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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934 For the fiscal year ended May 31, 2007

[ ]  TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 For the transition period from _____ to _____

                           Commission File No. 0-18105
                           ---------------------------

                                VASOMEDICAL, INC.
              (Exact name of small business issuer in its charter)

              Delaware                                          11-2871434
   (State or other jurisdiction of                            (IRS Employer
    incorporation or organization)                           Identification No.)

  180 Linden Avenue, Westbury, New York                           11590
 (Address of Principal Executive Offices)                       (Zip Code)

         Issuer's telephone number, including area code: (516) 997-4600

           Securities registered under Section 12(b) of the Act: None

              Securities registered under Section 12(g) of the Act:
                          Common Stock, $.001 par value
                                (Title of Class)

Check whether the issuer is not required to file reports  pursuant to Section 13
or Section 15(d) of the Act.
Yes [  ]     No [ X ]

Check  whether  the issuer  (1) has filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 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 [  ]

Check if there is no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation S-B contained in this Form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB.
[ X ]

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

       State issuer's revenues for its most recent fiscal year. $6,354,083

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates  of the registrant based on the closing sale price of $0.11 as of
August 17, 2007, was  approximately  $7,009,469.  Shares of common stock held by
each  officer  and  director  and by  each  person  who  owns  5% or more of the
outstanding  common stock have been  excluded in that such persons may be deemed
to be affiliates.  The  determination of affiliates  status is not necessarily a
conclusive determination for other purposes.

At August 17, 2007,  the number of shares  outstanding  of the  issuer's  common
stock was 93,618,004.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Part III - (Items  9, 10,  11,  12 and 14)  Registrant's  definitive  proxy
statement to be filed pursuant to Regulation 14A of the Securities  Exchange Act
of 1934.

     Transitional Small Business Disclosure Format (check one) Yes [ ] No [X].
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<PAGE>

                              INDEX TO FORM 10-KSB

<TABLE>
<CAPTION>
                                                                                                             Page
                                     PART I

<S>                                                                                                            <C>
Item 1.       Business..........................................................................................1
Item 2.       Properties.......................................................................................25
Item 3.       Legal Proceedings................................................................................25
Item 4.       Submission of Matters to a Vote of Security Holders..............................................25

                                     PART II

Item 5.       Market for Registrant's Common Equity, Related Stockholder Matters and Small
              Business Issuer Purchases of Equity Securities...................................................26
Item 6.       Management's Discussion and Analysis or Plan of Operation........................................27
Item 7.       Financial Statements.............................................................................41
Item 8.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............41
Item 8A.      Controls and Procedures..........................................................................41
Item 8B.      Other Information................................................................................41

                                    PART III

Item 9.       Directors and Executive Officers of the Registrant...............................................42
Item 10.      Executive Compensation...........................................................................42
Item 11.      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ..42
Item 12.      Certain Relationships and Related Transactions...................................................42
Item 13.      Exhibits
Item 14.      Principal Accountant Fees and Services...........................................................43





Signatures    .................................................................................................44

                                    EXHIBITS

Exhibit 23    Consent of Independent Registered Public Accounting Firm........................................E-1

Exhibit 31    Certifications Pursuant to Securities Exchange Act Rule 13A-14(A)/15D-14(A).....................E-2

Exhibit 32    Certification of Periodic Report................................................................E-4
</TABLE>

                                      -i-

<PAGE>
                                     PART I


ITEM 1 - BUSINESS

     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  "anticipates",  "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. was  incorporated  in Delaware in July 1987.  Unless the
context requires  otherwise,  all references to "we",  "our",  "us",  "Company",
"registrant",  "Vasomedical"  or "management"  refer to Vasomedical Inc. and its
subsidiaries.   Since  1995,  we  have  been  primarily  engaged  in  designing,
manufacturing,    marketing   and   supporting    EECP(R)   enhanced    external
counterpulsation  systems based on our unique proprietary  technology  currently
indicated  for use in cases of stable or unstable  angina  (i.e.,  chest  pain),
congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack,
(MI)) and  cardiogenic  shock.  The EECP(R)  therapy  system 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 helps to restore  systemic  vascular  function.  The
therapy  also  increases  blood flow and oxygen  supply to the heart  muscle and
other organs and decreases the heart's workload and need for oxygen,  while also
improving  function of the endothelium,  the lining of blood vessels  throughout
the body, lessening resistance to blood flow. We provide hospitals,  clinics and
physician private practices with EECP(R) equipment,  treatment  guidance,  and a
staff training and equipment  maintenance  program  designed to provide  optimal
patient outcomes.  EECP(R) is a registered trademark for Vasomedical's  enhanced
external     counterpulsation    systems.    For    more    information    visit
www.vasomedical.com.

     We have Food and Drug Administration  (FDA) clearance to market our EECP(R)
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 chronic  stable  angina and
congestive  heart  failure.  Medicare  and other  third-party  payers  currently
reimburse  for the  treatment of angina  symptoms in patients  with  moderate to
severe  symptoms  who are  refractory  to  medications  and not  candidates  for
invasive procedures. Patients with primary diagnoses of heart failure, diabetes,
peripheral  vascular disease,  etc. are also reimbursed under the same criteria,
provided the primary  indication  for treatment  with EECP(R)  therapy is angina
symptoms.

     During the last two fiscal  years  ended May 31,  2007 and 2006 we incurred
large  operating  losses.  We  attempted  to achieve  profitability  by reducing
operating costs and halting the trend of declining revenue, to reduce cash usage
through  bringing our cost structure more into alignment with current revenue by
engaging in  restructurings  during  January 2006,  March 2007 and April 2007 to
substantially reduce personnel and spending on sales,  marketing and development
projects. In addition, we sought to obtain a strategic alliance within the sales
and marketing areas and/or to raise additional capital through public or private
equity or debt financings.

     Subsequent to May 31, 2007 the following events took place which allowed us
to raise  additional  capital through a private equity financing and by the sale
of our facility under a leaseback agreement.

                                       1
<PAGE>
     o    On June 21, 2007 we entered into a Securities  Purchase Agreement with
          Kerns Manufacturing Corp. ("Kerns").  Concurrently with our entry into
          the Securities Purchase Agreement, we also entered into a Distribution
          Agreement  and  a  Supplier  Agreement  with  Living  Data  Technology
          Corporation, an affiliate of Kerns ("Living Data").

          We  sold to  Kerns  pursuant  to the  Securities  Purchase  Agreement,
          21,428,572  shares  of our  common  stock  at $.07  per  share  for an
          aggregate  of  $1,500,000  as well a  five-year  warrant  to  purchase
          4,285,714  shares of our common stock at an initial  exercise price of
          $.08 per  share  (the  "Warrant").  We also  have an option to sell an
          additional  $1  million of our common  stock to Kerns.  The  agreement
          further  provided for the appointment to our Board of Directors of two
          representatives of Kerns. In furtherance  thereof,  Mr. Jun Ma and Mr.
          Simon  Srybnik,  Chairman  of both  Kerns and Living  Data,  have been
          appointed  members  of  our  Board  of  Directors.   Pursuant  to  the
          Distribution  Agreement,  we have become the exclusive  distributor in
          the United States of the AngioNew ECP systems  manufactured  by Living
          Data. As additional  consideration  for such  agreement,  we agreed to
          issue an  additional  6,990,840  shares of our common  stock to Living
          Data. Pursuant to the Supplier Agreement,  Living Data now will be the
          exclusive  supplier  to us of the ECP therapy  systems  that we market
          under the registered trademark EECP(R). The Distribution Agreement and
          the Supplier Agreement each have an initial term extending through May
          31, 2012.

          Pursuant to a Registration  Rights Agreement,  we granted to Kerns and
          Living Data, subject to certain restrictions,  "piggyback registration
          rights"  covering  the  shares  sold to  Kerns  as well as the  shares
          issuable  upon exercise of the Warrant and the shares issued to Living
          Data.

     o    On August 15, 2007 we sold our  facility  under a five-year  leaseback
          agreement  for  $1.4  million.  The net  proceeds  from  the  sale was
          approximately  $425,000 after payment in full of the two secured notes
          on our facility,  brokers fees,  closing  costs,  and the opening of a
          certificate  of deposit in accordance  with the  provisions of the new
          lease.

Market Overview

     Cardiovascular disease (CVD) is the leading cause of death in the world and
is among the top three diseases in terms of healthcare  spending in nearly every
country.  CVD claimed  approximately  2.4 million  lives in the United States in
2003 and was  responsible  for 1 of every 2.7 deaths,  according to The American
Heart Association (AHA) Heart and Stroke  Statistical 2006 Update (2006 Update).
Approximately  71.3 million  Americans  suffer from some form of  cardiovascular
disease. Among these, 12.0 million have coronary heart disease (CHD).

     We have Food and Drug Administration  (FDA) clearance to market our EECP(R)
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 chronic  stable  angina and
congestive  heart  failure.  Medicare  and other  third-party  payers  currently
reimburse  for the  treatment of angina  symptoms in patients  with  moderate to
severe  symptoms  who are  refractory  to  medications  and not  candidates  for
invasive procedures. Patients with primary diagnoses of heart failure, diabetes,
peripheral  vascular disease,  etc. are also reimbursed under the same criteria,
provided the primary  indication  for treatment  with EECP(R)  therapy is angina
symptoms.

     The Company sponsored a pivotal,  randomized  clinical trial to demonstrate
the efficacy of EECP(R)  therapy in the most  prevalent  types of heart  failure
patients.  This trial, known as PEECH(TM) (Prospective  Evaluation of EECP(R) in
Congestive Heart Failure),  was intended to provide  additional  evidence of the
safety and efficacy of EECP(R) therapy in the treatment of NY Heart  Association
(NYHA) class II and III patients with systolic heart failure.

     The  preliminary  results  of the  PEECH(TM)  trial were  presented  at the
American  College of Cardiology  scientific  sessions in March 2005. On June 20,
2005,  the Centers  for  Medicare  and  Medicaid  Services  (CMS)  accepted  our
application for expansion of reimbursement coverage of EECP(R) therapy. On March

                                       2
<PAGE>
20, 2006,  the Centers for Medicare  and  Medicaid  Services  (CMS) issued their
Decision  Memorandum  regarding this  reconsideration  with the opinion that the
evidence  is not  adequate  to  extend  coverage  to  include  CHF as a  primary
indication  and to keep the  existing  coverage  in the NCP  (National  Coverage
Policy) intact.  They commented in their decision  memorandum that they were not
able to apply full weight to the evidence  generated by the PEECH(TM)  trial, as
it had not yet been  published in a  peer-reviewed  medical  journal by the time
they were required to issue a final decision on this application.

     On August 25, 2006 the  results of the trial were  initially  published  on
line by the Journal of the American College of Cardiology  (JACC),  and in print
in its  September  19, 2006 issue.  In the  November-December  2006 issue of the
journal  Congestive  Heart  Failure,  a second  report of the  results  from the
PEECH(TM)  trial  was  published,  focusing  on the  results  of a  prespecified
subgroup analysis in trial patients age 65 and over.

     We will  continue  to educate the  marketplace  that  EECP(R)  therapy is a
therapy for ischemic  cardiovascular  disease and that  patients  with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also
eligible  for  reimbursement  under the current  coverage  policy,  provided the
primary  indication  for  treatment  with  EECP(R)  therapy  is angina or angina
equivalent   symptoms  and  the  patient   satisfies   other  listed   criteria.
Additionally,  we will  continue to pursue  expansion  of  coverage  for EECP(R)
therapy with Medicare and other  third-party  payers as evidence of its clinical
utility develops.

Angina

     Angina  pectoris is the medical term for a recurring  pain or discomfort in
the  chest due to  coronary  artery  disease  (CAD).  Angina  is a symptom  of a
condition  called  myocardial  ischemia,  which  occurs when the heart muscle or
myocardium  doesn't  receive as much blood,  hence as much oxygen,  as it needs.
This  usually  happens  because one or more of the heart's  arteries,  the blood
vessels  that  supply  blood  to  the  heart  muscle,   is  narrow  or  blocked.
Insufficient  blood  supply to meet the need of the organ to  function is called
ischemia.

     The  cardinal  symptom of stable CAD is  anginal  chest pain or  equivalent
symptoms,  such as  exertional  dyspnea  or  fatigue.  Angina  is  uncomfortable
pressure,  fullness,  squeezing or pain,  usually occurring in the center of the
chest under the  breastbone.  The discomfort  also may be felt in the neck, jaw,
shoulder, back or arm. Often the patient suffers not only from the discomfort of
the symptom itself but also from the accompanying  limitations on activities and
the  associated  anxiety  that  the  symptoms  may  produce.  Uncertainty  about
prognosis  may be an  additional  source  of  anxiety.  For some  patients,  the
predominant   symptoms  may  be  palpitations  or  syncope  that  is  caused  by
arrhythmias or fatigue, edema, or orthopnea caused by heart failure. Episodes of
angina  occur  when the  heart's  need for  oxygen  increases  beyond the oxygen
available  from the blood  nourishing the heart.  Physical  exertion is the most
common though not only trigger for angina.  For example,  running to catch a bus
could  trigger an attack of angina while  walking  might not.  Angina may happen
during exercise,  periods of emotional stress, exposure to extreme cold or heat,
heavy meals,  alcohol  consumption or cigarette  smoking.  Some people,  such as
those with a coronary artery spasm, may have angina when they are resting.

     There are  approximately  6.4 million angina  patients in the United States
and our EECP(R) therapy currently competes with other technologies in the market
for  approximately  130,000 new angina  patients  annually who do not adequately
respond to or are not  amenable  to medical  and  surgical  therapy and have the
potential to meet the  guidelines for  reimbursement  of EECP(R)  therapy.  Most
angina  patients are treated with  medications,  including beta blockers to slow
and protect the heart and  vasodilators,  which are often prescribed to increase
blood flow to the coronary arteries. When drugs fail or inadequately correct the
problem the patients are considered unresponsive to medical therapy. Most angina
patients are readily amenable by invasive  revascularization  procedures such as
angioplasty  and coronary  stent  placement,  as well as coronary  artery bypass
grafting (CABG).  However,  there are approximately 130,000 angina patients each
year  whose  angina  can not be  stopped  by  medication  and they are no longer
amenable by invasive procedures.

     In February 1999, the Centers for Medicare and Medicaid Services (CMS), the
federal agency that  administers  the Medicare  program for more than 39 million
beneficiaries,  issued  a  national  coverage  policy  for the  use of  external
counterpulsation  therapy in the  treatment  of angina.  Medicare  reimbursement
guidelines  have a significant  impact in determining  the available  market for
EECP(R)  therapy.  We believe that over 65% of the patients that receive EECP(R)

                                       3
<PAGE>
therapy are Medicare patients and many of the third-party payers follow Medicare
guidelines,  which limits  reimbursement  for EECP(R) therapy to patients who do
not  adequately  respond to or are not  amenable to medical  therapy and are not
readily amenable to invasive  therapy.  As a result, an important element of our
strategy is to grow the market for EECP(R)  therapy by  expanding  reimbursement
coverage to include a broader range of angina patients than the current coverage
policy  provides  and  enabling  EECP(R)  therapy  to  compete  more with  other
therapies for ischemic heart disease.  Please see the heading "Reimbursement" in
the "Item-1 Business" section of this Form 10-KSB for a more detailed discussion
of reimbursement issues.

Congestive Heart Failure

     CHF is a condition  in which the heart loses its full  pumping  capacity to
supply the metabolic needs of all other organs. The condition affects both sexes
and is most common in people over age 50. Symptoms include angina,  shortness of
breath,  weakness,  fatigue,  swelling of the abdomen, legs and ankles, rapid or
irregular heartbeat and low blood pressure. Causes range from chronic high blood
pressure,  heart-valve disease, heart attack, coronary artery disease, heartbeat
irregularities,  severe lung  disease  such as  emphysema,  congenital  disease,
cardiomyopathy, hyperthyroidism, severe anemia and others.

     CHF is treated with medication and,  sometimes,  surgery on heart valves or
the coronary  arteries and, in certain  severe cases,  heart  transplants.  Left
ventricular assist devices (LVADs) and the use of cardiac  resynchronization and
implantable  defibrillators  are useful in selected patients with heart failure.
Still, no consensus therapy currently exists for CHF and patients must currently
suffer their symptoms chronically and have a reduced life expectancy.

     According to the 2006 Update, in 2003 approximately 2.4 million men and 2.6
million women in the US had CHF and about 550,000 new cases of the disease occur
each year.  Deaths caused by the disease  increased 20.5% from 1993 to 2003. The
prevalence of the disease is growing as a result of the aging of the  population
and the  improved  survival  rate of people  after  heart  attacks.  Because the
condition  frequently  entails  visits  to the  emergency  room  and  in-patient
treatment centers, two-thirds of all hospitalizations for people over age 65 are
due to CHF. The economic burden of congestive  heart failure is enormous with an
estimated  cost to the health care system in 2005 in the United  States of $29.6
billion.  Congestive  heart failure offers a good strategic fit with our current
angina business and offers an expanded market  opportunity for EECP(R)  therapy.
Unmet clinical needs in CHF are greater than those for angina,  as there are few
consensus  therapies,  invasive or otherwise,  beyond medical management for the
condition.  It is noteworthy that data collected from the International  EECP(R)
Patient  Registry(TM)  (IEPR) at the University of Pittsburgh Graduate School of
Public Health shows that approximately one-third of angina patients treated with
EECP(R)  also have a history  of CHF and 70% to 80% have  demonstrated  positive
outcomes from EECP(R) therapy.

     We  sponsored  a pivotal,  randomized  clinical  trial to  demonstrate  the
efficacy  of  EECP(R)  therapy  in the most  prevalent  types  of heart  failure
patients.  This trial, known as PEECH(TM) (Prospective  Evaluation of EECP(R) in
Congestive Heart Failure),  was intended to provide  additional  evidence of the
safety and  efficacy of EECP(R)  therapy in the  treatment  of  mild-to-moderate
heart  failure and to support our  application  for  expansion  of the  Medicare
national reimbursement coverage policy to include mild-to-moderate heart failure
as a primary  indication.  The PEECH(TM)  trial was a positive  clinical  trial,
having met the statistical requirement of meeting at least one of its co-primary
endpoints,  a significant  difference in the proportion of patients satisfying a
prespecified  threshold  of  improvement  in exercise  duration.  The trial also
demonstrated  significant  improvements  in favor of EECP(R)  therapy on several
important  secondary  endpoints,  including exercise duration and improvement in
symptom  status  and  quality  of  life.  Measures  of  change  in  peak  oxygen
consumption were not statistically  significant in the overall study population,
though a trend favoring EECP(R) therapy was present in early follow-up. Patients
in the trial who had an ischemic  etiology,  i.e.  pre-existing  coronary artery
disease,  demonstrated a greater  response to EECP(R) therapy than those who had
an idiopathic (non-ischemic) etiology.

     The  preliminary  results of the PEECH trial were presented at the American
College of Cardiology  scientific  sessions in March 2005. On June 20, 2005, the
Centers for Medicare and Medicaid  Services (CMS) accepted our  application  for
expansion of reimbursement  coverage of EECP(R) therapy to include patients with
New York Heart  Association  (NYHA) Class II/III stable heart  failure  symptoms
with an ejection  fraction of less than or equal to 35%, i.e.  chronic,  stable,
mild-to-moderate  systolic  heart  failure as a primary  indication,  as well as
patients with Canadian  Cardiovascular  Society  Classification  (CCSC) II, i.e.
chronic, stable mild angina.

                                       4
<PAGE>

     On June 23, 2005, CMS also received a request from a competing manufacturer
of external  counterpulsation therapy equipment, to reconsider the reimbursement
coverage policy. They requested expansion of coverage to include 1) treatment of
congestive heart failure,  to include NYHA Class II, III with a left ventricular
ejection fraction (LVEF) less than or equal to 40%, and acute heart failure;  2)
treatment  of stable  angina to include  CCSC II angina;  3)  treatment of acute
myocardial infarction; 4) treatment of cardiogenic shock. On September 15, 2005,
they amended their request to include NYHA Class IV heart failure.

         On March 20, 2006, the Centers for Medicare and Medicaid Services (CMS)
issued their Decision Memorandum regarding this reconsideration with the opinion
"that the evidence is not adequate to conclude that external counterpulsation
therapy is reasonable and necessary for the treatment of:

          o    Canadian Cardiovascular Society Classification (CCSC) II angina
          o    Heart Failure
          o    New York Heart  Association  Class II/III  stable  heart  failure
               symptoms with an ejection fraction of less than or equal to 35%
          o    New York Heart  Association  Class II/III  stable  heart  failure
               symptoms with an ejection fraction of less than or equal to 40%
          o    New York Heart  Association  Class IV heart failure
          o    Acute heart failure
          o    Cardiogenic shock
          o    Acute myocardial infarction."

     They  commented  in their  decision  memorandum  that they were not able to
apply full weight to the evidence  generated by the PEECH(TM)  trial,  as it had
not yet been published in a peer-reviewed  medical journal by the time they were
required to issue a final decision on this application.  Moreover,  they did not
opine on whether they would  consider the results of the trial when published to
be sufficient  evidence to conclude that  external  counterpulsation  therapy is
reasonable and necessary for the treatment of New York Heart  Association  Class
II/III stable heart failure  symptoms with an ejection  fraction of less than or
equal to 35%.  They did,  however,  reiterate  in the decision  memorandum  that
"Current  coverage  as  described  in  Section  20.20 of the  Medicare  National
Coverage  Determination  (NCD)  manual will remain in effect.",  for  refractory
angina patients.

     On August 25, 2006 the  results of the trial were  initially  published  on
line by the Journal of the American College of Cardiology  (JACC),  and in print
in its  September 19, 2006 issue.  JACC is the official  journal of the American
College of Cardiology.

     In the  November-December  issue of the journal Congestive Heart Failure, a
second report of results from the PEECH(TM) trial was published, focusing on the
results of a prespecified  subgroup  analysis in trial patients age 65 and over.
This analysis demonstrated a statistically  positive response on both co-primary
endpoints of the trial in patients  receiving  EECP(R)  therapy versus those who
did not, i.e. a significantly  larger proportion of patients  undergoing EECP(R)
therapy met or  exceeded  prespecified  thresholds  of  improvement  in exercise
duration and peak oxygen  consumption.  Moreover,  the patients age 65 and older
who received EECP(R) therapy  demonstrated the greatest  differences in exercise
duration, peak oxygen consumption and functional class (symptom status) compared
with those who did not receive EECP(R) therapy.

     We will  continue  to educate the  marketplace  that  EECP(R)  therapy is a
therapy for ischemic  cardiovascular  disease and that  patients  with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also
eligible  for  reimbursement  under the current  coverage  policy,  provided the
primary  indication  for  treatment  with  EECP(R)  therapy  is angina or angina
equivalent   symptoms  and  the  patient   satisfies   other  listed   criteria.
Additionally,  we will  continue to pursue  expansion  of  coverage  for EECP(R)
therapy with Medicare and other  third-party  payers as evidence of its clinical
utility develops.

                                       5
<PAGE>
The EECP(R) Therapy Systems

     The EECP(R)  therapy systems are noninvasive  treatment  systems  utilizing
fundamental  hemodynamic  principles to augment  coronary  blood flow and at the
same time reduce the workload of the heart while improving the overall  vascular
function.  The  treatment  is  completely  noninvasive  and is  administered  to
patients on an outpatient basis,  usually in daily one-hour sessions,  five days
per week over seven weeks for a total of 35  treatments.  The  procedure is well
tolerated  and most  patients  begin to  experience  relief of chest pain due to
their coronary  artery disease after 15 to 20 hours of therapy.  As demonstrated
in our clinical  studies,  positive  effects have been shown in most patients to
continue for years following a full course of therapy.

     During EECP(R)  therapy,  the patient lies on a contoured  treatment  table
while  three sets of  inflatable  pressure  cuffs,  resembling  oversized  blood
pressure cuffs,  are wrapped around the calves,  and the lower and upper thighs,
including the buttocks.  The system is synchronized to the individual  patient's
cardiac  cycle   triggering   the  system  to  inflate  the  cuffs  rapidly  and
sequentially -- via computer-interpreted ECG signals -- starting from the calves
and  proceeding  upward to the  buttocks  during  the  relaxation  phase of each
heartbeat  (diastole).  This has the  effect  of  creating  a strong  retrograde
counterpulse in the arterial  system,  forcing freshly  oxygenated blood towards
the heart and coronary arteries at a time when resistance to coronary blood flow
is at its lowest  level.  The counter  pulse also  simultaneously  increases the
volume of venous  blood  return to the heart  when the heart is  filling  up for
ejection in the  contracting  phase.  Just prior to the next  heartbeat when the
heart  begins  to  eject  blood  by  contracting  (systole),   all  three  cuffs
simultaneously  deflate,  leaving  an  empty  vascular  space to  receive  blood
ejecting  from the heart,  thereby  significantly  reducing  the workload of the
heart.  This is achieved because the vascular beds in the lower  extremities are
relatively  empty  when the  cuffs  are  deflated,  significantly  lowering  the
resistance,  and  provide  vascular  space to receive  the blood  ejected by the
heart, reducing the amount of work the heart must do to pump oxygenated blood to
the rest of the body. The  inflation/deflation  activity is monitored constantly
and  coordinated by a  computerized  console that  interprets  electrocardiogram
signals from the patient's  heart,  monitors heart rhythm and rate  information,
and actuates the  inflation and  deflation in  synchronization  with the cardiac
cycles. The end result of this sequential "squeezing" of the legs is to create a
pressure wave that significantly  increases peak diastolic  pressure  benefiting
circulation  to the heart muscle and other  organs,  increases  venous return so
that the heart has more blood volume to eject out, and increases cardiac output.
The release of  external  pressure  produces  reduction  of  systolic  pressure,
thereby  reducing  the  workload  of  the  heart.  This  reduction  of  vascular
resistance  insures  that the heart  does not have to work as hard to pump large
amounts of blood through the body to help supply its metabolic needs.

     While the precise  scientific  means by which EECP(R) therapy  achieves its
long-term beneficial effects are only partially explained,  there is evidence to
suggest that the EECP(R) therapy triggers a neurohormonal  response that induces
the production of growth and vasodilatation factors that promotes recruitment of
new arteries and dilates existing blood vessels. The recruitment of new arteries
known as  "collateral  blood  vessels"  bypass  blocked or narrowed  vessels and
increase  blood flow to ischemic areas of the heart muscle that are receiving an
inadequate  supply of  blood.  There is also  evidence  to  support a  mechanism
related to improved  function of the endothelium  (the inner lining of the blood
vessels),  which  regulates  the luminal  size of the  arteries and controls the
dilation of the  arteries  to insure  adequate  blood flow to all  organs,  thus
reducing  constriction  of blood  vessels  that supply  oxygenated  blood to the
body's organs and tissues and as a result the required workload of the heart.

Clinical Studies

Early History

     Early   experiments   with   counterpulsation   at  Harvard  in  the  1950s
demonstrated that this technique markedly reduces the workload,  and thus oxygen
consumption, of the left ventricle. This basic effect has been demonstrated over
the past forty years in both animal  experiments  and in patients.  The clinical
benefits of external  counterpulsation  were not consistently  achieved in early
studies because the equipment used then lacked some of the features found in the
current EECP(R) systems,  such as the computerized  electrocardiographic  signal
for triggering,  and the use of pneumatic versus hydraulic  actuating media that
makes sequential cuff inflation possible.  As the technology improved,  however,
it became apparent that both internal (i.e.  intra-aortic  balloon  pumping) and

                                       6
<PAGE>

external  forms of  counterpulsation  were  capable  of  improving  survival  in
patients with cardiogenic shock following myocardial  infarction.  Later, in the
1980s, Dr. Zheng and colleagues in China reported on their extensive  experience
in treating angina using the newly developed "enhanced"  sequentially  inflating
EECP(R) device that incorporated three sets of cuffs including the buttocks cuff
instead of a single cuff used in the previous system. The Chinese  investigators
were able to show that a 36-hour  course of  treatment  with the EECP(R)  system
reduced the  frequency  and  severity of anginal  symptoms  during  normal daily
functions  and also  during  exercise,  and  also  that  the  improvements  were
sustained for years after therapy.

     These results  prompted a group of investigators at the State University of
New York at Stony  Brook  (Stony  Brook) to  undertake  a number  of open  label
studies with the EECP(R)  system  between 1989 and 1996 to reproduce the Chinese
results,  using both subjective and objective endpoints.  These studies,  though
open  label and  non-randomized,  showed  significant  improvement  in  exercise
tolerance  by  patients  as  evidenced  by exercise  treadmill  stress  testing,
improvement in the perfusion of ischemic regions of the heart muscle by thallium
radionuclide  imaging  stress  testing,  and partial or complete  resolution  of
coronary perfusion  defects.  All of these results have been reported in medical
literature  and support the assertion  that EECP(R)  therapy is an effective and
durable treatment for patients suffering from chronic angina pectoris.

The MUST-EECP(R) Study

     In 1995, we began a randomized,  controlled and double-blinded  multicenter
clinical  study  (MUST-EECP(R))  at seven  leading  university  hospitals in the
United  States to confirm the  patient  benefits  observed  in the open  studies
conducted  at Stony  Brook and to  provide  definitive  scientific  evidence  of
EECP(R) therapy's effectiveness. MUST-EECP(R) was completed in July 1997 and the
results  presented at the annual  meetings of the American Heart  Association in
November 1997 and the American  College of Cardiology in March 1998. The results
of  MUST-EECP(R)  were  published  in the  Journal  of the  American  College of
Cardiology (JACC), a major peer-review medical journal, in June 1999.

     This 139  patient  study,  which  included a  sham-EECP(R)  control  group,
demonstrated  that patients  treated with EECP(R)  therapy were able to increase
the amount of time on  exercise  testing  before  they  showed  signs of cardiac
ischemia (i.e. ST-segment depression on their electrocardiogram) and experienced
a reduction in the  frequency of their angina  attacks  compared to patients who
did not receive EECP(R) therapy. In 1999,  physician  collaborators  completed a
quality-of-life  study with the EECP(R)  system in a subset of the same patients
that  participated in MUST-EECP(R).  Two highly regarded  standardized  means of
measurement  were used to gauge  changes in  patients'  outlook  and  ability to
participate  in normal daily living during the treatment  phase and for up to 12
months  after  treatment.  Results of this study,  which have been  presented at
major  scientific  meetings  and  published  in  the  January  2002  Journal  of
Investigative  Medicine,  show that after  one-year  of  follow-up  the group of
patients  receiving  EECP(R) therapy enjoyed  significantly  improved aspects of
health-related quality of life compared to those who received a sham treatment.

The PEECH(TM) Study

     As part of our program to expand the therapy's  indications  for use beyond
the treatment of angina,  we applied for and received FDA approval in April 1998
to  study,  under  an  Investigational  Device  Exemption  (IDE)  protocol,  the
application of EECP(R) therapy in the treatment of CHF. A 32 patient feasibility
study  was  conducted  simultaneously  at  the  University  of  Pittsburgh,  the
University  of  California  San  Francisco  and  the  Grant/Riverside  Methodist
Hospitals in  Columbus,  Ohio.  The results of this study were  presented at the
49th Scientific Sessions of the American College of Cardiology in March 2000 and
the Heart Failure Society of America's Annual Meeting in September 2000 and were
published in the July/August 2002 issue of Congestive Heart Failure.  This study
indicated  that  EECP(R)  therapy  could  improve  exercise  capacity,  increase
functional capacity was beneficial to left ventricular function in patients with
New York Heart Association (NYHA) Class II and III (i.e. mild to moderate) heart
failure and a reduced left  ventricular  ejection  fraction (i.e.  LVEF = 35% or
less).

     In summer  2000,  an IDE  supplement  to  proceed  with a pivotal  study to
demonstrate the efficacy of EECP(R) therapy in the most prevalent types of heart
failure  patients was  approved.  This study,  known as  PEECH(TM)  (Prospective
Evaluation of EECP(R) in Congestive Heart Failure),  began patient enrollment in
March  2001.  The  PEECH(TM)  clinical  trial  involved  nearly  thirty  centers
including:  the Cleveland Clinic, Mayo Clinic,  Scripps Clinic, Thomas Jefferson
University  Hospital,  the  University  of North  Carolina at Chapel  Hill,  the
Minnesota Heart Failure  Consortium,  Advocate Christ  Hospital,  Hull Infirmary
(UK), the University of California at San Diego Medical  Center,  the University
of  Pittsburgh  Medical  Center,  the  Lindner  Clinical  Trial  Center  and the
Cardiovascular Research Institute. Vasomedical obtained 510(k) clearance for CHF
from  FDA in June  2002,  obviating  the need to  continue  this  trial  for FDA

                                       7
<PAGE>

regulatory reasons.  However, we decided to complete the clinical trial in order
to use  the  anticipated  clinical  outcomes  to  help  establish  the  clinical
validation of EECP(R)  therapy as a treatment for CHF and to provide  additional
scientific support for Medicare, Medicaid and other third-party payers to expand
reimbursement coverage of EECP(R) therapy to include the CHF indication.

     The  protocol  for the study  required  that  patients  have NYHA II or III
symptoms,  have an LVEF of 35% or less, be able to undergo  exercise testing and
complete patient examinations 1-week,  3-months and 6-months following treatment
that evaluated  changes from baseline in exercise  capacity,  symptom status and
quality of life.  Patients  were  randomized  to receive  either  optimal  (i.e.
guideline-recommended)  medical  therapy (OPT) or EECP(R) therapy in addition to
OPT.  Enrollment of patients into the PEECH(TM)  trial was completed in February
2004, with 187 patients, and the six-month follow-up examinations were completed
by the end of December 2004.

     The  preliminary  results  of the  PEECH(TM)  trial were  presented  at the
American  College of Cardiology  scientific  sessions in March 2005. On June 20,
2005,  the Centers  for  Medicare  and  Medicaid  Services  (CMS)  accepted  our
application  for  expansion  of  reimbursement  coverage  of EECP(R)  therapy to
include  patients  with New York Heart  Association  (NYHA) Class II/III  stable
heart failure  symptoms with an ejection  fraction of less than or equal to 35%,
i.e.  chronic,  stable,  mild-to-moderate  systolic  heart  failure as a primary
indication,   as  well  as  patients   with  Canadian   Cardiovascular   Society
Classification (CCSC) II, i.e. chronic, stable mild angina.

     In  designing  the  PEECH(TM)  trial,   success  was  demonstrated  if  the
difference  between  EECP(R)  therapy  combined  with  optimal  medical  therapy
compared to optimal  medical therapy alone achieved a p-value less than 0.025 in
at least one of two pre-defined co-primary endpoints:

          1.   percentage  of subjects  with greater than or equal to 60 seconds
               improvement in exercise duration from baseline to six months, or
          2.   percentage of subjects with at least 1.25  mL/kg/min  increase in
               peak oxygen consumption from baseline to six months.

     Additional secondary endpoints were actual changes in exercise duration and
peak  oxygen  consumption,  changes  in  New  York  Heart  Association  ("NYHA")
functional  classification,  changes in quality of life, adverse experiences and
pre-defined clinical outcomes.

     The study was a positive  clinical trial on the basis that a  significantly
greater  proportion of patients who underwent  EECP(R)  therapy  improved  their
exercise  duration  by 60  seconds or more six months  following  completion  of
therapy compared to those who received OPT alone (35.4% vs. 25.3%, p=0.016). The
proportion of patients  achieving a 1.25  mL/kg/min  improvement  in peak oxygen
consumption  was not  significantly  different  between  the two  groups  at six
months.

     Consistent with the results on the primary  endpoint of exercise  duration,
statistically  significant  differences favoring the EECP(R)-treated  group were
seen in changes in average exercise duration, symptom status and quality of life
during follow-up.  Average peak oxygen  consumption  showed a trend favoring the
EECP(R)  group  at 1 week,  but  there  were no  differences  detected  at later
follow-up.  Results in patients  with heart  failure of ischemic  etiology  were
noted to be clearly superior to those patients of idiopathic etiology though the
benefit in these later  patients could not be ruled out  statistically.  Lastly,
EECP(R) therapy was deemed safe and well tolerated in this group of patients, as
patients in the  EECP(R)-treated  group did not suffer more adverse  events than
those in the control group.

     Moreover, results of a predefined subgroup analysis showed that patients 65
years  of age or  older  not  only had a  significantly  greater  response  rate
(co-primary   endpoint)  and  average  change  in  exercise   duration  favoring
EECP(R)-treated  patients,  but the  response  rate  (co-primary  endpoint)  and
average change in peak oxygen consumption were also significantly  better out to
completion of the study at six months follow-up.

     The results of the PEECH(TM) trial indicate that EECP(R)  therapy  provides
beneficial  adjunctive therapy in patients with NYHA Class II-III systolic heart
failure receiving optimal pharmacological therapy,  especially in those 65 years
of age or older.  There can be no  assurance  that the results of the  PEECH(TM)
clinical  trial  will be  sufficient  to expand  reimbursement  coverage  or the
adoption by the medical community of EECP(R) therapy for use in the treatment of
congestive heart failure.

                                       8
<PAGE>

The International EECP(R) Patient Registry (IEPR(TM))

     The International  EECP(R) Patient Registry at the University of Pittsburgh
Graduate  School of Public Health was  established  in January 1998 to track the
outcomes of angina patients who have undergone  EECP(R)  therapy.  More than one
hundred centers have  participated in the registry and data from more than 5,000
patients  from an initial  cohort  enrolled  between 1998 and 2001 (IEPR-1) have
been tabulated and reported in several peer-reviewed publications.

     The American  Journal of Cardiology  published a report in February of 2004
on the two-year  outcomes after EECP(R) therapy  observed in 1,097 patients with
two-year follow-up enrolled in IEPR-1. The authors noted that 73% of patients in
this cohort had a decrease in their angina  symptom  status upon  completion  of
EECP(R) therapy and that the average number of angina episodes for the group was
reduced from 10.6 to 2.8 per week.  They  characterized  this  improvement  as a
"significant  and  dramatic  reduction  in CCSC"  and  stated  that the  adverse
clinical  event  rate  was  low.  (CCSC,  or  Canadian   Cardiovascular  Society
Classification,  is a rating scale used by physicians to assess the  limitations
imposed on patients'  lives by angina.)  Patients also reported  improvement  in
health status, quality of life and satisfaction with life.

     At two-years  follow-up,  74.9% of patients  reported  their angina symptom
status (CCSC class) was improved  compared to before  EECP(R)  therapy,  and the
accompanying  improvements in angina frequency and quality of life measures were
largely  sustained as well. Nine per cent of patients had died over the two-year
follow-up  and 15% had  undergone a  revascularization  procedure  (angioplasty,
stenting or coronary bypass surgery).

     The authors  summarize the results by stating "Most patients  experienced a
significant reduction in angina and improvement in quality of life after EECP(R)
therapy, and this reduction was sustained in most patients at 2-year follow-up."

     In a separate report that appeared in The American Journal of Cardiology in
2005,  physician  investigators  participating  in the IEPR(TM)  reported on the
results of EECP(R)  therapy in  patients  with  angina who also had severe  left
ventricular  dysfunction  (LVD,  a  reduced  pumping  capacity  of  the  heart).
Previously  it was thought  that such  patients,  and those with a diagnosis  of
heart failure,  would be put at risk if treated with EECP(R) therapy, due to the
increase in venous return to the heart caused by compression of the leg veins by
enhanced external counterpulsation.

     The 363 patients in this cohort had  long-standing  and extensive  coronary
artery disease,  had a high prevalence of  cardiovascular  disease risk factors,
were not amenable to invasive  revascularization  procedures,  and suffered from
severe angina.  Following  completion of EECP(R) treatment,  77% decreased their
CCSC angina class by at least one severity rating.  The average number of angina
episodes per week was greatly  reduced and many were able to discontinue the use
of  nitroglycerin  pills  designed to relieve  angina.  As in the  overall  IEPR
population,  measures  of  quality  of life were  significantly  improved  after
treatment.

     The rate of major adverse clinical events,  while somewhat more frequent in
this group of patients with significant  comorbid disease,  was characterized as
low over the  course of  EECP(R)  therapy.  Exacerbation  of heart  failure  was
significantly more frequent in patients who did not complete therapy compared to
those who did (16% vs. 0%) in patients with a previous history of heart failure.

     At two-years of follow-up,  83% remained  alive and 70% were free of death,
heart attack or invasive  revascularization  procedures  (coronary artery bypass
surgery,  angioplasty  and/or  stenting)  during that  period.  The  majority of
patients  experienced  sustained  relief of their angina and improved quality of
life.  Twenty per cent of the group underwent  repeat EECP(R) therapy during the
two-year  follow-up,  mostly due to failure to complete the  original  course of
therapy.

     A  second  phase  of  enrollment  into  the  registry   (IEPR-2)   enrolled
approximately  2,500  patients  between  2002 and 2004 and  these  patients  are
currently being followed to 2-year follow-up.  IEPR-2  incorporates  sub-studies
regarding treatment beyond 35 hours, possible predictors of response, effects on
certain aspects of peripheral  vascular  disease and sexual  dysfunction in men.
Notably,  the data set was modified in February 2003 to capture  information  on
changes in heart failure  symptom  status,  occurrence of clinical events due to
heart  failure  and  to  include  a  heart  failure-specific   quality  of  life
questionnaire in IEPR-2 patients with concomitant heart failure.

                                       9
<PAGE>
     Vasomedical  considers  the  IEPR(TM) to be a vital  source of  information
about  the   effectiveness  and  safety  of  EECP(R)  therapy  in  a  real-world
environment  for the medical  community at large.  To date,  twenty  full-length
articles  reporting  data from the IEPR(TM) have been  published in  peer-review
medical journals and more than seventy-eight  abstracts have been presented at a
variety of major  cardiovascular  scientific  conferences.  For this reason,  we
continue to provide an ongoing grant to fund the registry to publicize data that
assists clinicians in delivering optimal care to patients.

     Registry data, while considered a valuable source of complementary clinical
data, is deemed by  scientific  cardiologists  and others to be less  convincing
than data from  randomized,  blinded,  clinical  trials and from  certain  other
well-controlled  clinical  study  designs.  There can be no  assurance  that the
Company  will be able to  obtain  regulatory,  reimbursement  or other  types of
approvals,  or a favorable standing in medical professional practice guidelines,
based upon results observed in patients enrolled in registries.

Other studies and publications

     A search on the term  "external  counterpulsation"  of the PubMed  database
available through the National Library of Medicine conducted on August 21, 2006,
identified one-hundred-ninety-eight (198) citations of articles published in the
medical scientific  literature,  including 28 review articles. The vast majority
of these  publications  have reported  results in patients  with chronic  stable
angina  and/or heart  failure  treated with EECP(R)  therapy,  while others have
reported  use  of the  device  in  other  cardiovascular  or  non-cardiovascular
indications.  The vast majority of these reports are generated using Vasomedical
EECP(R)  therapy  systems and  equipment.  In summary,  this body of  literature
contains evidence from a variety of institutions and investigators demonstrating
that  EECP(R)  therapy  can  provide  benefit  to  appropriate  patients  in the
following ways:

     o    Enhancement  of  coronary  and  peripheral   circulation,   myocardial
          perfusion, ventricular function and hemodynamics,
     o    Improvement  in  endothelial   function  and  vascular   reactivity
     o    Elimination or reduction of cardiac ischemia,
     o    Elimination or reduction in symptoms and improved  functional class in
          angina and heart failure,
     o    Resolution  of  reversible  ischemic  defects  found  on  quantitative
          myocardial perfusion studies,
     o    Increased  exercise  duration and increased  time to ischemic  changes
          during treadmill  exercise in angina and increased  exercise  duration
          and peak oxygen  consumption  in heart  failure in  properly  selected
          patients,
     o    Elimination or reduction in use of anti-angina medications,
     o    Improved quality of life in patients with angina and heart failure.

Strategic Initiatives

     Our short- and long-term plans are to:

     a)   reduce the cash burn and bring our cost  structure into alignment with
          current revenue in the short term by:
               i)   reducing or  eliminating  spending on all but  critical  new
                    product development and clinical research projects,
               ii)  focusing on rebuilding  our revenue base through  supporting
                    our direct sales effort and expanding our use of independent
                    sales representatives, and
               iii) maintaining  tight cost  control  on all areas of  personnel
                    cost and spending.
     b)   pursue possible strategic  investments and creative  partnerships with
          others who have distinctive  competencies or delivery capabilities for
          serving the  cardiovascular  and disease  management  marketplace,  as
          opportunities become available.
     c)   Increase market penetration in the domestic reimbursable user base for
          EECP(R) therapy by:
               i)   expanding   reimbursement   to  include   coverage  for  the
                    treatment of ischemic NYHA Class II and III CHF patients,
               ii)  marketing   directly  to  third-party   payers  to  increase
                    third-party reimbursement, and

                                       10
<PAGE>
               iii) expanding  reimbursement  coverage  in the angina  market to
                    include patients with CCS Class II angina.

     d)   Increase the clinical and scientific  understanding of EECP(R) therapy
          by:
               i)   resubmitting  data  to  insurers,  including  Medicare,  for
                    favorable coverage policies;
               ii)  continuing to support on a limited basis academic  reference
                    centers  in the  United  States  and  overseas  in  order to
                    accelerate the growth and prestige of EECP(R) therapy and
     e)   Increase  awareness  of the  benefits  of the  EECP(R)  therapy in the
          medical community by:
               i)   developing  campaigns  to market  the  benefits  of  EECP(R)
                    therapy  directly  to  clinicians,  third-party  payers  and
                    patients;
               ii)  engaging in educational  campaigns for providers and medical
                    directors of third-party  insurers designed to highlight the
                    cost-effectiveness and quality-of-life advantages of EECP(R)
                    therapy; and
               iii) continuing  the  development  of EECP(R)  therapy in certain
                    international markets,  principally through the expansion of
                    our  distribution  network and  obtaining  of  reimbursement
                    approvals.
     f)   Maintain  development efforts to improve the EECP(R) system and expand
          its intellectual  property estate by filing for additional  patents in
          the United States and other countries.

     These  listed  strategic  objectives  are  forward-looking  statements.  We
review,  modify and change our strategic objectives from time to time based upon
changing business conditions.  There can be no assurance that we will be able to
achieve our strategic  objectives  and even if these results are achieved  risks
and  uncertainties   could  cause  actual  results  to  differ  materially  from
anticipated  results. To a large extent limited financial resource  availability
reduces  our  ability  to achieve  these  strategic  objectives.  Please see the
section of this Form 10-KSB entitled "Risk Factors" for a description of certain
risks  among  others  that  may  cause  our  actual  results  to vary  from  the
forward-looking statements.

Sales and Marketing

Domestic Operations

     We sell EECP(R) therapy  systems to treatment  providers such as hospitals,
clinics and physician  private  practices in the United States  through a direct
and indirect  sales force.  Our sales force has  consisted of a  combination  of
employees and independent sales  representatives  managed by a vice president of
sales plus in-house administrative support.

     The efforts of our sales  organization  are further  supported  by clinical
educators  who are  responsible  for  the  onsite  training  of  physicians  and
therapists as new centers are established.  This clinical  applications group is
also engaged in training and  certification  of new  personnel at each site,  as
well as for updating providers on new clinical  developments relating to EECP(R)
therapy.

     Our marketing activities support physician education and physician outreach
programs,   exhibition   at  national,   international   and  regional   medical
conferences,  as well as  sponsorship  of seminars at  professional  association
meetings.  These  programs are designed to support our field sales  organization
and increase awareness of EECP(R) therapy in the medical  community.  Additional
marketing  activities include creating awareness among third-party payers to the
benefits of EECP(R) treatment for patients suffering from CHF as well as angina.

     We employ service technicians responsible for the repair and maintenance of
EECP(R)  systems  and,  in some  instances,  on-site  training  of a  customer's
biomedical engineering personnel.  We provide a service arrangement (usually one
year)  that  includes:   service  by  factory-trained  service  representatives,
material and labor costs,  emergency  and remedial  visits,  software  upgrades,
technical  phone support and preferred  response times. We service our customers
after the service arrangement  expires either under separately  purchased annual
service contracts or on a fee-for-service basis.

                                       11
<PAGE>
International Operations

     We distribute our product  internationally through a network of independent
distributors. It has generally been our policy to appoint distributors exclusive
marketing  rights to EECP(R) therapy systems in their respective  countries,  in
exchange for their commitment to meet the duties and  responsibilities  required
of a distributor.  Each distribution agreement contains a number of requirements
that must be met for the distributor to retain  exclusivity,  including  minimum
performance  standards.  In most  cases,  distributors  must assist us either to
obtain  an  FDA-equivalent  marketing  clearance,  country  registration  or  to
establish  confirmatory clinical trials,  conducted by local key opinion leaders
in cardiology, required to obtain Ministry of Health approval,  certification or
reimbursement.  Each  distributor is responsible for registering the product and
obtaining  any  required  regulatory  or clinical  approvals,  supporting  local
reimbursement  efforts for EECP(R) therapy and maintaining an  infrastructure to
provide post-sales support.

     To date, revenues from international  operations have not been significant,
but did increase  during fiscal 2007.  Revenues from  non-domestic  markets were
16%,  8% and 9% for the  fiscal  years  ended  May 31,  2007,  2006,  and  2005,
respectively.  Our  international  marketing  activities  include,  among  other
things,  assisting in obtaining  national or  third-party  healthcare  insurance
reimbursement  approval  and  participating  in  medical  conferences  to create
greater awareness and acceptance of EECP(R) therapy by clinicians.

     International   sales  may  be   subject  to   certain   risks,   including
export/import  licenses,  tariffs,  other trade  regulations  and local  medical
regulations.  Tariff and trade  policies,  domestic and foreign tax and economic
policies,  exchange rate fluctuations and international monetary conditions have
not  significantly  affected our business to date. In addition,  there can be no
assurance  that we will be successful in maintaining  our existing  distribution
agreements or entering into any additional distribution agreements,  or that our
international distributors will be successful in marketing EECP(R) therapy.

Competition

     Presently,  we are  aware  of at  least  four  direct  competitors  with an
external counterpulsation device on the market, namely Cardiomedics,  Inc., ACS,
Scottcare and Living Data Technology  Corporation.  As of June 2007  Vasomedical
and Living  Data  Technology  Corporation  entered  into a  Securities  Purchase
Agreement with Kerns Manufacturing Corp. ("Kerns").  Concurrently with our entry
into the  Securities  Purchase  Agreement,  we also entered into a  Distribution
Agreement and a Supplier Agreement with Living Data Technology  Corporation,  an
affiliate of Kerns ("Living Data").

     We sold to Kerns pursuant to the Securities Purchase Agreement,  21,428,572
shares of our common stock at $.07 per share for an aggregate of  $1,500,000  as
well a five-year warrant to purchase  4,285,714 shares of our common stock at an
initial exercise price of $.08 per share (the "Warrant"). We also have an option
to sell an  additional  $1 million of our common stock to Kerns.  The  agreement
further  provided  for  the  appointment  to  our  Board  of  Directors  of  two
representatives  of Kerns.  In  furtherance  thereof,  Mr. Jun Ma and Mr.  Simon
Srybnik,  Chairman of both Kerns and Living Data, have been appointed members of
our Board of Directors.  Pursuant to the Distribution  Agreement, we have become
the  exclusive  distributor  in the United  States of the  AngioNew  ECP systems
manufactured by Living Data. As additional  consideration for such agreement, we
agreed to issue an  additional  6,990,840  shares of our common  stock to Living
Data. Pursuant to the Supplier Agreement,  Living Data now will be the exclusive
supplier to us of the ECP therapy  systems that we market  under the  registered
trademark  EECP(R).  The Distribution  Agreement and the Supplier Agreement each
have an initial term extending through May 31, 2012.

     Pursuant to a Registration Rights Agreement, we granted to Kerns and Living
Data, subject to certain restrictions,  "piggyback registration rights" covering
the shares  sold to Kerns as well as the shares  issuable  upon  exercise of the
Warrant and the shares issued to Living Data.

     In  addition,  other  companies  have  received  FDA 510(k)  clearance  for
external  counterpulsation  systems since 1998,  although we have not seen these
systems   commercially  in  the   marketplace.   While  we  believe  that  these
competitors'  involvement  in the market is limited,  there can be no  assurance
that these  companies will not become a significant  competitive  factor or that
other companies will not enter the external counterpulsation market.

     We view other  companies  engaged  in the  development  of  device-related,
biotechnology and pharmacological approaches to the management of cardiovascular

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<PAGE>
disease as potential  competitors in the marketplace as well. These include such
common and well  established  medical devices and treatments as the intra-aortic
balloon pump (IABP),  ventricular  assist devices (VAD),  coronary artery bypass
graft surgery  (CABG),  coronary  angioplasty,  mechanical  circulatory  support
(MCS),  transmyocardial laser revascularization  (TMR), total artificial hearts,
cardiac resynchronization devices,  ranolazine and nesiritide (Natrecor(R));  as
well as newer  technologies  currently in  FDA-approved  clinical trials such as
spinal cord  stimulation  (SCS).  There can be no assurance that other companies
will not  develop  new  technologies  or enter the market  intended  for EECP(R)
therapy systems.  Such other companies may have substantially greater financial,
manufacturing  and marketing  resources and  technological  expertise than those
possessed  by us and may,  therefore,  succeed  in  developing  technologies  or
products  that are more  efficient  than those offered by  Vasomedical  and that
would render our technology and existing products obsolete or noncompetitive.

Government Regulations

     We are subject to extensive  regulation by numerous  government  regulatory
agencies,  including the FDA and similar foreign agencies. Where applicable,  we
are  required to comply  with laws,  regulations  and  standards  governing  the
development,  preclinical and clinical testing, manufacturing,  quality testing,
labeling, promotion, import, export, and distribution of our medical devices.

Device Classification

     FDA regulates  medical  devices,  including the  requirements for premarket
review,  according to their classification.  Class I devices are generally lower
risk products for which general  regulatory  controls are  sufficient to provide
reasonable  assurance  of safety and  effectiveness.  Most  Class I devices  are
exempt from the requirement of 510(k) premarket notification clearance; however,
510(k)  clearance  is necessary  prior to marketing a non-510(k)  exempt Class I
device in the United  States.  Class II devices are  devices  for which  general
regulatory  controls  are  insufficient,  but  for  which  there  is  sufficient
information  to  establish  special  controls,  such as  guidance  documents  or
standards,  to  provide  reasonable  assurance  of safety and  effectiveness.  A
premarket  notification  clearance is necessary  prior to marketing a non-510(k)
exempt Class II device in the United  States.  Class III devices are devices for
which there is insufficient  information  demonstrating that general and special
controls will provide reasonable assurance of safety and effectiveness and which
are life-sustaining,  life-supporting or implantable devices, are of substantial
importance  in  preventing  impairment  of  human  health,  or pose a  potential
unreasonable  risk of  illness  or  injury.  The FDA  generally  must  approve a
premarket  approval or PMA application  prior to marketing a Class III device in
the United States.

     A medical  device is considered by FDA to be a  preamendments  device,  and
generally not subject to premarket  review,  if it was commercially  distributed
before May 28, 1976, the date the Medical Device  Amendments of 1976 became law.
A  postamendments  device is one that was first  distributed  commercially on or
after May 28, 1976.  Postamendments  device versions of preamendments  Class III
devices are subject to the same requirements as those preamendments devices. FDA
may require a PMA for a preamendments Class III device only after it publishes a
regulation  calling for such PMA submissions.  Persons who market  preamendments
devices must submit a PMA, and have it filed by FDA, by a date  specified by FDA
in order to continue  marketing  the device.  Prior to the  effective  date of a
regulation  requiring a PMA, devices must have a cleared premarket  notification
or 510(k) for marketing.

     Certain external  counterpulsation  devices were  commercially  distributed
prior to May 28, 1976. Our external counterpulsation devices were marketed after
1976; however, they were found to be substantially equivalent to a preamendments
Class III device and  therefore  are  subject  to the same  requirements  as the
preamendments external counterpulsation devices.

Premarket Review

     The 510(k)  premarket  notification  process  requires an applicant to give
notice to FDA of its  intent to  introduce  its  device  into  commerce.  In its
premarket notification,  the applicant must demonstrate that its new or modified
medical device is  substantially  equivalent to a legally  marketed or predicate
device marketed before May 28, 1976. Prior to beginning commercialization of the
new or modified  product it must receive an order from the FDA  classifying  the
device under section 510(k) in the same  classification as the predicate device,

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<PAGE>

and as a result, the new device will be cleared for marketing.  Modifications to
a previously cleared medical device that do not significantly  affect its safety
and  effectiveness  or constitute a major change in the intended use can be made
without having to submit a new 510(k).  In February  1995, the Company  received
510(k) clearance to market the second-generation  version of its EECP(R) therapy
system, the MC2, which incorporated a number of technological  improvements over
the predicate system. In addition, in December 2000, the Company received 510(k)
clearance to market its third generation system, the TS3. The FDA's clearance in
these  cases was for the use of EECP(R)  therapy in the  treatment  of  patients
suffering from stable or unstable angina pectoris,  acute myocardial  infarction
and cardiogenic shock. In June 2002, the FDA granted 510(k) market clearance for
an upgraded TS3,  which  incorporated  the Company's  patented CHF treatment and
oxygen saturation monitoring technologies, and provided for a new indication for
the use of  EECP(R) in CHF,  which  applied  to all  then-current  models of the
Company's EECP(R) therapy systems.

     Modifications   to  a  previously   cleared  medical  device  that  do  not
significantly  affect its safety and  effectiveness or constitute a major change
in the  intended  use can be made  without  having to submit a new  510(k).  FDA
publishes guidance for medical device manufacturers on the types of changes that
meet the  requirements  for a new 510(k) prior to  introduction  of a device for
marketing distribution.  Vasomedical followed FDA's guidance on when to submit a
new 510(k) for changes to a device and concluded  that the changes  incorporated
into its Model TS4 did not  require a new 510(k)  prior to its  introduction  to
market. Vasomedical subsequently obtained a 510(k) that applied to the Model TS4
and all of its models in March 2004, when it made changes to the labeling of all
of its EECP(R)  therapy  systems.  In November 2004, the Company  introduced its
Model  Lumenair,  and again  concluded  that the  changes  did not require a new
510(k) at that  time.  There can be no  assurance  that the FDA will  agree with
Vasomedical's  conclusions  that a new 510(k) was unnecessary on these occasions
or in other  similar  instances,  or that our products  will not be subject to a
regulation requiring a PMA for preamendments Class III external counterpulsation
devices.

     If a device does not receive a clearance  order because the FDA  determines
that the device is not  substantially  equivalent to a predicate device and thus
the device automatically is considered a Class III device, the applicant may ask
the FDA to make a  risk-based  classification  to place the device in Class I or
II. However,  if a timely request for risk-based  classification is not made, or
if the FDA determines that a Class III  designation is appropriate,  an approved
PMA will be required before the device may be marketed.

     The more  rigorous  premarket  review  process is the PMA process.  The FDA
approves  a PMA  if the  applicant  has  provided  sufficient  valid  scientific
evidence to prove that the device is safe and effective for its intended use(s).
Applications for premarket  approval generally contain human clinical data. This
process is usually much more  complex,  time-consuming  and  expensive  than the
510(k)  process,  and is  uncertain.  Both  510(k)s  and  PMAs now  require  the
submission of user fees in most circumstances.

     There  can be no  assurance  that  all  the  necessary  FDA  clearances  or
approvals,  including  approval  of any PMA  required by the  promulgation  of a
regulation,  will be granted  for our  products,  future-generation  upgrades or
newly developed  products,  on a timely basis or at all. Failure to receive,  or
delays in receipt of such  clearances,  could have a material  adverse effect on
our financial condition and results of operations.

Clinical Trials

     If human  clinical  trials of a device are  required,  whether to support a
510(k)  or  PMA  application,   the  trials'  sponsor,   which  is  usually  the
manufacturer  of the device,  first must obtain the approval of the  appropriate
institutional  review boards.  If a trial is of a significant  risk device,  the
sponsor  also must obtain an  investigational  device  exemption or IDE from FDA
before the trial may begin. A significant  risk device is a device that presents
a  potential   for  serious   risk  to  the  subject  and  is  an  implant;   is
life-sustaining or life-supporting; or is for a use of substantial importance in
diagnosing,  curing,  mitigating,  or treating disease, or otherwise  preventing
impairment of human health.  For all clinical  testing,  the sponsor must obtain
informed  consent from the patients  participating in each trial. The results of
clinical  testing  that a  sponsor  undertakes  may be  insufficient  to  obtain
clearance or approval of the tested product.

Pervasive and Continuing FDA Regulation

     We are also subject to other FDA regulations  that apply prior to and after
a product is commercially  released.  These include  Current Good  Manufacturing
Practice (CGMP) requirements set forth in FDA's Quality System Regulation (QSR),
that require manufacturers to have a quality system for the design, manufacture,

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<PAGE>

packaging,  labeling,  storage,  installation  and servicing of medical  devices
intended for  commercial  distribution  in the United  States.  This  regulation
covers  various areas  including  management  and  organization,  device design,
purchase and handling of  components,  production  and process  controls such as
those  related to buildings  and  equipment,  packaging  and  labeling  control,
distribution,   installation,  complaint  handling,  corrective  and  preventive
action, servicing, and records. We are subject to periodic inspection by the FDA
for compliance with the CGMP requirements and Quality System Regulation.

     The FDA also enforces  post-marketing controls that include the requirement
to submit medical device reports to the agency when a manufacturer becomes aware
of information  suggesting that any of its marketed  products may have caused or
contributed  to  a  death  or  serious  injury,  or  any  of  its  products  has
malfunctioned  and that a recurrence  of the  malfunction  would likely cause or
contribute  to a death or  serious  injury.  The FDA  relies on  medical  device
reports to identify  product  problems and utilizes  these reports to determine,
among other things,  whether it should exercise its enforcement  powers. The FDA
also may require postmarket surveillance studies for specified devices.

     We are subject to the Federal Food,  Drug, and Cosmetic  Act's,  or FDCA's,
general controls,  including  establishment  registration,  device listing,  and
labeling  requirements.  If we fail to comply  with any  requirements  under the
FDCA, we, including our officers and employees, could be subject to, among other
things, fines, injunctions,  civil penalties, and criminal prosecution.  We also
could be subject to recalls or product corrections,  total or partial suspension
of production,  denial of premarket  notification clearance or PMA approval, and
rescission  or withdrawal of clearances  and  approvals.  Our products  could be
detained or seized, the FDA could order a recall, repair, replacement, or refund
of our devices,  and the agency could require us to notify health  professionals
and others that the devices present  unreasonable  risks of substantial  harm to
the public health.

     The  advertising  of our products is subject to  regulation  by the Federal
Trade  Commission,  or FTC. The FTC Act  prohibits  unfair or deceptive  acts or
practices in or affecting  commerce.  Violations of the FTC Act, such as failure
to have  substantiation  for product  claims,  would  subject us to a variety of
enforcement actions,  including compulsory process,  cease and desist orders and
injunctions,  which can  require,  among other  things,  limits on  advertising,
corrective advertising, consumer redress and restitution, as well as substantial
fines or other penalties.

Foreign Regulation

     In most  countries to which we seek to export the EECP(R)  system,  we must
first obtain approval from the local medical device  regulatory  authority.  The
regulatory  review  process  varies from  country to country and can be complex,
costly, uncertain, and time-consuming.

     We are also  subject to  periodic  audits by  organizations  authorized  by
foreign countries to determine  compliance with laws,  regulations and standards
that apply to the  commercialization of our products in those markets.  Examples
include auditing by a European Union Notified Body organization (authorized by a
member state's  Competent  Authority) to determine  conformity  with the Medical
Device  Directives  (MDD)  and by an  organization  authorized  by the  Canadian
government to determine conformity with the Canadian Medical Devices Regulations
(CMDR).

     There  can  be  no   assurance   that  we  will  obtain   desired   foreign
authorizations to commercially  distribute our products in those markets or that
we will comply with all laws,  regulations  and  standards  that  pertain to our
products  in those  markets.  Failure  to  receive  or delays in receipt of such
authorizations  or  determinations  of conformity  could have a material adverse
effect on our financial condition and results of operations.

Patient Privacy

     Federal  and state laws  protect  the  confidentiality  of certain  patient
health  information,  including  patient  records,  and  restrict  the  use  and
disclosure  of that  protected  information.  The U.S.  Department of Health and
Human Services (HHS) published  patient privacy rules under the Health Insurance
Portability  and  Accountability  Act of  1996  (HIPAA  privacy  rule)  and  the
regulation was finalized in October 2002. The HIPAA privacy rule governs the use
and disclosure of protected health information by "Covered  Entities," which are
(1) health plans, (2) health care clearinghouses,  and (3) health care providers
that transmit  health  information in electronic form in connection with certain
health care  transactions such as benefit claims.  Currently,  the HIPAA privacy
rule affects us only indirectly in that patient data that we access, collect and

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<PAGE>
analyze may include protected health information.  Additionally,  we have signed
some Business Associate agreements with Covered Entities that contractually bind
us to protect  protected health  information,  consistent with the HIPAA privacy
rule's requirements.  We do not expect the costs and impact of the HIPAA privacy
rule to be material to our business.

Practice Guidelines

     Medical  professional  societies  periodically issue Practice Guidelines to
their  members  and make  them  available  publicly.  The  American  College  of
Cardiology (ACC) and the American Heart  Association  (AHA) have jointly engaged
in developing  practice  guidelines since 1980 to critically evaluate the use of
diagnostic   procedures  and  therapies  in  the  management  or  prevention  of
cardiovascular   diseases.   These   guidelines   are  meant  to  "improve   the
effectiveness of care,  optimize patient outcomes and affect the overall cost of
care  favorably  by  focusing  resources  on  the  most  effective  strategies".
Recommendations incorporated into the guidelines are based upon an assessment of
the strength of evidence for or against a treatment or procedure  and  estimates
of expected  health  outcomes  stemming  from a formal  review of  peer-reviewed
published literature. These guidelines may not be updated for some time.

     The "ACC/AHA  2002  Guideline  Update for the  Management  of Patients with
Chronic  Stable   Angina"  was  last  issued  in  2003.   Comments  on  external
counterpulsation  appear in a section entitled " Recommendations for Alternative
Therapies for Chronic  Stable Angina in Patients  Refractory to Medical  Therapy
Who   Are   Not   Candidates   for   Percutaneous   Intervention   or   Surgical
Revascularization"  and include a so-called  Class IIb  recommendation.  ACC/AHA
guideline   classifications   I,  II  and  III  are  used  to   "provide   final
recommendations  for both patient evaluation and therapy" and a Class IIb rating
is   defined   as    "Usefulness/efficacy    is   less   well   established   by
evidence/opinion".

     The ACC/AHA 2005  Guidelines  for the Diagnosis  and  Management of Chronic
Heart  Failure in the Adult were issued in 2005.  External  counterpulsation  is
listed as one of the devices under  investigation  in a section  entitled "Drugs
and Interventions Under Active Investigation".

     The 2006 Comprehensive  Heart Failure Practice Guideline issued in February
2006 by the Heart  Failure  Society of America  does not include any comments on
the  use  of  external  counterpulsation  therapy  for  treating  heart  failure
patients.

     In summary,  while  evaluations  of the use of EECP(R)  therapy in patients
with  chronic  angina and heart  failure  continue to appear in several  oral or
poster   presentations  at  major  scientific   meetings  and  in  peer-reviewed
publications  each year,  there  continues to be  skepticism  in the  cardiology
community about its broader use.  Additional  evidence regarding the efficacy of
EECP(R) therapy continues to appear,  however the evidence may not be sufficient
to  warrant  a  modification   of  practice   guidelines  to  a  more  favorable
recommendation and increased acceptance by the medical community.

Reimbursement

     In addition to  regulatory  approvals for  commercialization  by government
agencies,  reimbursement  coverage and payment rates are factors in the sales of
our products and we depend in large part on the  availability  of  reimbursement
programs.  Medicare,  Medicaid,  as well as private  health care  insurance  and
managed-care  plans  determine  eligibility for coverage of a product or therapy
based on a number of  factors,  including  the  payer's  determination  that the
product is  reasonable  and  necessary  for the  diagnosis  or  treatment of the
illness  or  injury  for  which it is  administered  according  to the  scope of
clinical evidence available, accepted standards of medical care in practice, the
product's  cost   effectiveness,   whether  the  product  is   experimental   or
investigational,  impact on health  outcomes  and  whether  the  product  is not
otherwise excluded from coverage by law or regulation.  The coverage process for
Medicare reimbursement is legislated by Congress and administered by the Centers
for  Medicare  and  Medicaid  Services  (CMS),  and is  highly  variable  in the
commercial  market.  There may be significant  delays in obtaining  coverage for
newly-approved  products, and coverage may be more limited than the purposes for
which  the  product  is  approved  or  cleared  by  FDA.  Even  when  we  obtain
authorization   from  the  FDA  or  a  foreign  authority  to  begin  commercial
distribution,  there may be limited  demand for the device  until  reimbursement
approval has been obtained from  governmental  and private  third-party  payers.
Moreover,  eligibility  for  coverage  does not  imply  that a  product  will be
reimbursed  in all cases or at a rate  that  allows  us to  market  our  EECP(R)
systems at a price that will enable us to make a profit or even cover our costs.
Reimbursement  rates  may  vary  according  to the  use of the  product  and the

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<PAGE>

clinical  setting  in which it is used,  may be based on  payments  allowed  for
lower-cost  products  that are  already  reimbursed,  may be  incorporated  into
existing  payments  for other  products or services,  and may reflect  budgetary
constraints  and/or   imperfections  in  Medicare  or  Medicaid  data.  Even  if
successful, demand for products may be driven more by the scope of peer-reviewed
evidence and  acceptance,  endorsement  by regulatory  and clinical  bodies,  or
foreign country authorities than by the reimbursement rates available.  Securing
coverage at adequate  reimbursement rates from government and third party payers
can be a time  consuming  and costly  process  that could  require us to provide
supporting scientific,  clinical, and cost-effectiveness data for the use of our
products to each payer. Our inability to promptly obtain coverage and profitable
reimbursement rates from  government-funded  and private payers for our products
could have a material  adverse  effect on our financial  condition and operating
results.

     Our reimbursement strategies are currently focused in the following primary
areas:  expanding Medicare coverage to include congestive heart failure and mild
angina,  expanding  coverage with other third-party  payers,  expanding Medicare
coverage for angina and obtaining coverage in selected international markets.

Current Medicare Coverage in Angina

     In February 1999, the Centers for Medicare and Medicaid Services (CMS), the
federal agency that  administers  the Medicare  program for more than 39 million
beneficiaries,  issued a national coverage policy under HCPCS code G0166 for the
use of the EECP(R)  therapy  system.  Key  excerpts  from the  coverage  read as
follows:

     "Although ECP devices are cleared by the Food and Drug Administration (FDA)
     for use in treating a variety of cardiac  conditions,  including  stable or
     unstable  angina  pectoris,  acute  myocardial  infarction and  cardiogenic
     shock, the use of this device to treat cardiac conditions other than stable
     angina  pectoris  is  not  covered,  since  only  that  use  has  developed
     sufficient evidence to demonstrate its medical effectiveness."

     "for patients who have been diagnosed  with disabling  angina (class III or
     class IV,  Canadian  Cardiovascular  Society  Classification  or equivalent
     classification)  who, in the opinion of a  cardiologist  or  cardiothoracic
     surgeon, are not readily amenable to surgical interventions such as balloon
     angioplasty and cardiac bypass because:

          1.   their  condition  is  inoperable,  or at high  risk of  operative
               complications or post-operative failure;

          2.   their   coronary   anatomy  is  not  readily   amenable  to  such
               procedures; or

          3.   they have co-morbid states, which create excessive risk."

     The 2007 national  average payment rate per hourly session in the physician
office setting and the hospital  outpatient  facility is approximately  $147 and
$107,  respectively.  Reimbursement  rates vary throughout the country and range
from $98 to $215 per hourly session.  The 2006 national average payment rate per
hourly  session in the  physician  office  setting and the  hospital  outpatient
facility is approximately $138 and $104, respectively.  Reimbursement rates vary
throughout the country and range from $113 to $231 per hourly session. Under the
Medicare program, physician reimbursement of the provision of EECP(R) therapy is
higher if the therapy is performed in a physician  office setting as compared to
a hospital  outpatient facility in order to reflect higher costs associated with
the physician office.  Since January 2000, the national average payment rate has
varied considerably. The initial national average payment rate for the physician
office setting and the hospital  outpatient  facility in 2000 was  approximately
$130 and $112, respectively per hourly session. The average payment rate for the
physician  office setting  climbed to $208 per treatment  session in 2003 before
being reduced  approximately 37% in 2004 to $132 per treatment session.  In 2005
the physician rate increased  approximately  5% and remained  unchanged in 2006.
The average payment rate for the hospital  outpatient facility declined steadily
to 2005 before increasing approximately 2% in 2006.

     In order to bill and receive payment from Medicare, an individual or entity
must be enrolled in the  Medicare  program for EECP(R)  therapy.  The  physician
office  setting  and the  hospital  outpatient  facility  are the only  entities
currently authorized to receive  reimbursement for the EECP(R) therapy under the
Medicare  program and  reimbursement  is not permitted to other  individuals  or
entity  types,  which  include,  but are not  limited to,  nurse  practitioners,

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<PAGE>

physical therapists,  ambulatory surgery centers,  nursing homes,  comprehensive
outpatient  rehabilitation  facilities,   outpatient  dialysis  facilities,  and
independent  diagnostic  testing  facilities.  For each of these  provider types
there is statutory  authorization  and accompanying  regulations that govern the
terms and conditions of Medicare program participation.

     If there were any material change in the availability of Medicare coverage,
or if the reimbursement level for treatment procedures using the EECP(R) therapy
system is determined to be inadequate,  it would adversely  affect our business,
financial  condition  and  results  of  operations.  Moreover,  we are unable to
forecast what  additional  legislation  or regulation,  if any,  relating to the
health care  industry or Medicare  coverage and payment  level may be enacted in
the future, or what effect such legislation or regulation would have on us.

Application  to Expand  Medicare  Coverage to include  Class II Angina and Class
II/III CHF

     On May 31, 2005, we submitted an  application to CMS to expand the national
coverage  policy  for  external  counterpulsation  treatment  to  patients  with
Canadian  Cardiovascular  Class II stable  angina and to patients  with New York
Heart Association  (NYHA) Class II and III stable heart failure symptoms with an
ejection fraction less than 35%.

     On June 20, 2005,  the Centers for Medicare  and  Medicaid  Services  (CMS)
accepted our  application  for  expansion of  reimbursement  coverage of EECP(R)
therapy to include patients with New York Heart Association  (NYHA) Class II/III
stable heart failure symptoms with an ejection fraction of less than or equal to
35%, i.e. chronic, stable,  mild-to-moderate systolic heart failure as a primary
indication,   as  well  as  patients   with  Canadian   Cardiovascular   Society
Classification (CCSC) II, i.e. chronic, stable mild angina.

     On June 23, 2005, CMS also received a request from a competing manufacturer
of external  counterpulsation therapy equipment, to reconsider the reimbursement
coverage policy. They requested expansion of coverage to include 1) treatment of
congestive heart failure,  to include NYHA Class II, III with a left ventricular
ejection fraction (LVEF) less than or equal to 40%, and acute heart failure;  2)
treatment  of stable  angina to include  CCSC II angina;  3)  treatment of acute
myocardial infarction; 4) treatment of cardiogenic shock. On September 15, 2005,
they amended their request to include NYHA Class IV heart failure.

     On March 20, 2006,  the Centers for Medicare  and Medicaid  Services  (CMS)
issued their Decision Memorandum regarding this reconsideration with the opinion
"that the evidence is not adequate to conclude  that  external  counterpulsation
therapy is reasonable and necessary for the treatment of:
          o    Canadian Cardiovascular Society Classification (CCSC) II angina
          o    Heart Failure
          o    New York Heart  Association  Class II/III  stable  heart  failure
               symptoms with an ejection fraction of less than or equal to 35%
          o    New York Heart  Association  Class II/III  stable  heart  failure
               symptoms with an ejection fraction of less than or equal to 40%
          o    New York Heart Association Class IV heart failure
          o    Acute heart failure
          o    Cardiogenic shock
          o    Acute myocardial infarction."

     They  commented  in their  decision  memorandum  that they were not able to
apply full weight to the evidence  generated by the PEECH(TM)  trial,  as it had
not yet been published in a peer-reviewed  medical journal by the time they were
required to issue a final decision on this application.  Moreover,  they did not
opine on whether they would  consider the results of the trial when published to
be sufficient  evidence to conclude that  external  counterpulsation  therapy is
reasonable and necessary for the treatment of New York Heart  Association  Class
II/III stable heart failure  symptoms with an ejection  fraction of less than or
equal to 35%.  They did,  however,  reiterate  in the decision  memorandum  that
"Current  coverage  as  described  in  Section  20.20 of the  Medicare  National
Coverage  Determination  (NCD)  manual will remain in effect.",  for  refractory
angina patients.

     On August 25, 2006 the  results of the trial were  initially  published  on
line by the Journal of the American College of Cardiology  (JACC),  and in print
in its  September 19, 2006 issue.  JACC is the official  journal of the American
College of Cardiology.

                                       18
<PAGE>
     In the  November-December  issue of the journal Congestive Heart Failure, a
second report of results from the PEECH(TM) trial was published, focusing on the
results of a prespecified  subgroup  analysis in trial patients age 65 and over.
This analysis demonstrated a statistically  positive response on both co-primary
endpoints of the trial in patients  receiving  EECP(R)  therapy versus those who
did not, i.e. a significantly  larger proportion of patients  undergoing EECP(R)
therapy met or  exceeded  prespecified  thresholds  of  improvement  in exercise
duration and peak oxygen  consumption.  Moreover,  the patients age 65 and older
who received EECP(R) therapy  demonstrated the greatest  differences in exercise
duration, peak oxygen consumption and functional class (symptom status) compared
with those who did not receive EECP(R) therapy.

     We will  continue  to educate the  marketplace  that  EECP(R)  therapy is a
therapy for ischemic  cardiovascular  disease and that  patients  with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also
eligible  for  reimbursement  under the current  coverage  policy,  provided the
primary  indication  for  treatment  with  EECP(R)  therapy  is angina or angina
equivalent   symptoms  and  the  patient   satisfies   other  listed   criteria.
Additionally,  we will  continue to pursue  expansion  of  coverage  for EECP(R)
therapy with Medicare and other  third-party  payers as evidence of its clinical
utility develops.

Expanding Coverage with Other Third-Party Payers

     Some private insurance  carriers  continue to adjudicate  EECP(R) treatment
claims on a case-by-case  basis. Since the establishment of reimbursement by the
federal government,  however, an increasing number of these private carriers now
routinely  pay for use of EECP(R)  therapy for the  treatment of angina and have
issued positive  coverage  policies,  which are generally  similar to Medicare's
coverage  policy in  scope.  We  estimate  that over 300  private  insurers  are
reimbursing  for EECP(R)  therapy for the treatment of angina today at favorable
payment  levels  and we expect  that the number of  private  insurers  and their
related health plans that provide for EECP(R)  therapy as a covered benefit will
continue to increase.  In addition,  we are aware of two third-party payers that
have begun limited coverage of EECP(R) therapy for the treatment of CHF.

     We intend to pursue a constructive  dialogue with many private insurers for
the  establishment  of  positive  and  expanded  coverage  policies  for EECP(R)
treatment  that include CHF patients.  If there were any material  change in the
availability   of   third-party   private   insurers  or  the  adequacy  of  the
reimbursement level for treatment procedures using the EECP(R) therapy system it
would  adversely  affect  our  business,  financial  condition  and  results  of
operations.  Moreover, we are unable to forecast what additional  legislation or
regulation,  if any, relating to the health care industry or third-party private
insurers coverage and payment levels may be enacted in the future or what effect
such legislation or regulation would have on us.

Reimbursement in International Markets

     The reimbursement  environment for EECP(R) therapy in international markets
is  fragmented  and  coverage  varies as a mix of  available  private and public
healthcare  providers  may not yet be aware of  coverage  of this  therapy.  Our
reimbursement  strategy has been  opportunistic  and  responsive  to the selling
opportunities  presented through our distribution  partners.  During this fiscal
year our  efforts on behalf of EECP(R)  therapy in both the  private  and public
healthcare sectors of selected  international markets have been initiated by our
distributors,  in  support  of  the  therapy,  in  their  designated  territory.
Additionally,  efforts  have been  initiated  to obtain  coverage  in the public
sector in certain overseas markets;  however,  we do not anticipate an impact on
financial  performance  in the next fiscal year,  given the long lead times from
submission  to  approval  of  international   dossiers  for  each  reimbursement
authority.

Patents and Trademarks

     We own eleven US patents  including  eight utility and three design patents
that expire at various times  between 2006 and 2021.  In addition,  more than 20
foreign patents have been issued that expire at various times from 2007 to 2022.
We are also  planning  to file  other  patent  applications  regarding  specific
enhancements to the current  EECP(R) models,  future  generation  products,  and
methods of treatment in the future.  Moreover,  trademarks  have been registered
for the names "EECP(R)" and "Natural Bypass".


                                       19
<PAGE>
     We pursue a policy of seeking patent protection, both in the US and abroad,
for  our  proprietary  technology.  We  believe  that  we  have a  solid  patent
foundation in the field of external counterpulsation devices and that the number
of patents and applications  demonstrates our technical leadership,  dating back
to the  mid-1980s.  Our  patent  portfolio  focuses  on the  areas  of  external
counterpulsation  control and the overall design and arrangement of the external
counterpulsation   apparatus,   including  the  console,  treatment  bed,  fluid
distribution,  and  inflatable  cuffs.  None of our current  competitors  have a
significant patent portfolio in the area of external counterpulsation devices.

     There can be no assurance that our patents will not be violated or that any
issued patents will provide protection that has commercial significance. As with
any  patented  technology,  litigation  could be necessary to protect our patent
position. Such litigation can be costly and time-consuming,  and there can be no
assurance  that we will be  successful.  The loss or  violation  of our  EECP(R)
patents and trademarks could have a material adverse effect upon our business.

Employees

     As of May 31, 2007, we employed 18 full-time and 1 part-time persons with 2
in direct sales,  sales and clinical  applications  support, 7 in manufacturing,
quality control and technical service, 1 in marketing and customer support, 2 in
engineering,  regulatory and clinical research and 7 in administration.  None of
our employees  are  represented  by a labor union.  We believe that our employee
relations are good.

Manufacturing

     We manufacture our EECP(R) therapy systems in a single facility  located in
Westbury,  New York.  Manufacturing  operations are conducted  under the Current
Good Manufacturing  Practice (CGMP) requirements as set forth in the FDA Quality
System  Regulation.  These  regulations  subject  us to  inspections  to  verify
compliance  and  require  us to  maintain  documentation  and  controls  for the
manufacturing and quality  activities.  ISO 13485 is the  international  quality
standard  for  medical  device  manufacturers,  based upon the ISO 9001  quality
standard  with  specific  requirements  consistent  with the FDA Quality  System
Regulation.  While  previously  we  were  certified  to  comply  with  ISO  9001
requirements,  we have applied and received ISO 13485  certification in February
2003. We are also  certified to conform with the full quality  assurance  system
requirements  of the EU Medical  Device  Directive  and can apply the CE mark to
certain  of  our  products.   Lastly,  we  are  certified  to  comply  with  the
requirements of the Canadian Medical Device Regulations (CMDR).

     We believe our manufacturing  facility, is adequate to meet the current and
immediately foreseeable future demand for the production of these systems.

RISK FACTORS

     Investing in our common stock involves risk. You should carefully  consider
the following  information about these risks together with the other information
contained in this Report.  If any of the following  risks  actually  occur,  our
business  could be harmed.  This could  cause the price of our stock to decline,
and you may lose part or all of your investment.

Financial Risks

     We have incurred  recurring  losses over the past few years and continue to
sustain  losses  which  could  result in a further  decline  in the value of our
common stock.

     During the last two fiscal years we incurred  large  operating  losses.  We
currently  anticipate  that we will continue to sustain  operating  losses.  Our
ability to achieve  profitability is largely  dependent on our ability to reduce
operating  costs  sufficiently as well as halting the current trend of declining
revenue.  Our ability to  maintain  our  current  base of revenue  and  increase
revenue is largely dependent upon  restructuring our sales and marketing efforts
in the angina market where reimbursement is currently available and operating in
a more efficient manner.

Risks Related to Our Business

     We  are  materially  dependent  on  medical   reimbursement  for  treatment
procedures  using EECP(R) therapy on patients with  congestive  heart failure in
order to achieve continued growth.

     We are currently  dependent on a single product  platform  which,  based on
current medical reimbursement policies, provides coverage for a restricted class
of heart patients. On May 31, 2005, we submitted an application to CMS to expand
the national coverage policy for external counterpulsation treatment to patients
with  Canadian  Cardiovascular  Class II stable  angina and to patients with New
York Heart  Association  (NYHA) Class II and III stable heart  failure  symptoms
with an ejection  fraction  less than 35%. The  application  was accepted by CMS
effective  June 20,  2005,  and CMS  announced  their  decision to maintain  the
existing  coverage as stated  prior to the  application  and not to expand it to

                                       20
<PAGE>
include  Class II Angina and Class II/III CHF on March 20, 2006.  Results of the
PEECH(TM)  trial have been  published in the Journal of the American  College of
Cardiology in September  2006, and the subgroup  analysis of CHF patients age 65
and over has also been  published  in the  November-December  2006  issue of the
Journal of Congestive Heart Failure. These two papers have been submitted to CMS
for reconsideration of our application. We had met with representatives from CMS
in February 2007 and presented our case. CMS has requested  additional data from
us. We will continue our dialogue with CMS to obtain  coverage for heart failure
patients.  However,  there is no assurance that the Company will have sufficient
resources to gather the necessary data to be sufficient to support  expansion of
the Medicare  National  Coverage Policy for EECP(R)  treatment for NYHA class II
and III heart failure patients.

     If we do not  receive  medical  coverage  for  treatment  procedures  using
EECP(R)  therapy  on  patients  with CHF,  it will  adversely  affect our future
business prospects.

     Material changes in the  availability of Medicare,  Medicaid or third-party
reimbursement at adequate price levels could adversely affect our business.

     Health care providers,  such as hospitals and physician private  practices,
that purchase or lease medical  devices such as the EECP(R)  therapy  system for
use  on  their  patients  generally  rely  on  third-party  payers,  principally
Medicare,  Medicaid and private health insurance plans, to reimburse all or part
of the  costs and fees  associated  with the  procedures  performed  with  these
devices.  If there were any  material  change in the  availability  of Medicare,
Medicaid  or other  third-party  coverage or the  adequacy of the  reimbursement
level for  treatment  procedures  using the  EECP(R)  therapy  system,  it would
adversely  affect our business,  financial  condition and results of operations.
Moreover,  we are unable to forecast what additional  legislation or regulation,
if any,  relating to the health care  industry or Medicare or Medicaid  coverage
and payment  level may be enacted in the future or what effect such  legislation
or regulation  would have on our business.  Even if a device has FDA  clearance,
Medicare,  Medicaid and other third-party  payers may deny reimbursement if they
conclude that the device is not  "reasonable  and necessary"  according to their
criteria.  In addition,  reimbursement may not be at, or remain at, price levels
adequate to allow medical  professionals and hospitals to realize an appropriate
return on the purchase of our products.

     Increased  acceptance  by the medical  community is important for continued
growth.

     While many  abstracts and  publications  are  presented  each year at major
scientific meetings worldwide with respect to EECP(R) treatment efficacy,  there
is continued  skepticism  concerning EECP(R) therapy  methodology.  The American
Heart  Association and the American  College of Cardiology  Practice  Guidelines
currently list EECP(R) as a therapy currently under  investigation for treatment
of heart  failure and have a  classification  rating of IIb as a  treatment  for
patients  who are  refractory  to medical  therapy  and are not  candidates  for
percutaneous  intervention or revascularization.  A classification rating of IIb
indicates the usefulness/efficacy of EECP(R) therapy is less well established by
evidence/opinion.   The  medical   community   utilizes  these  guidelines  when
considering  the  various   treatment   options  for  their  patients.   Certain
cardiologists, in cases where the EECP(R) therapy is a viable alternative, still
appear to prefer percutaneous  coronary  interventions (e.g. balloon angioplasty
and stenting) and cardiac bypass surgery for their patients. Additional evidence
regarding  the  efficacy of EECP(R)  therapy  continues  to evolve,  however the
evidence may not be sufficient to warrant a modification of these  guidelines to
a  more  favorable  recommendation  and  increased  acceptance  by  the  medical
community.  We are dependent on consistency of favorable research findings about
EECP(R)  therapy  and  increasing  acceptance  of  EECP(R)  therapy  as a  safe,
effective and cost  effective  alternative  to other  available  products by the
medical community for continued growth.

     We face competition from other companies and technologies.

     We compete with at least four other  companies that are marketing  external
counterpulsation  devices.  We do not  know  whether  these  companies  or other
potential competitors who may be developing external  counterpulsation  devices,
may succeed in developing  technologies or products that are more efficient than
those offered by us, and that would render our technology and existing  products
obsolete  or   non-competitive.   Potential  new   competitors   may  also  have
substantially  greater  financial,  manufacturing  and marketing  resources than
those  possessed  by us. In  addition,  other  technologies  or products  may be
developed that have an entirely different approach or means of accomplishing the
intended purpose of our products.  Accordingly,  the life cycles of our products
are  difficult  to  estimate.  To compete  successfully,  we must keep pace with
technological  advancements,  respond  to  evolving  consumer  requirements  and
achieve market acceptance.

                                       21
<PAGE>
     As of June  2007 the  Company  entered  into a  distribution  and  supplier
agreement with Living Data  Technology  Corporation,  a competitor as of May 31,
2007.  This  arrangement  has  subsequently  reduced the competitors to at least
three other companies.

     We may not continue to receive necessary FDA clearances or approvals, which
     could hinder our ability to market and sell our products.

     If we modify our external  counterpulsation  devices and the  modifications
significantly  affect  safety  or  effectiveness,  or if we make a change to the
intended  use,  we will be required to submit a new  premarket  notification  or
510(k) to FDA. We would be unable to market the modified device until FDA issues
a clearance for the 510(k).

     Additionally,  if FDA publishes a regulation requiring a premarket approval
application or PMA for external  counterpulsation devices, we would then need to
submit a PMA, and have it filed by the agency,  by the date  specified by FDA in
its  regulation.  A PMA requires us to prove the safety and  effectiveness  of a
device  to the  FDA.  The  process  of  obtaining  PMA  approval  is  expensive,
time-consuming,  and uncertain. If FDA were to require a PMA application, we may
be required to undertake a clinical  study,  which likely will be expensive  and
require lengthy follow-up, to demonstrate the effectiveness of the device. If we
did obtain PMA  approval,  any change  after  approval  affecting  the safety or
effectiveness of the device will require approval of a PMA supplement.

     If we offer new products that require 510(k) clearance or PMA approval,  we
will not be able to commercially distribute those products until we receive such
clearance or approval. Regulatory agency approval or clearance for a product may
not be received or may entail  limitations on the device's  indications  for use
that could limit the potential  market for any such  product.  Delays in receipt
of, or failure to obtain or maintain, regulatory clearances and approvals, could
delay or prevent our ability to market or distribute  our products.  Such delays
could have a material adverse effect on our business.

     If we are unable to comply with applicable governmental regulation,  we may
not be able to continue our operations.

     We also  must  comply  with  Current  Good  Manufacturing  Practice  (CGMP)
requirements as set forth in the Quality System  Regulation (QSR) to receive FDA
approval to market new products and to continue to market current products.  The
QSR imposes certain procedural and documentation requirements on us with respect
to manufacturing and quality assurance activities, including packaging, storage,
and record  keeping.  Our  products  and  activities  are subject to  extensive,
ongoing regulation,  including  regulation of labeling and promotion  activities
and adverse event reporting.  Also, our FDA registered facilities are subject to
inspection by the FDA and other governmental authorities.  Any failure to comply
with  regulatory  requirements  could  delay or prevent our ability to market or
distribute our products.  Violation of FDA statutory or regulatory  requirements
could result in  enforcement  actions,  such as voluntary or mandatory  recalls,
suspension  or  withdrawal  of  marketing  clearances  or  approvals,  seizures,
injunctions,  fines, civil penalties,  and criminal  prosecutions,  all of which
could have a material  adverse  effect on our  business.  Most  states also have
similar postmarket regulatory and enforcement authority for devices.

     We  cannot   predict   the   nature  of  any  future   laws,   regulations,
interpretations,  or  applications,  nor can we predict  what effect  additional
governmental  regulations or  administrative  orders,  when and if  promulgated,
would have on our  business  in the future.  We may be slow to adapt,  or we may
never adapt to changes in existing  requirements or adoption of new requirements
or policies.  We may incur significant costs to comply with laws and regulations
in the future or compliance with laws or regulations may create an unsustainable
burden on our business.

     We may not receive  approvals by foreign  regulators that are necessary for
international sales.

     Sales of medical  devices  outside the United States are subject to foreign
regulatory requirements that vary from country to country. Premarket approval or
clearance  in the United  States  does not ensure  regulatory  approval by other
jurisdictions.  If we,  or any  international  distributor,  fail to  obtain  or
maintain  required   pre-market   approvals  or  fail  to  comply  with  foreign
regulations,  foreign  regulatory  authorities  may  require us to file  revised
governmental  notifications,  cease  commercial  sales  of our  products  in the
applicable  countries or otherwise cure the problem.  Such enforcement action by
regulatory authorities may be costly.

                                       22
<PAGE>
     In order to sell our  products  within the European  Union,  we must comply
with the  European  Union's  Medical  Device  Directive.  The CE  marking on our
products attests to this  compliance.  Future  regulatory  changes may limit our
ability to use the CE mark,  and any new products we develop may not qualify for
the CE mark. If we lose this  authorization  or fail to obtain  authorization on
future products, we will not be able to sell our products in the European Union.

     We depend on management and other key personnel.

     We are  dependent  on a limited  number  of key  management  and  technical
personnel. The loss of one or more of our key employees may hurt our business if
we are unable to identify other individuals to provide us with similar services.
We do not maintain "key person" insurance on any of our employees.  In addition,
our success  depends  upon our ability to attract and retain  additional  highly
qualified  sales,   management,   manufacturing  and  research  and  development
personnel.  We face competition in our recruiting activities and may not be able
to attract or retain qualified personnel.

     We may not have adequate intellectual property protection.

     Our  patents  and  proprietary  technology  may  not  be  able  to  prevent
competition by others.  The validity and breadth of claims in medical technology
patents involve complex legal and factual questions.  Future patent applications
may  not be  issued,  the  scope  of  any  patent  protection  may  not  exclude
competitors,  and our patents may not provide competitive  advantages to us. Our
patents may be found to be invalid and other  companies  may claim  rights in or
ownership  of the patents and other  proprietary  rights held or licensed by us.
Also, our existing patents may not cover products that we develop in the future.
Moreover,  when our patents expire, the inventions will enter the public domain.
There can be no  assurance  that our  patents  will not be  violated or that any
issued  patents  will  provide  protection  that  has  commercial  significance.
Litigation may be necessary to protect our patent position.  Such litigation may
be costly  and  time-consuming,  and there can be no  assurance  that we will be
successful in such litigation.

     The loss or violation of certain of our patents and trademarks could have a
material adverse effect upon our business.

     Since patent  applications  in the United States are  maintained in secrecy
until such patent  applications are issued, our current product  development may
infringe  patents that may be issued to others.  If our  products  were found to
infringe  patents  held by  competitors,  we may have to modify our  products to
avoid  infringement,  and it is possible that our modified products would not be
commercially successful.

     We do not intend to pay dividends in the foreseeable future.

     We do not  intend  to pay any cash  dividends  on our  common  stock in the
foreseeable future.

Risks Related to Our Industry

     Technological change is difficult to predict and to manage.

     We face the challenges that are typically faced by companies in the medical
device  field.  Our product  line has  required,  and any future  products  will
require,  substantial  development  efforts  and  compliance  with  governmental
clearance or approval requirements. We may encounter unforeseen technological or
scientific  problems  that  force  abandonment  or  substantial  change  in  the
development of a specific product or process.

     We are subject to product liability claims and product recalls that may not
be covered by insurance.

     The nature of our business exposes us to risks of product  liability claims
and product  recalls.  Medical devices as complex as ours frequently  experience
errors or failures,  especially  when first  introduced or when new versions are
released.

     We  currently  maintain  product  liability  insurance  at  $7,000,000  per
occurrence and $7,000,000 in the aggregate.  Our product liability insurance may
not be  adequate.  In the future,  insurance  coverage  may not be  available on

                                       23
<PAGE>

commercially reasonable terms, or at all. In addition,  product liability claims
or  product  recalls  could  damage  our  reputation  even if we  have  adequate
insurance coverage.

     We do not know the effects of healthcare reform proposals.

     The healthcare  industry is undergoing  fundamental  changes resulting from
political,   economic  and   regulatory   influences.   In  the  United  States,
comprehensive  programs  have  been  suggested  seeking  to  increase  access to
healthcare for the uninsured,  control the escalation of healthcare expenditures
within the  economy  and use  healthcare  reimbursement  policies to balance the
federal budget.

     We expect  that the United  States  Congress  and state  legislatures  will
continue to review and assess various  healthcare reform  proposals,  and public
debate of these issues will likely continue. There have been, and we expect that
there will continue to be, a number of federal and state  proposals to constrain
expenditures  for medical  products and services,  which may affect payments for
products such as ours. We cannot predict which, if any of such reform  proposals
will be adopted and when they might be effective,  or the effect these proposals
may have on our business.  Other countries also are  considering  health reform.
Significant changes in healthcare systems could have a substantial impact on the
manner in which we  conduct  our  business  and could  require  us to revise our
strategies.

Risks Related to Stock Exchange and SEC Regulation

     We were de-listed from Nasdaq and may be subject to regulations  that could
reduce our ability to raise funds.

     By letter dated May 2, 2005, we received written  notification  from Nasdaq
that the bid price of our common stock for the last 30 consecutive business days
had closed below the minimum $1.00 per share  required for  continued  inclusion
under  Marketplace  Rule 4310(c) (4) (the Rule). In accordance with  Marketplace
Rule 4310 (c) (d), we were  provided an initial  period of 180 calendar  days to
regain  compliance  plus an automatic  extension  for  additional  period of 180
calendar days since we met the Nasdaq Capital Markets  initial listing  criteria
except for the bid price  requirement.  During this period our common  stock did
not rise above the $1.00 per share minimum and on May 26, 2006, our common stock
was delisted and our stock is currently traded on the Over-the-Counter  Bulletin
Board.

     As a result of our  de-listing  from the Nasdaq  Capital  Market due to low
stock price, we may become subject to special rules,  called "penny stock" rules
that impose additional sales practice  requirements on  broker-dealers  who sell
our common  stock.  Penny stocks  generally are equity  securities  that are not
registered on certain national securities exchanges or quoted by Nasdaq and have
a price per share of less than $5.00. The rules require, among other things, the
delivery,  prior to the transaction,  of a disclosure  schedule  required by the
Securities and Exchange  Commission relating to the market for penny stocks. The
broker-dealer   also  must  disclose  the   commissions   payable  both  to  the
broker-dealer and the registered  representative  and current quotations for the
securities,  and  monthly  statements  must  be  sent  disclosing  recent  price
information.

     In the event that our common stock becomes  characterized as a penny stock,
our market  liquidity could be severely  affected.  The regulations  relating to
penny stocks could limit the ability of  broker-dealers to sell our common stock
and thus the  ability of  purchasers  of our common  stock to sell their  common
stock in the secondary market.

     Additionally,  Nasdaq's delisting of our common stock could have an adverse
effect on our ability to raise additional equity capital.

     We are subject to stock exchange and SEC regulation.

     Recent  Sarbanes-Oxley  legislation  and stock  exchange  regulations  have
increased  disclosure control,  financial  reporting,  corporate  governance and
internal control  requirements  that will increase the  administrative  costs of
documenting  and auditing  internal  processes,  gathering  data,  and reporting
information.  Our inability to comply with the requirements would  significantly
impact our market valuation.

                                       24
<PAGE>
     Our common stock is subject to price volatility.

     The market price of our common stock historically has been and may continue
to be highly volatile.  Our stock price could be subject to wide fluctuations in
response to various factors beyond our control, including, but not limited to:

     o    medical reimbursement
     o    quarterly variations in operating results;
     o    announcements of technological innovations, new products or pricing by
          our  competitors;
     o    the rate of adoption by physicians of our  technology  and products in
          targeted markets;
     o    the timing of patent and regulatory approvals;
     o    the timing and extent of technological advancements;
     o    results of clinical studies;
     o    the sales of our common stock by affiliates or other shareholders with
          large holdings; and
     o    general market conditions.

     Our future operating  results may fall below the expectations of securities
industry analysts or investors. Any such shortfall could result in a significant
decline in the market price of our common stock.  In addition,  the stock market
has experienced significant price and volume fluctuations that have affected the
market price of the stock of many medical  device  companies and that often have
been  unrelated to the  operating  performance  of such  companies.  These broad
market fluctuations may directly influence the market price of our common stock.

Additional Information

     We are subject to the reporting  requirements under the Securities Exchange
Act of 1934 and are required to file reports and information with the Securities
and Exchange Commission (SEC),  including reports on the following forms: annual
report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form
8-K, and  amendments  to those  reports  files or furnished  pursuant to Section
13(a) or 15(d) of the Securities Act of 1934.

ITEM 2 - PROPERTIES

     We  have  historically  owned  our  18,000  square  foot  headquarters  and
manufacturing  facility  at  180  Linden  Avenue,   Westbury,  New  York  11590.
Additionally,  we leased approximately 3,500 square feet of additional warehouse
space under an operating  lease with a  non-affiliated  landlord that expired in
September 2006, which we did not renew.

     On  August  15,  2007 we sold  our  facility  under a  five-year  leaseback
agreement  for $1.4 million.  The net proceeds  from the sale was  approximately
$425,000 after payment in full of the two secured notes on our facility, brokers
fees,  closing costs,  and the opening of a certificate of deposit in accordance
with the provisions of the new lease. The annual rental expense for the lease is
approximately $138,600. We believe that our current facility is adequate to meet
our  current  needs and  should  continue  to be  adequate  for the  immediately
foreseeable future.

ITEM 3 - LEGAL PROCEEDINGS

     There were no material legal proceedings under applicable rules.

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

     There were no matters  submitted to a vote of security  holders  during the
fourth quarter of the fiscal year.

                                       25
<PAGE>
                                     PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
         SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

     Our common stock currently  trades on the  Over-the-Counter  Bulletin Board
under the symbol  VASO.OB.  On May 26, 2006,  our common stock ceased trading on
the Nasdaq  Capital  Market tier of the Nasdaq Stock Market and began trading on
the NASD Pink Sheets. Effective June 20, 2006, our common stock began trading on
the Over the Counter  Bulletin  Board  (OTCBB).  The number of record holders of
common  stock as of August 1,  2007,  was  approximately  1,066,  which does not
include  approximately  24,755  beneficial  owners of shares held in the name of
brokers or other nominees.  The table below sets forth the range of high and low
trade prices of the common stock for the fiscal periods specified.
<TABLE>
<CAPTION>
                                 Fiscal 2007                Fiscal 2006
                                 -----------                -----------
                               High         Low           High          Low
<S>                           <C>          <C>           <C>           <C>
First Quarter                 $0.17        $0.08         $0.88         $0.53
Second Quarter                $0.15        $0.08         $0.65         $0.38
Third Quarter                 $0.12        $0.07         $0.53         $0.16
Fourth Quarter                $0.09        $0.07         $0.35         $0.10
</TABLE>
     The last bid price of the  Company's  common stock on August 17, 2007,  was
$0.11 per share.

De-listing from the Nasdaq Capital Market

     By letter dated May 2, 2005, we received written  notification  from Nasdaq
that the bid price of our common stock for the last 30 consecutive business days
had closed below the minimum $1.00 per share  required for  continued  inclusion
under  Marketplace  Rule 4310(c) (4) (the Rule). In accordance with  Marketplace
Rule 4310 (c) (d), we were  provided an initial  period of 180 calendar  days to
regain  compliance  plus an automatic  extension  for  additional  period of 180
calendar days since we met the Nasdaq Capital Markets  initial listing  criteria
except for the bid price  requirement.  During this period our common  stock did
not rise above the $1.00 per share minimum and on May 26, 2006, our common stock
was delisted and our stock is currently traded over-the-counter.

     As a result of our  de-listing  from the Nasdaq  Capital  Market due to low
stock price,  we may become subject to special  rules,  called penny stock rules
that impose additional sales practice  requirements on  broker-dealers  who sell
our common stock. The rules require, among other things, the delivery,  prior to
the  transaction,  of a  disclosure  schedule  required  by the  Securities  and
Exchange  Commission  relating to the market for penny stocks. The broker-dealer
also must disclose the  commissions  payable both to the  broker-dealer  and the
registered representative and current quotations for the securities, and monthly
statements must be sent disclosing recent price information.

     The  regulations  relating  to penny  stocks  could  limit the  ability  of
broker-dealers  to sell our common stock and thus the ability of  purchasers  of
our common stock to sell their common stock in the secondary market.

     Additionally,  Nasdaq's delisting of our common stock could have an adverse
effect our ability to raise additional equity capital.

Dividend Policy

     We have never paid any cash dividends on our common stock.  While we do not
intend  to pay  cash  dividends  in the  foreseeable  future,  payment  of  cash
dividends,  if any, will be dependent upon our earnings and financial  position,
investment  opportunities and such other factors as the Board of Directors deems
pertinent.  Stock  dividends,  if any, also will be dependent on such factors as
the Board of Directors deems pertinent.

                                       26
<PAGE>
Sale of Convertible Preferred Securities

     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 our Series D Preferred  Stock at $100 per share plus  warrants.  As of
February 7, 2006,  all of the preferred  shares had been  converted  into common
shares and there are no preferred shares currently outstanding.

Entry Into A Material Definitive Agreement

     On June 21, 2007 we entered into a Securities Purchase Agreement with Kerns
Manufacturing Corp.  ("Kerns").  Concurrently with our entry into the Securities
Purchase Agreement, we also entered into a Distribution Agreement and a Supplier
Agreement  with  Living  Data  Technology  Corporation,  an  affiliate  of Kerns
("Living Data").

     We sold to Kerns pursuant to the Securities Purchase Agreement,  21,428,572
shares of our common stock at $.07 per share for an aggregate of  $1,500,000  as
well a five-year warrant to purchase  4,285,714 shares of our common stock at an
initial exercise price of $.08 per share (the "Warrant"). We also have an option
to sell an  additional  $1 million of our common stock to Kerns.  The  agreement
further  provided  for  the  appointment  to  our  Board  of  Directors  of  two
representatives  of Kerns.  In  furtherance  thereof,  Mr. Jun Ma and Mr.  Simon
Srybnik,  Chairman of both Kerns and Living Data, have been appointed members of
our Board of Directors.  Pursuant to the Distribution  Agreement, we have become
the  exclusive  distributor  in the United  States of the  AngioNew  ECP systems
manufactured by Living Data. As additional  consideration for such agreement, we
agreed to issue an  additional  6,990,840  shares of our common  stock to Living
Data. Pursuant to the Supplier Agreement,  Living Data now will be the exclusive
supplier to us of the ECP therapy  systems that we market  under the  registered
trademark  EECP(R).  The Distribution  Agreement and the Supplier Agreement each
have an initial term extending through May 31, 2012.

     Pursuant to a Registration Rights Agreement, we granted to Kerns and Living
Data, subject to certain restrictions,  "piggyback registration rights" covering
the shares  sold to Kerns as well as the shares  issuable  upon  exercise of the
Warrant and the shares issued to Living Data.

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     This  Management's  Discussion and Analysis or Plan of Operations  contains
descriptions of our expectations regarding future trends affecting our business.
These forward  looking  statements  and other  forward-looking  statements  made
elsewhere  in this  document  are made under the safe harbor  provisions  of the
Private Securities Litigation Reform Act of 1995. Please read the section titled
"Risk  Factors" in "Item One - Business"  to review  certain  conditions,  among
others,  which we believe  could cause results to differ  materially  from those
contemplated by the forward-looking statements.

     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  "anticipates",  "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.

     The  following  discussion  should be read in  conjunction  with  financial
statements and notes thereto included in this Annual Report on Form 10-KSB.

                                       27
<PAGE>
Overview

     Vasomedical,  Inc. was  incorporated  in Delaware in July 1987.  Unless the
context requires  otherwise,  all references to "we",  "our",  "us",  "Company",
"registrant",  "Vasomedical"  or "management"  refer to Vasomedical Inc. and its
subsidiaries.   Since  1995,  we  have  been  primarily  engaged  in  designing,
manufacturing,    marketing   and   supporting    EECP(R)   enhanced    external
counterpulsation  systems based on our unique proprietary  technology  currently
indicated  for use in cases of stable or unstable  angina  (i.e.,  chest  pain),
congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack,
(MI)) and  cardiogenic  shock.  The EECP(R)  therapy  system 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 helps to restore  systemic  vascular  function.  The
therapy  also  increases  blood flow and oxygen  supply to the heart  muscle and
other organs and decreases the heart's workload and need for oxygen,  while also
improving  function of the endothelium,  the lining of blood vessels  throughout
the body, lessening resistance to blood flow. We provide hospitals,  clinics and
physician private practices with EECP(R) equipment,  treatment  guidance,  and a
staff training and equipment  maintenance  program  designed to provide  optimal
patient outcomes.  EECP(R) is a registered trademark for Vasomedical's  enhanced
external counterpulsation systems.  For  more information visit www.vasomedical.
com.

     We have Food and Drug Administration  (FDA) clearance to market our EECP(R)
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 chronic  stable  angina and
congestive  heart  failure.  Medicare  and other  third-party  payers  currently
reimburse  for the  treatment of angina  symptoms in patients  with  moderate to
severe  symptoms  who are  refractory  to  medications  and not  candidates  for
invasive  procedures,  including  patients with serious  comorbidities,  such as
heart failure, diabetes, peripheral vascular disease, etc. Patients with primary
diagnoses of heart failure, diabetes, peripheral vascular disease, etc. are also
reimbursed  under  the  same  criteria,  provided  the  primary  indication  for
treatment with EECP(R) therapy is angina symptoms.

     During the last two fiscal  years  ended May 31,  2007 and 2006 we incurred
large  operating  losses.  We  attempted  to achieve  profitability  by reducing
operating costs and halting the trend of declining revenue, to reduce cash usage
through  bringing our cost structure more into alignment with current revenue by
engaging in  restructurings  during  January 2006,  March 2007 and April 2007 to
substantially reduce personnel and spending on sales,  marketing and development
projects. In addition, we sought to obtain a strategic alliance within the sales
and marketing areas and/or to raise additional capital through public or private
equity or debt financings.

     Subsequent to May 31, 2007 the following events took place which allowed us
to raise  additional  capital through a private equity financing and by the sale
of our facility under a leaseback agreement.

     o    On June 21, 2007 we entered into a Securities  Purchase Agreement with
          Kerns Manufacturing Corp. ("Kerns").  Concurrently with our entry into
          the Securities Purchase Agreement, we also entered into a Distribution
          Agreement  and  a  Supplier  Agreement  with  Living  Data  Technology
          Corporation, an affiliate of Kerns ("Living Data").

          We  sold to  Kerns  pursuant  to the  Securities  Purchase  Agreement,
          21,428,572  shares  of our  common  stock  at $.07  per  share  for an
          aggregate  of  $1,500,000  as well a  five-year  warrant  to  purchase
          4,285,714  shares of our common stock at an initial  exercise price of
          $.08 per  share  (the  "Warrant").  We also  have an option to sell an
          additional  $1  million of our common  stock to Kerns.  The  agreement
          further  provided for the appointment to our Board of Directors of two
          representatives of Kerns. In furtherance  thereof,  Mr. Jun Ma and Mr.
          Simon  Srybnik,  Chairman  of both  Kerns and Living  Data,  have been
          appointed  members  of  our  Board  of  Directors.   Pursuant  to  the
          Distribution  Agreement,  we have become the exclusive  distributor in
          the United States of the AngioNew ECP systems  manufactured  by Living
          Data. As additional  consideration  for such  agreement,  we agreed to
          issue an  additional  6,990,840  shares of our common  stock to Living
          Data. Pursuant to the Supplier Agreement,  Living Data now will be the
          exclusive  supplier  to us of the ECP therapy  systems  that we market
          under the registered trademark EECP(R). The Distribution Agreement and
          the Supplier Agreement each have an initial term extending through May
          31, 2012.

                                       28
<PAGE>
          Pursuant to a Registration  Rights Agreement,  we granted to Kerns and
          Living Data, subject to certain restrictions,  "piggyback registration
          rights"  covering  the  shares  sold to  Kerns  as well as the  shares
          issuable  upon exercise of the Warrant and the shares issued to Living
          Data.

     o    On August 15, 2007 we sold our  facility  under a five-year  leaseback
          agreement  for  $1.4  million.  The net  proceeds  from  the  sale was
          approximately  $425,000 after payment in full of the two secured notes
          on our facility,  brokers fees,  closing  costs,  and the opening of a
          certificate  of deposit in accordance  with the  provisions of the new
          lease.



Results of Operations

Fiscal Years Ended May 31, 2007 and 2006

     Net revenue from sales,  leases and service of our EECP(R)  systems for the
fiscal  years  ended May 31,  2007 and 2006,  was  $6,354,083  and  $10,942,997,
respectively,  which  represented  a decline of $4,588,914 or 42%. We reported a
net loss  attributable to common  stockholders of $1,571,066 and $11,579,011 for
fiscal 2007 and 2006, respectively.  Our net loss per common share was $0.02 for
the fiscal year ended May 31, 2007 compared to a net loss of $0.19 per share for
the fiscal year ended May 31,  2006.  The  decrease in the net loss per share is
primarily due to a $7,082,138 income tax valuation reserve established in fiscal
2006 for the remaining value of the deferred tax asset.

     The gross profit  declined to  $3,450,970 or 54% of revenues for the fiscal
year ended May 31,  2007,  compared to  $6,168,668  or 56% of  revenues  for the
fiscal year ended May 31, 2006. The decline in gross profit  primarily  reflects
the reduced sales volume,  however the loss from  operations  was reduced in the
fiscal  year  ended  May 31,  2007  to  $1,534,339  compared  to the  loss  from
operations in fiscal year 2006 of $3,612,849.  Total  operating  expenses in the
fiscal  years  ended  May 31,  2007 and 2006  were  $4,985,309  and  $9,781,517,
respectively, reflecting a decline of $4,796,208 due primarily to two major cost
saving restructuring programs initiated in March 2007 and April 2007.

Revenues

     Revenue from equipment sales declined  approximately  62% to $2,561,064 for
the fiscal year ended May 31, 2007 as compared to $6,820,980 for the prior year.
The decline in equipment  sales is due  primarily to a 52% decline in the number
of equipment  shipments and a 23% decrease in average sales prices.  The overall
decrease in average  sales prices is  primarily  due to the decline of equipment
sales as well as the  reduction  in sales price due to  competition  in both the
domestic and international markets, from the prior fiscal year.

     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  direct and indirect  competition.  We  anticipate  that
demand for EECP(R)  systems  will remain soft unless  there is greater  clinical
acceptance  for the use of EECP(R)  therapy in treating  patients with angina or
angina equivalent symptoms who meet the current  reimbursement  guidelines or an
expansion  of the current CMS national  reimbursement  policy to include some or
all  Class II & III  heart  failure  patients.  Patients  with  angina or angina
equivalent  symptoms eligible for  reimbursement  under current policies include
many with serious  comorbidities,  such as heart failure,  diabetes,  peripheral
vascular disease and/or others.  Despite this, many cardiology clinicians appear
to be waiting for  approval of  reimbursement  coverage  for heart  failure as a
primary  indication before they will move forward with the treatment of ischemic
heart failure patients with angina equivalent  symptoms.  Reluctance to bill for
ischemic  heart failure  patients  under the current  coverage  guidelines,  and
failure to get or maintain adequate  reimbursement coverage for angina and heart
failure would  adversely  affect our business  prospects.  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.  The  average  price of new systems  sales  declined by 7%, in fiscal
2007,  compared  to  prior  year and the  average  sales  price of used  systems
declined  43% in fiscal  2007.  We  continue  to  reorganize  certain  territory
responsibilities  in our  sales  department  due to vacant  and/or  unproductive
territories.

                                       29
<PAGE>
     Our  revenue  from the sale of EECP(R)  systems  and  related  products  to
international  distributors  in  fiscal  2007  increased  approximately  15%  to
$991,000  compared  to  $863,000 in the prior year  reflecting  increased  sales
volume.

     The above decline in revenue was also a result of an 8% decrease in revenue
from equipment  rental and services to $3,793,019 in fiscal 2007 from $4,122,017
in fiscal year 2006. Revenue from equipment rental and services  represented 60%
of total revenue in fiscal 2007 compared to 38% in fiscal 2006.  The increase in
the percentage of revenue  generated from equipment  rentals and services is due
to decreased unit sales volume and decreased total revenues. The decrease in the
absolute  amounts and the decrease in the  percentage of total revenue  resulted
primarily from a 31% decline in service  related  revenue,  and a 74% decline in
rental  revenue.  The decline was due to a decrease in the rental  install  base
from the prior fiscal year ended May 31, 2006.

Gross Profit

     Gross profit  declined to $3,450,970 or 54% of revenues for the fiscal year
ended May 31,  2007,  compared to  $6,168,668  or 56% of revenues for the fiscal
year ended May 31, 2006.  Gross profit margin as a percentage of revenue for the
fiscal year ended May 31,  2007,  decreased  compared  to the prior  fiscal year
mainly due to the higher fixed  production  unit costs  associated  with reduced
production due to decreasing sales in the last fiscal year,  offset minimally by
the adoption of SFAS No. 151 which  increased the amount of fixed overhead costs
absorbed  into  inventory  in fiscal  2007.  The  decline in gross  profit  when
compared to the prior year in absolute  dollars is principally  due to the lower
sales volume.

     Gross profits are dependent on a number of factors, particularly the mix of
EECP(R)  models  sold  domestically  and  internationally  and their  respective
average selling prices,  the mix of EECP(R) 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 fiscal years
ended May 31, 2007 and 2006,  were  $4,051,570 or 64% of revenues and $7,865,533
or  72% of  revenues,  respectively  reflecting  a  decrease  of  $3,813,963  or
approximately  48%. The decrease in SG&A expenditures in fiscal 2007 compared to
fiscal 2006 resulted primarily from decreased direct  expenditures of $2,354,828
due to reduced sales personnel and associated travel plus lower sales commission
due to reduced  sales  volume.  Marketing  expenses  decreased  $975,971  due to
reduced  personnel in the marketing and clinical  application  support areas, as
well as  associated  travel,  plus lower  market  research,  product  promotion,
advertising, and trade show expenses. Administrative expenses decreased $483,164
as a result of decreased expenditures in professional fees related to accounting
and outside consulting, along with reduced personnel and their associated costs.

Research and Development

     Research and  development  ("R&D")  expenses of $933,316 or 15% of revenues
for the fiscal year ended May 31,  2007,  decreased  by  $872,351  or 48%,  from
$1,805,667  or 17% of  revenues  for the  fiscal  year ended May 31,  2006.  The
decrease is primarily  attributable to fewer  engineering  personnel,  lower new
product development spending, and reduced spending on clinical trials.

Provision for Doubtful Accounts

     During the fiscal years ended May 31, 2007 and 2006, the Company recorded a
provision for doubtful accounts of $423 and $110,317,  respectively.  The change
in the provision is a primarily a result of the fiscal 2007 decrease in sales.

                                       30
<PAGE>
Interest Expense and Financing Costs

     Interest  expense and  financing  costs  decreased to $69,767 in the fiscal
year ended May 31,  2007,  from  $81,662  for 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.  The majority of
the  decrease  is a  result  of  the  loans  secured  to  finance  the  cost  of
implementation of a new management  information system being paid in full during
fiscal 2007.

Interest and Other Income, Net

     Interest and other income for the fiscal years ended May 31, 2007 and 2006,
were $53,648 and  $75,508,  respectively.  Interest  income  primarily  reflects
interest earned on the Company's cash balances.  As cash balances have declined,
the direct impact has been a decrease in interest income.

Income Tax Expense, Net

     During  the  fiscal  years  ended May 31,  2007 and  2006,  we  recorded  a
provision for income taxes of $20,608 and $7,082,138, respectively.

     As of May 31,  2007,  the recorded  deferred  tax assets were  $19,589,352,
reflecting  an  increase of $29,894  during the fiscal year ended May 31,  2007,
which was offset by the valuation allowance of the same amount.

     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.  In
November 2005, we concluded that,  based upon the weight of available  evidence,
it was  "more  likely  than not" that the net  deferred  tax asset  would not be
realized and  increased  the  valuation  allowance to bring the net deferred tax
asset carrying value to zero.

Liquidity and Capital Resources

Cash and Cash Flow

     We have  financed our  operations  in fiscal 2007 and 2006  primarily  from
working capital and in fiscal 2006 from the issuance of preferred  stock. At May
31, 2007, we had cash of $850,288 and working  capital of $1,320,347 as compared
to cash and cash  equivalents of $2,385,778 and working capital of $2,867,288 at
May 31, 2006. Our cash and cash equivalents  decreased $1,535,490 in fiscal year
2007.  Our net  loss of  $1,571,066  was  partially  offset  by  adjustments  to
reconcile  the net loss to net cash and changes in working  capital  accounts of
$337,772. Cash used in investing activities was $10,593 and financing activities
was $291,603.

     The  adjustments  to  reconcile  net  loss to net  cash  used in  operating
activities was $294,596 in non-cash adjustments to reconcile the net loss to net
cash used in operating activities, primarily due to $315,269 in depreciation and
amortization.  In  addition,  changes in our  operating  assets and  liabilities
produced  net cash of $43,176.  The changes in the accounts  balances  primarily
reflect a decrease  in accounts  receivable  of  $147,805,  lower  inventory  of
$606,580 and lower other current assets of $265,408, which were partially offset
by a decrease in accounts payable,  accrued expenses,  deferred  revenues-ST and
other current liabilities of $721,970 and a decrease in deferred revenues-LT and
in other liabilities of $253,575.  Net accounts  receivable were 12% of revenues
for the period  ended May 31,  2007,  as compared to 8% for the period ended May
31, 2006, and accounts  receivable  turnover improved to 8.1 times as of May 31,
2007, as compared to 7.9 times as of May 31, 2006.

     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(R) 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  fiscal  2007 and 2006,  there were no revenues  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

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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(R)
program. As we are creating a new market for the EECP(R) 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 $10,593 during the fiscal year ended
May 31, 2007 for the purchase of property and equipment.

     Our financing  activities  used net cash of $291,603 during the fiscal year
ended May 31, 2007, reflecting payments on our outstanding notes and loans.

     We do not have an available line of credit.

Sale of 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 was 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.  After  registration  in August 2005 the shares of common  stock could be
acquired through conversion of the preferred shares. 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
18, 2010.

     By  the  placement  of the  preferred  stock  described  above,  we  became
obligated to pay a cash dividend monthly on the outstanding  shares of preferred
stock. The dividend rate was 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.

     During the period  beginning on September 14, 2005, and ending  February 7,
2006, all the preferred  stock issued under this financing were converted into a
total of 6,112,209  shares of common  stock and the are no  remaining  shares of
preferred stock outstanding.

     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.

Liquidity

     During the last two fiscal  years  ended May 31,  2007 and 2006 we incurred
large  operating  losses.  The Company  attempted  to achieve  profitability  by
reducing operating costs and halting the trend of declining  revenue,  to reduce
cash usage by bringing  its cost  structure  more into  alignment  with  current
revenue by engaging in restructurings  during January 2006, March 2007 and April
2007 to  substantially  reduce  personnel  and spending on sales,  marketing and
development projects. In addition, the Company was seeking to obtain a strategic
alliance within the sales and marketing areas and/or to raise additional capital
through public or private equity or debt financings.

     Subsequent to May 31, 2007 the following events took place which allowed us
to raise  additional  capital through a private equity financing and by the sale
of our facility under a leaseback agreement.

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<PAGE>
     o    On June 21, 2007 we entered into a Securities  Purchase Agreement with
          Kerns Manufacturing Corp. ("Kerns").  Concurrently with our entry into
          the Securities Purchase Agreement, we also entered into a Distribution
          Agreement  and  a  Supplier  Agreement  with  Living  Data  Technology
          Corporation, an affiliate of Kerns ("Living Data").

          We  sold to  Kerns  pursuant  to the  Securities  Purchase  Agreement,
          21,428,572  shares  of our  common  stock  at $.07  per  share  for an
          aggregate  of  $1,500,000  as well a  five-year  warrant  to  purchase
          4,285,714  shares of our common stock at an initial  exercise price of
          $.08 per  share  (the  "Warrant").  We also  have an option to sell an
          additional  $1  million of our common  stock to Kerns.  The  agreement
          further  provided for the appointment to our Board of Directors of two
          representatives of Kerns. In furtherance  thereof,  Mr. Jun Ma and Mr.
          Simon  Srybnik,  Chairman  of both  Kerns and Living  Data,  have been
          appointed  members  of  our  Board  of  Directors.   Pursuant  to  the
          Distribution  Agreement,  we have become the exclusive  distributor in
          the United States of the AngioNew ECP systems  manufactured  by Living
          Data. As additional  consideration  for such  agreement,  we agreed to
          issue an  additional  6,990,840  shares of our common  stock to Living
          Data. Pursuant to the Supplier Agreement,  Living Data now will be the
          exclusive  supplier  to us of the ECP therapy  systems  that we market
          under the registered trademark EECP(R). The Distribution Agreement and
          the Supplier Agreement each have an initial term extending through May
          31, 2012.

          Pursuant to a Registration  Rights Agreement,  we granted to Kerns and
          Living Data, subject to certain restrictions,  "piggyback registration
          rights"  covering  the  shares  sold to  Kerns  as well as the  shares
          issuable  upon exercise of the Warrant and the shares issued to Living
          Data.

     o    On August 15, 2007 we sold our  facility  under a five-year  leaseback
          agreement  for  $1.4  million.  The net  proceeds  from  the  sale was
          approximately  $425,000 after payment in full of the two secured notes
          on our facility,  brokers fees,  closing  costs,  and the opening of a
          certificate  of deposit in accordance  with the  provisions of the new
          lease.

     Based on the above transactions, we believe that we have sufficient working
capital to continue our operations through at least May 31, 2008.

Off-Balance Sheet Arrangements

     As part of our on-going  business,  we do not  participate in  transactions
that  generate   relationships   with   unconsolidated   entities  or  financial
partnerships,  such as  entities  often  referred  to as  structured  finance or
special purpose  entities  (`SPES"),  which would have been  established for the
purpose of facilitating  off-balance sheet  arrangements or other  contractually
narrow or limited  purposes.  As of May 31,  2007,  we are not  involved  in any
unconsolidated SPES.

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.

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 B of  the  Notes  to  Consolidated
Financial  Statements  included in our Annual Report on Form 10-KSB for the year
ended May 31, 2007,  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:

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<PAGE>
Revenue Recognition

     The Company recognizes  revenue when persuasive  evidence of an arrangement
exists,  delivery has occurred or service has been rendered,  the price is fixed
or determinable and collectibility is reasonably  assured. In the United States,
we recognize revenue from the sale of our EECP(R) systems in the period in which
we deliver  the system to the  customer.  Revenue  from the sale of our  EECP(R)
systems to international markets is recognized upon shipment of 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(R) 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(R) systems includes
a combination of three elements that qualify as separate units of accounting:
     i.   EECP(R) 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,  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(R) 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(R)  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 a few 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  service  revenue  at the time the  in-service  and  training  is
completed and the amount related to service  arrangements is recognized  ratably
as service revenue 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 equipment sales as incurred.

     The Company  also  recognizes  revenue  generated  from  servicing  EECP(R)
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(R)  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.

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<PAGE>
     Revenues  from  the  sale of  EECP(R)  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 parts when the equipment sale is recognized.

     The Company has also entered into lease agreements for our EECP(R) 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(R) 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 May 31, 2007.

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 that remain  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 its 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
our 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(R)  systems  at  various  field  locations  for  demonstration,   training,
evaluation,  and other similar purposes at no charge.  The cost of these EECP(R)
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(R) 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 record a  provision  for  excess  and  obsolete
inventory  based  primarily on existing and  anticipated  design and engineering
changes to its 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 $3,000 more in fixed
production  overhead into inventory during fiscal year 2007 and $256,000 less in
fixed production overhead into inventory during fiscal year 2006.

Deferred Revenues

     The Company records revenue on extended service  contracts ratably over the
term  of  the  related  contract  period.   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(R)  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.

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<PAGE>
Warranty Costs

     Equipment  sold is  generally  covered  by a  warranty  period of one year.
Effective September 1, 2003, the Company adopted the provisions of EITF 00-21 on
a prospective  basis. Under EITF 00-21, for certain  arrangements,  a portion of
the overall system price  attributable to the first year service  arrangement 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.

     Equipment sold to international  customers through our distributor  network
is generally  covered by a one-year  warranty  period.  For these  customers the
Company accrues a warranty reserve for estimated costs of providing a parts only
warranty 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.

Net Loss per Common Share

     Basic  loss per  share is based on the  weighted  average  number of common
shares outstanding without consideration of potential common stock. Diluted loss
per  share is 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  changes,  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  assets  and   liabilities   are  classified  as  current  or
non-current  based on the  classification  of the related asset or liability for
financial reporting.  A deferred tax asset or liabilty 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 the Company  previously
recorded,  and then  reversed  fully in fiscal  2006,  related  primarily to the
realization of net operating loss carryforwards,  of which the allocation of the
current  portion,  if any,  reflected  the  expected  utilization  of  such  net
operating losses for the following  twelve months.  Such allocation was based on
the Company's  internal  financial forecast and may be subject to revision based
upon actual results.

Stock-based Employee Compensation

     In December 2004, the FASB issued Statement of Financial  Standards No. 123
(revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), which is a revision of
SFAS No. 123. SFAS No. 123 (R)  supersedes  APB Opinion No. 25,  Accounting  for
Stock Issued to Employees,  and amends FASB Statement No. 95,  Statement of Cash
Flows.  Generally,  the approach to accounting for share-based  payments in SFAS
No. 123(R) is similar to the approach  described in SFAS No. 123. However,  SFAS
No. 123(R) requires all share-based  payments to employees  including  grants of

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<PAGE>
employee stock options,  to be recognized in the financial  statements  based on
their  fair  values.  Pro  forma  disclosure  of the fair  value of  share-based
payments is no longer an alternative  to financial  statement  recognition.  The
Company has five stock-based employee compensation plans.

     Prior  to  second  quarter  of  fiscal  2007  the  Company   accounted  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  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 prior to
fiscal 2007.

     In  May  2006,  the  compensation  committee  of  the  board  of  directors
accelerated the vesting  provision of all outstanding stock options and warrants
so that they were fully  vested at May 31,  2006,  and as a result  the  Company
expects that the adoption of SFAS No. 123(R) will not have an immediate material
effect on its financial statements.  However, as new stock options are issued by
the  Company  this  may have a  material  effect  on its  quarterly  and  annual
financial statements,  in the form of additional compensation expense. It is not
possible to precisely  determine the expense  impact of adoption since a portion
of the ultimate  expense that is recorded will likely relate to awards that have
not yet been granted.  The expense  associated with these future awards can only
be determined based on factors such as the price for the Company's common stock,
volatility of the Company's stock price and risk free interest rates as measured
at the grant date.  However,  the pro forma disclosures  related to SFAS No. 123
included in the Company's historic financial statements are relevant data points
for  gauging  the  potential  level of expense  that might be recorded in future
periods.

     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
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
(R).

Recently Issued Accounting Pronouncements Not Yet Effective

     Statement of Financial Accounting Standards No. 155, Accounting for Certain
Hybrid Financial  Instruments--an  amendment of FASB Statements No. 133 and 140,
was issued in  February  2006 and is  effective  for all  financial  instruments
acquired or issued  after the  beginning  of an entity's  first fiscal year that
begins after September 15, 2006.  Certain parts of this Statement may be applied
prior to the adoption of this Statement. Earlier adoption is permitted as of the
beginning  of an entity's  fiscal  year,  provided the entity has not yet issued
financial statements,  including financial statements for any interim period for
that fiscal year.  Provisions of this  Statement  may be applied to  instruments
that an  entity  holds at the date of  adoption  on an  instrument-by-instrument
basis.  The  Company  does not  expect  that SFAS 155 will have any  significant
effect on future financial statements.

     Statement  of  Financial  Accounting  Standards  No.  156,  Accounting  for
Servicing of Financial  Assets--an amendment of FASB Statement No. 140, pertains
to the servicing of financial  assets and was issued in March 2006 and should be
adopted as of the beginning of its first fiscal year that begins after September
15,  2006.  Earlier  adoption is  permitted  as of the  beginning of an entity's
fiscal  year,  provided  the  entity has not yet  issued  financial  statements,
including interim financial statements,  for any period of that fiscal year. The
Company does not expect that SFAS 156 will have any significant effect on future
financial statements.

                                       37
<PAGE>
     Statement  of  Financial   Accounting   Standards   No.  157,   Fair  Value
Measurements.  This  Statement  defines fair value,  establishes a framework for
measuring fair value,  and expands  disclosures  about fair value  measurements.
This Statement  applies under other  accounting  pronouncements  that require or
permit fair value measurements,  the Board having previously  concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly,  this Statement  does not require any new fair value  measurements.
However,  for some  entities,  the  application  of this  Statement  will change
current  practice.  This Statement is effective for financial  statements issued
for fiscal years  beginning  after November 15, 2007, and interim periods within
those  fiscal  years.  Earlier  application  is  encouraged,  provided  that the
reporting entity has not yet issued  financial  statements for that fiscal year,
including  financial  statements  for an interim period within that fiscal year.
The Company  does not expect that SFAS 157 will have any  significant  effect on
future financial statements.

     Statement of Financial Accounting Standards No. 158, Employers'  Accounting
for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements  No. 87, 88, 106, and 132(R).  This Statement  requires  employers to
recognize  the   overfunded  or   underfunded   status  of  a  defined   benefit
postretirement  plan (other than a multiemployer  plan) as an asset or liability
in its statement of financial  position and to recognize  changes in that funded
status in the year in which the changes occur through  comprehensive income of a
business  entity or  changes  in  unrestricted  net  assets of a  not-for-profit
organization.  This  Statement  also  requires  employers  to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions.

     An employer with publicly traded equity securities is required to initially
recognize  the funded  status of a defined  benefit  postretirement  plan and to
provide the required  disclosures  as of the end of the fiscal year ending after
December 15, 2006.

     An  employer  without  publicly  traded  equity  securities  is required to
recognize  the funded  status of a defined  benefit  postretirement  plan and to
provide the required  disclosures  as of the end of the fiscal year ending after
June 15, 2007.

     Statement of Financial  Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial  Liabilities - Including an Amendment to FASB
Statement No. 115.  This  Statement  permits  entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve  financial  reporting  by providing  entities  with the  opportunity  to
mitigate  volatility in reported earnings caused by measuring related assets and
liabilities  differently  without  having  to  apply  complex  hedge  accounting
provisions.  This  Statement  is  expected  to  expand  the  use of  fair  value
measurement,   which  is  consistent  with  the  Board's  long-term  measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity's  first fiscal year that begins after November
15, 2007,  and interim  periods  within those fiscal  years.  Early  adoption is
permitted as of the beginning of a fiscal year that begins on or before November
15,  2007,  provided  the entity  also  elects to apply the  provisions  of FASB
Statement  No. 157,  Fair Value  Measurements.  The Company does not expect that
SFAS 159 will have any significant effect on future financial statements.

     FASB Staff  Position No. FIN 46(R)-6,  Determining  the  Variability  to Be
Considered in Applying FASB  Interpretation  No. 46(R). This FASB Staff Position
(FSP) addresses how a reporting  enterprise  should determine the variability to
be considered in applying FASB  Interpretation  No. 46 (revised  December 2003),
Consolidation of Variable Interest Entities.  The variability that is considered
in applying  Interpretation  46(R) affects the  determination of (a) whether the
entity is a variable  interest  entity (VIE),  (b) which  interests are variable
interests1  in the  entity,  and  (c)  which  party,  if  any,  is  the  primary
beneficiary of the VIE. That variability will affect any calculation of expected
losses and  expected  residual  returns,  if such a  calculation  is  necessary.
Retrospective  application,  if elected, must be completed no later than the end
of the first annual  reporting  period  ending after July 15, 2006.  The Company
does not expect  that FIN 46(R  )-6will  have any  significant  effect on future
financial statements.

     FASB Staff  Position (FSP) No. FTB 85-4-1,  Accounting for Life  Settlement
Contracts  by  Third-Party  Investors,  was  posted  in  March  27,  2006 and is
effective for fiscal years  beginning  after June 15, 2006. It provides  initial
and subsequent  measurement  guidance and financial  statement  presentation and
disclosure guidance for investments by third-party  investors in life settlement
contracts.  This FSP also amends certain  provisions of FASB Technical  Bulletin
No. 85-4,  Accounting  for Purchases of Life  Insurance,  and FASB Statement No.
133, Accounting for Derivative  Instruments and Hedging Activities.  The Company
does not  expect  that FSP  85-4-1  will have any  significant  effect on future
financial statements.

                                       38
<PAGE>
     FASB Staff  Position  (FSP) No. AUG AIR-1,  Accounting  for  Planned  Major
Maintenance Activities, was posted on September 8, 2006 and is effective for the
first fiscal year  beginning  after  December 15, 2006.  This FSP  addresses the
accounting  for  planned  major   maintenance   activities  and  amends  certain
provisions  in the AICPA  Industry  Audit  Guide,  Audits of  Airlines  (Airline
Guide), and APB Opinion No. 28, Interim Financial  Reporting.  The Airline Guide
permits four  alternative  methods of accounting  for planned major  maintenance
activities:   direct  expense,   built-in   overhaul,   deferral,   and  accrual
(accrue-in-advance).  Those methods are widely used by other industries. The FSP
prohibits the use of the  accrue-in-advance  method. The Company does not expect
that FSP No.  AUG AIR-1  will have any  significant  effect on future  financial
statements.

     FASB Staff Position No. FAS 126-1,  Applicability of Certain Disclosure and
Interim  Reporting  Requirements for Obligors for Conduit Debt  Securities,  was
posted on  October  25,  2006.  This FASB Staff  Position  (FSP)  clarifies  the
definition  of a public  entity  in  certain  accounting  standards  to  include
entities  that are conduit bond  obligors for conduit debt  securities  that are
traded  in a  public  market.  The  guidance  in  this  FSP  is  to  be  applied
prospectively  in fiscal periods  beginning after December 15, 2006. The Company
does not  expect  that FAS  126-1  will  have any  significant  effect on future
financial statements.

     The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes--an  Interpretation  of FASB Statement No. 109 (FIN 48) in June 2006. This
Interpretation  primarily relates to tax positions taken or expected to be taken
in a tax return and clarifies the  accounting  for  uncertainty  in income taxes
recognized in an enterprise's  financial  statements.  Under this Interpretation
the effects of a tax position would be recognized or  derecognized  depending on
what outcome is more likely than not to occur with respect to the position.  The
Interpretation also provides guidance on derecognition, classification, interest
and penalties,  accounting in interim periods,  disclosure,  and transition.  It
requires  that all tax  positions  be evaluated  using the  more-likely-than-not
recognition threshold,  and that the enterprise should presume that the position
will be  examined  by the  appropriate  taxing  authority  that  would have full
knowledge  of all  relevant  information  for  recognition,  derecognition,  and
measurement using consistent criteria. Disclosures are required about the effect
of  unrecognized  tax benefits  related to tax positions as well as  information
about the  nature of the  uncertainties  related  to tax  positions  where it is
reasonably  possible that changes in the tax provision will occur in the next 12
months  of  this   Interpretation   will  provide  more  information  about  the
uncertainty  in income  tax  assets  and  liabilities.  This  Interpretation  is
effective  for  fiscal  years  beginning   after  December  15,  2006.   Earlier
application  of the  provisions  of this  Interpretation  is  encouraged  if the
enterprise has not yet issued financial statements,  including interim financial
statements,  in the  period  this  Interpretation  is  adopted.  The  Company is
currently  evaluating  whether the adoption of Interpretation No. 48 will have a
material effect on our consolidated  financial  position,  results of operations
and cash flows.

     EITF Issue 05-1, Accounting for the Conversion of an Instrument That Became
Convertible upon the Issuer's Exercise of a Call Option.  The Task Force reached
a consensus that the issuance of equity  securities to settle a debt  instrument
(pursuant to the instrument's original conversion terms) that became convertible
upon the  issuer's  exercise  of a call  option  should  be  accounted  for as a
conversion if the debt instrument contained a substantive  conversion feature as
of its  issuance  date,  as defined  herein.  That is, no gain or loss should be
recognized related to the equity securities issued to settle the instrument. The
issuance  of  equity   securities  to  settle  a  debt  instrument  that  became
convertible upon the issuer's  exercise of a call option should be accounted for
as a debt  extinguishment  if the debt  instrument did not contain a substantive
conversion  feature  as of its  issuance  date.  That is,  the fair value of the
equity  securities  issued should be considered a component of the reacquisition
price of the debt.  This Issue  applies to all  conversions  within the scope of
this Issue that result from the  exercise of call  options and is  effective  in
interim or annual  reporting  periods  beginning  after June 28, 2006 (the Board
ratification date of the consensus),  irrespective of whether the instrument was
entered  into prior or  subsequent  to Board  ratification  of this  Issue.  For
instruments issued prior to the effective date of this consensus, the assessment
as to whether a  substantive  conversion  feature  exists at issuance  should be
based  only  on  assumptions,  considerations,  and/or  marketplace  information
available  as  of  the  issuance   date.   The  Company  does  not  expect  that
pronouncement  EITF  Issue  05-1  will  have any  significant  effect  on future
financial statements.

     EITF Issue 06-1,  Accounting for Consideration  Given by a Service Provider
to a  Manufacturer  or Reseller of Equipment  Necessary for an  End-Customer  to
Receive  Service from the Service  Provider.  The Task Force reached a consensus

                                       39
<PAGE>
that if the  consideration  given by a service  provider  to a  manufacturer  or
reseller  (that  is  not a  customer  of the  service  provider)  can be  linked
contractually  to the benefit  received by the service  provider's  customer,  a
service  provider  should  use the  guidance  in  Issue  01-9 to  determine  the
characterization of the consideration  (that is, "cash  consideration" or "other
than  cash"   consideration).   Issue  01-9   presumes  that  an  entity  should
characterize  "cash  consideration"  as a reduction of revenue  unless an entity
meets the  requirements of paragraph 9 of Issue 01-9.  Under Issue 01-9,  "other
than cash" consideration should be characterized as an expense. In applying that
guidance,  the service provider should characterize the consideration given to a
third-party manufacturer or reseller based on the form of consideration directed
by the service provider to be provided to the service  provider's  customer.  If
the form of the  consideration  is  directed  to be  anything  other  than "cash
consideration"  (as defined in Issue 01-9),  then the form of the  consideration
should be  characterized  as "other  than cash"  consideration.  If the  service
provider does not control the form of the consideration  provided to the service
provider's  customer,  the consideration  should be characterized as "other than
cash"  consideration.  In reaching this conclusion,  Task Force members observed
that  consideration  paid by a  service  provider  that  results  in a  customer
receiving a reduced price on equipment purchased from a manufacturer or reseller
should be  characterized  as "other  than cash"  consideration  for  purposes of
applying  Issue 01-9.  The  consensus in this Issue is  effective  for the first
annual reporting period  beginning after June 15, 2007.  Earlier  application is
permitted  for  financial  statements  that have not yet been  issued.  Entities
should recognize the effects of applying the consensus in this Issue as a change
in accounting principle through  retrospective  application to all prior periods
unless  it is  impracticable  to  do  so.  The  Company  does  not  expect  that
pronouncement  EITF  Issue  06-1  will  have any  significant  effect  on future
financial statements.

     EITF Issue 06-2, Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43,  "Accounting  for Compensated  Absences".  An
employer  may provide  its  employees  with  sabbatical  leave or other  similar
benefits.  Sabbatical leave involves an employee receiving time off upon working
at the  employer  for a  specific  period  of time.  When an  employer  provides
sabbatical leave or another similar benefit, the employer must determine whether
such benefit  should be accrued based on the guidance in FASB  Statement No. 43,
Accounting for Compensated Absences.  The Task Force reached a consensus that an
employee's  right to a  compensated  absence under a sabbatical or other similar
benefit arrangement (a) that requires the completion of a minimum service period
and (b) in which the benefit does not increase with additional  years of service
accumulates  pursuant to Statement 43 for  arrangements  in which the individual
continues to be a compensated employee and is not required to perform duties for
the entity during the absence.  Therefore,  assuming all of the other conditions
of Statement 43 are met, the  compensation  cost associated with a sabbatical or
other similar benefit  arrangement  should be accrued over the requisite service
period. This Issue should be effective for fiscal years beginning after December
15, 2006.  An entity  should apply the  consensus  reached in this Issue through
either  (a)  a  change  in  accounting  principle  through  a  cumulative-effect
adjustment to retained  earnings or to other  components of equity or net assets
in the statement of financial  position at the beginning of the year of adoption
or (b) a change in accounting principle through retrospective application to all
prior  periods.  Earlier  adoption  of  this  guidance  is  permitted  as of the
beginning of an entity's fiscal year provided that the entity has not yet issued
financial statements,  including interim financial statements, for any period of
that fiscal year. The Company does not expect that pronouncement EITF Issue 06-2
will have any significant effect on future financial statements.

     EITF Issue 06-3,  How Sales Taxes  Collected from Customers and Remitted to
Governmental  Authorities  Should Be Presented in the Income Statement (That Is,
Gross Versus Net  Presentation).  The issue concerns whether various  non-income
taxes assessed by governmental  authorities  should be presented gross or net in
an entity's income statement. Non-income taxes on which this question has arisen
include  sales tax,  use tax,  excise tax,  value added tax,  and various  taxes
related to  specific  industries  (e.g.,  the  severance  tax in the oil and gas
industry and the franchise tax in the cable industry).  The Task Force reached a
consensus  that  the  scope  of  this  Issue  includes  any  tax  assessed  by a
governmental   authority  that  is  directly  imposed  on  a   revenue-producing
transaction between a seller and a customer and may include,  but is not limited
to, sales,  use, value added, and some excise taxes. The Task Force also reached
a  consensus  that the  presentation  of taxes on  either a gross  (included  in
revenues and costs) or a net  (excluded  from  revenues)  basis is an accounting
policy  decision  that should be disclosed  pursuant to Opinion 22. In addition,
for any such taxes that are reported on a gross basis, a company should disclose
the amounts of those taxes in interim and annual  financial  statements for each
period  for  which  an  income  statement  is  presented  if those  amounts  are
significant.  The  disclosure of those taxes can be done on an aggregate  basis.
The consensuses in this Issue should be applied to financial reports for interim

                                       40
<PAGE>
and  annual  reporting  periods  beginning  after  December  15,  2006.  Earlier
application is permitted.  The Company does not expect that  pronouncement  EITF
Issue 06-3 will have any significant effect on future financial statements.

     EITF Issue 06-4,  Accounting for Deferred  Compensation and  Postretirement
Benefit  Aspects of Endorsement  Split-Dollar  Life Insurance  Arrangements.  An
endorsement  split-dollar life insurance should be recognized as a liability for
future  benefits  in  accordance  with  Statement  106  (if,  in  substance,   a
postretirement  benefit  plan exists) or Opinion 12 (if the  arrangement  is, in
substance,   an  individual  deferred   compensation   contract)  based  on  the
substantive  agreement  with  the  employee.  The  consensus  in this  Issue  is
effective  for fiscal years  beginning  after  December  15, 2007,  with earlier
application permitted. The Company does not expect that pronouncement EITF Issue
06-4 will have any significant effect on future financial statements.

     EITF Issue 06-5,  Accounting  for Purchases of Life  Insurance--Determining
the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No.
85-4. A  policyholder  should  consider any additional  amounts  included in the
contractual terms of the policy in determining the amount that could be realized
under the insurance contract.  When it is probable (as is used in FASB Statement
No. 5) that  contractual  terms  would  limit the amount  that could be realized
under the  insurance  contract,  the Task Force  agreed  that these  contractual
limitations should be considered when determining the realizable amounts.  Those
amounts  that are  recoverable  by the  policyholder  at the  discretion  of the
insurance  company  should be  excluded  from the amount  that could be realized
under the  insurance  contract.  The  consensus in this Issue is  effective  for
fiscal years beginning after December 15, 2006. Earlier application is permitted
as of the  beginning  of a fiscal  year for  periods in which  interim or annual
financial  statements have not yet been issued. The Company does not expect that
pronouncement  EITF  Issue  06-5  will  have any  significant  effect  on future
financial statements.

ITEM 7 - FINANCIAL STATEMENTS

     The consolidated  financial  statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this report.

ITEM 8 -  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

   None.

ITEM 8A - 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 the end of the period covered by this report our disclosure
controls and procedures are effective to ensure that information  required to be
disclosed in our reports filed or submitted  under the Exchange Act is recorded,
processed,  summarized  and reported  within the time  periods  specified in the
SEC's  rules  and  forms,  and are also  effective  to ensure  that  information
required to be  disclosed in our reports  filed or submitted  under the Exchange
Act is accumulated and communicated to the Company's  management,  including the
principal executive and principal financial officers,  to allow timely decisions
regarding required disclosure.  During the fourth fiscal quarter, there has been
no change in our internal  control over financial  reporting that has materially
affected,  or is reasonably  likely to materially  affect,  our internal control
over financial reporting.

ITEM 8B - OTHER INFORMATION

   None.

                                       41
<PAGE>
                                    PART III

ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information  required by this Item will be included in our  definitive
Proxy Statement, which will be filed with the Securities and Exchange Commission
in connection with our 2007 Annual Meeting of Stockholders,  and is incorporated
herein by reference.

ITEM 10 - EXECUTIVE COMPENSATION

     The  information  required  by this Item is  intended to be included in our
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection  with our 2007 Annual Meeting of  Stockholders,  and is
incorporated herein by reference.

ITEM 11 - SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

     The  information  required  by this Item is  intended to be included in our
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection  with our 2007 Annual Meeting of  Stockholders,  and is
incorporated herein by reference.

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The  information  required  by this Item is  intended to be included in our
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection  with our 2007 Annual Meeting of  Stockholders,  and is
incorporated herein by reference.

ITEM 13 - EXHIBITS

(a) Financial Statements and Financial Statement Schedules
    ------------------------------------------------------
     (1) See Index to Consolidated Financial Statements on page F-1 at beginning
     of attached financial statements.
(b)  Exhibits
     --------
     (3)  (a) Restated Certificate of Incorporation (2)
          (b)  By-Laws (1)
     (4)  (a) Specimen Certificate for Common Stock (1)
          (b)  Certificate of Designation of the Preferred Stock, Series A (3)
          (c)  Certificate of Designation of the Preferred Stock, Series B (7)
          (d)  Form of  Rights  Agreement  dated as of March  9,  1995,  between
               Registrant and American Stock Transfer & Trust Company (5)
          (e)  Certificate of Designation of the Preferred Stock, Series C (8)
          (f)  Certificate of Designation of the Preferred Stock, Series D (15)
          (g)  Form of Stock Purchase Warrant (18)
     (10) (a) 1995 Stock Option Plan (6)
          (b)  Outside Director Stock Option Plan (6)
          (c)  Employment Agreement dated February 1, 1995, as amended March 12,
               1998, and October 10, 2001,  between Registrant and John C.K. Hui
               (4) (9) (13)
          (d)  1997 Stock Option Plan, as amended (10)
          (e)  1999 Stock Option Plan, as amended (11)
          (f)  2004 Stock Option/Stock Issuance Plan (12)
          (g)  Credit Agreement dated February 21, 2002,  between Registrant and
               Fleet National Bank (12)
          (h)  Securities   Purchase  Agreement  dated  June  21,  2007  between
               Registrant and Kerns Manufacturing Corp. (14)
          (i)  Form of Common Stock Purchase Warrant dated June 21, 2007 (14)
          (j)  Registration   Rights  Agreement  dated  June  21,  2007  between
               Registrant,  Kerns Manufacturing Corp. and Living Data Technology
               Corporation (14)
          (k)  Purchase and Sale Agreement dated June 1, 2007 between 180 Linden
               Avenue Corp. and 180 Linden Realty LLC
          (l)  Lease  Agreement  dated August 15, 2007 between 180 Linden Realty
               LLC and Registrant
     (21) Subsidiaries of the Registrant

                                       42
<PAGE>
<TABLE>
<CAPTION>
                                                                                         Percentage
                           Name                      State of Incorporation           Owned by Company
                           ----                      ----------------------           ----------------
                       <S>                                 <C>                           <C>
                       Viromedics, Inc.                    Delaware                       61%
                       180 Linden Avenue Corp.             New York                      100%
</TABLE>
     (23) Consent of Miller Ellin & Company, LLP
     (31) Certification  Reports pursuant to Securities  Exchange Act Rule 13a -
          14
     (32) Certification  Reports  pursuant to Section 906 of the  Sarbanes-Oxley
          Act of 2002


__________________________

     (1)  Incorporated by reference to Registration  Statement on Form S-18, No.
          33-24095.
     (2)  Incorporated by reference to  Registration  Statement on Form S-1, No.
          33-46377 (effective 7/12/94).
     (3)  Incorporated  by  reference  to Report on Form 8-K dated  November 14,
          1994.
     (4)  Incorporated  by  reference  to Report on Form 8-K dated  January  24,
          1995.
     (5)  Incorporated by reference to Registration  Statement on Form 8-A dated
          May 12, 1995.
     (6)  Incorporated  by reference to Notice of Annual Meeting of Stockholders
          dated December 5, 1995.
     (7)  Incorporated by reference to Report on Form 8-K dated June 25, 1997.
     (8)  Incorporated by reference to Report on Form 8-K dated April 30, 1998.
     (9)  Incorporated  by  reference to Report on Form 10-K for the fiscal year
          ended May 31, 1998.
     (10) Incorporated  by  reference to Report on Form 10-K for the fiscal year
          ended May 31, 1999
     (11) Incorporated  by  reference to Report on Form 10-K for the fiscal year
          ended May 31, 2000.
     (12) Incorporated  by reference to Notice of Annual Meeting of Stockholders
          dated October 28, 2004.
     (13) Incorporated  by  reference to Report on Form 10-K for the fiscal year
          ended May 31, 2002.
     (14) Incorporated by reference to Report on Form 8-K dated June 21, 2007.
     (15) Incorporated by reference to Report on Form 8-K dated July 19, 2005.

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The  information  required  by this Item is  intended to be included in our
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection  with our 2007 Annual Meeting of  Stockholders,  and is
incorporated herein by reference.

                                       43
<PAGE>
SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 23rd day of August, 2007.

                              VASOMEDICAL, INC.

                              By: /s/ John C.K. Hui
                              --------------------------------
                              John C.K. Hui
                              President, Chief Executive Officer, and Director
                              (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been  signed  below on August  23,  2007,  by the  following  persons in the
capacities indicated:


/s/ John C.K. Hui                      President, Chief Executive Officer, Chief
---------------------------            Technology Officer and Director
John C.K. Hui                          (Principal Executive Officer)

/s/ Abraham E. Cohen                   Chairman of the Board
---------------------------
Abraham E. Cohen

/s/ Tricia Efstathiou                  Chief Financial Officer (Principal
---------------------------            Financial and Accounting Officer)
Tricia Efstathiou

/s/Photios T. Paulson                  Director
---------------------------
Photios T. Paulson

/s/ Martin Zeiger                      Director
---------------------------
Martin Zeiger

/s/ Simon Srybnik                      Director
---------------------------
Simon Srybnik

/s/ Jun Ma                             Director
---------------------------
Jun Ma

/s/ Behnam Movaseghi                   Director
---------------------------
Behnam Movaseghi

/s/ Derek Enlander                     Director
---------------------------
Derek Enlander
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                        Page
                                                                                        ----
<S>                                                                                     <C>
Report of Independent Registered Public Accounting Firm                                 F-1

Financial Statements
         Consolidated Balance Sheet as of May 31, 2007                                  F-2

         Consolidated Statements of Operations for the years ended
         May 31, 2007 and 2006                                                          F-3

         Consolidated Statement of Changes in Stockholders'
         Equity for the years ended May 31, 2007 and 2006                               F-4

         Consolidated Statements of Cash Flows for the years ended
         May 31, 2007 and 2006                                                          F-5 to F-6

         Notes to Consolidated Financial Statements                                     F-7 to F-28
</TABLE>


<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Shareholders

  Vasomedical, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Vasomedical, Inc.
and Subsidiaries (the "Company") as of May 31, 2007 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended May 31, 2007 and 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Vasomedical, Inc. and Subsidiaries as of May 31, 2007 and the consolidated
results of their operations and their consolidated cash flow for the years ended
May 31, 2007 and 2006 in conformity with accounting principles generally
accepted in the United States of America.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedules,
Schedule II, Valuation and Qualifying Accounts, are presented for the purposes
of additional analysis and are not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.




                                /s/ Miller Ellin & Company, LLP
                                    CERTIFIED PUBLIC ACCOUNTANTS



New York, New York
August 23, 2007

                                      F - 1
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET
                                  May 31, 2007
<TABLE>
<CAPTION>
                                          ASSETS
<S>                                                                                                <C>
CURRENT ASSETS
     Cash                                                                                            $850,288
     Accounts receivable, net of an allowance for doubtful accounts of $364,809                       733,655
     Inventories, net                                                                               2,117,627
     Other current assets                                                                              34,761
                                                                                               ----------------
         Total current assets                                                                       3,736,331

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,836,938                               1,286,880
OTHER ASSETS                                                                                          260,240
                                                                                               ----------------
                                                                                                   $5,283,451
                                                                                               ================

                           LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                                           $575,793
     Current maturities of long-term debt and notes payable                                            65,769
     Sales tax payable                                                                                159,542
     Deferred revenue                                                                               1,286,726
     Accrued director fees                                                                             79,000
     Accrued warranty and customer support expenses                                                    15,750
     Accrued professional fees                                                                        143,521
     Accrued commissions                                                                               89,883
                                                                                               ----------------
         Total current liabilities                                                                  2,415,984

LONG-TERM DEBT                                                                                        785,246

DEFERRED REVENUE                                                                                      469,626

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; 65,198,592 shares
       issued and outstanding                                                                          65,198
     Additional paid-in capital                                                                    46,165,998
     Accumulated deficit                                                                          (44,618,601)
                                                                                               ----------------
         Total stockholders' equity                                                                 1,612,595
                                                                                               ----------------
                                                                                                   $5,283,451
                                                                                               ================
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                      F-2

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                     Years Ended May 31,
                                                                                 2007                2006
                                                                            ----------------    -----------------
<S>                                                                           <C>                  <C>
Revenues
   Equipment sales                                                            $2,561,064           $6,820,980
   Equipment rentals and services                                              3,793,019            4,122,017
                                                                            ----------------    -----------------
     Total revenues                                                            6,354,083           10,942,997

Cost of Sales and Services
   Cost of sales, equipment                                                    1,457,279            3,374,194
   Cost of equipment rentals and services                                      1,445,834            1,400,135
                                                                            ----------------    -----------------
     Total cost of sales and services                                          2,903,113            4,774,329
                                                                            ----------------    -----------------
   Gross profit                                                                3,450,970            6,168,668

Operating Expenses
   Selling, general and administrative                                         4,051,570            7,865,533
   Research and development                                                      933,316            1,805,667
   Provision for doubtful accounts                                                   423              110,317
                                                                            ----------------    -----------------
     Total operating expenses                                                  4,985,309            9,781,517
                                                                            ----------------    -----------------
Loss from operations                                                          (1,534,339)          (3,612,849)

Other Income (Expenses)
   Interest and financing costs                                                  (69,767)             (81,662)
   Interest and other income, net                                                 53,648               75,508
                                                                            ----------------    -----------------
     Total other income (expenses)                                               (16,119)              (6,154)
                                                                            ----------------    -----------------

Loss before income taxes                                                      (1,550,458)          (3,619,003)
   Income tax expense, net                                                       (20,608)          (7,082,138)
                                                                            ----------------    -----------------
Net Loss                                                                      (1,571,066)         (10,701,141)
   Preferred stock dividend                                                           --             (877,870)
                                                                            ----------------    -----------------
Net Loss Attributable to Common Shareholders                                 $(1,571,066)        $(11,579,011)
                                                                            ================    =================


Net loss per common share
     - basic                                                                      $(0.02)              $(0.19)
                                                                            ================    =================
     - diluted                                                                    $(0.02)              $(0.19)
                                                                            ================    =================

Weighted average common shares outstanding
     - basic                                                                  65,198,592           61,351,323
                                                                            ================    =================
     - diluted                                                                65,198,592           61,351,323
                                                                            ================    =================
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                      F-3
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                              Additional                      Total
                                    Preferred Stock         Common Stock       Paid-in-    Accumulated      Stockholders'
                                   Share     Amount      Shares      Amount    Capital       Deficit          Equity
                                  --------- ---------  ----------  ---------  -----------  -------------  --------------
<S>                                <C>           <C>   <C>          <C>       <C>          <C>              <C>
Balance at May 31, 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 the
     issuance of Series
     D convertible preferred
     stock issued                                                                 411,158                       411,158
  Beneficial conversion
     feature embedded in
     Series D convertible
     preferred stock                                                              786,247                       786,247
  Dividends of Series D
     convertible preferred
     stock                                                                       (877,870)                     (877,870)
  Issuance of common
     stock in connection with
     the conversion of Series
     D convertible
     preferred stock               (25,000)      (250)  6,112,209     6,112        (5,862)                           --
  Issuance of common
     stock in payment of
     outside director fees                                225,000       225       101,025                       101,250
  Issuance of common stock
     in payment of a
     consulting fee                                       308,695       309       150,691                       151,000
  Issuance of stock options
     in payment of a
     consulting fee                                                                 8,256                         8,256
  Reserve for tax benefit
     of stock options and
     warrants exercised
     in prior years                                                            (7,489,000)                   (7,489,000)
  Net loss                                                                                  (10,701,141)    (10,701,141)
                                  --------- ---------  ----------  ---------  -----------  -------------  --------------
Balance at May 31, 2006                 --        --   65,198,592   $65,198   $46,148,493  $(43,047,535)     $3,166,156

Issuance of stock options
     in payment of
     outside director
     fees                                                                          11,445                        11,445
Issuance of stock options
     in payment of salaries
     to company officers                                                            6,060                         6,060
  Net loss                                                                                   (1,571,066)     (1,571,066)
                                  --------- ---------  ----------  ---------  -----------  -------------  --------------
Balance at May 31, 2007                 --       $--   65,198,592   $65,198   $46,165,998  $(44,618,601)     $1,612,595
</TABLE>
    The accompanying notes are an integral part of this financial statement.

                                      F-4

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                 Years ended May 31,
                                                                               2007               2006
                                                                           -------------     ---------------
<S>                                                                        <C>               <C>
Cash flows from operating activities
     Net loss                                                              $(1,571,066)      $(10,701,141)
                                                                           -------------     ---------------
     Adjustments to reconcile net loss to net cash used in
       operating activities
         Depreciation and amortization                                         315,269           518,176
         Provision for doubtful accounts, net of write-offs                    (38,178)          110,317
         Reserve for excess and obsolete inventory                                  --           152,004
         Deferred income taxes                                                      --         7,093,000
         Common stock issued for services                                           --           126,250
         Stock options granted for services                                     17,505             8,256
         Changes in operating assets and liabilities
              Accounts receivable                                              147,805           938,403
              Inventories                                                      606,580           699,371
              Other current assets                                             265,408           115,853
              Other assets                                                      (1,072)          (28,883)
              Accounts payable, accrued expenses, deferred
                revenues - ST, and other current
                liabilities                                                   (721,970)       (1,070,978)
              Deferred revenues - LT and other liabilities                    (253,575)         (236,501)
                                                                           -------------     ---------------
                                                                               337,772         8,425,268
                                                                           -------------     ---------------
     Net cash used in operating activities                                  (1,233,294)       (2,275,873)
                                                                           -------------     ---------------

     Cash flows provided by (used in) investing activities
         Redemptions of certificates and deposit and
           treasury bills                                                           --         1,758,443
         Purchase of property and equipment                                    (10,593)               --
                                                                           -------------     ---------------
     Net cash provided by  (used in) investing activities                      (10,593)        1,758,443
                                                                           -------------     ---------------

     Cash flows provided by (used in) financing activities
         Payments on long term debt and notes payable                         (291,603)         (447,363)
         Payments of preferred stock dividends                                      --           (91,623)
         Payments of preferred stock issue costs                                    --          (349,382)
         Proceeds from notes payable                                                --           302,052
         Proceeds from sale of convertible preferred stock                          --         2,500,000
                                                                           -------------     ---------------
     Net cash provided by (used in) financing activities                      (291,603)        1,913,684
                                                                           -------------     ---------------

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS                                                                 (1,535,490)        1,396,254
                                                                           -------------     ---------------
     Cash and cash equivalents - beginning of year                           2,385,778           989,524
                                                                           -------------     ---------------
     Cash - end of year                                                       $850,288        $2,385,778
                                                                           =============     ===============
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>

                                                                          Years ended May 31,
                                                                         2007            2006
                                                                    --------------- -------------
<S>                                                                   <C>              <C>
NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
   Inventories  transferred  (to)/from property and equipment,
       attributable to operating leases - net                         $(24,534)        $190,776
     Issue of note for purchase of insurance policy                   $192,120         $302,052
     Preferred stock dividends                                             $--         $786,247
     Preferred issue costs                                                 $--         $227,087

 SUPPLEMENTAL DISCLOSURES:
     Interest paid                                                     $69,767          $81,662
     Income taxes paid                                                 $10,079          $22,923

</TABLE>

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

                                      F-6
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


NOTE A - ORGANIZATION AND PLAN OF OPERATIONS


     Vasomedical,  Inc. was  incorporated  in Delaware in July 1987.  Unless the
context requires  otherwise,  all references to "we",  "our",  "us",  "Company",
"registrant",  "Vasomedical"  or "management"  refer to Vasomedical Inc. and its
subsidiaries.   Since  1995,  we  have  been  primarily  engaged  in  designing,
manufacturing,    marketing   and   supporting    EECP(R)   enhanced    external
counterpulsation  systems based on our unique proprietary  technology  currently
indicated  for use in cases of stable or unstable  angina  (i.e.,  chest  pain),
congestive heart failure (CHF), acute myocardial infarction (i.e., heart attack,
(MI)) and  cardiogenic  shock.  The EECP(R)  therapy  system 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 helps to restore  systemic  vascular  function.  The
therapy  also  increases  blood flow and oxygen  supply to the heart  muscle and
other organs and decreases the heart's workload and need for oxygen,  while also
improving  function of the endothelium,  the lining of blood vessels  throughout
the body, lessening resistance to blood flow. We provide hospitals,  clinics and
physician private practices with EECP(R) equipment,  treatment  guidance,  and a
staff training and equipment  maintenance  program  designed to provide  optimal
patient outcomes.  EECP(R) is a registered trademark for Vasomedical's  enhanced
external     counterpulsation    systems.    For    more    information    visit
www.vasomedical.com.

     We have Food and Drug Administration  (FDA) clearance to market our EECP(R)
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 chronic stable angina
and congestive heart failure.  Medicare and other  third-party  payers currently
reimburse  for the  treatment of angina  symptoms in patients  with  moderate to
severe  symptoms  who are  refractory  to  medications  and not  candidates  for
invasive  procedures,  including  patients with serious  comorbidities,  such as
heart failure, diabetes, peripheral vascular disease, etc. Patients with primary
diagnoses of heart failure, diabetes, peripheral vascular disease, etc. are also
reimbursed  under  the  same  criteria,  provided  the  primary  indication  for
treatment with EECP(R) therapy is angina symptoms.

     During the last two fiscal  years  ended May 31,  2007 and 2006 we incurred
large operating  losses.  The Company has attempted to achieve  profitability by
reducing operating costs and halting the trend of declining  revenue,  to reduce
cash usage through  bringing its cost structure more into alignment with current
revenues by engaging in restructurings during January 2006, March 2007 and April
2007 to  substantially  reduce  personnel  and spending on sales,  marketing and
development projects. In addition, the Company was seeking to obtain a strategic
alliance within the sales and marketing areas and/or to raise additional capital
through public or private equity or debt financings.

     Subsequent to May 31, 2007 the following events took place which allowed us
to raise  additional  capital through a private equity financing and by the sale
of our facility under a leaseback agreement.

     o    On June 21, 2007 we entered into a Securities  Purchase Agreement with
          Kerns Manufacturing Corp. ("Kerns").  Concurrently with our entry into
          the Securities Purchase Agreement, we also entered into a Distribution
          Agreement  and  a  Supplier  Agreement  with  Living  Data  Technology
          Corporation, an affiliate of Kerns ("Living Data").

          We  sold to  Kerns  pursuant  to the  Securities  Purchase  Agreement,
          21,428,572  shares  of our  common  stock  at $.07  per  share  for an
          aggregate  of  $1,500,000  as well a  five-year  warrant  to  purchase
          4,285,714  shares of our common stock at an initial  exercise price of
          $.08 per  share  (the  "Warrant").  We also  have an option to sell an
          additional  $1  million of our common  stock to Kerns.  The  agreement
          further  provided for the appointment to our Board of Directors of two
          representatives of Kerns. In furtherance  thereof,  Mr. Jun Ma and Mr.
          Simon  Srybnik,  Chairman  of both  Kerns and Living  Data,  have been

                                      F-7
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


          appointed  members  of  our  Board  of  Directors.   Pursuant  to  the
          Distribution  Agreement,  we have become the exclusive  distributor in
          the United States of the AngioNew ECP systems  manufactured  by Living
          Data. As additional  consideration  for such  agreement,  we agreed to
          issue an  additional  6,990,840  shares of our common  stock to Living
          Data. Pursuant to the Supplier Agreement,  Living Data now will be the
          exclusive  supplier  to us of the ECP therapy  systems  that we market
          under the registered trademark EECP(R). The Distribution Agreement and
          the Supplier Agreement each have an initial term extending through May
          31, 2012.

          Pursuant to a Registration  Rights Agreement,  we granted to Kerns and
          Living Data, subject to certain restrictions,  "piggyback registration
          rights"  covering  the  shares  sold to  Kerns  as well as the  shares
          issuable  upon exercise of the Warrant and the shares issued to Living
          Data.

     o    On August 15, 2007 we sold our  facility  under a five-year  leaseback
          agreement  for  $1.4  million.  The net  proceeds  from  the  sale was
          approximately  $425,000 after payment in full of the two secured notes
          on our facility,  brokers fees,  closing  costs,  and the opening of a
          certificate  of deposit in accordance  with the  provisions of the new
          lease.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     A summary of the significant  accounting policies  consistently  applied in
the preparation of the consolidated financial statements follows:

Reclassifications

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

Principles of Consolidation

     The consolidated  financial statements include the accounts of the Company,
its  wholly-owned  subsidiary  and  its  inactive   majority-owned   subsidiary.
Significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

     The Company recognizes  revenue when persuasive  evidence of an arrangement
exists,  delivery has occurred or service has been rendered,  the price is fixed
or determinable and collectibility is reasonably  assured. In the United States,
we recognize revenue from the sale of our EECP(R) systems in the period in which
we deliver  the system to the  customer.  Revenue  from the sale of our  EECP(R)
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(R) 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(R) systems includes
a combination of three elements that qualify as separate units of accounting:
     i.   EECP(R) equipment sale,

                                       F-8
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


     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,  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(R) 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(R)  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 a few 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  service  revenue  at the time the  in-service  and  training  is
completed and the amount related to service  arrangements is recognized  ratably
as service revenue 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 equipment sales as incurred.

     The Company  also  recognizes  revenue  generated  from  servicing  EECP(R)
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(R)  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.

     Revenues  from  the  sale of  EECP(R)  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  parts when the  equipment  sale is  recognized.

     The Company has also entered into lease agreements for our EECP(R) 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(R) 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 May 31, 2007.

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 that remain  outstanding  longer
than the contractual  payment terms are considered past due.  Estimates are used

                                      F-9
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


in  determining  the  allowance  for doubtful  accounts  based on the  Company's
historical  collections   experience,   current  trends,  credit  policy  and  a
percentage of its 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
our 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.

     The  changes  in the  Company's  allowance  for  doubtful  accounts  are as
follows:
<TABLE>
<CAPTION>
                                                     May 31, 2007
                                                  -------------------
<S>                                                    <C>
Beginning balance                                      $410,691
    (Reversal)/Provision for losses on
    accounts receivable                                  (7,421)
    Direct write-offs, net of recoveries                (38,461)
                                                  -------------------
Ending balance                                         $364,809
                                                  ===================
</TABLE>
Concentrations of Credit Risk

     We market the EECP(R) system principally to hospitals and physician private
practices.  We perform credit evaluations of our customers'  financial condition
and, as a  consequence,  believe  that our  receivable  credit risk  exposure is
limited. Receivables are generally due 30 to 90 days from shipment. For the year
ended May 31, 2007 no customer accounted for 10% or more of revenues or accounts
receivable.

     Our revenues were derived from the following geographic areas:
<TABLE>
<CAPTION>
                                                             Years Ended May 31,
                                                   -----------------------------------
                                                        2007                2006
                                                   ---------------     ---------------
<S>                                                  <C>                <C>
Domestic (United States)                             $5,363,138         $10,079,789
Non-domestic (foreign)                                  990,945             863,208
                                                   ---------------     ---------------
                                                     $6,354,083         $10,942,997
                                                   ===============     ===============
</TABLE>
Cash and Cash Equivalents

     Cash and cash  equivalents  represent  cash and  short-term,  highly liquid
investments in certificates of deposit,  treasury bills, money market funds, and
investment  grade  commercial  paper issued by major  corporations and financial
institutions  that generally have  maturities of three months or less.  Dividend
and interest income are recognized  when earned.  The cost of securities sold is
calculated using the specific identification method.

Certificates of Deposit

     Included in this caption are all certificates of deposit that have original
maturities  of greater  than three  months.  Realized and  unrealized  gains and
losses and declines in value,  if any,  are  included in earnings.  Dividend and
interest  income are  recognized  when earned.  The cost of  securities  sold is
calculated using the specific identification method.

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(R)  systems  at  various  field  locations  for  demonstration,   training,
evaluation,  and other similar purposes at no charge.  The cost of these EECP(R)
systems is  transferred to property and equipment and is amortized over the next

                                      F-10
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006



two to five years.  The Company  records the cost of  refurbished  components of
EECP(R) systems and critical  components at cost plus the cost of refurbishment.
The Company  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 its 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 $3,000 more in fixed
production  overhead into inventory during fiscal year 2007 and $256,000 less in
fixed production overhead into inventory during fiscal year 2006.

Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation and
amortization.   Major  improvements  are  capitalized  and  minor  replacements,
maintenance  and repairs are charged to expense as incurred.  Upon retirement or
disposal of assets,  the cost and related  accumulated  depreciation are removed
from  the  consolidated  balance  sheets.  Depreciation  is  provided  over  the
estimated useful lives of the assets, which range from two to thirty-nine years,
on a straight-line  basis.  Accelerated methods of depreciation are used for tax
purposes. We amortize leasehold improvements over the useful life of the related
leasehold improvement or the life of the related lease,  whichever is less. (See
Note E)

Deferred Revenues

     We record revenue on extended  service  contracts  ratably over the term of
the related  warranty  contracts.  Effective  September 1, 2003,  we adopted the
provisions of EITF 00-21. Upon adoption of the provisions of EITF 00-21 we began
to  defer  revenue  related  to  EECP(R)  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. (See Note F)

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 do not
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 of providing a parts only warranty
when the equipment sale is recognized.

     The factors affecting our warranty  liability  includes the number of units
sold and the  historical  and  anticipated  rates of claims and costs per claim.
(See Note G)

Research and Development

     Research and development costs  attributable to development are expensed as
incurred.  Included in research and development  costs is  amortization  expense
related to the  capiltalized  cost of EECP(R)  systems  under loan for  clinical
trials.

                                      F-11
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


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  changes,  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
"realizability"  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  assets  and   liabilities   are  classified  as  current  or
non-current  based on the  classification  of the related asset or liability for
financial reporting. A deferred tax asset or liability 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 the Company  previously
recorded,  and then  reversed  fully in fiscal  2006,  related  primarily to the
realization of net operating loss carryforwards,  of which the allocation of the
current  portion,  if any,  reflected  the  expected  utilization  of  such  net
operating losses for the following  twelve months.  Such allocation was based on
the Company's  internal  financial forecast and may be subject to revision based
upon actual results. (See Note L)

Shipping and Handling Costs

     All shipping  and handling  expenses are incurred as a component of cost of
sales.  Amounts  billed to customers  related to shipping and handling costs are
included as a component of sales.

Fair Value of Financial Instruments

     The carrying amounts of cash and cash equivalents,  accounts receivable and
accounts payable approximate fair value due to the short-term  maturities of the
instruments.  The carrying amount of the financing receivables approximates fair
value as the interest  rates implicit in the leases  approximate  current market
interest rates for similar financial instruments.  The carrying amounts of notes
payable approximates their fair value as the interest rates of these instruments
approximate the interest rates  available on instruments  with similar terms and
maturities.

Use of Estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the amounts reported in
the financial  statements  and  accompanying  notes.  Significant  estimates and
assumptions  relate to estimates of  collectibility  of accounts  receivable and
financing  receivables,  the  realizability  of  deferred  tax  assets,  and the
adequacy of inventory and warranty  reserves.  Actual  results could differ from
those estimates.

Net Loss Per Common Share

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

                                      F-12
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006



Stock-Based Employee Compensation

     As of June 1, 2006 the Company has adopted Statement of Financial Standards
No. 123 (revised  2004),  Share-Based  Payment ("SFAS No. 123 (R)"),  which is a
revision  of SFAS No.  123.  SFAS No. 123 (R)  supersedes  APB  Opinion  No. 25,
Accounting  for Stock Issued to  Employees,  and amends FASB  Statement  No. 95,
Statement of Cash Flows.  Generally,  the approach to accounting for share-based
payments in SFAS No.  123(R) is similar to the  approach  described  in SFAS No.
123.  However,  SFAS No. 123(R) requires all share-based  payments to employees,
including  grants of employee stock  options,  to be recognized in the financial
statements based on their fair values. Pro forma disclosure of the fair value of
share-based  payments  is  no  longer  an  alternative  to  financial  statement
recognition.

     Prior to first quarter of fiscal 2007 the Company accounted 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 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 prior to fiscal 2007.

     The following  table  illustrates the effect on net income and earnings per
share had we 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>
                                                      May 31, 2006
                                                     ----------------
<S>                                                    <C>
Net loss attributable to common shareholders,
as reported                                            $(11,579,011)
Deduct: Total stock-based employee compensation
   expense determined under fair value-based
   method for all awards                                 (2,173,828)
                                                     ----------------
Pro forma net loss                                     $(13,752,839)
                                                     ================

Loss per share:
    Basic and diluted - as reported                          $(0.19)
                                                     ================
    Basic and diluted - pro forma                            $(0.22)
                                                     ================
</TABLE>
     During the  twelve-month  period ended May 31, 2007, the Board of Directors
granted  non-qualified stock options under the 1997 Stock Option/Stock  Issuance
Plan to one director to purchase an aggregate of 150,000 shares of common stock,
at an exercise price of $.09 per share, and granted  non-qualified stock options
under the 1999 Stock  Option/Stock  Issuance Plan to three directors to purchase
an aggregate of 450,000 shares of common stock, at an exercise price of $.09 per
share, and granted non-qualified stock options under the 2004 Stock Option/Stock
Issuance  Plan to one  officer to  purchase an  aggregate  of 200,000  shares of
common stock, at an exercise price of $.11 per share, which represented the fair
market  value of the  underlying  common  stock  at the  time of the  respective
grants. These options vest over a two-year period, and expire ten years from the
date of grant.

     Stock-based  compensation  expense  recognized  under  SFAS  123(R) for the
fiscal year ended May 31, 2007 was $17,505,  which  comprised  the fair value of
the stock options  issued during the year.  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

                                      F-13
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


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.

     The fair value of the Company's stock-based awards were estimated using the
following weighted-average assumptions:
<TABLE>
<CAPTION>
                                                          Years Ended May 31,
                                                       2007               2006
                                                  ---------------    --------------
<S>                                                     <C>                <C>
Expected life (years)                                     5                  5
Expected volatility                                      99%                83%
Risk-free interest rate                                 4.5%               4.5%
Expected dividend yield                                 0.0%               0.0%
</TABLE>


Recently Issued Accounting Pronouncements Not Yet Effective

     Statement of Financial Accounting Standards No. 155, Accounting for Certain
Hybrid Financial  Instruments--an  amendment of FASB Statements No. 133 and 140,
was issued in  February  2006 and is  effective  for all  financial  instruments
acquired or issued  after the  beginning  of an entity's  first fiscal year that
begins after September 15, 2006.  Certain parts of this Statement may be applied
prior to the adoption of this Statement. Earlier adoption is permitted as of the
beginning  of an entity's  fiscal  year,  provided the entity has not yet issued
financial statements,  including financial statements for any interim period for
that fiscal year.  Provisions of this  Statement  may be applied to  instruments
that an  entity  holds at the date of  adoption  on an  instrument-by-instrument
basis.  The  Company  does not  expect  that SFAS 155 will have any  significant
effect on future financial statements.

     Statement  of  Financial  Accounting  Standards  No.  156,  Accounting  for
Servicing of Financial  Assets--an amendment of FASB Statement No. 140, pertains
to the servicing of financial  assets and was issued in March 2006 and should be
adopted as of the beginning of its first fiscal year that begins after September
15,  2006.  Earlier  adoption is  permitted  as of the  beginning of an entity's
fiscal  year,  provided  the  entity has not yet  issued  financial  statements,
including interim financial statements,  for any period of that fiscal year. The
Company does not expect that SFAS 156 will have any significant effect on future
financial statements.

     Statement  of  Financial   Accounting   Standards   No.  157,   Fair  Value
Measurements.  This  Statement  defines fair value,  establishes a framework for
measuring fair value,  and expands  disclosures  about fair value  measurements.
This Statement  applies under other  accounting  pronouncements  that require or
permit fair value measurements,  the Board having previously  concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly,  this Statement  does not require any new fair value  measurements.
However,  for some  entities,  the  application  of this  Statement  will change
current  practice.  This Statement is effective for financial  statements issued
for fiscal years  beginning  after November 15, 2007, and interim periods within
those  fiscal  years.  Earlier  application  is  encouraged,  provided  that the
reporting entity has not yet issued  financial  statements for that fiscal year,
including  financial  statements  for an interim period within that fiscal year.
The Company  does not expect that SFAS 157 will have any  significant  effect on
future financial statements.

     Statement of Financial Accounting Standards No. 158, Employers'  Accounting
for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements  No. 87, 88, 106, and 132(R).  This Statement  requires  employers to
recognize  the   overfunded  or   underfunded   status  of  a  defined   benefit
postretirement  plan (other than a multiemployer  plan) as an asset or liability
in its statement of financial  position and to recognize  changes in that funded
status in the year in which the changes occur through  comprehensive income of a
business  entity or  changes  in  unrestricted  net  assets of a  not-for-profit

                                      F-14
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


organization.  This  Statement  also  requires  employers  to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited  exceptions.

     An employer with publicly traded equity securities is required to initially
recognize  the funded  status of a defined  benefit  postretirement  plan and to
provide the required  disclosures  as of the end of the fiscal year ending after
December 15, 2006.

     An  employer  without  publicly  traded  equity  securities  is required to
recognize  the funded  status of a defined  benefit  postretirement  plan and to
provide the required  disclosures  as of the end of the fiscal year ending after
June 15, 2007.

     Statement of Financial  Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial  Liabilities - Including an Amendment to FASB
Statement No. 115.  This  Statement  permits  entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve  financial  reporting  by providing  entities  with the  opportunity  to
mitigate  volatility in reported earnings caused by measuring related assets and
liabilities  differently  without  having  to  apply  complex  hedge  accounting
provisions.  This  Statement  is  expected  to  expand  the  use of  fair  value
measurement,   which  is  consistent  with  the  Board's  long-term  measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity's  first fiscal year that begins after November
15, 2007,  and interim  periods  within those fiscal  years.  Early  adoption is
permitted as of the beginning of a fiscal year that begins on or before November
15,  2007,  provided  the entity  also  elects to apply the  provisions  of FASB
Statement  No. 157,  Fair Value  Measurements.  The Company does not expect that
SFAS 159 will have any significant effect on future financial statements.

     FASB Staff  Position No. FIN 46(R)-6,  Determining  the  Variability  to Be
Considered in Applying FASB  Interpretation  No. 46(R). This FASB Staff Position
(FSP) addresses how a reporting  enterprise  should determine the variability to
be considered in applying FASB  Interpretation  No. 46 (revised  December 2003),
Consolidation of Variable Interest Entities.  The variability that is considered
in applying  Interpretation  46(R) affects the  determination of (a) whether the
entity is a variable  interest  entity (VIE),  (b) which  interests are variable
interests1  in the  entity,  and  (c)  which  party,  if  any,  is  the  primary
beneficiary of the VIE. That variability will affect any calculation of expected
losses and  expected  residual  returns,  if such a  calculation  is  necessary.
Retrospective  application,  if elected, must be completed no later than the end
of the first annual  reporting  period  ending after July 15, 2006.  The Company
does not expect  that FIN 46(R  )-6will  have any  significant  effect on future
financial statements.


     FASB Staff  Position (FSP) No. FTB 85-4-1,  Accounting for Life  Settlement
Contracts  by  Third-Party  Investors,  was  posted  in  March  27,  2006 and is
effective for fiscal years  beginning  after June 15, 2006. It provides  initial
and subsequent  measurement  guidance and financial  statement  presentation and
disclosure guidance for investments by third-party  investors in life settlement
contracts.  This FSP also amends certain  provisions of FASB Technical  Bulletin
No. 85-4,  Accounting  for Purchases of Life  Insurance,  and FASB Statement No.
133, Accounting for Derivative  Instruments and Hedging Activities.  The Company
does not  expect  that FSP  85-4-1  will have any  significant  effect on future
financial statements.

     FASB Staff  Position  (FSP) No. AUG AIR-1,  Accounting  for  Planned  Major
Maintenance Activities, was posted on September 8, 2006 and is effective for the
first fiscal year  beginning  after  December 15, 2006.  This FSP  addresses the
accounting  for  planned  major   maintenance   activities  and  amends  certain
provisions  in the AICPA  Industry  Audit  Guide,  Audits of  Airlines  (Airline
Guide), and APB Opinion No. 28, Interim Financial  Reporting.  The Airline Guide
permits four  alternative  methods of accounting  for planned major  maintenance
activities:   direct  expense,   built-in   overhaul,   deferral,   and  accrual
(accrue-in-advance).  Those methods are widely used by other industries. The FSP
prohibits the use of the  accrue-in-advance  method. The Company does not expect
that FSP No.  AUG AIR-1  will have any  significant  effect on future  financial
statements.

                                      F-15
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


     FASB Staff Position No. FAS 126-1,  Applicability of Certain Disclosure and
Interim  Reporting  Requirements for Obligors for Conduit Debt  Securities,  was
posted on  October  25,  2006.  This FASB Staff  Position  (FSP)  clarifies  the
definition  of a public  entity  in  certain  accounting  standards  to  include
entities  that are conduit bond  obligors for conduit debt  securities  that are
traded  in a  public  market.  The  guidance  in  this  FSP  is  to  be  applied
prospectively  in fiscal periods  beginning after December 15, 2006. The Company
does not  expect  that FAS  126-1  will  have any  significant  effect on future
financial statements.

     The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes--an  Interpretation  of FASB Statement No. 109 (FIN 48) in June 2006. This
Interpretation  primarily relates to tax positions taken or expected to be taken
in a tax return and clarifies the  accounting  for  uncertainty  in income taxes
recognized in an enterprise's  financial  statements.  Under this Interpretation
the effects of a tax position would be recognized or  derecognized  depending on
what outcome is more likely than not to occur with respect to the position.  The
Interpretation also provides guidance on derecognition, classification, interest
and penalties,  accounting in interim periods,  disclosure,  and transition.  It
requires  that all tax  positions  be evaluated  using the  more-likely-than-not
recognition threshold,  and that the enterprise should presume that the position
will be  examined  by the  appropriate  taxing  authority  that  would have full
knowledge  of all  relevant  information  for  recognition,  derecognition,  and
measurement using consistent criteria. Disclosures are required about the effect
of  unrecognized  tax benefits  related to tax positions as well as  information
about the  nature of the  uncertainties  related  to tax  positions  where it is
reasonably  possible that changes in the tax provision will occur in the next 12
months  of  this   Interpretation   will  provide  more  information  about  the
uncertainty  in income  tax  assets  and  liabilities.  This  Interpretation  is
effective  for  fiscal  years  beginning   after  December  15,  2006.   Earlier
application  of the  provisions  of this  Interpretation  is  encouraged  if the
enterprise has not yet issued financial statements,  including interim financial
statements,  in the  period  this  Interpretation  is  adopted.  The  Company is
currently  evaluating  whether the adoption of Interpretation No. 48 will have a
material effect on our consolidated  financial  position,  results of operations
and cash flows.

     EITF Issue 05-1, Accounting for the Conversion of an Instrument That Became
Convertible upon the Issuer's Exercise of a Call Option.  The Task Force reached
a consensus that the issuance of equity  securities to settle a debt  instrument
(pursuant to the instrument's original conversion terms) that became convertible
upon the  issuer's  exercise  of a call  option  should  be  accounted  for as a
conversion if the debt instrument contained a substantive  conversion feature as
of its  issuance  date,  as defined  herein.  That is, no gain or loss should be
recognized related to the equity securities issued to settle the instrument. The
issuance  of  equity   securities  to  settle  a  debt  instrument  that  became
convertible upon the issuer's  exercise of a call option should be accounted for
as a debt  extinguishment  if the debt  instrument did not contain a substantive
conversion  feature  as of its  issuance  date.  That is,  the fair value of the
equity  securities  issued should be considered a component of the reacquisition
price of the debt.  This Issue  applies to all  conversions  within the scope of
this Issue that result from the  exercise of call  options and is  effective  in
interim or annual  reporting  periods  beginning  after June 28, 2006 (the Board
ratification date of the consensus),  irrespective of whether the instrument was
entered  into prior or  subsequent  to Board  ratification  of this  Issue.  For
instruments issued prior to the effective date of this consensus, the assessment
as to whether a  substantive  conversion  feature  exists at issuance  should be
based  only  on  assumptions,  considerations,  and/or  marketplace  information
available  as  of  the  issuance   date.   The  Company  does  not  expect  that
pronouncement  EITF  Issue  05-1  will  have any  significant  effect  on future
financial statements.

     EITF Issue 06-1,  Accounting for Consideration  Given by a Service Provider
to a  Manufacturer  or Reseller of Equipment  Necessary for an  End-Customer  to
Receive  Service from the Service  Provider.  The Task Force reached a consensus
that if the  consideration  given by a service  provider  to a  manufacturer  or
reseller  (that  is  not a  customer  of the  service  provider)  can be  linked
contractually  to the benefit  received by the service  provider's  customer,  a
service  provider  should  use the  guidance  in  Issue  01-9 to  determine  the
characterization of the consideration  (that is, "cash  consideration" or "other
than  cash"   consideration).   Issue  01-9   presumes  that  an  entity  should
characterize  "cash  consideration"  as a reduction of revenue  unless an entity
meets the  requirements of paragraph 9 of Issue 01-9.  Under Issue 01-9,  "other
than cash" consideration should be characterized as an expense. In applying that
guidance,  the service provider should characterize the consideration given to a
third-party manufacturer or reseller based on the form of consideration directed
by the service provider to be provided to the service  provider's  customer.  If
the form of the  consideration  is  directed  to be  anything  other  than "cash

                                      F-16
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


consideration"  (as defined in Issue 01-9),  then the form of the  consideration
should be  characterized  as "other  than cash"  consideration.  If the  service
provider does not control the form of the consideration  provided to the service
provider's  customer,  the consideration  should be characterized as "other than
cash"  consideration.  In reaching this conclusion,  Task Force members observed
that  consideration  paid by a  service  provider  that  results  in a  customer
receiving a reduced price on equipment purchased from a manufacturer or reseller
should be  characterized  as "other  than cash"  consideration  for  purposes of
applying  Issue 01-9.  The  consensus in this Issue is  effective  for the first
annual reporting period  beginning after June 15, 2007.  Earlier  application is
permitted  for  financial  statements  that have not yet been  issued.  Entities
should recognize the effects of applying the consensus in this Issue as a change
in accounting principle through  retrospective  application to all prior periods
unless  it is  impracticable  to  do  so.  The  Company  does  not  expect  that
pronouncement  EITF  Issue  06-1  will  have any  significant  effect  on future
financial statements.

     EITF Issue 06-2, Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43,  "Accounting  for Compensated  Absences".  An
employer  may provide  its  employees  with  sabbatical  leave or other  similar
benefits.  Sabbatical leave involves an employee receiving time off upon working
at the  employer  for a  specific  period  of time.  When an  employer  provides
sabbatical leave or another similar benefit, the employer must determine whether
such benefit  should be accrued based on the guidance in FASB  Statement No. 43,
Accounting for Compensated Absences.  The Task Force reached a consensus that an
employee's  right to a  compensated  absence under a sabbatical or other similar
benefit arrangement (a) that requires the completion of a minimum service period
and (b) in which the benefit does not increase with additional  years of service
accumulates  pursuant to Statement 43 for  arrangements  in which the individual
continues to be a compensated employee and is not required to perform duties for
the entity during the absence.  Therefore,  assuming all of the other conditions
of Statement 43 are met, the  compensation  cost associated with a sabbatical or
other similar benefit  arrangement  should be accrued over the requisite service
period. This Issue should be effective for fiscal years beginning after December
15, 2006.  An entity  should apply the  consensus  reached in this Issue through
either  (a)  a  change  in  accounting  principle  through  a  cumulative-effect
adjustment to retained  earnings or to other  components of equity or net assets
in the statement of financial  position at the beginning of the year of adoption
or (b) a change in accounting principle through retrospective application to all
prior  periods.  Earlier  adoption  of  this  guidance  is  permitted  as of the
beginning of an entity's fiscal year provided that the entity has not yet issued
financial statements,  including interim financial statements, for any period of
that fiscal year. The Company does not expect that pronouncement EITF Issue 06-2
will have any significant effect on future financial statements.

     EITF Issue 06-3,  How Sales Taxes  Collected from Customers and Remitted to
Governmental  Authorities  Should Be Presented in the Income Statement (That Is,
Gross Versus Net  Presentation).  The issue concerns whether various  non-income
taxes assessed by governmental  authorities  should be presented gross or net in
an entity's income statement. Non-income taxes on which this question has arisen
include  sales tax,  use tax,  excise tax,  value added tax,  and various  taxes
related to  specific  industries  (e.g.,  the  severance  tax in the oil and gas
industry and the franchise tax in the cable industry).  The Task Force reached a
consensus  that  the  scope  of  this  Issue  includes  any  tax  assessed  by a
governmental   authority  that  is  directly  imposed  on  a   revenue-producing
transaction between a seller and a customer and may include,  but is not limited
to, sales,  use, value added, and some excise taxes. The Task Force also reached
a  consensus  that the  presentation  of taxes on  either a gross  (included  in
revenues and costs) or a net  (excluded  from  revenues)  basis is an accounting
policy  decision  that should be disclosed  pursuant to Opinion 22. In addition,
for any such taxes that are reported on a gross basis, a company should disclose
the amounts of those taxes in interim and annual  financial  statements for each
period  for  which  an  income  statement  is  presented  if those  amounts  are
significant.  The  disclosure of those taxes can be done on an aggregate  basis.
The consensuses in this Issue should be applied to financial reports for interim
and  annual  reporting  periods  beginning  after  December  15,  2006.  Earlier
application is permitted.  The Company does not expect that  pronouncement  EITF
Issue 06-3 will have any significant effect on future financial statements.

     EITF Issue 06-4,  Accounting for Deferred  Compensation and  Postretirement
Benefit  Aspects of Endorsement  Split-Dollar  Life Insurance  Arrangements.  An
endorsement  split-dollar life insurance should be recognized as a liability for
future  benefits  in  accordance  with  Statement  106  (if,  in  substance,   a
postretirement  benefit  plan exists) or Opinion 12 (if the  arrangement  is, in

                                      F-17
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


substance,   an  individual  deferred   compensation   contract)  based  on  the
substantive  agreement  with  the  employee.  The  consensus  in this  Issue  is
effective  for fiscal years  beginning  after  December  15, 2007,  with earlier
application permitted. The Company does not expect that pronouncement EITF Issue
06-4 will have any significant effect on future financial statements.

     EITF Issue 06-5,  Accounting  for Purchases of Life  Insurance--Determining
the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No.
85-4. A  policyholder  should  consider any additional  amounts  included in the
contractual terms of the policy in determining the amount that could be realized
under the insurance contract.  When it is probable (as is used in FASB Statement
No. 5) that  contractual  terms  would  limit the amount  that could be realized
under the  insurance  contract,  the Task Force  agreed  that these  contractual
limitations should be considered when determining the realizable amounts.  Those
amounts  that are  recoverable  by the  policyholder  at the  discretion  of the
insurance  company  should be  excluded  from the amount  that could be realized
under the  insurance  contract.  The  consensus in this Issue is  effective  for
fiscal years beginning after December 15, 2006. Earlier application is permitted
as of the  beginning  of a fiscal  year for  periods in which  interim or annual
financial  statements have not yet been issued. The Company does not expect that
pronouncement  EITF  Issue  06-5  will  have any  significant  effect  on future
financial statements.

NOTE C - LOSS PER COMMON SHARE

     The following  table sets forth the  computation  of basic and diluted loss
per share:
<TABLE>
<CAPTION>
                                                          Years Ended May 31,
                                                       2007               2006
                                                  ---------------    ---------------
<S>                                                 <C>               <C>
Numerator:
   Net loss                                         $(1,571,066)      $(11,579,011)
                                                  ---------------    ---------------
Denominator:
   Basic - weighted average shares                   65,198,592         61,351,323
         Stock options                                       --                 --
         Warrants                                            --                 --
                                                  ---------------    ---------------
   Diluted - weighted average shares                 65,198,592         61,351,323
                                                  ===============    ===============

Loss per share - basic                                   $(0.02)            $(0.19)
                                                  ===============    ===============
               - diluted                                 $(0.02)            $(0.19)
                                                  ===============    ===============
</TABLE>
     Options and warrants to purchase  8,846,876 and 10,466,613 shares of common
stock were excluded from the  computation of diluted  earnings per share for the
years  ended May 31,  2007 and 2006,  respectively,  because the effect of their
inclusion would be antidilutive.


NOTE D - INVENTORIES, NET

     Inventories, net consist of the following:
<TABLE>
<CAPTION>
                                                                  May 31, 2007
                                                                -----------------
<S>                                                                <C>
Raw materials                                                        $794,188
Work in process                                                       915,744
Finished goods                                                        407,695
                                                                -----------------
                                                                   $2,117,627
                                                                =================
</TABLE>
     At May 31, 2007 the Company has  recorded  reserves for excess and obsolete
inventory of $677,166.

                                      F-18
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


NOTE E - PROPERTY AND EQUIPMENT

     Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
                                                                      May 31, 2007
                                                                    ----------------
        <S>                                                          <C>
        Land                                                         $   200,000
        Building and improvements                                      1,394,569
        Office, laboratory and other equipment                         1,436,360
        EECP(R) systems under  operating  leases or under loan
           for clinical trials                                           813,020
        Furniture and fixtures                                           162,066
        Leasehold improvements                                           117,803
                                                                    ---------------
                                                                       4,123,818
                                                                    ---------------
        Property and equipment - net                                  $1,286,880
                                                                    ===============
</TABLE>
NOTE F - DEFERRED REVENUE

     The changes in the Company's deferred revenues are as follows:
<TABLE>
<CAPTION>
                                                                      May 31, 2007
                                                                    ----------------
        <S>                                                         <C>
        Deferred revenue at beginning of year                         $2,322,588
        Additions
           Deferred extended service contracts                         1,977,341
           Deferred in-service and training                               45,000
           Deferred service contract promotion                             9,300
           Deferred service arrangement obligations                      143,000
        Recognized as revenue
           Deferred extended service contracts                        (2,450,010)
           Deferred in-service and training                              (47,500)
           Deferred service contract promotion                            (2,700)
           Deferred service arrangement obligations                     (240,667)
                                                                    ----------------
        Deferred revenue at end of year                                1,756,352
           Less: current portion                                      (1,286,726)
                                                                    ----------------
        Long-term deferred revenue at end of year                       $469,626
                                                                    ===============
</TABLE>
NOTE G - WARRANTY LIABILITY

     The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
                                                                      May 31, 2007
                                                                    ----------------
<S>                                                                      <C>
        Warranty liability at the beginning of the year                  $32,000
          Expense for new warranties issued                               42,000
          Warranty claims                                                (58,250)
                                                                    ----------------
        Warranty liability at the end of the year                         15,750
                                                                    ----------------
        Long-term warranty liability at the end of the year              $    --
                                                                    ===============
</TABLE>

                                      F-19
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


NOTE H - LONG-TERM DEBT

     Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                 May 31, 2007
                                                               -----------------
<S>                                                                 <C>
        Facility loans (a)                                          $851,015
        Term loans (b)                                                    --
                                                               -----------------
                                                                     851,015
        Less:  current portion                                       (65,769)
                                                               -----------------
                                                                    $785,246
                                                               =================
<FN>
     (a)  The Company  purchased its  headquarters  and warehouse  facility with
          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 bore
          interest at rates  ranging  from 7.5% through  12.5%,  were payable in
          monthly  installments  consisting of principal  and interest  payments
          over  four-year  terms,  expiring at various times between  August and
          October 2006.
</FN>
</TABLE>
     Maturities of long-term debt are as follows at May 31, 2007:
        <TABLE>
        <CAPTION>
                Fiscal Year                    Amount
                -------------------       --------------
                <C>                           <C>
                2008                          $65,769
                2009                           70,524
                2010                           75,629
                2011                           81,110
                2012                           86,995
                Thereafter                    470,988
                                          --------------
                                             $851,015
                                          ==============
</TABLE>

NOTE I - SERIES D 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 was 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. 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. As of February 28, 2006, all of the
Series D Preferred  Stock had been  converted  into  6,112,209  shares of common
stock.

     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 SEC declared the
registration  statement  effective  on  September  1, 2005.  The total number of

                                      F-20
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


shares  registered  was based on a  conversion  price of $0.30 per share,  which
would  only  have an  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 applied the funds to 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  applicable to
common  shareholders.  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 these warrants as of July 19, 2005, we
utilized the Black-Scholes  option-pricing model. We estimated the fair value of
the warrants using the following weighted-average assumptions:


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

                                      F-21
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


     We 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  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 was 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 fiscal year ended May 31, 2006, cash dividends of $91,623
were paid.  Preferred  stock  dividends  for the fiscal 2006 are  summarized  as
follows:
<TABLE>
<CAPTION>
                                                   Amount
                                                --------------
        <S>                                       <C>
        Cash dividends paid                        $91,623
        Beneficial conversion feature              786,247
                                                --------------
                                                  $877,870
                                                ==============
</TABLE>
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 J - STOCKHOLDERS' EQUITY AND WARRANTS

     On July 19, 2005, we granted  warrants for the purchase of 2,254,538 shares
of common stock to investors  and  consultants  associated  with the issuance of
Series D Preferred Stock, (See Note I). The warrants may be exercised at a price
of $0.69 per share for a term of five years, ending July 19, 2010. The remaining
200,000 warrants expired in October 2006.

     Warrant activity for the years ended May 31, 2006 and 2007 is summarized as
follows:
<TABLE>
<CAPTION>
                                       Employees         Consultants               Total             Price Range
                                    ----------------- ------------------- ------------------------ ----------------
<S>                                            <C>        <C>                   <C>                     <C>
Balance at May 31, 2005                        --           200,000               200,000               $0.91
                                    ----------------- ------------------- ------------------------ ----------------
    Warrants granted                                      2,254,538             2,254,538               $0.69
                                    ----------------- ------------------- ------------------------ ----------------
Balance at May 31, 2006                        --         2,454,538             2,454,538               $0.71
                                    ----------------- ------------------- ------------------------ ----------------
  Warrants expired                             --          (200,000)             (200,000)              $0.91
                                    ----------------- ------------------- ------------------------ ----------------
Balance at May 31, 2007                        --         2,254,538             2,254,538               $0.69
                                    ================= =================== ======================== ================
Number of shares exercisable                   --         2,254,538             2,254,538               $0.69
                                    ================= =================== ======================== ================
</TABLE>
NOTE K - OPTION PLANS

                                      F-22
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


1995 Stock Option Plan

     In May 1995, the Company's stockholders approved the 1995 Stock Option Plan
for officers and  employees  of the Company,  for which the Company  reserved an
aggregate of 1,500,000  shares of common stock.  In December 1997, the Company's
Board of  Directors  terminated  the 1995 Stock  Option Plan with respect to new
option  grants.

     In fiscal 2006,  options to purchase  155,000  shares of common stock at an
exercise  price of $3.44  under  the 1995  Stock  Option  Plan were  retired  or
cancelled.

     In fiscal 2007,  options to purchase  286,000  shares of common stock at an
exercise  price of $3.43750  under the 1995 Stock  Option  Plan were  retired or
cancelled.

Outside Director Stock Option Plan

     In May 1995, the Company's  stockholders approved an Outside Director Stock
Option Plan (the "OD Plan") for non-employee directors of the Company, for which
the Company reserved an aggregate of 300,000 shares of common stock. In December
1997,  the Company's  Board of Directors  terminated the OD Plan with respect to
new option grants.

     In fiscal 2006,  options to purchase  155,000  shares of common stock at an
exercise price of $2.21 under the OD Plan were retired unexercised.

     In fiscal  2007,  options to purchase  28,250  shares of common stock at an
exercise price of $1.77 under the OD Plan were retired unexercised.

1997 Stock Option Plan

     In December 1997, the Company's stockholders approved the 1997 Stock Option
Plan (the "1997 Plan") for officers, directors, employees and consultants of the
Company,  for which the Company has reserved an aggregate of 1,800,000 shares of
common stock.  The 1997 Plan provides that a committee of the Board of Directors
of the  Company  will  administer  it and  that the  committee  will  have  full
authority to determine  the  identity of the  recipients  of the options and the
number of shares subject to each option. Options granted under the 1997 Plan may
be either  incentive stock options or  non-qualified  stock options.  The option
price shall be 100% of the fair market  value of the common stock on the date of
the grant (or in the case of incentive  stock options  granted to any individual
principal  stockholder  who owns  stock  possessing  more  than 10% of the total
combined  voting  power of all voting  stock of the  Company,  110% of such fair
market  value).  The term of any option may be fixed by the  committee but in no
event shall  exceed ten years from the date of grant.  Options  are  exercisable
upon  payment in full of the exercise  price,  either in cash or in common stock
valued at fair market value on the date of exercise of the option.  The term for
which options may be granted under the 1997 Plan expires August 6, 2007.

     In January 1999, the Company's  Board of Directors  increased the number of
shares  authorized  for  issuance  under  the 1997 Plan by  1,000,000  shares to
2,800,000 shares.

     In May 2006, the Board of Directors  accelerated the vesting period for all
unvested options to May 31, 2006.

     In fiscal 2006,  options to purchase 4,500 shares of common stock under the
1997 Plan at  exercise  prices  ranging  from  $0.88 to $1.91  were  retired  or
cancelled.

     In fiscal 2007 the Board of Directors granted  non-qualified  stock options
under the 1997 plan to a Director to purchase  150,000 shares of common stock at
an exercise  price of $0.09 per share (which  represent the fair market value of
the underlying common stock at the time of the respective grants). These options
expire 10 years  from  grant  date.  In fiscal  2007,  there  were no options to
purchase shares of common stock under the 1997 Plan. In fiscal 2007,  options to
purchase  175,192 shares of common stock under the 1997 Plan at exercise  prices
of $0.88 to $1.91 were retired or cancelled.

     At May 31, 2007,  there were 328,360  shares  available  for future  grants
under the 1997 Plan.

                                      F-23
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006



1999 Stock Option Plan

     In July 1999,  the  Company's  Board of  Directors  approved the 1999 Stock
Option Plan (the "1999  Plan"),  for which the Company  reserved an aggregate of
2,000,000 shares of common stock. The 1999 Plan provides that a committee of the
Board of Directors of the Company will administer it and that the committee will
have full  authority to determine the identity of the  recipients of the options
and the number of shares subject to each option.  Options granted under the 1999
Plan may be either incentive stock options or non-qualified  stock options.  The
option  price shall be 100% of the fair market  value of the common stock on the
date of the grant (or in the case of  incentive  stock  options  granted  to any
individual principal  stockholder who owns stock possessing more than 10% of the
total  combined  voting power of all voting  stock of the Company,  110% of such
fair market value).  The term of any option may be fixed by the committee but in
no event shall exceed ten years from the date of grant.  Options are exercisable
upon  payment in full of the exercise  price,  either in cash or in common stock
valued at fair market value on the date of exercise of the option.  The term for
which  options may be granted under the 1999 Plan expires July 12, 2009. In July
2000, the Company's Board of Directors increased the number of shares authorized
for issuance  under the 1999 Plan by 1,000,000  shares to 3,000,000  shares.  In
December  2001,  the Board of Directors of the Company  increased  the number of
shares  authorized  for  issuance  under  the 1999 Plan by  2,000,000  shares to
5,000,000 shares.

     In May 2006, the Board of Directors  accelerated the vesting period for all
unvested options to May 31, 2006.

     In fiscal 2006,  the  Company's  Board of Directors  granted  non-qualified
stock  options  to  purchase  under the 1999  Plan to  officers,  directors  and
employees to purchase an aggregate of 1,260,000  shares of common  stock,  at an
exercise price of $0.20 to $0.22 per share,  which  represented  the fair market
value of the underlying common stock at the time of the respective grants. These
ten years from the date of grant. In fiscal 2006,  options to purchase 1,173,250
shares of common  stock  under  the 1999 Plan at an  exercise  price of $0.20 to
$4.69 were retired or cancelled.

     In fiscal 2007, the Board of Directors granted  non-qualified stock options
under the 1999 Plan to directors  to purchase an aggregate of 450,000  shares of
common stock,  at an exercise price of $0.09 per shares (which  represented  the
fair market value of the  underlying  common stock at the time of the respective
grants).  In fiscal  2007,  there were no options to  purchase  shares of common
stock under the 1999 Plan. In fiscal 2007, options to purchase 996,279 shares of
common  stock  under the 1999 Plan at an  exercise  price of $0.20 to $5.00 were
retired or cancelled.

     At May 31, 2007,  there were 412,032  shares  available  for future  grants
under the 1999 Plan.

2004 Stock Option and Stock Issuance Plan

     In October 2004, the Company's  stockholders approved the 2004 Stock Option
and Stock  Issuance  Plan (the "2004 Plan"),  for which the Company  reserved an
aggregate of 2,500,000 shares of common stock. The 2004 Plan is divided into two
separate  equity  programs:  (i) the Option Grant Program  under which  eligible
persons  ("Optionees")  may, at the  discretion  of the board of  directors,  be
granted options to purchase shares of common stock;  and (ii) the Stock Issuance
Program under which eligible persons  ("Participants") may, at the discretion of
the board or  directors,  be issued  shares of  common  stock  directly,  either
through  the  immediate  purchase  of such  shares  or as a bonus  for  services
rendered to the Corporation.

     Options  granted  under  the 2004  Stock  Plan  shall be  non-qualified  or
incentive  stock options and the exercise  price is the fair market value of the
common stock on the date of grant  except that for  incentive  stock  options it
shall be 110% of the fair market value if the  Optionee  owns 10% or more of our
common  stock.  The term of any option may be fixed by the board of directors or
committee  but in no event shall exceed ten years from the date of grant.  Stock
options  granted  under  the 2004  Plan may  become  exercisable  in one or more
installments  in the manner and at the time or times specified by the committee.
Options are exercisable  upon payment in full of the exercise  price,  either in
cash or in common  stock  valued at fair market value on the date of exercise of
the  option.  The term for  which  options  may be  granted  under the 2004 Plan
expires July 12, 2014.

                                      F-24
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


     Under the stock  issuance  program,  the purchase  price per share shall be
fixed by the board of directors  or  committee  but cannot be less than the fair
market value of the common stock on the  issuance  date.  Payment for the shares
may be made in cash or check payable to us, or for past services  rendered to us
and all shares of common stock issued thereunder shall vest upon issuance unless
otherwise  directed  by the  committee.  The number of shares  issuable  is also
subject to adjustments  upon the occurrence of certain  events,  including stock
dividends,    stock   splits,    mergers,    consolidations,    reorganizations,
recapitalizations,  or other capital adjustments.  The term for which shares may
be issued under the 2004 Plan expires July 12, 2014.

     The 2004 Plan  provides  that a committee  of the Board of Directors of the
Company will  administer it and that the committee  will have full  authority to
determine and designate the  individuals  who are to be granted stock options or
qualify to purchase shares of common stock under the 2004 Stock Plan, the number
of shares to be subject to options or to be  purchased  and the nature and terms
of the options to be granted.  The committee also has authority to interpret the
2004 Plan and to prescribe, amend and rescind the rules and regulations relating
to the 2004 Plan.

     In May 2006, the Board of Directors  accelerated the vesting period for all
unvested options to May 31, 2006.

     In fiscal 2006,  the Company's  Board of Directors  granted an aggregate of
225,000  shares of common  stock  under the 2004 Plan  directors  of the Company
having a fair  market  value of $0.45  per  share at the time of the  respective
grants. In fiscal 2006, the Company's Board of Directors  granted  non-qualified
stock  options  under the 2004 Plan to  Officers  and  employees  to purchase an
aggregate of 2,118,045  shares of common stock,  at exercise  prices of $0.20 to
$0.58 per share,  which  represented  the fair  market  value of the  underlying
common stock at the time of the  respective  grants.  These  options  expire ten
years from the date of grant. In fiscal 2006, options to purchase 266,496 shares
of common  stock under the 2004 Plan at  exercise  prices of $0.45 to $0.58 were
retired or cancelled.

     In fiscal 2007,  the  Company's  Board of Directors  granted  non-qualified
stock  options  under the 2004 Plan to an Officer to  purchase an  aggregate  of
200,000 shares of common stock, at an exercise price of $0.11 per share,  (which
represented the fair market value of the underlying  common stock at the time of
the respective  grants).  These options expire ten years from the date of grant.
In fiscal  2007,  options to purchase  733,716  shares of common stock under the
2004 Plan at exercise prices of $0.20 to $0.58 were retired or cancelled.

     At May 31, 2007,  there were 957,457  shares  available  for future  grants
under the 2004 Plan.

     Activity  under all the plans for the years ended May 31, 2006 and 2007, is
summarized as follows:
<TABLE>
<CAPTION>
                                                                          Outstanding Options
                                                      ------------------------------------------------------------
                                         Shares                                 Range of             Weighted
                                     Available for         Number of            Exercise             Average
                                         Grant              Shares           Price per Share      Exercise Price
                                    ----------------- ------------------- ---------------------- -----------------
<S>                                    <C>                 <C>               <C>                         <C>
Balance at May 31, 2005                 2,614,503           6,545,544         $0.71 - $5.15              $1.86
  Common shares granted                  (225,000)                 --              --                      --
  Options granted                      (3,378,045)          3,378,045         $0.20 - $0.58              $0.34
  Options exercised                            --                  --              --                      --
  Options canceled                      1,738,414          (1,911,514)        $0.20 - $5.15              $0.70
                                    ----------------- ------------------- ---------------------- -----------------
Balance at May 31, 2006                   749,872           8,012,075         $0.20 - $5.15              $1.20
  Options granted                        (800,000)            800,000         $0.09 - $0.11              $0.10
  Options exercised                            --                  --              --                      --
  Options canceled                      1,747,987          (2,219,737)        $0.20 - $5.00              $1.28
                                    ----------------- ------------------- ---------------------- -----------------
Balance at May 31, 2007                 1,697,859           6,592,338         $0.20 - $5.00              $1.04
                                    ================= =================== ====================== =================
</TABLE>
                                      F-25
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


     (1) May be issued under the Stock Issuance Program.

The following table summarizes  information about stock options  outstanding and
exercisable at May 31, 2007:
<TABLE>
<CAPTION>
                                             Options Outstanding                           Options Exercisable
                              ---------------------------------------------------    --------------------------------
                                                    Weighted
                                                     Average         Weighted                            Weighted
                                   Number           Remaining        Average               Number         Average
                               Outstanding at      Contractual       Exercise         Exercisable at     Exercise
Range of Exercise Prices        May 31, 2007       Life (yrs.)        Price             May 31, 2007        Price
                              ------------------ ---------------- ---------------    ----------------- --------------
<C>                                 <C>                 <C>             <C>              <C>                 <C>
$0.09 - $0.58                       2,748,171           8.8             $0.26            2,748,171           $0.26
$0.71 - $0.97                         752,500           4.6             $0.89              752,500           $0.89
$1.00 - $1.49                       1,887,500           6.2             $1.09            1,887,500           $1.09
$1.53 - $2.49                         541,167           1.0             $1.87              541,167           $1.87
$2.66 - $5.15                         663,000           3.8             $3.66              663,000           $3.66
                              ------------------ ---------------- ---------------    ----------------- --------------
                                    6,592,338           5.3             $1.03            6,592,338           $1.03
                              ================== ================ ===============    ================= ==============
</TABLE>
     The  weighted-average  fair value exercise price of options  granted during
fiscal years 2007 and 2006 was $0.10 and $0.34,  respectively.  At May 31, 2007,
there were approximately  34,256,673 remaining authorized shares of common stock
after reserves for all stock option plans and stock warrants.

NOTE L - INCOME TAXES

     During the fiscal years ended May 31, 2007 and 2006,  the Company  recorded
income tax expense of $20,608 and $7,109,176, respectively.

     The fiscal 2006 tax expense  consists  mainly of  $7,093,000  in additional
valuation  allowance  provided for the  deferred tax asset in the second  fiscal
quarter.  The income tax expense  for fiscal  2006 does not  include  $7,489,000
added to the deferred tax valuation  allowance for tax benefits  associated with
prior years' exercises of stock options and warrants, which was charged directly
to additional paid-in capital.

     As of May 31, 2005, we had recorded  deferred tax assets of $14,582,000 net
of a $3,774,000  valuation allowance related to the anticipated  recovery of tax
loss  carryforwards.  No deferred tax assets have been recorded for state income
tax net  operating  losses  since it was  determined  that the amounts  were not
material  and the  Company  could not be sure that any  benefit  from the losses
would be utilized.

     On December 20, 2005,  Centers for  Medicare  and Medicaid  Services  (CMS)
issued a Proposed  Decision  Memorandum (PDM) for External  Counterpulsation  in
response  to  Vasomedical's  application  to expand  reimbursement  coverage  to
include  Canadian  Cardiovascular  Society  (CCSC)  Class II angina and New York
Heart  Association  (NYHA) Class II/III  congestive heart failure (CHF). The PDM
stated  that  the  evidence  was  not   adequate  to  conclude   that   external
counterpulsation  therapy is reasonable  and  necessary to expand  reimbursement
coverage  to CCSC  Class II angina and NYHA  Class  II/III CHF and that  current
coverage  for CCSC  class  III/IV  refractory  angina  would  remain in  effect.
Consequently,  at the end of the  second  fiscal  quarter  of  fiscal  2006,  we
concluded that,  based upon the weight of available  evidence,  it was no longer
"more likely than not" that the net deferred tax asset of  $14,582,000  would be
realized,  and added  $14,582,000  to the  valuation  allowance to bring the net
deferred tax asset  carrying  value to zero.  On March 20, 2006,  CMS issued its
final decision, which upheld the PDM.

     As of May 31,  2007,  the  recorded  deferred  tax asset  was  $19,589,352,
reflecting an increase of $29,894  during  fiscal 2007,  which was offset by the
valuation allowance of the same amount.

                                      F-26
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


     The Company's deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
                                                       2007               2006
                                                  ---------------    ---------------
        <S>                                         <C>                <C>
        Net operating loss and other carryforwards  $18,120,000        $17,850,000
              Accrued compensation                        2,400              6,900
              Bad debts                                 125,000            140,000
              Other                                   1,341,952          1,562,558
                                                  ---------------    ---------------
        Total gross deferred tax assets              19,589,352         19,559,458
              Valuation allowance                   (19,589,352)       (19,559,458)
                                                  ---------------    ---------------
        Net deferred tax assets                             $--                $--
                                                  ===============    ===============
</TABLE>
     At May 31,  2007,  the Company had net  operating  loss  carryforwards  for
Federal and state income tax purposes of approximately $53,290,050,  expiring at
various  dates from 2008 through  2027. In fiscal 2007 $517,934 of net operating
loss carryforwards  expired.  Expiration of net operating loss carryforwards are
as follows:
<TABLE>
<CAPTION>
                   Fiscal Year              Amount
                -------------------     --------------
                <S>                      <C>
                2008                     $    558,968
                2009                          470,994
                2010                        2,454,162
                2011                        5,449,051
                2012                        6,084,213
                Thereafter                 38,272,662
                                        --------------
                                         $ 53,290,050
                                        ==============
</TABLE>
     Under current tax law, the utilization of tax attributes will be restricted
if an ownership change, as defined,  were to occur.  Section 382 of the Internal
Revenue Code  provides,  in general,  that if an "ownership  change" occurs with
respect to a corporation with net operating and other loss  carryforwards,  such
carryforwards  will be available to offset  taxable  income in each taxable year
after the ownership change only up to the "Section 382 Limitation" for each year
(generally,  the product of the fair market value of the corporation's  stock at
the time of the  ownership  change,  with certain  adjustments,  and a specified
long-term  tax-exempt bond rate at such time). The Company's  ability to use its
loss carryforwards could be limited in the event of an ownership change.

     The following is a  reconciliation  of the effective income tax rate to the
federal statutory rate:
<TABLE>
<CAPTION>
                                                             2007             2006
                                                              %                 %
                                                       ----------------- ---------------
        <S>                                                 <C>               <C>
        Federal statutory rate                              (34.0)            (34.0)
        State taxes, net                                      1.3               0.3
        Permanent differences                                 2.7               0.6
        Change in valuation allowance
          relating to operations                             31.4             229.0
        Other                                                (2.7)             (0.6)
                                                       ----------------- ----------------
                                                             (1.3)           (195.3)
                                                       ================= ================
</TABLE>
NOTE M - COMMITMENTS AND CONTINGENCIES

Leases

     As of  May  31,  2007  the  company  was  not  obligated  under  any  lease
agreements.

                                      F-27
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2007 and 2006


     The   Company   leased    additional    warehouse    space   under   a   no
cancelable-operating  lease,  which expired on September 30, 2006.  Rent expense
was $17,000 and $94,000 in fiscal 2007and 2006, respectively.

Litigation

     The  Company  is  currently,  and has been in the past,  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.

NOTE N - 401(K) PLAN

     In April 1997, the Company  adopted the  Vasomedical,  Inc.  401(k) Plan to
provide retirement  benefits for its employees.  As allowed under Section 401(k)
of the Internal Revenue Code, the plan provides  tax-deferred  salary deductions
for  eligible  employees.  Employees  are  eligible to  participate  in the next
quarter  enrollment  period after  employment.  Participants  may make voluntary
contributions to the plan up to 15% of their  compensation.  In fiscal year 2007
and 2006, the Company made discretionary  contributions of approximately $15,000
and $27,000, respectively, to match a percentage of employee contributions.

NOTE O - SUBSEQUENT EVENT

     On June 21, 2007 we entered into a Securities Purchase Agreement with Kerns
Manufacturing Corp.  ("Kerns").  Concurrently with our entry into the Securities
Purchase Agreement, we also entered into a Distribution Agreement and a Supplier
Agreement  with  Living  Data  Technology  Corporation,  an  affiliate  of Kerns
("Living Data").

     We sold to Kerns pursuant to the Securities Purchase Agreement,  21,428,572
shares of our common stock at $.07 per share for an aggregate of  $1,500,000  as
well a five-year warrant to purchase  4,285,714 shares of our common stock at an
initial exercise price of $.08 per share (the "Warrant"). We also have an option
to sell an  additional  $1 million of our common stock to Kerns.  The  agreement
further  provided  for  the  appointment  to  our  Board  of  Directors  of  two
representatives  of Kerns.  In  furtherance  thereof,  Mr. Jun Ma and Mr.  Simon
Srybnik,  Chairman of both Kerns and Living Data, have been appointed members of
our Board of Directors.  Pursuant to the Distribution  Agreement, we have become
the  exclusive  distributor  in the United  States of the  AngioNew  ECP systems
manufactured by Living Data. As additional  consideration for such agreement, we
agreed to issue an  additional  6,990,840  shares of our common  stock to Living
Data. Pursuant to the Supplier Agreement,  Living Data now will be the exclusive
supplier to us of the ECP therapy  systems that we market  under the  registered
trademark  EECP(R).  The Distribution  Agreement and the Supplier Agreement each
have an initial term extending through May 31, 2012.

     Pursuant to a Registration Rights Agreement, we granted to Kerns and Living
Data, subject to certain restrictions,  "piggyback registration rights" covering
the shares  sold to Kerns as well as the shares  issuable  upon  exercise of the
Warrant and the shares issued to Living Data.

     On  August  15,  2007 we sold  our  facility  under a  five-year  leaseback
agreement  for $1.4 million.  The net proceeds  from the sale was  approximately
$425,000 after payment in full of the two secured notes on our facility, brokers
fees,  closing costs,  and the opening of a certificate of deposit in accordance
with the provisions of the new lease.

                                      F-28
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                 Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
---------------------------------------- ---------------- -------------------------------- ----------------- ---------------
               Column A                     Column B                 Column C                  Column D         Column E
---------------------------------------- ---------------- -------------------------------- ----------------- ---------------
                                                                     Additions
                                                          --------------------------------
                                                                 (1)             (2)
                                           Balance at     Charged to costs    Charged to
                                          beginning of      and expenses        other                          Balance at
                                             period                            accounts       Deductions     end of period
---------------------------------------- ---------------- ------------------ ------------- ----------------- ---------------
<S>                                          <C>               <C>                    <C>      <C>              <C>
Allowance for doubtful accounts
  Year ended May 31, 2007                       $410,691       (a) $ (7,421)          $--           $38,461        $364,809
  Year ended May 31, 2006                       $394,692           $110,317           $--      (b)  $94,318        $410,691


Reserve for excess and obsolete
inventory
  Year ended May 31, 2007                       $677,166                $--           $--               $--        $677,166
  Year ended May 31, 2006                       $566,149           $152,004           $--           $40,987        $677,166

Valuation Allowance - Deferred Tax
Asset
  Year ended May 31, 2007                    $19,559,458            $29,894           $--               $--     $19,589,352
  Year ended May 31, 2006                     $3,774,000         $8,296,458    $7,489,000               $--     $19,559,458

Provision for warranty obligations
  Year ended May 31, 2007                        $32,000            $42,000           $--     (c)   $58,250         $15,750
  Year ended May 31, 2006                       $118,333            $33,000           $--     (c)  $119,333         $32,000
<FN>
     (a)  reversal of overaccrual from prior years balance
     (b)  financing receivables written off
     (c)  warranty claims
</FN>
</TABLE>

                                      S-1