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, 2005

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

Commission File Number: 0-18105

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

             (Exact name of registrant as specified in its charter)

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

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

Registrant's Telephone Number                                 (516) 997-4600

Number of Shares Outstanding of Common Stock,
     $.001 Par Value, at October 10, 2005     59,364,897


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

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

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

                                     Page 1
<PAGE>
Vasomedical, Inc. and Subsidiaries



                                     INDEX


                                                                            Page
                                                                            ----
PART I - FINANCIAL INFORMATION

     Item 1 - Financial Statements (unaudited)

              Consolidated Condensed Balance Sheets as of
                  August 31, 2005 and May 31, 2005                             3

              Consolidated Condensed Statements of Operations for the
                  Three Months Ended August 31, 2005 and 2004                  4

              Consolidated Condensed Statement of Changes in Stockholders'
                  Equity for the Period from June 1, 2005 to August 31, 2005   5

              Consolidated Condensed Statements of Cash Flows for the
                  Three Months Ended August 31, 2005 and 2004                  6

              Notes to Consolidated Condensed Financial Statements             7

     Item 2 - Management's Discussion and Analysis of Financial Condition
                and Results of Operations                                     17

     Item 3 - Quantitative and Qualitative Disclosures About Market Risk      27

     Item 4 - Controls and Procedures                                         27

PART II - OTHER INFORMATION                                                   28

                                     Page 2
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                     CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                 August 31,            May 31,
                                                                                    2005                2005
                                                                              -----------------    -----------------
                                 ASSETS                                         (unaudited)           (audited)
<S>                                                                               <C>                  <C>
CURRENT ASSETS
     Cash and cash equivalents                                                    $2,465,446             $989,524
     Certificates of deposit                                                         995,157            1,758,443
     Accounts receivable, net of an allowance for doubtful accounts of
       $459,139 at August 31, 2005, and $394,692 at May 31, 2005                   2,479,103            1,892,002
     Inventories, net                                                              3,075,393            3,360,272
     Other current assets                                                            489,005              223,902
                                                                              -----------------    -----------------
         Total current assets                                                      9,504,104            8,224,143

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,669,940 at
   August 31, 2005, and $2,626,983 at May 31, 2005                                 2,114,065            2,234,153
DEFERRED INCOME TAXES                                                             14,582,000           14,582,000
OTHER ASSETS                                                                         315,301              321,174
                                                                              -----------------    -----------------
                                                                                 $26,515,470          $25,361,470
                                                                              =================    =================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                        $1,481,360           $1,569,131
     Current maturities of long-term debt and notes payable                          364,301              148,212
     Sales tax payable                                                               222,783              216,753
     Deferred revenue                                                              1,517,893            1,667,080
     Accrued warranty and customer support expenses                                   90,750              110,583
     Accrued professional fees                                                       348,881              401,511
     Accrued commissions                                                             181,653              178,104
                                                                              -----------------    -----------------
         Total current liabilities                                                 4,207,621            4,291,374

LONG-TERM DEBT                                                                       909,303              947,597
ACCRUED WARRANTY COSTS                                                                 4,250                7,750
DEFERRED REVENUE                                                                     958,870              884,452
OTHER LIABILITIES                                                                     34,250               67,500

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock, $.01 par value; 1,000,000 shares authorized;
       25,000 and 0 at August 31, 2005, and May 31, 2005, respectively,                  250                   --
       issued and outstanding; aggregate liquidation preference of
       $2,514,430 and $0 at August 31, 2005 and May 31, 2005,
       respectively
     Common stock, $.001 par value; 110,000,000 shares authorized;
       58,752,688 and 58,552,688 shares at August 31, 2005, and May 31,
       2005, respectively, issued and outstanding                                     58,752               58,552
     Additional paid-in capital                                                   53,581,430           51,450,639
     Accumulated deficit                                                         (33,239,256)         (32,346,394)
                                                                              -----------------    -----------------
         Total stockholders' equity                                               20,401,176           19,162,797
                                                                              -----------------    -----------------
                                                                                 $26,515,470          $25,361,470
                                                                              =================    =================

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

                                     Page 3
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                           Three months
                                                                                         ended August 31,
                                                                              --------------------------------------
                                                                                    2005                 2004
                                                                              -----------------    -----------------
<S>                                                                             <C>                  <C>
Revenues
   Equipment sales                                                              $2,456,909           $3,974,897
   Equipment rentals and services                                                1,079,462              846,519
                                                                              -----------------    -----------------
     Total revenues                                                              3,536,371            4,821,416

Cost of Sales and Services
   Cost of sales, equipment                                                      1,032,257            1,325,557
   Cost of equipment rentals and services                                          390,927              336,236
                                                                              -----------------    -----------------
     Total cost of sales and services                                            1,423,184            1,661,793

                                                                              -----------------    -----------------
   Gross profit                                                                  2,113,187            3,159,623

Operating Expenses
   Selling, general and administrative                                           2,409,149            3,052,481
   Research and development                                                        512,006              871,898
   Provision for doubtful accounts                                                  70,575              132,956
                                                                              -----------------    -----------------
     Total operating expenses                                                    2,991,730            4,057,335

                                                                              -----------------    -----------------
LOSS FROM OPERATIONS                                                              (878,543)            (897,712)

Other Income (Expense)
   Interest and financing costs                                                    (23,509)             (30,362)
   Interest and other income, net                                                   19,016               13,744
                                                                              -----------------    -----------------
     Total other income (expense)                                                   (4,493)             (16,618)

                                                                              -----------------    -----------------
LOSS BEFORE INCOME TAXES                                                          (883,036)            (914,330)
   Income tax expense, net                                                          (9,826)             (10,000)
                                                                              -----------------    -----------------
NET LOSS                                                                          (892,862)            (924,330)
   Preferred stock dividend                                                       (805,623)                  --
                                                                              -----------------    -----------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                                   $(1,698,485)           $(924,330)
                                                                              =================    =================


Net loss per common share
     - basic                                                                       $(0.03)              $(0.02)
                                                                              =================    =================
     - diluted                                                                     $(0.03)              $(0.02)
                                                                              =================    =================

Weighted average common shares outstanding
     - basic                                                                    58,646,166           58,532,398
                                                                              =================    =================
     - diluted                                                                  58,646,166           58,532,398
                                                                              =================    =================
</TABLE>

The  accompanying  notes  are an  integral  part of  these  condensed  financial
statements.

                                     Page 4
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

<TABLE>
<CAPTION>
                                                                   Additional                                Total
                              Preferred Stock    Common Stock        Paid-in         Accumulated         Stockholders'
                              Shares  Amount   Shares     Amount     Capital           Deficit               Equity
                              ------  ------   ------    -------   ----------     ------------------    -----------------
<S>                           <C>      <C>    <C>         <C>      <C>                <C>                    <C>
Balance at June 1, 2005           --     --   58,552,688  $58,552  $51,450,639        $(32,346,394)          $19,162,797
   Issuance of Series D
     convertible
     preferred stock,
     net of costs             25,000   $250                          1,613,209                                 1,613,459
   Warrants  issued  in
     connection  with                                                  411,158                                   411,158
     the issuance
     of Series D
     convertible
     preferred stock
   Beneficial conversion
     feature embedded
     in Series D                                                       786,247                                   786,247
     convertible
     preferred stock issued
   Dividends on Series D
     convertible preferred
     stock                                                            (805,623)                                 (805,623)
   Issuance of common stock
     in connection with the
     issuance of Series D
     convertible preferred
     stock                                       200,000      200      125,800                                   126,000
   Net loss                                                                               (892,862)             (892,862)
                              ------  ------  ----------  -------  -----------     ------------------    -----------------
Balance at August 31, 2005    25,000   $250   58,752,688  $58,752  $53,581,430        $(33,239,256)          $20,401,176
                              ======  ======  ==========  =======  ===========     ==================    =================
</TABLE>

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

                                     Page 5
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                               Three months
                                                                                             ended August 31,
                                                                                   -------------------------------------
                                                                                        2005                 2004
                                                                                   ----------------     ----------------
<S>                                                                                     <C>                  <C>
Cash flows from operating activities
     Net loss                                                                           $(892,862)           $(924,330)
                                                                                   ----------------     ----------------
     Adjustments to reconcile net loss to net cash used in operating
       activities
         Depreciation and amortization                                                    108,301              149,660
         Provision for doubtful accounts                                                   70,575              132,956
         Reserve for excess and obsolete inventory                                         15,119                8,583
         Changes in operating assets and liabilities
              Accounts receivable                                                        (657,676)             872,142
              Inventories                                                                 292,258             (299,527)
              Other current assets                                                         36,949             (390,054)
              Other assets                                                                 (4,838)             (25,236)
              Accounts payable, accrued expenses and other current liabilities
                                                                                         (372,312)            (577,682)
              Other liabilities                                                            37,668             (191,793)
                                                                                   ----------------     ----------------
                                                                                         (473,956)            (320,951)
                                                                                   ----------------     ----------------
     Net cash used in operating activities                                             (1,366,818)          (1,245,281)
                                                                                   ----------------     ----------------

     Cash flows provided by (used in) investing activities
         Purchase of property and equipment                                                    --             (138,568)
         Purchase of certificates of deposit and treasury bills                                --           (1,474,474)
         Redemptions of certificates of deposit                                           763,286                   --
                                                                                   ----------------     ----------------
     Net cash provided by (used in) investing activities                                  763,286           (1,613,042)
                                                                                   ----------------     ----------------

     Cash flows provided by financing activities
         Payments on long term debt and notes payable                                    (124,257)             (32,326)
         Payments of preferred stock dividends                                             (4,946)                  --
         Payments of preferred stock issue costs                                         (291,343)                  --
         Proceeds from exercise of options and warrants                                        --              130,666
         Proceeds from sale of convertible preferred stock                              2,500,000                   --
                                                                                   ----------------     ----------------
     Net cash provided by financing activities                                          2,079,454               98,340
                                                                                   ----------------     ----------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    1,475,922           (2,759,983)
     Cash and cash equivalents - beginning of period                                      989,524            6,365,049
                                                                                   ----------------     ----------------
     Cash and cash equivalents - end of period                                         $2,465,446           $3,605,066
                                                                                   ================     ================

Non-cash investing and financing activities were as follows:
     Inventories  transferred to (from)  property and equipment,  attributable to
       operating leases, net                                                             $(22,498)             $67,858
     Issue of note for purchase of insurance policy                                      $302,052                   --
     Preferred stock dividends                                                           $800,677                   --
     Preferred stock issue costs                                                         $250,127                   --

Supplemental Disclosures
     Interest Paid                                                                        $23,509              $22,690
     Income taxes paid                                                                    $16,805              $19,526

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

                                     Page 6
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2005


NOTE A - BASIS OF PRESENTATION

     The  consolidated  condensed  balance sheet as of August 31, 2005,  and the
related  consolidated  condensed  statements of operations  for the  three-month
periods ended August 31, 2005 and 2004, changes in stockholders'  equity for the
three-month  period ended August 31,  2005,  and cash flows for the  three-month
periods ended August 31, 2005 and 2004, have been prepared by Vasomedical,  Inc.
and  Subsidiaries  (the "Company")  without audit. In the opinion of management,
all  adjustments  (which  include only normal,  recurring  accrual  adjustments)
necessary to present fairly the financial  position and results of operations as
of August 31, 2005, and for all periods presented have been made.

     Certain  information  and  footnote   disclosures,   normally  included  in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted.  These
financial statements should be read in conjunction with the financial statements
and notes thereto  included in the Annual Report on Form 10-K for the year ended
May 31, 2005.  Results of  operations  for the periods ended August 31, 2005 and
2004,  are not  necessarily  indicative  of the  operating  results  expected or
reported for the full year.

     We believe  that our cash flow from  operations  together  with our current
cash reserves and the cash received for the sale of convertible  preferred stock
and  warrants  on July 19,  2005 (see Note L),  will be  sufficient  to fund our
business plan and projected capital  requirements through at least May 31, 2006.
However, we have incurred  significant losses during the last three fiscal years
and our  long-term  ability to maintain  current  operations  is dependent  upon
achieving profitable operations,  which is largely dependent upon the successful
commercialization  of EECP therapy into the congestive heart failure indication,
and depends in part upon the  acceptance  of the  results of the PEECH  clinical
trial by the medical  community and expanded  reimbursement  coverage to include
CHF as being  sufficient  to promote  the  adoption  of EECP  therapy in CHF; 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.

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 May 2005, the FASB issued  Statement of Financial  Accounting  Standards
No. 154 ("SFAS No. 154"),  "Accounting  Changes and Error Corrections." SFAS No.
154 replaces APB Opinion No. 20, Accounting  Changes,  and FASB Statement No. 3,
Reporting  Accounting Changes in Interim Financial  Statements,  and changes the
requirements  for the  accounting  for and  reporting of a change in  accounting
principle.  The  Statement  applies  to  all  voluntary  changes  in  accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions,  those
provisions should be followed.  SFAS No. 154 is effective for accounting changes
and  corrections  of errors made in fiscal years  beginning  after  December 15,
2005.

     In December 2004, the Financial  Accounting  Standards  Board (FASB) issued
FASB Statement No. 153 ("SFAS No. 153"), "Exchanges of Non-monetary Assets -- an
amendment  of APB Opinion No. 29".  SFAS No. 153 amends  Opinion 29 to eliminate
the  exception  for  non-monetary  exchanges  of similar  productive  assets and
replaces it with a general  exception for exchanges of non-monetary  assets that
do not have  commercial  substance.  A non-  monetary  exchange  has  commercial
substance  if the  future  cash  flows of the  entity  are  expected  to  change
significantly as a result of the exchange.  SFAS No. 153 is effective for fiscal
periods  after June 15,  2005.  The Company does not expect the adoption of SFAS
No.  153 to have a  material  impact  on the  Company's  consolidated  financial
statements.

     In  December  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards  No.  123(R)  ("SFAS  No.   123(R)"),   "Accounting   for  Stock-Based
Compensation".  SFAS No. 123(R)  establishes  standards for the  accounting  for
transactions  in which an entity  exchanges its equity  instruments for goods or
services.  This Statement  focuses  primarily on accounting for  transactions in
which an entity obtains employee services in share-based  payment  transactions.
SFAS No.  123(R)  requires  that the fair value of such  equity  instruments  be
recognized  as expense in the  historical  financial  statements as services are

                                     Page 7
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2005

performed.  Prior to SFAS No. 123(R), only certain pro-forma disclosures of fair
value were  required.  SFAS No.  123(R) shall be effective for the Company as of
the  beginning  of the next  fiscal year that begins  after June 15,  2005.  The
adoption  of this new  accounting  pronouncement  is expected to have a material
impact on the financial  statements of the Company  commencing  with the quarter
ending August 31, 2006.

     In  November  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 151 ("SFAS No. 151"), Inventory Costs, an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 will improve financial  reporting
by clarifying that abnormal amounts of idle facility expense,  freight, handling
costs, and wasted materials  (spoilage)  should be recognized as  current-period
charges  and by  requiring  the  allocation  of fixed  production  overheads  to
inventory  based on the normal capacity of the production  facilities.  SFAS No.
151 is effective  for inventory  costs  incurred  during fiscal years  beginning
after June 15, 2005.  Earlier  application  is  permitted  for  inventory  costs
incurred  during fiscal years  beginning  after  November 24, 2004.  The Company
adopted SFAS No. 151 effective  for fiscal  periods  beginning  June 1, 2005. We
determined that our production  facilities are currently  operating below normal
capacity and as a result we applied  production  overhead  rates based on normal
production  capacity  which  resulted in a  reduction  of the amount of overhead
allocated  to  inventory  for the three month  period  ended  August 31, 2005 of
$73,000.  Had the Company  adopted the  provisions  of SFAS No. 151 beginning in
fiscal  2005,  there  would have been no change in  overhead  allocation  as the
Company was operating within its normal production capacity at that time.

NOTE C -  STOCK-BASED COMPENSATION

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

     On October 28, 2004 the shareholders  approved the 2004 Stock  Option/Stock
Issuance Plan and authorized the issuance of 2,500,000 shares.

     During the three-month period ended August 31, 2005, the Board of Directors
granted  non-qualified stock options under the 2004 Stock Option/Stock  Issuance
Plan to three  officers,  and 31  employees  to purchase an aggregate of 511,055
shares  of  common  stock,  at an  exercise  price of  $0.57  per  share,  which
represented the fair market value of the underlying  common stock at the time of
the respective grants.  These options vest on May 31, 2006, and expire ten years
from the date of grant.

     During the  three-month  period ended August 31, 2005,  options to purchase
275,191  shares  of  common  stock at an  exercise  price of $0.57 - $5.15  were
cancelled.

                                     Page 8
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2005


     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,
                                                                          --------------------------------------
                                                                                 2005                 2004
                                                                          -----------------    -----------------
     <S>                                                                   <C>                    <C>
     Net loss attributable to common stockholders, as reported             $(1,698,485)           $(924,330)
          Deduct: Total stock-based employee compensation expense
            determined under fair value-based method for all awards
                                                                              (212,294)            (170,921)
                                                                          -----------------    -----------------
     Pro forma net loss                                                    $(1,910,779)         $(1,095,251)
                                                                          =================    =================

     Loss per share:
         Basic and diluted - as reported                                       $(0.03)              $(0.02)
                                                                          =================    =================
         Basic and diluted - pro forma                                         $(0.03)              $(0.02)
                                                                          =================    =================
</TABLE>

     For  purposes  of  estimating  the fair value of each option on the date of
grant, the Company utilized the Black-Scholes option-pricing model.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded options,  which have no vesting restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
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, 2005:

        Expected life (years)                            5
        Expected volatility                              73%
        Risk-free interest rate                        4.18%
        Expected dividend yield                         0.0%

NOTE D - LOSS PER COMMON SHARE

     Basic  loss per  share is based on the  weighted  average  number of common
shares  outstanding  without  consideration of potential common shares.  Diluted
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, plus conversion of convertible  preferred stock
into common shares based upon the most  advantageous  conversion rate during the
period.

                                     Page 9
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2005

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

                                                                             Three months ended
                                                                                 August 31,
                                                                     --------------------------------------
                                                                           2005                 2004
                                                                     -----------------    -----------------
<S>                                                                   <C>                   <C>
Numerator:
   Basic and diluted net loss                                           $(892,862)           $(924,330)
     Deemed dividend related to beneficial conversion
     feature on Series D preferred stock                                 (786,247)                  --
     Series D preferred stock dividends                                   (19,376)                  --
                                                                     -----------------    -----------------
  Net loss attributable to common stockholders                        $(1,698,485)           $(924,330)
                                                                     =================    =================
Denominator:
   Basic - weighted average common shares                              58,646,166           58,532,398
     Stock options                                                             --                   --
     Warrants                                                                  --                   --
                                                                     -----------------    -----------------
   Diluted - weighted average common shares                            58,646,166           58,532,398
                                                                     =================    =================

Basic and diluted loss per common share                                   $(0.03)              $(0.02)
</TABLE>


     Options,  warrants, and convertible preferred stock, in accordance with the
following  table,  were excluded from the  computation of diluted loss per share
for the three months ended August 31, 2005 and 2004,  respectively,  because the
effect of their inclusion would be antidilutive.
<TABLE>
<CAPTION>
                                                                                 Three months ended
                                                                                      August 31,
                                                                          --------------------------------------
                                                                               2005                 2004
                                                                          -----------------    -----------------
       <S>                                                                 <C>                   <C>
       Options to purchase common stock                                     6,789,408            5,439,753
       Warrants to purchase common stock                                    2,454,538              200,000
       Convertible preferred stock                                          5,159,959                   --
                                                                          -----------------    -----------------
                                                                           14,403,905            5,639,753
                                                                          =================    =================
</TABLE>
NOTE E - INVENTORIES, NET

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

                                                                             August 31,              May 31,
                                                                               2005                  2005
                                                                          -----------------    -----------------
        <S>                                                                    <C>                  <C>
        Raw materials                                                           $912,261             $960,101
        Work in process                                                        1,053,063            1,194,688
        Finished goods                                                         1,110,069            1,205,483
                                                                          -----------------    -----------------
                                                                              $3,075,393           $3,360,272
                                                                          =================    =================
</TABLE>
     At August 31, 2005 and May 31, 2005, the Company has recorded  reserves for
excess and obsolete inventory of $581,268 and $566,149, respectively.

                                    Page 10
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2005



NOTE F - PROPERTY AND EQUIPMENT

         Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
                                                                         August 31, 2005      May 31, 2005
                                                                         ----------------    ---------------
     <S>                                                                  <C>                 <C>
     Land                                                                 $   200,000         $   200,000
     Building and improvements                                              1,383,976           1,383,976
     Office, laboratory and other equipment                                 1,445,168           1,445,168
     EECP systems  under  operating  leases or under loan
        for clinical trials                                                 1,474,990           1,552,121
     Furniture and fixtures                                                   162,068             162,068
     Leasehold improvements                                                   117,803             117,803
                                                                         ----------------    ---------------
                                                                            4,784,005           4,861,136
                                                                         ----------------    ---------------
     Less: accumulated depreciation and amortization                       (2,669,940)         (2,626,983)
                                                                         ----------------    ---------------
                                                                           $2,114,065          $2,234,153
                                                                         ================    ===============

</TABLE>


NOTE G - NOTES PAYABLE

     The Company  financed the purchase of Director's  and  Officer's  Liability
Insurance through the issuance of a note with a principal value of $302,052. The
note,  which  bears  interest at 5.85%,  is payable in ten monthly  installments
consisting  of principal and  interest,  and expires in March 2006.  The balance
outstanding  at August 31, 2005,  of $212,974 is  presented on the  consolidated
condensed  balance  sheet in  current  maturities  of  long-term  debt and notes
payable.

NOTE H - LONG-TERM DEBT

     The following table sets forth the computation of long-term debt:
<TABLE>
<CAPTION>
                                                                          August 31, 2005      May 31, 2005
                                                                          -----------------    --------------
     <S>                                                                     <C>                  <C>
     Facility loans (a)                                                       $955,634             $969,566
     Term loans (b)                                                            104,996              126,243
                                                                          -----------------    --------------
                                                                             1,060,630            1,095,809
Less: current portion                                                         (151,327)            (148,212)
                                                                          -----------------    --------------
                                                                              $909,303             $947,597
                                                                          =================    ==============
</TABLE>

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

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

NOTE I - 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 domestic

                                    Page 11
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2005


EECP system  sales for the fair value of  in-service  and training to the period
when the services are  rendered  and for warranty  obligations  ratably over the
service  period,  which is  generally  one year:

     The changes in the Company's deferred revenues are as follows:
<TABLE>
<CAPTION>
                                                                                 Three months ended
                                                                                    August 31,
                                                                     --------------------------------------
                                                                           2005                 2004
                                                                     -----------------    -----------------
<S>                                                                    <C>                  <C>
Deferred Revenue at the beginning of the period                        $2,551,532           $2,846,451
ADDITIONS
     Deferred extended service contracts                                  510,855              319,850
     Deferred in-service training                                          47,500               67,500
     Deferred warranty obligations                                        152,500              310,000
RECOGNIZED AS REVENUE
     Deferred extended service contracts                                 (580,000)            (432,771)
     Deferred in-service training                                         (50,000)            (127,500)
     Deferred warranty obligations                                       (155,624)            (332,084)
                                                                     -----------------    -----------------
Deferred revenue at end of period                                       2,476,763            2,651,446
     Less: current portion                                             (1,517,893)          (1,672,713)
                                                                     -----------------    -----------------
Long-term deferred revenue at end of period                              $958,870             $978,733
                                                                     =================    =================
</TABLE>

NOTE J - 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 for our  shipments to customers in the United  States.  Under
EITF 00-21,  for certain  arrangements,  a portion of the overall  system  price
attributable to the first year service arrangement is deferred and recognized as
revenue over the service  period.  As such, we no longer accrue  warranty  costs
upon  delivery for these  customers  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.

     Equipment sold to international  customers through our distributor  network
is generally  covered by a one- year  warranty  period.  For these  customers we
accrue a warranty reserve for estimated costs to provide warranty  services when
the equipment sale is 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.

     The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
                                                                            Three months ended
                                                                                August 31,
                                                                    -----------------------------------
                                                                          2005                2004
                                                                    ---------------     ---------------
      <S>                                                               <C>                 <C>
      Warranty liability at the beginning of the period                 $118,333            $244,917
          Expense for new warranties issued                               12,000                  --
          Warranty amortization                                          (35,333)            (56,084)
                                                                    ---------------     ---------------
     Warranty liability at end of period                                  95,000             188,833
          Less: current portion                                          (90,750)           (131,833)
                                                                    ---------------     ---------------
     Long-term warranty liability at end of period                        $4,250             $57,000
                                                                    ===============     ===============
</TABLE>

NOTE K - INCOME TAXES

     During the  three-months  ended  August 31,  2005 and 2004,  we  recorded a
provision for state income taxes of $9,826 and $10,000, respectively.

                                    Page 12
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2005


     As of August 31,  2005,  the Company had  recorded  deferred  tax assets of
$14,582,000 (net of a $4,073,000 valuation allowance) related to the anticipated
recovery  of tax loss  carryforwards.  The  amount of the  deferred  tax  assets
considered  realizable  could be reduced in the  future if  estimates  of future
taxable income during the carryforward period are reduced.  Ultimate realization
of the deferred tax assets is dependent upon the Company  generating  sufficient
taxable income prior to the expiration of the tax loss carryforwards. Management
believes that the Company is positioned for long-term  growth despite the losses
during  fiscal years 2005 and 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 and material  assumptions  associated
with  estimates of future  taxable income during the  carryforward  period.  Our
estimates are largely  dependent upon achieving  considerable  growth in revenue
and profits resulting from the successful commercialization of EECP therapy into
the  congestive  heart  failure  indication,  which we believe will enable us to
reverse the current trend of increasing  losses and generate  pre-tax  income in
excess of $39 million over the next seven years in order to fully utilize all of
the deferred tax assets.  Such  estimates of future  taxable income are based on
our beliefs, as well as assumptions made by and information  currently available
to us. Certain critical assumptions associated with our estimates include:

     --   that the  results  from the  PEECH  clinical  trial,  as well as other
          clinical  evidence are  sufficiently  positive for the PEECH  clinical
          trial to be published in a peer  reviewed  journal and enable the EECP
          therapy  to obtain  approval  for a  national  Medicare  reimbursement
          coverage policy plus other  third-party payer  reimbursement  policies
          specific to the congestive heart failure indication;
     --   that the reimbursement  coverage will be both broad enough in terms of
          coverage  language  and at an amount  adequate  to  enable  successful
          commercialization  of EECP therapy into the  congestive  heart failure
          indication  and enable us to achieve  material  growth in revenue  and
          profits;
     --   that the EECP therapy will be accepted by the medical  community as an
          adjunctive  therapy  for the  treatment  of  patients  suffering  from
          congestive heart failure; and
     --   that  we  will  be able to  secure  additional  financing  to  provide
          sufficient  funds to  market  EECP  therapy  in the  congestive  heart
          failure indication.

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

     --   the effect of the  dramatic  changes  taking  place in the  healthcare
          environment;
     --   the impact of competitive procedures and products and their pricing;
     --   other medical insurance reimbursement policies;
     --   lack of  assurance  that we will be able to raise  additional  capital
          necessary to implement our business plan;
     --   unexpected manufacturing problems;
     --   unforeseen  difficulties and delays in the conduct of clinical trials,
          peer reviewed publications and other product development programs;
     --   the actions of regulatory  authorities and  third-party  payers in the
          United States and overseas;
     --   uncertainties about the acceptance of a novel therapeutic  modality by
          the medical community;
     --   our recent financial history of declining revenues and losses;
     --   unanticipated loss of management or other key personnel; and
     --   the  risk  factors  reported  from  time to  time in our SEC  reports.

     Factors  considered  by us in making our  assumptions  and  included in our
long-term business plan are the following:

     --   we currently  have FDA  clearance to market EECP therapy in congestive
          heart failure;
     --   independent  market  research  indicates  that the patient  population
          potentially  eligible for EECP  therapy in  congestive  heart  failure
          market is larger than the current refractory angina patient population
          and when the two patient  populations  are  combined  the total market
          opportunity for EECP therapy will be more than double;
     --   many  physician  practices  have  told  us  that  they  do not  have a
          sufficient number of patients to economically  justify adoption of the

                                    Page 13
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2005

          procedure  with the  current  reimbursement  coverage  for  refractory
          angina.  The increased  market size resulting from the addition of CHF
          patients could improve the economic model for the physician practice;


     --   we have positive  clinical evidence from the PEECH clinical trial that
          was recently  concluded,  plus other smaller  clinical  trials and the
          IEPR patient registry that demonstrates the clinical  effectiveness of
          EECP therapy in the treatment of  congestive  heart failure to medical
          providers, payers and regulators;
     --   we completed the PEECH  clinical trial this fiscal year as planned and
          disclosed the summary results of the trial in March 2005;
     --   we expect the  results of the PEECH  trial to be  published  in a peer
          reviewed  journal,  which is an important step necessary to support an
          application to CMS to expand reimbursement coverage of EECP therapy to
          include CHF patients;
     --   we sustained a period of  profitability in fiscal years 2000, 2001 and
          2002 with profits  before income taxes of  $1,290,916,  $5,237,242 and
          $4,240,106, respectively; and
     --   we continue to believe that we will be able to raise  sufficient funds
          to enable us to execute our business plan.

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

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

     The  recorded  deferred  tax asset  includes an  increase to the  valuation
allowance of $299,000 during the three-months ended August 31, 2005.

NOTE L - SERIES D CONVERTIBLE PREFERRED STOCK AND WARRANTS

     On July 19,  2005,  we entered into a Securities  Purchase  Agreement  that
provided us with gross proceeds of $2.5 million  through a private  placement of
preferred stock with M.A.G.  Capital,  LLC through its designated funds, Monarch
Pointe Fund Ltd., Mercator Momentum Fund III, LP, and Mercator Momentum Fund, LP
(the  "Investors").  The  agreement  provided for a private  placement of 25,000
shares  of  Vasomedical's  Series  D  Preferred  Stock at $100  per  share.  The
preferred stock is convertible into shares of  Vasomedical's  common stock at 85
percent of the volume weighted average price per share for the five trading days
preceding  any  conversion,  but not at more than $0.6606 or less than $0.40 per
share.  Vasomedical may, at its option, require the holders to convert all their
preferred stock into common shares if the closing price for the common stock for
the  preceding  20 trading  days has been  greater  than  $1.30 per  share.  The
Investors also acquired  warrants for the purchase of 1,892,219 shares of common
stock. The warrants may be exercised at a price of $0.69 per share for a term of
five years, ending July 19, 2010. Conversion of the preferred stock and exercise
of the warrants are subject to limitation such that the beneficial  ownership of
the  Investors and their  affiliates  shall not exceed 9.99% of the common stock
outstanding.

     An event  of  default  occurs  if we fail to  timely  pay the  dividend  or
commence a voluntary case or proceeding  under the bankruptcy  laws, among other
specified  occurrences.  Upon an  event of  default,  the  price  at  which  the
preferred stock may be converted into common stock is reduced from 85 percent to
75 percent of the then current volume  weighted  average market price per share,
but not more than $0.6606 or less than $0.40 per share (the "Floor  Price").  In
the event that our quarterly gross revenues are less than  $2,500,000,  then the
Floor Price shall automatically reduce to $0.30. In addition, the holders of the
preferred  stock have the right to be paid first from the assets of  Vasomedical
upon any  dissolution  or  liquidation of the Company in an amount equal to $100
per share plus any declared but unpaid dividends.

                                    Page 14
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2005

     Under the terms of a  Registration  Rights  Agreement  with the  Investors,
Vasomedical  filed a Form S-3  registration  statement  with the  Securities and
Exchange  Commission  (SEC) on August 22, 2005, for 10,787,871  shares of common
stock representing up to 8,533,333 shares issuable in connection with conversion
of our Series D Convertible  Preferred Stock and up to 2,254,538 shares issuable
upon the  exercise  of our common  stock  purchase  warrants.  The  registration
statement  was declared  effective  by the SEC on  September 1, 2005.  The total
number of shares  registered is based on a conversion  price of $0.30 per share,
which  would  only have  affect in the event of default  by  Vasomedical  of its
obligation to holders of the Series D Convertible Preferred Stock.

     These  securities  were  offered  and sold to the  Investors  in a  private
placement  transaction  made  in  reliance  upon  exemptions  from  registration
pursuant  to Section  4(2) of the  Securities  Act of 1933.  The  Investors  are
accredited  investors as defined in Rule 501 of Regulation D  promulgated  under
the Securities Act of 1933.  Vasomedical  intends to apply the funds for working
capital.

Warrants and Beneficial Conversion Feature

     The Company applied  Emerging Issues Task Force Issue No. 98-5  "Accounting
for Convertible  Securities with Beneficial  Conversion Features or Contingently
Adjustable  Conversion  Ratios"(EITF  No. 98-5) and  Emerging  Issues Task Force
(EITF 00-27) Application of Issue No. 98-5 to Certain Convertible Instruments in
accounting  for the  preferred  stock  issuance.  EITF No.  98-5  provides  that
detachable  warrants issued with convertible  securities are valued  separately,
and that the  beneficial  conversion  feature  of the  convertible  security  be
measured and recognized over the minimum period over which the  shareholders can
realize the return.

     The Task Force reached a consensus that  convertible  preferred  securities
with a non-detachable  conversion feature that is in-the-money at the commitment
date  represents  an  embedded  beneficial  conversion  feature  that  should be
recognized as a dividend and recorded to additional paid-in capital. That amount
should be  calculated  at the  commitment  date as the  difference  between  the
allocated  portion of the gross proceeds to the convertible  preferred stock and
the fair value of the common stock or other  securities  into which the security
is  convertible,  multiplied  by the number of shares into which the security is
convertible (intrinsic value method).

     The beneficial conversion feature is treated analogous to a dividend and is
recognizable  immediately  over the minimum  period  during which the  preferred
shareholders  can realize that return.  The imputed  dividend  will increase the
Company's loss for the purpose of computing the  loss-per-share.  The beneficial
conversion  feature is calculated at its intrinsic  value at the commitment date
(that is, the  difference  between the total  gross  proceeds  allocated  to the
preferred  stock as compared to the total  market value of the common stock into
which the Preferred  Stock is convertible  on the commitment  date. The computed
value of the  beneficial  conversion  feature is  treated  as a deemed  dividend
immediately  with a  corresponding  increase to paid-in  capital.  No additional
amount will be recognized at the  conversion  date in recognition of an increase
in the fair value of the stock conversion.

     In circumstances in which convertible securities are issued with detachable
warrants,  the Task  Force  noted  that in order to  determine  the amount to be
allocated to the beneficial  conversion feature,  the issuer must first allocate
the proceeds  between the  convertible  instrument and the  detachable  warrants
using the relative fair value method of APB Opinion Number 14.

     The investors and consultants acquired detachable warrants for the purchase
of 1,892,219 and 362,319 shares of common stock, respectively, which were valued
at $345,071 and $66,087,  respectively. The warrants may be exercised at a price
of $0.69 per share for a term of five years,  ending July 18, 2010. For purposes
of estimating  the intrinsic  fair value of each warrant as of July 19, 2005, we
utilized the Black-Scholes  option-pricing model. We estimated the fair value of
the warrants assuming no expected  dividends and the following  weighted-average
assumptions:


                Expected life (years)                   2.5
                Expected volatility                     66%
                Risk-free interest rate               4.16%
                Expected dividend yield                0.0%

     We next  determined the intrinsic fair value of the  convertible  preferred
stock as of July 19, 2005, to be $2,941,176 based on the number of common shares
that could be acquired as of the date of closing times $0.63,  the closing price
of the  common  stock on the date  preceding  the close of the  transaction.  In
applying  EITF No. 98-5,  we then  allocated  the gross  proceeds of  $2,500,000


                                    Page 15
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                August 31, 2005

between  the  warrants  and  preferred  stock based on  intrinsic  value of each
instrument.  As a result,  we  allocated  $2,154,929  of gross  proceeds  to the
convertible  preferred  stock  and  $345,071  to the  detachable  warrants.  The
beneficial conversion feature of $786,247 was then determined by subtracting the
allocated proceeds of convertible  preferred stock from the intrinsic fair value
of  convertible   preferred  stock.  The  beneficial   conversion   feature  was
immediately recognized as a preferred stock dividend, as the preferred stock can
be converted immediately.

Dividends

     By the placement of the convertible  preferred  stock  described  above, we
became  obligated to pay a cash dividend  monthly on the  outstanding  shares of
convertible  preferred  stock.  The dividend rate is the higher of (i) the prime
rate as reported by the Wall Street Journal on the first day of the month,  plus
three  percent or, (ii) 8.5% times $100 per share,  but in no event greater than
10% annually.  For the three-month  period ended August 31, 2005, cash dividends
of  $19,376  were  recorded,  of which  $14,430  were  unpaid.  Preferred  stock
dividends in the quarter are summarized as follows:


                                                Amount
                                               -------
                Cash dividends paid             $4,946
                Cash dividends accrued          14,430
                Beneficial conversion feature  786,247
                                              --------
                                              $805,623
                                              ========
Common stock

     The  Company  issued  200,000  shares of  common  stock in lieu of cash for
$126,000 in  consultant  services  associated  with the issuance of the Series D
Convertible  Preferred  Stock.  These issue costs were treated as a reduction in
the paid-in capital associated with the preferred stock issuance.

NOTE M - COMMITMENTS AND CONTINGENCIES

Employment Agreements

     The approximate  aggregate  minimum  compensation  obligation  under active
employment agreements at August 31, 2005 are summarized as follows:

        Twelve month period ended August 31,            Amount
        ------------------------------------            ------
                      2006                              $3,125
                                                        ======
Litigation

     The  Company is  currently,  and has in the past  been,  a party to various
routine  legal  proceedings  incident to the ordinary  course of  business.  The
Company  believes that the outcome of all such pending legal  proceedings in the
aggregate  is  unlikely  to have a material  adverse  effect on the  business or
consolidated financial condition of the Company.

                                    Page 16
<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.  incorporated  in  Delaware  in July  1987 is  primarily
engaged in designing,  manufacturing,  marketing and supporting EECP(R) external
counterpulsation systems based on our proprietary technology.  EECP therapy 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 has been shown to improve
systemic vascular function. We provide hospitals and physician private practices
with EECP  equipment,  treatment  guidance,  and a staff  training and equipment
maintenance  program  designed to provide  optimal patient  outcomes.  EECP is a
registered  trademark  for  Vasomedical's  enhanced  external   counterpulsation
systems.

     We have Food and Drug  Administration  (FDA)  clearance  to market our EECP
therapy for use in the treatment of stable and unstable angina, congestive heart
failure, acute myocardial infarction, and cardiogenic shock, however our current
marketing  efforts are limited to the treatment of stable angina and  congestive
heart  failure  indications.  Within  the  stable  angina  and CHF  indications,
Medicare and other  third-party  payers  currently  reimburse  for stable angina
patients with moderate to severe  symptoms who are refractory to medications and
not candidates for invasive  procedures.  CHF patients are also reimbursed under
the same criteria, provided their primary symptoms are angina.

     We are also  actively  engaged  in  research  to  establish  the  potential
benefits of EECP therapy in the  management of CHF and sponsored a pivotal study
to demonstrate the efficacy of EECP therapy in the most prevalent types of heart
failure patients.  This study, known as PEECH (Prospective Evaluation of EECP in
Congestive Heart Failure),  is intended to provide  additional  clinical data in
order to support our application for expanded  Medicare national coverage policy
for the use of EECP therapy in the treatment of CHF. The preliminary  results of
the trial  were  presented  at the  American  College of  Cardiology  scientific
sessions in March 2005, and we expect the results of the PEECH clinical trial to
be published in a peer-reviewed  journal within the next few months. On June 20,
2005,  the Centers  for  Medicare  and  Medicaid  Services  (CMS)  accepted  our
application  for  expanded  coverage of EECP therapy to include CHF as a primary
indication, as well as additional patients with angina.

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, 2005,  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:

                                    Page 17
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

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
parts  delivered  to both  domestic  and  international  customers.  Returns are
accepted prior to the in-service and training subject to a 10% restocking charge
or for normal warranty matters,  and we are not obligated for post-sale upgrades
to these systems.  In addition,  we use the installment method to record revenue
based on cash receipts in situations  where the account  receivable is collected
over an extended period of time and in our judgment the degree of collectibility
is uncertain.

     In most cases,  revenue from domestic  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 the domestic sale of our EECP systems includes a
combination of three elements that qualify as separate units of accounting:

     i.   EECP equipment sale,
     ii.  provision of in-service and training  support  consisting of equipment
          set-up and training provided at the customer's facilities, and
     iii. a service  arrangement  (usually one year),  consisting of: service by
          factory-trained  service  representatives,  material  and labor costs,
          emergency  and  remedial  service  visits,  preventative  maintenance,
          software  upgrades,  technical  phone support and  preferred  response
          times.

     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:

     i.   EECP equipment  sales,  when delivery and  acceptance  occurs based on
          delivery  and  acceptance   documentation  received  from  independent
          shipping companies or customers,
     ii.  in-service  and  training,  following  documented  completion  of  the
          training, and
     iii. the service  arrangement,  ratably over the service  period,  which is
          generally one year.

     In-service and training generally occurs within three weeks of shipment and
our return policy states that no returns will be accepted  after  in-service and
training has been  completed.  The amount  related to in-service and training is
recognized as revenue at the time the  in-service  and training is completed and
the amount  related to service  arrangements  is recognized  as service  revenue
ratably over the related  service  period,  which is generally  one year.  Costs
associated  with the  provision  of  in-service  and  training  and the  service
arrangement,  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 the service arrangement, or by providing sites with additional
training,  in the period that these  services are provided.  Revenue  related to
future  commitments under separately  priced extended service  agreements on our
EECP  system are  deferred  and  recognized  ratably  over the  service  period,
generally  ranging  from  one  year to four  years.  Costs  associated  with the
provision of service and  maintenance,  including  salaries,  benefits,  travel,
spare parts and equipment, are recognized in cost of sales as incurred.  Amounts
billed in excess of revenue  recognized are included as deferred  revenue in the
consolidated balance sheets.

                                    Page 18
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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


     Revenues  from  the  sale  of  EECP  systems   through  our   international
distributor  network are generally  covered by a one-year  warranty period.  For
these  customers  we accrue a warranty  reserve for  estimated  costs to provide
warranty services when the equipment sale is recognized.

     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, 2005.

Accounts Receivable, net

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

Inventories, net

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

     Effective June 1, 2005, we adopted the provisions of Statement of Financial
Accounting  Standards No. 151,  "Inventory  Costs", on a prospective  basis. The
statement  clarifies that abnormal  amounts of idle facility  expense,  freight,
handling  costs,  and  wasted  materials  (spoilage)  should  be  recognized  as
current-period charges and requires the allocation of fixed production overheads
to inventory  based on the normal  capacity of the production  facilities.  As a
result of adopting SFAS No. 151, we absorbed approximately $73,000 less in fixed
production overheads into inventory.

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 service  arrangement  is
deferred and  recognized  as revenue  over the service  period.  As such,  we no

                                    Page 19
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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


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.

     Equipment sold to international  customers through our distributor  network
is  generally  covered by a one year  warranty  period.  For these  customers we
accrue a warranty reserve for estimated costs to provide warranty  services when
the equipment sale is 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.

Net Loss per Common Share

     Basic  loss per share are based on the  weighted  average  number of common
shares outstanding without consideration of potential common stock. Diluted loss
per share are based on the  weighted  number of common  and  potential  dilutive
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.

Income Taxes

     Deferred  income taxes are  recognized  for temporary  differences  between
financial  statement  and income tax bases of assets  and  liabilities  and loss
carryforwards  for which  income tax  benefits  are  expected  to be realized in
future years. A valuation  allowance is established,  when necessary,  to reduce
deferred tax assets to the amount expected to be realized.  In estimating future
tax consequences, we generally consider all expected future events other than an
enactment  of  changes  in the tax laws or  rates.  The  deferred  tax  asset is
continually  evaluated for  realizability.  To the extent our judgment regarding
the  realization  of the  deferred  tax  assets  change,  an  adjustment  to the
allowance is recorded,  with an offsetting increase or decrease, as appropriate,
in income tax expense.  Such adjustments are recorded in the period in which our
estimate as to the  realizability  of the asset  changed that it is "more likely
than not" that all of the deferred tax assets will be realized. The "more likely
than not"  standard is  subjective,  and is based upon our estimate of a greater
than 50% probability that our long range business plan can be realized.

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

Stock-based Employee Compensation

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

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

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded options,  which have no vesting restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price

                                    Page 20
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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


volatility.  Because the Company's  employee stock options have  characteristics
significantly  different from those of traded options and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

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

Recently Issued Accounting Standards

     In May 2005, the FASB issued  Statement of Financial  Accounting  Standards
No. 154 ("SFAS No. 154"),  "Accounting  Changes and Error Corrections." SFAS No.
154 replaces APB Opinion No. 20, Accounting  Changes,  and FASB Statement No. 3,
Reporting  Accounting Changes in Interim Financial  Statements,  and changes the
requirements  for the  accounting  for and  reporting of a change in  accounting
principle.  The  Statement  applies  to  all  voluntary  changes  in  accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions,  those
provisions should be followed.  SFAS No. 154 is effective for accounting changes
and  corrections  of errors made in fiscal years  beginning  after  December 15,
2005.

     In December 2004, the Financial  Accounting  Standards  Board (FASB) issued
FASB Statement No. 153 ("SFAS No. 153"), "Exchanges of Non-monetary Assets -- an
amendment  of APB Opinion No. 29".  SFAS No. 153 amends  Opinion 29 to eliminate
the  exception  for  non-monetary  exchanges  of similar  productive  assets and
replaces it with a general  exception for exchanges of non-monetary  assets that
do not have  commercial  substance.  A non-  monetary  exchange  has  commercial
substance  if the  future  cash  flows of the  entity  are  expected  to  change
significantly as a result of the exchange.  SFAS No. 153 is effective for fiscal
periods  after June 15,  2005.  The Company does not expect the adoption of SFAS
No.  153 to have a  material  impact  on the  Company's  consolidated  financial
statements.

     In  December  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards  No.  123(R)  ("SFAS  No.   123(R)"),   "Accounting   for  Stock-Based
Compensation".  SFAS No. 123(R)  establishes  standards for the  accounting  for
transactions  in which an entity  exchanges its equity  instruments for goods or
services.  This Statement  focuses  primarily on accounting for  transactions in
which an entity obtains employee services in share-based  payment  transactions.
SFAS No.  123(R)  requires  that the fair value of such  equity  instruments  be
recognized  as expense in the  historical  financial  statements as services are
performed.  Prior to SFAS No. 123(R), only certain pro-forma disclosures of fair
value were  required.  SFAS No.  123(R) shall be effective for the Company as of
the beginning of the first interim  reporting  period that begins after June 15,
2005.  The adoption of this new accounting  pronouncement  is expected to have a
material impact on the financial  statements of the Company  commencing with the
quarter ending August 31, 2006.

     In  November  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 151 ("SFAS No. 151"), Inventory Costs, an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 will improve financial  reporting
by clarifying that abnormal amounts of idle facility expense,  freight, handling
costs, and wasted materials  (spoilage)  should be recognized as  current-period
charges  and by  requiring  the  allocation  of fixed  production  overheads  to
inventory  based on the normal capacity of the production  facilities.  SFAS No.
151 is effective  for inventory  costs  incurred  during fiscal years  beginning
after June 15, 2005.  Earlier  application  is  permitted  for  inventory  costs
incurred  during fiscal years beginning after November 24, 2004. The Company has
adopted SFAS No. 151 effective June 1, 2005.

Results of Operations

Three Months Ended August 31, 2005 and 2004

     Net  revenue  from sales,  leases and  service of our EECP  systems for the
three-month  periods  ended  August  31,  2005  and  2004,  was  $3,536,371  and
$4,821,416,  respectively,  which represented a decline of $1,285,045 or 27%. We
reported a net loss of $892,862 compared to $924,330 for the three-month periods
ended August 31, 2005 and 2004, respectively.  Our net loss per common share was
$0.03 for the three-month period ended August 31, 2005 compared to a net loss of
$0.02 per share for the three-month period August 31, 2004.

                                    Page 21

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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


Revenues

     Revenue from equipment sales declined  approximately  38% to $2,456,909 for
the  three-month  period ended August 31, 2005 as compared to $3,974,897 for the
same period for the prior year. The decline in equipment  sales is due primarily
to a 43% decline in the number of equipment shipments, partially offset by a 13%
improvement in average sales prices.  A higher mix of both newer model equipment
and new equipment versus used equipment was the primary cause of the increase in
average sales prices.

     We believe the decline in domestic units shipped  reflects  weakened demand
in the  refractory  angina market as existing  capacity is more fully  utilized,
coupled with increased  competition from surgical procedures,  mainly the use of
drug-eluting stents. We anticipate that demand for EECP systems will remain soft
until a projected expansion of the current CMS national reimbursement policy for
use of EECP therapy to treat congestive  heart failure patients is obtained.  If
we are  unable to obtain an  adequate  national  Medicare  coverage  policy  for
treatment  procedures  using the EECP therapy system in CHF, it would  adversely
affect  our  business  prospects.  Although,  average  domestic  selling  prices
improved  compared to the first  quarter of fiscal 2005,  we  anticipate  that a
prevailing  trend of declining  prices will continue in the immediate  future as
our  competition  attempts  to capture  greater  market  share  through  pricing
discounts.  We sold an unusually high  percentage of used equipment in the first
quarter of fiscal  2005,which  reduced the average selling price in that period.
The average price of new systems sales  declined  approximately  1% in the first
quarter of fiscal 2006 compared to the same period in the prior year. Lastly, we
continue  to  reorganize  certain  territory   responsibilities   in  our  sales
department due to vacant and/or unproductive  territories.  Our revenue from the
sale of EECP  systems  to  international  distributors  in the first  quarter of
fiscal 2006 decreased  approximately  6% to $313,334  compared  $334,792 in same
period of the prior year reflecting decreased volume.

     The above decline in revenue from equipment sales was partially offset by a
28% increase in revenue from  equipment  rental and services for the three month
period  ended  August 31, 2005,  from the same  three-month  period in the prior
year.  Revenue  from  equipment  rental and  services  represented  31% of total
revenue in the first quarter of fiscal 2006 compared to 18% in the first quarter
of fiscal 2005.  The increase in both absolute  amounts and  percentage of total
revenue  resulted  primarily  from an increase of  approximately  38% in service
related  revenue.  The higher service  revenue  reflects an increase in service,
spare parts and consumables as a result of the continued growth of the installed
base of EECP  systems  plus  greater  marketing  focus on the  sale of  extended
service  contracts.   Rental  revenue  declined   approximately  26%,  partially
offsetting the above. The decline was due to a multi-system  customer defaulting
on its rental  payments;  consequently,  we shifted to a cash basis for  revenue
recognition for this customer.

Gross Profit

     The  gross  profit  declined  to  $2,113,187  or 60% of  revenues  for  the
three-month  period  ended  August 31, 2005,  compared to  $3,159,623  or 66% of
revenues for the three-month  period ended August 31, 2004.  Gross profit margin
as a  percentage  of revenue for the  three-month  period ended August 31, 2005,
decreased  compared  to the same  year of the  prior  fiscal  year  despite  the
improvement in average selling prices, mainly due to the higher production units
costs  associated  with  reduced  production  volumes  in the  last  two  fiscal
quarters.  In  addition,  adoption  of SFAS No. 151  lowered the amount of fixed
overhead  costs  absorbed  into  inventory in the first  quarter of fiscal 2006.
Partially  offsetting the decline was an improvement in the gross profit margins
associated with accessory  revenues,  reflecting  higher average selling prices.
The decline in gross profit when compared to the prior year in absolute  dollars
is a direct result of the lower sales volume.

     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,  2005  and  2004,  were  $2,409,149  or 68% of  revenues  and
$3,052,481 or 63% of revenues,  respectively  reflecting an decrease of $643,332
or approximately  21%. The decrease in SG&A expenditures in the first quarter of
fiscal 2006 compared to fiscal 2005 resulted  primarily from decreased sales and

                                    Page 22
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

marketing  expenditures  reflecting  lower  sales and  marketing  personnel  and
travel, plus reduced market research and advertising costs.

Research and Development

     Research and  development  ("R&D")  expenses of $512,006 or 14% of revenues
for the three months ended August 31, 2005,  decreased by $359,892 or 41%,  from
the prior three months ended August 31 2004, of $871,898 or 18% of revenues. The
decrease is primarily attributable to lower new product development spending.

Provision for Doubtful Accounts

     During the  three-month  period ended August 31, 2005, the Company  charged
$70,575 to its  provision for doubtful  accounts as compared to $132,956  during
the three-month period ended August 31, 2004, reflecting lower sales volume.

Interest Expense and Financing Costs

     Interest   expense  and  financing   costs  decreased  to  $23,509  in  the
three-month  period ended  August 31, 2005,  from $30,362 for the same period in
the prior year. Interest expense primarily 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 2006 and 2005,  were
$19,016 and  $13,744,  respectively.  The  increase in interest  income from the
prior  period is the direct  result of $8,871 in  increased  unrealized  gain on
investments. Lower 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,  2005 and 2004,  we  recorded a
provision for state income taxes of $9,826 and $10,000, respectively.

     As of August 31, 2005, we had recorded  deferred tax assets of  $14,582,000
net of a $4,073,000  valuation allowance related to the anticipated  recovery of
tax loss  carryforwards.  The  amount  of the  deferred  tax  assets  considered
realizable  could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced. Ultimate realization of the deferred
tax assets is dependent upon 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 losses during fiscal years 2005,
2004 and 2003, and that based upon the weight of available evidence,  that it is
"more likely than not" that net deferred tax assets will be realized.  The "more
likely than not" standard is subjective, and is based upon management's estimate
of a greater  than 50%  probability  that its long  range  business  plan can be
realized.

     Ultimate  realization  of any or all of  the  deferred  tax  assets  is not
assured, due to significant  uncertainties and material  assumptions  associated
with  estimates of future  taxable income during the  carryforward  period.  Our
estimates are largely  dependent upon achieving  considerable  growth in revenue
and profits resulting from the successful commercialization of EECP therapy into
the  congestive  heart  failure  indication,  which we believe will enable us to
reverse the current trend of increasing  losses and generate  pre-tax  income in
excess of $39 million over the next seven years in order to fully utilize all of
the deferred tax assets.  Such  estimates of future  taxable income are based on
our beliefs, as well as assumptions made by and information  currently available
to us. Certain critical assumptions associated with our estimates include:

     --   that the  results  from the  PEECH  clinical  trial,  as well as other
          clinical  evidence are  sufficiently  positive for the PEECH  clinical
          trial to be  published in a  peer-reviewed  journal and to enable EECP
          therapy  to  obtain  approval  of a  national  Medicare  reimbursement
          coverage policy plus other  third-party payer  reimbursement  policies
          inclusive of the congestive heart failure indication;

     --   that the reimbursement  coverage will be both broad enough in terms of
          coverage  language  and at an amount  adequate  to  enable  successful
          commercialization  of EECP therapy into the  congestive  heart failure
          indication  and enable us to achieve  material  growth in revenue  and
          profits;

                                    Page 23
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

     --   that  EECP  therapy  will  be  sufficiently  accepted  by the  medical
          community  as an  adjunctive  therapy  for the  treatment  of patients
          suffering from congestive heart failure; and
     --   that  we  will  be able to  secure  additional  financing  to  provide
          sufficient  funds to  market  EECP  therapy  in the  congestive  heart
          failure indication.

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

     --   the effect of the  dramatic  changes  taking  place in the  healthcare
          environment;
     --   the impact of competitive procedures and products and their pricing;
     --   other medical insurance reimbursement policies;
     --   lack of  assurance  that we will be able to raise  additional  capital
          necessary to implement our business plan;
     --   unexpected manufacturing problems;
     --   unforeseen  difficulties and delays in the conduct of clinical trials,
          peer-reviewed publications and product development programs;
     --   the actions of regulatory  authorities and  third-party  payers in the
          United States and overseas;
     --   uncertainties about the acceptance of a novel therapeutic  modality by
          the medical community;
     --   our recent financial history of declining revenues and losses;
     --   unanticipated loss of management or other key personnel; and
     --   the risk factors reported from time to time in our SEC reports.

     Factors  considered  by us in making our  assumptions  and  included in our
long-term business plan are the following:

     --   we currently  have FDA  clearance to market EECP therapy in congestive
          heart failure;
     --   independent  market  research  indicates  that the patient  population
          potentially  eligible for EECP  therapy in  congestive  heart  failure
          market is larger than the current refractory angina patient population
          and when the two patient  populations  are  combined  the total market
          opportunity for EECP therapy will be more than double;
     --   many  physician  practices  have  told  us  that  they  do not  have a
          sufficient number of patients to economically  justify adoption of the
          procedure  with the  current  reimbursement  coverage  for  refractory
          angina.  The increased  market size resulting from the addition of CHF
          patients could improve the economic model for the physician practice;
     --   we have positive  clinical evidence from the PEECH clinical trial that
          was recently  concluded,  plus other smaller  clinical  trials and the
          IEPR patient registry that demonstrates the clinical  effectiveness of
          EECP therapy in the treatment of  congestive  heart failure to medical
          providers, payers and regulators;
     --   we completed the PEECH  clinical trial this fiscal year as planned and
          disclosed the summary results of the trial in March 2005;
     --   we  expect  the  results  of the  PEECH  trial  to be  published  in a
          peer-reviewed journal, which is an important step necessary to support
          an application to CMS to expand reimbursement coverage of EECP therapy
          to include CHF patients;
     --   we sustained a period of  profitability in fiscal years 2000, 2001 and
          2002 with profits  before income taxes of  $1,290,916,  $5,237,242 and
          $4,240,106, respectively; and
     --   we continue to believe that we will be able to raise  sufficient funds
          to enable us to execute our business plan.

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

                                    Page 24
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

by current  operating  losses.  We review this  policy on a quarterly  basis and
believe  that the above  valuation  reserve  is  appropriate  under the  current
circumstances.

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

     The recorded  deferred tax asset and  increase to the  valuation  allowance
during the three months ended August 31, 2005 was $299,000.

Liquidity and Capital Resources

     We have financed our operations in fiscal 2006 and fiscal 2005 from working
capital and in fiscal 2006 from the issuance of preferred  stock.  At August 31,
2005, we had a cash, cash  equivalents,  and  certificates of deposit balance of
$3,460,603  and  working  capital of  $5,296,483  as  compared  to a cash,  cash
equivalents,  and  certificates  of deposit  balance of  $2,747,967  and working
capital  of  $3,932,769  at May  31,  2005.  Our  cash,  cash  equivalents,  and
certificates  of  deposit  balances  increased  $1,475,922  in fiscal  year 2006
primarily  due to  $2,208,657  in net  proceeds  from the  issuance of preferred
stock, partially offset by the net loss of $892,862.

     The  increase  in cash used in our  operating  activities  during the first
quarter of fiscal  year 2006  resulted  primarily  from the net loss of $892,862
plus  adjustments  to  reconcile  net loss to net  cash  provided  by  operating
activities of $473,956.  Changes in our operating  assets and  liabilities  were
$667,951.  The changes in the asset components  primarily reflect an increase in
accounts  receivable  of $657,676,  offset by lower  inventory of $292,258.  The
changes in our  operating  liability  components  reflect a decrease in accounts
payable and accrued liabilities of $372,312 and an increase in other liabilities
of $37,668. Non-cash adjustments for depreciation,  amortization,  allowance for
doubtful accounts and allowance for inventory  write-offs of $193,995  partially
offset the above. Net accounts receivable were 70% of quarterly revenues for the
three-month  period  ended  August 31,  2005,  compared to 94% at the end of the
three-month  period  ended August 31, 2004,  and  accounts  receivable  turnover
decreased  to 4.0 times as of August 31,  2005,  as  compared to 4.5 times as of
August 31, 2004.

     Standard payment terms on our domestic equipment sales are generally net 30
to 90 days from  shipment and do not contain  "right of return"  provisions.  We
have  historically  offered a  variety  of  extended  payment  terms,  including
sales-type  leases,  in certain  situations and to certain customers in order to
expand the  market for our EECP  products  in the US and  internationally.  Such
extended payment terms were offered in lieu of price concessions, in competitive
situations,  when opening new markets or geographies  and for repeat  customers.
Extended payment terms cover a variety of negotiated terms, including payment in
full - net 120, net 180 days or some fixed or variable  monthly  payment  amount
for a six to twelve month period followed by a balloon  payment,  if applicable.
During  the first  quarter  of fiscal  2006 and 2005,  approximately  0% and 1%,
respectively,  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 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  provided net cash of $763,286 during the three-month
period  ended  August 31,  2005.  Cash was  provided  by the sale of  short-term
certificates  of  deposit.  All of our  certificates  of deposit  have  original
maturities of greater than three months and mature in less than twelve months.

     Our  financing  activities  provided  net  cash of  $2,079,454  during  the
three-month period ended August 31, 2005,  reflecting $2,208,657 in net proceeds
received from the issuance of preferred stock,  less payments on our outstanding
notes and  loans  totaling  $124,257,  and  preferred  stock  dividend  payments
totaling  $4,946.  On July 19,  2005,  we  entered  into a  Securities  Purchase
Agreement that provided us with gross proceeds of $2.5 million through a private
placement of preferred  stock with M.A.G.  Capital,  LLC through its  designated
funds,  Monarch Pointe Fund Ltd.,  Mercator  Momentum Fund III, LP, and Mercator
Momentum  Fund,  LP. The  agreement  provided for a private  placement of 25,000
shares of Vasomedical's Series D Preferred Stock at $100 per share.

     We do not have an available line of credit.

     We believe that our projected cash flow from  operations  together with our
current  cash  reserves  and  working  capital  will be  sufficient  to fund our

                                    Page 25

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

business plan and projected capital  requirements through at least May 31, 2006;
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 the Company's  expected cash  requirements for
contractual obligations outstanding as of August 31, 2005.
<TABLE>
<CAPTION>
                                                                        Due as of       Due as of
                                                      Due as of        8/31/07 and     8/31/09 and          Due
                                      Total            8/31/06           8/31/08         8/31/10        Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>              <C>             <C>             <C>
Long-Term Debt                        $1,060,630        $151,327         $141,130        $128,982        $639,191
Notes Payable                            212,974         212,974
Operating Leases                          53,299          49,739            3,560              --              --
Litigation Settlement                    167,250         133,000           34,250              --              --
Employment Agreements (a)                  3,125           3,125               --              --              --
--------------------------------------------------------------------------------------------------------------------
Total Contractual Cash                $1,497,278       $ 550,165         $178,940        $128,982        $639,191
Obligations
====================================================================================================================
<FN>
(a) We intend to incur a contractual cash requirement in the future with our President and Chief Executive Officer.
</FN>
</TABLE>

Effects of Inflation

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

                                    Page 26
<PAGE>
                       Vasomedical, Inc. and Subsidiaries



ITEM 3 - QUANTITATIVE AND QUALITATIVE 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 our  cash  and  cash  equivalent  balances.  The  majority  of our
investments  are in short-term  instruments  and subject to  fluctuations  in US
interest rates. Due to the nature of our short-term investments, we believe that
there is no material risk exposure.

ITEM 4 - CONTROLS AND PROCEDURES

     We  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation of our management, including our Chief Executive Officer and Chief
Financial  Officer,  of the  effectiveness  of the design and  operation  of our
disclosure controls and procedures  pursuant to Exchange Act Rule 13a-15.  Based
upon that evaluation,  the Chief Executive  Officer and Chief Financial  Officer
concluded  that, as of August 31, 2005, our  disclosure  controls and procedures
are effective to provide reasonable assurances that such disclosure controls and
procedures  satisfy their  objectives  and that the  information  required to be
disclosed  by us in the  reports we file  under the  Exchange  Act is  recorded,
processed,  summarized and reported within the required time periods. There were
no changes  during the fiscal  quarter  ended  August 31,  2005 in our  internal
controls  or in other  factors  that  could  have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

                                    Page 27
<PAGE>
                       Vasomedical, Inc. and Subsidiaries


                          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 28
<PAGE>
                       Vasomedical, Inc. and Subsidiaries





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


                               VASOMEDICAL, INC.

                       By:    /s/ Thomas Glover
                              -----------------
                              Thomas Glover
                              Chief Executive Officer and Director
                              (Principal Executive Officer)

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


Date:  October 13, 2005

                                    Page 29