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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549


FORM 10-Q


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

For the quarterly period ended August 31, 2004

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

For the transition period from _______________ to ______________

Commission File Number: 0-18105

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

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

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

Registrant's Telephone Number (516) 997-4600

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


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




Vasomedical, Inc. and Subsidiaries


INDEX

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements (unaudited) Page

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

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

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

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

Notes to Consolidated Condensed Financial Statements 7

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

Item 3 - Qualitative and Quantitative Disclosures About
Market Risk 23

Item 4 - Procedures and Controls 23

PART II - OTHER INFORMATION 24






Page 2



Vasomedical, Inc. and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS



August 31, May 31,
2004 2004
---------------- -----------------
ASSETS (unaudited) (audited)

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

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

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


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

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

COMMITMENTS AND CONTINGENCIES

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

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


Page 3

Vasomedical, Inc. and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)



Three months
ended August 31,
--------------------------------------
2004 2003
----------------- -----------------

Revenues
Equipment sales $3,974,897 $4,788,110
Equipment rentals and services 846,519 638,422
----------------- -----------------
4,821,416 5,426,532

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

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

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

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

Page 4



Vasomedical, Inc. and Subsidiaries

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




Additional Total
Paid-in Accumulated Stockholders
Shares Amount Capital Deficit Equity
------------ ---------- -------------- --------------- --------------

Balance at June 1, 2004 58,419,356 $58,419 $51,320,106 $(26,784,356) $24,594,169
Exercise of stock options 133,332 133 130,533 130,666
Net loss (924,330) (924,330)
------------ ---------- -------------- --------------- --------------
Balance at August 31, 2004 58,552,688 $58,552 $51,450,639 $(27,708,686) $23,800,505
============ ========== ============== =============== ==============

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



Page 5


Vasomedical, Inc. and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)



Three months
ended August 31,
--------------------------------------
2004 2003
----------------- -----------------

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

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

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

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

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


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


Page 6


Vasomedical, Inc. and Subsidiaries

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

NOTE A - BASIS OF PRESENTATION

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

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

Reclassifications

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

NOTE B - IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

Page 7


Vasomedical, Inc. and Subsidiaries

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


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

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

NOTE C - STOCK-BASED COMPENSATION

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

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

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


Page 8



Vasomedical, Inc. and Subsidiaries

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

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



Three months
ended August 31,
--------------------------------------
2004 2003
----------------- -----------------

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



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

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

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

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

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

NOTE D - EARNINGS (LOSS) PER COMMON SHARE

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


Page 9

Vasomedical, Inc. and Subsidiaries

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


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



Three months
ended August 31,
--------------------------------------
2004 2003
----------------- -----------------

Numerator:
Basic and diluted net loss $(924,330) $(266,594)
Denominator:
Basic - weighted average common shares 58,532,398 57,826,844
Stock options -- --
Warrants -- --
----------------- -----------------
Diluted - weighted average common shares 58,532,398 57,826,844
================= =================
Basic and diluted loss per common share $(0.02) $(0.00)
================= =================


NOTE E - INVENTORIES

Inventories consist of the following:



August 31, May 31,
2004 2004
----------------- -----------------

Raw materials $911,713 $928,269
Work in process 680,764 455,731
Finished goods 1,004,357 989,748
----------------- -----------------
$2,596,834 $2,373,748
================= =================


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

NOTE F - LONG-TERM DEBT

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



August 31, May 31,
2004 2004
----------------- -----------------

Facility loans (a) $1,009,937 $1,022,933
Term loans (b) 187,052 206,382
----------------- -----------------
1,196,989 1,229,315
Less current portion (139,263) (136,478)
----------------- -----------------
$1,057,726 $1,092,837
================= =================

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

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

Page 10

Vasomedical, Inc. and Subsidiaries

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


NOTE G - DEFERRED REVENUES

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

The changes in the Company's deferred revenues are as follows:


Three months
ended August 31,
--------------------------------------
2004 2003
----------------- -----------------

Deferred Revenue at the beginning of the period $2,846,451 $1,709,551
ADDITIONS
Deferred extended service contracts 319,850 445,187
Deferred in-service training 67,500 --
Deferred warranty obligations 310,000 --
RECOGNIZED AS REVENUE
Deferred extended service contracts (432,771) (303,154)
Deferred in-service training (127,500) --
Deferred warranty obligations (332,084) --
----------------- -----------------
Deferred revenue at end of period 2,651,446 1,851,584
Less: current portion (1,672,713) (968,758)
----------------- -----------------
Long-term deferred revenue at end of period $978,733 $882,826
================= =================



NOTE H - WARRANTY COSTS

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

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


Three months
ended
August 31,
-----------------------------------
2004 2003
--------------- ---------------

Warranty liability at the beginning of the period $244,917 $788,000
Expense for new warranties issued -- 164,000
Warranty amortization (56,084) (237,000)
--------------- ---------------
Warranty liability at end of period 188,833 715,000
Less: Current portion (131,833) (537,000)
--------------- ---------------
Long-term warranty liability at end of period $57,000 $178,000
=============== ===============



Page 11


Vasomedical, Inc. and Subsidiaries

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


NOTE I - INCOME TAXES

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

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

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

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

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

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

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

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

-- other medical insurance reimbursement policies;

-- unexpected manufacturing problems;

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

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

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

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

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

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



Page 12


Vasomedical, Inc. and Subsidiaries

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

NOTE J - COMMITMENTS AND CONTINGENCIES

Employment Agreements

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



Twelve month period ended August 31, Amount
------------------------------------ -------

2005 $209,375
2006 3,125
--------
$212,500
========







Page 13

Vasomedical, Inc. and Subsidiaries

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


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

General Overview

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

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

Critical Accounting Policies

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

Revenue Recognition

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

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AND RESULTS OF OPERATIONS


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

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

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

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

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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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Accounts Receivable, net

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

Inventories, net

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

Deferred Revenues

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

Warranty Costs

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

Income Taxes

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

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AND RESULTS OF OPERATIONS

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

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

Stock Compensation

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

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

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

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

Recently Issued Accounting Standards

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

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

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

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AND RESULTS OF OPERATIONS


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

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

Results of Operations

Three Months Ended August 31, 2004 and 2003

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

Revenues

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

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

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AND RESULTS OF OPERATIONS

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

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

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

Gross Profit

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

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

Selling, General and Administrative

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


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

Research and Development

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

Provision for Doubtful Accounts

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

Interest Expense and Financing Costs

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

Interest and Other Income, Net

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

Income Tax Expense, Net

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

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

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

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

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


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

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

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

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

-- other medical insurance reimbursement policies;

-- unexpected manufacturing problems;

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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Vasomedical, Inc. and Subsidiaries

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


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

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

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

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

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

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




Due as of Due as of
Due as of 8/31/06 and 8/31/08 and Due
Total 8/31/05 8/31/07 8/31/09 Thereafter
- --------------------------------------------------------------------------------------------------------------------

Long-Term Debt $1,196,989 $139,263 $220,727 $128,279 $708,720
Operating Leases 113,228 65,585 47,643 -- --
Litigation Settlement 300,250 133,000 167,250 -- --
Severance obligations 2,692 2,692 -- -- --
Employment Agreements (a) 212,500 209,375 3,125 -- --
- --------------------------------------------------------------------------------------------------------------------
Total Contractual Cash $1,825,659 $ 549,915 $438,745 $128,279 $708,720
Obligations
====================================================================================================================


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

Effects of Inflation

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

Subsequent Event

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

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Vasomedical, Inc. and Subsidiaries

ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4 - PROCEDURES AND CONTROLS

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


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Vasomedical, Inc. and Subsidaries


PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS:

None.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS:

None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:

None

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

None

ITEM 5 - OTHER INFORMATION:

None

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

Exhibits

31 Certifications pursuant to Rules 13a-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.


Reports on Form 8-K

None


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Vasomedical, Inc. and Subsidiaries

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


VASOMEDICAL, INC.

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

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

Date: October 7, 2004

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