at May
31, 2004.  Our cash  balances  decreased  $2,759,983 in the  three-month  period
compared  to May  31,  2004,  primarily  due to  $1,613,042  used  in  investing
activities and $1,245,281 used in operating activities.

     The decrease in cash provided by our operating  activities during the first
quarter of fiscal  year 2005  resulted  primarily  from the net loss of $924,330
plus adjustments to reconcile net loss to net cash used in operating  activities
of $320,951.  Changes in our operating assets and liabilities were $612,150. The
changes in the asset components  primarily  reflect an increase in other current
assets of $390,054,  primarily prepaid insurance  premiums plus higher inventory
of $299,527  offset by an $872,142  reduction in accounts  receivable due to the
revenue.  The changes in our operating liability  components reflect a reduction
in accounts  payable and accrued  liabilities of $577,682 and other  liabilities
totaling  $191,793.   Non-cash   adjustments  for  depreciation,   amortization,
allowance  for doubtful  accounts and  allowance  for  inventory  write-offs  of
$291,199 partially offset the above.

     Net accounts  receivable were 94% of quarterly revenues for the three-month
period  ended August 31,  2004,  compared to 102% at the end of the  three-month
period ended August 31, 2003, and accounts  receivable  turnover improved to 4.5
times as of August 31,  2004,  as compared  to 3.4 times as of August 31,  2003.
Standard  payment terms on our domestic  equipment sales are generally net 30 to
90 days from shipment and do not contain "right of return"  provisions.  We have
historically  offered a variety of extended payment terms,  including sales-type
leases,  in certain  situations and to certain  customers in order to expand the
market  for our  EECP  products  in the US and  internationally.  Such  extended
payment  terms  were  offered  in  lieu of  price  concessions,  in  competitive
situations,  when opening new markets or geographies  and for repeat  customers.
Extended payment terms cover a variety of negotiated terms, including payment in
full - net 120, net 180 days or some fixed or variable  monthly  payment  amount
for a six to twelve month period followed by a balloon  payment,  if applicable.
During the first quarter of fiscal 2005 and 2004,  approximately  1% of revenues
were  generated  from sales in which initial  payment terms were greater than 90
days and we offered no  sales-type  leases  during  either  period.  In general,
reserves are calculated on a formula basis considering factors such as the aging
of the receivables,  time past due, and the customer's  credit history and their
current  financial  status.  In most instances  where reserves are required,  or
accounts are ultimately written-off,  customers have been unable to successfully
implement  their  EECP  program.  As we are  creating  a new market for the EECP

                                    Page 21
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


therapy and  recognizing  the challenges  that some customers may encounter,  we
have opted, at times, on a customer-by-customer  basis, to recover our equipment
instead of pursuing other legal remedies, which has resulted in our recording of
a reserve  or a  write-off.

     Investing  activities  used net cash of $1,613,042  during the  three-month
period ended August 31, 2004.  The principal use of cash was for the purchase of
short-term  certificates  of deposit and treasury bills  totaling  $1,474,474 to
improve  the yield on our  unused  cash  balances.  All of our  certificates  of
deposit have original maturities of greater than three months and mature in less
than twelve  months.  Additionally,  we used $138,568 in cash  primarily for the
purchase of equipment to be used in the manufacture of our EECP systems.

     Our  financing   activities   provided  net  cash  of  $98,340  during  the
three-month period ended August 31, 2004,  reflecting $130,666 received from the
exercise  of stock  options  less  payments on our  outstanding  notes and loans
totaling $32,326.

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

     We believe  that our cash flow from  operations  together  with our current
cash reserves will be sufficient to fund our business plan and projected capital
requirements  through  at least  August  31,  2005;  however,  we have  incurred
significant losses during the last two fiscal years and our long-term ability to
maintain current operations is dependent upon achieving profitable operations or
through  additional  debt or  equity  financing.  In the event  that  additional
capital is required, we may seek to raise such capital through public or private
equity or debt financings.  Future capital funding, if available,  may result in
dilution to current shareholders.

     The following table presents our expected cash requirements for contractual
obligations outstanding as of August 31, 2004.

<TABLE>
<CAPTION>

                                                                     Due as of       Due as of
                                                      Due as of     8/31/06 and     8/31/08 and          Due
                                      Total            8/31/05        8/31/07         8/31/09        Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>              <C>             <C>             <C>
Long-Term Debt                        $1,196,989        $139,263         $220,727        $128,279        $708,720
Operating Leases                         113,228          65,585           47,643              --              --
Litigation Settlement                    300,250         133,000          167,250              --              --
Severance obligations                      2,692           2,692               --              --              --
Employment Agreements (a)                212,500         209,375            3,125              --              --
--------------------------------------------------------------------------------------------------------------------
Total Contractual Cash                $1,825,659       $ 549,915         $438,745        $128,279        $708,720
Obligations
====================================================================================================================
</TABLE>

     We intend to incur a contractual  cash  requirement  in the future with our
new President and Chief Executive Officer.

Effects of Inflation

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

Subsequent Event

     On October 1, 2004, the board of directors  appointed  Thomas Glover to the
position of President  and Chief  Executive  Officer.  Photios T.  Paulson,  our
interim President and Chief Executive  Officer,  resigned but will continue as a
director.

                                    Page 22
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4 - PROCEDURES AND CONTROLS

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


                                    Page 23
<PAGE>

Vasomedical, Inc. and Subsidaries


                          PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS:

     None.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS:

     None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:

     None

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

     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

     None


                                    Page 24
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

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


                                       VASOMEDICAL, INC.

                                       By:  /s/ Photios T. Paulson
                                                Photios T. Paulson
                                                Interim 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 7, 2004

                                    Page 25