UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                   FORM 10-Q


[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934
    For the quarterly period ended August 31, 2006

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

Commission File Number: 0-18105

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

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

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

Registrant's Telephone Number                                     (516) 997-4600

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

     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated  filer, or a non-accelerated  filer.

Large Accelerated Filer [ ]  Accelerated Filer [ ]   Non-Accelerated Filer [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]
                                            ---       --

Number of Shares  Outstanding of Common Stock,  $.001 Par Value, at
October 16, 2006 -  65,198,592

                                     Page 1
<PAGE>


Vasomedical, Inc. and Subsidiaries


                                     INDEX


                                                                         Page
                                                                         ----
PART I - FINANCIAL INFORMATION

    Item 1 - Financial Statements (Unaudited)

       Consolidated Condensed Balance Sheets as of
               August 31, 2006 and May 31, 2006                             3

       Consolidated Condensed Statements of Operations for the
               Three Months Ended August 31, 2006 and 2005                  4

       Consolidated Condensed Statement of Changes in Stockholders'
               Equity for the Period from June 1, 2006 to August 31, 2006   5

       Consolidated Condensed Statements of Cash Flows for the
               Three Months Ended August 31, 2006 and 2005                  6

       Notes to Consolidated Condensed Financial Statements                 7

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

    Item 3 - Quantitative and Qualitative Disclosures About Market Risk    26

    Item 4 - Controls and Procedures                                       26

PART II - OTHER INFORMATION                                                27

                                     Page 2


<PAGE>


ITEM 1.  FINANCIAL STATEMENTS


                       Vasomedical, Inc. and Subsidiaries
                     CONSOLIDATED CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                 August 31,           May 31,
                                                                                    2006               2006
                                                                              -----------------    -----------------
                                 ASSETS                                         (Unaudited)         (Derived from
                                                                                                       audited
                                                                                                      financial
                                                                                                     statements)
<S>                                                                               <C>                  <C>
CURRENT ASSETS
     Cash and cash equivalents                                                    $1,790,851           $2,385,778
     Accounts receivable, net of an allowance for doubtful accounts of
       $373,071 at August 31, 2006, and $410,691 at May 31, 2006                   1,000,870              843,282
     Inventories, net                                                              2,394,623            2,699,673
     Other current assets                                                            276,683              108,049
                                                                              -----------------    -----------------
         Total current assets                                                      5,463,027            6,036,782

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,683,979 at
   August 31, 2006, and $2,613,180 at May 31, 2006                                 1,483,752            1,569,588

OTHER ASSETS                                                                         297,440              305,670
                                                                              -----------------    -----------------
                                                                                  $7,244,219           $7,912,040
                                                                              =================    =================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                          $846,822             $938,095
     Current maturities of long-term debt and notes payable                          223,170               97,309
     Sales tax payable                                                               137,651              172,646
     Deferred revenue                                                              1,492,179            1,600,887
     Accrued director and executive compensation                                     321,500              175,000
     Accrued warranty and customer support expenses                                   29,250               30,500
     Accrued professional fees                                                        42,439               61,875
     Accrued commissions                                                             114,907               93,182
                                                                              -----------------    -----------------
         Total current liabilities                                                 3,207,918            3,169,494

LONG-TERM DEBT                                                                       835,000              853,189

ACCRUED WARRANTY COSTS                                                                   750                1,500

DEFERRED REVENUE                                                                     573,852              721,701

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Common stock, $.001 par value; 110,000,000 shares authorized;
       65,198,592 shares at August 31, 2006, and May 31, 2006, issued
       and outstanding                                                                65,198               65,198
     Additional paid-in capital                                                   46,148,493           46,148,493
     Accumulated deficit                                                         (43,586,992)         (43,047,535)
                                                                              -----------------    -----------------
         Total stockholders' equity                                                2,626,699            3,166,156
                                                                              -----------------    -----------------
                                                                                  $7,244,219           $7,912,040
                                                                              =================    =================

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

                                     Page 3
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                        Three months ended
                                                                                            August 31,
                                                                              --------------------------------------
                                                                                    2006                 2005
                                                                              -----------------    -----------------
<S>                                                                             <C>                  <C>
Revenues
   Equipment sales                                                              $1,073,216           $2,456,909
   Equipment rentals and services                                                1,008,640            1,079,462
                                                                              -----------------    -----------------
     Total revenues                                                              2,081,856            3,536,371

Cost of Sales and Services
   Cost of sales, equipment                                                        609,342            1,032,257
   Cost of equipment rentals and services                                          355,268              390,927
                                                                              -----------------    -----------------
     Total cost of sales and services                                              964,610            1,423,184

                                                                              -----------------    -----------------

   Gross profit                                                                  1,117,246            2,113,187

Operating Expenses
   Selling, general and administrative                                           1,323,826            2,409,149
   Research and development                                                        328,495              512,006
   Provision for doubtful accounts                                                   1,681               70,575
                                                                              -----------------    -----------------
     Total operating expenses                                                    1,654,002            2,991,730

                                                                              -----------------    -----------------
LOSS FROM OPERATIONS                                                              (536,756)            (878,543)

Other Income (Expense)
   Interest and financing costs                                                    (18,889)             (23,509)
   Interest and other income, net                                                   20,738               19,016
                                                                              -----------------    -----------------
     Total other income (expense)                                                    1,849               (4,493)

                                                                              -----------------    -----------------
LOSS BEFORE INCOME TAXES                                                          (534,907)            (883,036)
   Income tax expense, net                                                          (4,550)              (9,826)
                                                                              -----------------    -----------------
NET LOSS                                                                          (539,457)            (892,862)
   Preferred stock dividend                                                             --             (805,623)
                                                                              -----------------    -----------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                                     $(539,457)         $(1,698,485)
                                                                              =================    =================
Net loss per common share
     - basic                                                                        $(.01)              $(0.03)
                                                                              =================    =================
     - diluted                                                                      $(.01)              $(0.03)
                                                                              =================    =================

Weighted average common shares outstanding
     - basic                                                                    65,198,592           58,646,166
                                                                              =================    =================
     - diluted                                                                  65,198,592           58,646,166
                                                                              =================    =================

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


                                     Page 4
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

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

<TABLE>
<CAPTION>
                                                                         Additional                                    Total
                                             Common Stock                  Paid-in            Accumulated          Stockholders'
                                        Shares             Amount          Capital              Deficit               Equity
                                    ---------------    ------------    ----------------    ------------------     ----------------

<S>                                  <C>                 <C>            <C>                  <C>                      <C>
Balance at June 1, 2006              65,198,592          $65,198        $46,148,493          $(43,047,535)            $3,166,156

   Net loss                                                                                      (539,457)              (539,457)
                                    ---------------    ------------    ----------------    ------------------     ----------------

Balance at August 31, 2006           65,198,592          $65,198        $46,148,493          $(43,586,992)            $2,626,699
                                    ===============    ============    ================    ==================     ================

The accompanying notes are an integral part of this consolidated condensed financial statement.
</TABLE>
                                     Page 5
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                               Three months
                                                                                             ended August 31,
                                                                                   -------------------------------------
                                                                                        2006                 2005
                                                                                   ----------------     ----------------
<S>                                                                                     <C>                  <C>
Cash flows from operating activities
     Net loss                                                                           $(539,457)           $(892,862)
                                                                                   ----------------     ----------------
     Adjustments to reconcile net loss to net cash used in operating
       activities
         Depreciation and amortization                                                     94,313              108,301
         Provision for doubtful accounts                                                    1,681               70,575
         Reserve for excess and obsolete inventory                                             --               15,119
         Changes in operating assets and liabilities
              Accounts receivable                                                        (159,269)            (657,676)
              Inventories                                                                 308,059              292,258
              Other current assets                                                         23,486               36,949
              Other assets                                                                 (3,256)              (4,838)
              Accounts payable, accrued expenses and other current
                liabilities
              Other liabilities                                                          (148,599)              37,668
                                                                                   ----------------     ----------------
                                                                                           28,978             (473,956)
                                                                                   ----------------     ----------------
     Net cash used in operating activities                                               (510,479)          (1,366,818)
                                                                                   ----------------     ----------------
     Cash flows provided by investing activities
         Redemptions of certificates of deposit                                                --              763,286
                                                                                   ----------------     ----------------
     Net cash provided by investing activities                                                 --              763,286

                                                                                   ----------------     ----------------
     Cash flows provided by (used in) financing activities
         Payments on long term debt and notes payable                                     (84,448)            (124,257)
         Payments of preferred stock dividends                                                 --               (4,946)
         Payments of preferred stock issue costs                                               --             (291,343)
         Proceeds from sale of convertible preferred stock                                     --            2,500,000
                                                                                   ----------------     ----------------
     Net cash provided by (used in) financing activities                                  (84,448)           2,079,454

                                                                                   ----------------     ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     (594,927)           1,475,922
     Cash and cash equivalents - beginning of period                                    2,385,778              989,524
                                                                                   ----------------     ----------------
     Cash and cash equivalents - end of period                                         $1,790,851           $2,465,446
                                                                                   ================     ================
Non-cash investing and financing activities were as follows:
     Inventories  transferred to (from)  property and equipment,  attributable to
       operating leases, net                                                              $(3,009)            $(22,498)
     Issue of note for purchase of insurance policy                                      $192,120             $302,052
     Preferred stock dividends                                                             $--                $800,677
     Preferred stock issue costs                                                           $--                $250,127

Supplemental Disclosures
     Interest paid                                                                        $18,889              $23,509
     Income taxes paid                                                                     $2,825              $16,805

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

                                     Page 6
<PAGE>
                       Vasomedical Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
                                August 31, 2006

NOTE A - ORGANIZATION AND PLAN OF OPERATIONS

     The Company was incorporated in Delaware in July 1987.  During fiscal 1996,
the   Company   commenced   the   commercialization   of   its   EECP   external
counterpulsation system ("EECP"), a microprocessor-based  medical device for the
noninvasive,  outpatient treatment of patients with cardiovascular disease. EECP
is marketed worldwide to hospitals and physician private practices. To date, the
Company's  revenues have been  generated  primarily from customers in the United
States.

     The  Company  has  incurred  large  declines  in  revenue  and  significant
operating  losses  during the last four fiscal years and its ability to continue
operating  as a going  concern is  dependent  upon  achieving  profitability  or
through additional debt or equity financing.  Achieving profitability is largely
dependent on sufficiently reducing operating costs and halting the current trend
of declining revenue.  The Company's ability to halt the declines in revenue and
restore its revenue base is largely  dependent upon increasing the demand in the
refractory  angina  market and  operating  in a more  efficient  manner.  If the
Company  is not  able to  restore  its  revenue  base  and  sufficiently  reduce
operating  costs to  generate  an  adequate  cash  inflow,  or raise  additional
capital, it will not be able to continue as a going concern.

     In order to reduce the  Company's  cash usage and bring its cost  structure
more into alignment with current revenue,  the Company initiated a restructuring
in January 2006, to reduce  personnel and spending on marketing and  development
projects. Additional cost reductions are continuing. In addition, in April 2006,
the  outside  directors  of the  Company  elected  to defer  payment of board of
director  meeting fees and senior officers elected to defer  approximately  $0.4
million in annual salary compensation. However, revenue has continued to decline
and the Company has not achieved its goal of profitability.

     Management  believes that cash flow from  operations  together with current
cash reserves will be sufficient to fund minimum projected capital  requirements
through at least May 2007, assuming the current revenue rate.

     In the event that additional  capital is required,  the Company may seek to
raise such capital  through  public or private  equity or debt  financings or by
other  means.  The Company  may not be able to obtain  additional  financing  on
favorable  terms or at all. If the Company is unable to raise  additional  funds
when needed, it may need to further scale back operations,  research,  marketing
or sales  efforts  or  obtain  funds  through  arrangements  with  collaborative
partners or others that may require the Company to license or relinquish  rights
to technologies or products. Future capital funding, if available, may result in
dilution to current  shareholders,  and new investors could have rights superior
to existing stockholders.

     The accompanying  financial  statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.

Reclassifications

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

NOTE B - STOCK-BASED 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
employee stock options,  to be recognized in the financial  statements  based on
their  fair  values.
                                     Page 7
<PAGE>

                        Vasomedical Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
                                August 31, 2006


     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 has adopted the disclosure provisions
of  Statement  of  Financial  Accounting  Standards  No.  148,  "Accounting  for
Stock-Based  Compensation  -  Transition  and  Disclosure,  an amendment of FASB
Statement No. 123."  Under APB No. 25, when the exercise  price of the Company's
employee stock options  equals the market price of the  underlying  stock on the
date  of  grant,  no  compensation  expense  is  recognized.   Accordingly,   no
compensation   expense  has  been  recognized  in  the  consolidated   financial
statements in connection with employee stock option grants prior to fiscal 2007.

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

<TABLE>
<CAPTION>
                                                                                  Three months
                                                                                ended August 31,
                                                                     --------------------------------------
                                                                            2006                 2005
                                                                     -----------------    -----------------

<S>                                                                     <C>                <C>
Net loss attributable to common stockholders, as reported               $(539,457)         $(1,698,485)
     Deduct: Total stock-based employee compensation expense
       determined under fair value-based method for all awards
                                                                           --                 (212,294)
                                                                     -----------------    -----------------
Pro forma net loss                                                      $(539,457)         $(1,910,779)
                                                                     =================    =================
Loss per share:
    Basic and diluted - as reported                                        $(.01)              $(0.03)
                                                                     =================    =================
    Basic and diluted - pro forma                                          $(.01)              $(0.03)
                                                                     =================    =================
</TABLE>


     The pro forma  impact of options  on the net  income  for the three  months
ended  August 31,  2006 is not  representative  of the effects on net income for
future periods,  as future periods will include the effects of additional  stock
option grants which will be immediately expensed.

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

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

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

                                     Page 8
<PAGE>
                       Vasomedical Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
                                August 31, 2006


     The fair value of the Company's  stock-based  awards was estimated assuming
no expected  dividends and the following  weighted-average  assumptions  for the
three months ended August 31, 2005:

<TABLE>
<CAPTION>

<S>                                                      <C>
        Expected life (years)                            5
        Expected volatility                              73%
        Risk-free interest rate                        4.18%
        Expected dividend yield                         0.0%
</TABLE>

     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 and
with the adoption by the Company of SFAS No 123(R) the Company expects that this
will 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.

     During the  three-month  period ended August 31, 2006,  the Company did not
issue any share based compensation.

     During the  three-month  period ended August 31, 2006,  options to purchase
133,567  shares  of  common  stock at an  exercise  price of $0.88 - $3.88  were
cancelled.

NOTE C - LOSS PER COMMON SHARE

     Basic  loss per  share is based on the  weighted  average  number of common
shares  outstanding  without  consideration of potential common shares.  Diluted
loss per share is based on the weighted  number of common and  potential  common
shares  outstanding.  The calculation  takes into account the shares that may be
issued upon the exercise of stock  options and  warrants,  reduced by the shares
that may be repurchased with the funds received from the exercise,  based on the
average price during the period, plus conversion of convertible  preferred stock
into common shares based upon the most  advantageous  conversion rate during the
period.


                                     Page 9
<PAGE>
                        Vasomedical Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
                                August 31, 2006


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

<TABLE>
<CAPTION>
                                                                                  Three months
                                                                                  ended August 31,
                                                                     --------------------------------------
                                                                           2006                 2005
                                                                     -----------------    -----------------
<S>                                                                     <C>                  <C>
Numerator:
   Basic and diluted net loss                                           $(539,457)           $(892,862)
     Deemed  dividend   related  to  beneficial   conversion                   --
     feature on Series D preferred stock                                                      (786,247)
     Series D preferred stock dividends                                        --              (19,376)
                                                                     -----------------    -----------------
  Net loss attributable to common stockholders                          $(539,457)         $(1,698,485)
                                                                     =================    =================
Denominator:
   Basic - weighted average common shares                              65,198,592           58,646,166
     Stock options                                                             --                   --
     Warrants                                                                  --                   --
                                                                     -----------------    -----------------
   Diluted - weighted average common shares                            65,198,592           58,646,166
                                                                     =================    =================

Basic and diluted loss per common share                                    $(.01)              $(0.03)
</TABLE>

     Options,  warrants, and convertible preferred stock, in accordance with the
following  table,  were excluded from the  computation of diluted loss per share
for the three months ended August 31, 2006 and 2005,  respectively,  because the
effect of their inclusion would be antidilutive.

<TABLE>
<CAPTION>
                                                                              Three months ended
                                                                                 August 31,
                                                                     --------------------------------------
                                                                           2006                 2005
                                                                     -----------------    -----------------
<S>                                                                    <C>                  <C>
  Options to purchase common stock                                     7,878,508            6,789,408
  Warrants to purchase common stock                                    2,454,538            2,454,538
  Convertible preferred stock                                                 --            5,159,959
                                                                     -----------------    -----------------
                                                                      10,333,046           14,403,905
                                                                     =================    =================
</TABLE>

NOTE D - INVENTORIES, NET

         Inventories, net consist of the following:

<TABLE>
<CAPTION>
                                                                         August 31,           May 31,
                                                                           2006                2006
                                                                     -----------------    -----------------
<S>                                                                        <C>                 <C>
   Raw materials                                                           $904,613            $863,952
   Work in process                                                        1,014,906           1,243,986
   Finished goods                                                           475,104             591,735
                                                                     -----------------    -----------------
                                                                         $2,394,623          $2,699,673
                                                                     =================    =================
</TABLE>

     At August 31, 2006 and May 31, 2006, the Company has recorded  reserves for
excess and obsolete inventory of $677,166.


                                    Page 10
<PAGE>

                        Vasomedical Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
                                August 31, 2006


NOTE E - PROPERTY AND EQUIPMENT
         Property and equipment is summarized as follows:

<TABLE>
<CAPTION>
                                                                    August 31, 2006      May 31, 2006
                                                                    ----------------    ---------------
<S>                                                                  <C>                 <C>
Land                                                                 $   200,000         $   200,000
Building and improvements                                              1,383,976           1,383,976
Office, laboratory and other equipment                                 1,436,362           1,444,850
EECP systems  under  operating  leases or under loan
   for clinical trials                                                   867,522             874,071
Furniture and fixtures                                                   162,068             162,068
Leasehold improvements                                                   117,803             117,803
                                                                    ----------------    ---------------
                                                                       4,167,731           4,182,768
                                                                    ----------------    ---------------
Less: accumulated depreciation and amortization                       (2,683,979)         (2,613,180)
                                                                    ----------------    ---------------
                                                                      $1,483,752          $1,569,588
                                                                    ================    ===============
</TABLE>

NOTE F - NOTES PAYABLE

     The Company  financed the purchase of Director's  and  Officer's  Liability
Insurance through the issuance of a note with a principal value of $192,120. The
note,  which  bears  interest at 8.15%,  is payable in ten monthly  installments
consisting  of principal and  interest,  and expires in March 2007.  The balance
outstanding  at August 31, 2006,  of $154,729 is  presented on the  consolidated
condensed  balance  sheet in  current  maturities  of  long-term  debt and notes
payable.

NOTE G - LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                     August 31, 2006       May 31, 2006
                                                                     -----------------    ---------------
<S>                                                                      <C>                   <C>
Facility loans (a)                                                       $897,417              $914,528
Term loans (b)                                                              6,024                35,970
                                                                     -----------------    ---------------
                                                                          903,441               950,498
Less: current portion                                                     (68,441)              (97,309)
                                                                     -----------------    ---------------
                                                                         $835,000              $853,189
                                                                     =================    ===============
</TABLE>

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

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

                                    Page 11
<PAGE>

                        Vasomedical Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
                                August 31, 2006


NOTE H - DEFERRED REVENUES

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

<TABLE>
<CAPTION>
                                                                                Three months ended
                                                                                   August 31,
                                                                     --------------------------------------
                                                                           2006                 2005
                                                                     -----------------    -----------------
<S>                                                                    <C>                  <C>
Deferred Revenue at the beginning of the period                        $2,322,588           $2,551,532
ADDITIONS
     Deferred extended service contracts                                  390,534              510,855
     Deferred in-service training                                          17,500               47,500
     Deferred warranty obligations                                         52,500              152,500
RECOGNIZED AS REVENUE
     Deferred extended service contracts                                 (606,049)            (580,000)
     Deferred in-service training                                         (20,000)             (50,000)
     Deferred warranty obligations                                        (91,042)            (155,624)
                                                                     -----------------    -----------------
Deferred revenue at end of period                                       2,066,031            2,476,763
     Less: current portion                                             (1,492,179)          (1,517,893)
                                                                     -----------------    -----------------
Long-term deferred revenue at end of period                              $573,852             $958,870
                                                                     =================    =================
</TABLE>

NOTE I - WARRANTY COSTS

     The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
                                                                        Three months ended
                                                                            August 31,
                                                               -----------------------------------
                                                                    2006                2005
                                                               ---------------     ---------------

<S>                                                                 <C>                <C>
Warranty liability at the beginning of the period                   $32,000            $118,333
     Expense for new warranties issued                               21,000              12,000
     Warranty amortization                                          (23,000)            (35,333)
                                                               ---------------     ---------------
Warranty liability at end of period                                  30,000              95,000
     Less: current portion                                          (29,250)            (90,750)
                                                               ---------------     ---------------
Long-term warranty liability at end of period                          $750              $4,250
                                                               ===============     ===============
</TABLE>

NOTE J - INCOME TAXES

     During the  three-months  ended  August 31,  2006 and 2005,  we  recorded a
provision for state income taxes of $4,550 and $9,826, respectively.

     As of August 31, 2006, the recorded  deferred tax assets were  $19,741,653,
reflecting  an  increase of $182,195  during the first  quarter of fiscal  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
February 2006, 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.

                                    Page 12
<PAGE>

                        Vasomedical Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
                                August 31, 2006

NOTE K - COMMITMENTS AND CONTINGENCIES

Employment Agreements

     The approximate  aggregate  minimum  compensation  obligation  under active
employment agreements at August 31, 2006 is summarized as follows:

<TABLE>
<CAPTION>

Twelve month period ended August 31,                                Amount
------------------------------------------------------     ----------------
<S>  <C>                                                          <C>
     2007                                                         $260,000
     2008                                                          210,000
                                                           ----------------
Total                                                             $470,000
                                                           ================
</TABLE>

Litigation

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

NOTE L - SUBSEQUENT EVENT

Change in Senior Management

     On September 20, 2006 Thomas W. Fry resigned as Chief Financial  Officer of
the Company and his employment  agreement was  terminated.  Mr. Fry continues to
act as a consultant  to the  company.  Tricia  Efstathiou  was  appointed  Chief
Financial  Officer of the Company on September  20,  2006.  Prior  thereto,  Ms.
Efstathiou served as Controller of the Company since June 2000.


                                    Page 13
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


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

General Overview

     Vasomedical,   Inc.  incorporated  in  Delaware  in  July  1987,  develops,
manufactures and markets EECP(R) therapy systems to deliver its proprietary form
of enhanced external counterpulsation therapy. EECP(R) therapy is a noninvasive,
outpatient  therapy used in the treatment of ischemic  cardiovascular  diseases,
currently used to manage  chronic  stable angina and heart failure.  The therapy
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 inner lining of blood vessels  throughout the
body,  lessening  resistance to blood flow.  We provide  hospitals and physician
private practices with EECP equipment,  treatment guidance, and a staff training
and equipment  maintenance program designed to provide optimal patient outcomes.
EECP  is  a   registered   trademark   for   Vasomedical's   enhanced   external
counterpulsation systems. For more information visit www.vasomedical.com.

     We have Food and Drug  Administration  (FDA)  clearance  to market our EECP
therapy for use in the treatment of stable and unstable angina, congestive heart
failure, acute myocardial infarction, and cardiogenic shock, however our current
marketing  efforts are limited to the  treatment  of chronic  stable  angina and
congestive  heart  failure . Medicare  and other  third-party  payers  currently
reimburse for the treatment of angina or angina equivalent  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  and/or  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 therapy is angina or
angina equivalent symptoms.

     We recently sponsored a pivotal,  randomized  clinical trial to demonstrate
the  efficacy  of EECP  therapy  in the most  prevalent  types of heart  failure
patients.  This  trial,  known  as  PEECH  (Prospective  Evaluation  of  EECP in
Congestive Heart Failure),  was intended to provide  additional  evidence of the
safety and efficacy of EECP 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 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 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 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 therapy than those who had an idiopathic
(non-ischemic) etiology.  Subsequent analyses of the subgroup of patients in the
trial  age 65 and over has  been  performed  and a  manuscript  reporting  those
results has been accepted for publication.


                                    Page 14
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

     The  preliminary  results of the PEECH trial were presented at the American
College  of  Cardiology  scientific  sessions  in March  2005,  and the  initial
peer-reviewed  report of the results of the trial were  published in the Journal
of the American College of Cardiology  initially  on-line on August 25, 2006 and
subsequently  in print on September 19, 2006. On June 20, 2005,  the Centers for
Medicare and Medicaid  Services (CMS) accepted our  application for expansion of
reimbursement  coverage of EECP 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:

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

     They  reiterated  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."

     We will  continue to educate the  marketplace  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  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 therapy
with Medicare and other  third-party  payers as evidence of its clinical utility
develops.

Critical Accounting Policies

     Financial  Reporting  Release No. 60, which was released by the  Securities
and Exchange  Commission,  or SEC, in December  2001,  requires all companies to
include a  discussion  of critical  accounting  policies or methods  used in the
preparation  of  financial  statements.  Note A of  the  Notes  to  Consolidated
Financial  Statements  included  in our Annual  Report on Form 10-K for the year
ended May 31, 2006,  includes a summary of our significant  accounting  policies
and methods used in the  preparation of our financial  statements.  In preparing
these  financial  statements,  we have made our best  estimates and judgments of
certain amounts included in the financial  statements,  giving due consideration
to  materiality.  The  application  of these  accounting  policies  involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result,  actual  results  could  differ  from  these  estimates.   Our  critical
accounting policies are as follows:

Revenue Recognition

     We recognize  revenue when  persuasive  evidence of an arrangement  exists,
delivery  has  occurred  or  service  has been  rendered,  the price is fixed or
determinable and collectibility is reasonably  assured. In the United States, we

                                    Page 15
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


recognize  revenue  from the sale of our EECP  systems in the period in which we
deliver the system to the customer. Revenue from the sale of our EECP systems to
international markets is recognized upon shipment, during the period in which we
deliver the product to a common carrier, as are supplies,  accessories and spare
parts  delivered  to both  domestic  and  international  customers.  Returns are
accepted prior to the in-service and training subject to a 10% restocking charge
or for normal warranty matters,  and we are not obligated for post-sale upgrades
to these systems.  In addition,  we use the installment method to record revenue
based on cash receipts in situations  where the account  receivable is collected
over an extended period of time and in our judgment the degree of collectibility
is uncertain.

     In most cases,  revenue from domestic  EECP system sales is generated  from
multiple-element  arrangements  that  require  judgment in the areas of customer
acceptance,  collectibility,  the  separability of units of accounting,  and the
fair value of individual  elements.  Effective September 1, 2003, we adopted the
provisions of Emerging  Issues Task Force,  or EITF,  Issue No. 00-21,  "Revenue
Arrangements  with  Multiple  Deliverables",  ("EITF  00-21"),  on a prospective
basis. The principles and guidance outlined in EITF 00-21 provide a framework to
determine (a) how the arrangement  consideration  should be measured (b) whether
the arrangement should be divided into separate units of accounting, and (c) how
the  arrangement  consideration  should be allocated among the separate units of
accounting.  We determined that the domestic sale of our EECP systems includes a
combination of three elements that qualify as separate units of accounting:

     i.   EECP equipment sale,

     ii.  provision of in-service and training  support  consisting of equipment
          set-up and training provided at the customer's facilities, and

     iii. a service  arrangement  (usually one year),  consisting of: service by
          factory-trained  service  representatives,  material  and labor costs,
          emergency  and  remedial  service  visits,  preventative  maintenance,
          software  upgrades,  technical  phone support and  preferred  response
          times.

     Each of these  elements  represent  individual  units of  accounting as the
delivered  item has value to a customer on a  stand-alone  basis,  objective and
reliable  evidence of fair value exists for undelivered  items, and arrangements
normally do not  contain a general  right of return  relative  to the  delivered
item. We determine fair value based on the price of the  deliverable  when it is
sold  separately  or based  on  third-party  evidence.  In  accordance  with the
guidance in EITF 00-21,  we use the residual  method to allocate the arrangement
consideration  when it does not have fair value of the EECP system  sale.  Under
the residual method, the amount of consideration allocated to the delivered item
equals the total arrangement  consideration less the aggregate fair value of the
undelivered items. Assuming all other criteria for revenue recognition have been
met, we  recognize  revenue  for:

     i.   EECP equipment  sales,  when delivery and  acceptance  occurs based on
          delivery  and  acceptance   documentation  received  from  independent
          shipping companies or customers,

     ii.  in-service  and  training,  following  documented  completion  of  the
          training, and

     iii. the service  arrangement,  ratably over the service  period,  which is
          generally one year.

     In-service and training generally occurs within three weeks of shipment and
our return policy states that no returns will be accepted  after  in-service and
training has been  completed.  The amount  related to in-service and training is
recognized as revenue at the time the  in-service  and training is completed and
the amount  related to service  arrangements  is recognized  as service  revenue
ratably over the related  service  period,  which is generally  one year.  Costs
associated  with the  provision  of  in-service  and  training  and the  service
arrangement,  including salaries,  benefits,  travel, spare parts and equipment,
are recognized in cost of sales as incurred .

     We also recognize revenue generated from servicing EECP systems that are no
longer covered by the service arrangement, or by providing sites with additional
training,  in the period that these  services are provided.  Revenue  related to
future  commitments under separately  priced extended service  agreements on our
EECP  system are  deferred  and  recognized  ratably  over the  service  period,
generally  ranging  from  one  year to four  years.  Costs  associated  with the
provision of service and  maintenance,  including  salaries,  benefits,  travel,
spare parts and equipment, are recognized in cost of sales as incurred.  Amounts
billed in excess of revenue  recognized are included as deferred  revenue in the
consolidated balance sheets.

                                    Page 16
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


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

     We have also entered into lease agreements for our EECP systems,  generally
for terms of one year or less, that are classified as operating leases. Revenues
from operating leases are generally recognized,  in accordance with the terms of
the lease agreements,  on a straight-line  basis over the life of the respective
leases.  For certain operating leases in which payment terms are determined on a
"fee-per-use"  basis, revenues are recognized as incurred (i.e., as actual usage
occurs). The cost of the EECP system utilized under operating leases is recorded
as a component of property and  equipment and is amortized to cost of sales over
the estimated useful life of the equipment, not to exceed five years. There were
no significant  minimum rental  commitments on these operating  leases at August
31, 2006.

Accounts Receivable, net

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

Inventories, net

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

     Effective June 1, 2005, we adopted the provisions of Statement of Financial
Accounting  Standards No. 151,  "Inventory  Costs", on a prospective  basis. The
statement  clarifies that abnormal  amounts of idle facility  expense,  freight,
handling  costs,  and  wasted  materials  (spoilage)  should  be  recognized  as
current-period charges and requires the allocation of fixed production overheads
to inventory  based on the normal  capacity of the production  facilities.  As a
result of adopting SFAS No. 151, we absorbed approximately $78,000 less in fixed
production overhead into inventory.

Deferred Revenues

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

                                    Page 17
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


Warranty Costs

     Equipment  sold is  generally  covered  by a  warranty  period of one year.
Effective  September  1, 2003,  we  adopted  the  provisions  of EITF 00-21 on a
prospective basis. Under EITF 00-21, for certain arrangements,  a portion of the
overall  system  price  attributable  to the first year service  arrangement  is
deferred and  recognized  as revenue  over the service  period.  As such,  we no
longer accrue  warranty  costs upon delivery but rather  recognize  warranty and
related  service  costs as incurred.  Prior to  September 1, 2003,  we accrued a
warranty  reserve for  estimated  costs to provide  warranty  services  when the
equipment sale was recognized.

     Equipment sold to international  customers through our distributor  network
is  generally  covered by a one year  warranty  period.  For these  customers we
accrue a warranty reserve for estimated costs 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 are based on the  weighted  average  number of common
shares outstanding without consideration of potential common stock. Diluted loss
per share are based on the  weighted  number of common  and  potential  dilutive
common shares  outstanding.  The calculation  takes into account the shares that
may be issued upon the exercise of stock  options and  warrants,  reduced by the
shares that may be repurchased with the funds received from the exercise,  based
on the average price during the period.

Income Taxes

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

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

                                    Page 18
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS



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 first quarter of fiscal 2007 the Company  accounts for stock-based
compensation  using the  intrinsic  value method in accordance  with  Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations ("APB No. 25") and has adopted the disclosure provisions
of  Statement  of  Financial  Accounting  Standards  No.  148,  "Accounting  for
Stock-Based  Compensation  -  Transition  and  Disclosure,  an amendment of FASB
Statement No. 123."  Under APB No. 25, when the exercise  price of the Company's
employee stock options  equals the market price of the  underlying  stock on the
date  of  grant,  no  compensation  expense  is  recognized.   Accordingly,   no
compensation   expense  has  been  recognized  in  the  consolidated   financial
statements in connection with employee stock option grants prior to fiscal 2007.

     The Company has five stock-based employee compensation plans.

     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 the
Company has adopted  SFAS No 123(R) and this will 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
single measure of the fair value of its employee stock options.

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

Recently Issued Accounting Standards

     Statement of Financial  Accounting  Standards No. 152, "Accounting for Real
Estate Time-Sharing Transactions", an amendment of FASB Statements No. 66 and 67
(SFAS 152) was issued in  December  2004 and  becomes  effective  for  financial
statements for fiscal years  beginning after June 15, 2005. The Company does not
expect that SFAS 152 will have an effect on future financial statements.

     In December  2004, the FASB issued FASB Statement No. 153 ("SFAS No. 153"),
"Exchanges  of  Non-monetary  Assets - an amendment of APB Opinion No. 29". SFAS
No. 153 amends Opinion 29 to eliminate the exception for non-monetary  exchanges
of  similar  productive  assets and  replaces  it with a general  exception  for
exchanges  of  non-monetary  assets  that do not have  commercial  substance.  A

                                    Page 19
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


non-monetary  exchange has commercial  substance if the future cash flows of the
entity are expected to change  significantly  as a result of the exchange.  SFAS
No. 153 is effective for fiscal  periods  after June 15, 2005.  The Company does
not  expect  the  adoption  of SFAS No.  153 to have a  material  impact  on the
Company's consolidated financial statements.

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

     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.

     In March 2005, FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement  Obligations - an  interpretation of FASB Statement No. 143 (FIN 47).
FIN 47 is effective no later than the end of fiscal years ending after  December
15, 2005  (December  31, 2005,  for  calendar-year  enterprises).  Retrospective
application for interim financial  information is permitted but is not required.
Early adoption of this Interpretation is encouraged. The Company does not expect
that FIN 47 will have any significant effect on future financial statements.

     In December  2004,  the  Accounting  Standards  Executive  Committee of the
American Institute of Certified Public  Accountants  (AcSEC) issued Statement of
Position 04-2, Accounting for Real Estate Time-Sharing  Transactions (SOP 04-2).
SOP 04-2 is effective for financial statements issued for fiscal years beginning
after June 15, 2005, with earlier application  encouraged.  The Company does not
expect that SOP 04-2 will have any effect on future financial statements.

     In September 2005, AcSEC issued  Statement of Position 05-1:  Accounting by
Insurance   Enterprises  for  Deferred  Acquisition  Costs  in  Connection  with
Modifications  or  Exchanges  of  Insurance  Contracts  (SOP 05-1).  SOP 05-1 is
effective  for fiscal years  beginning  after  December  15, 2006,  with earlier
adoption  encouraged.  The  Company  does not expect that SOP 05-1 will have any
effect on future financial statements.

     FASB Staff  Position  (FSP) FAS 13-1 - Accounting for Rental Costs Incurred
during a  Construction  Period,  was  issued on October  6,  2005,  and  becomes
effective for the for new  transactions or  arrangements  entered into after the
beginning of the first fiscal  quarter  following the date that the final FSP is
posted by the FASB.  The  Company  does not  expect  that FSP 13-1 will have any
significant effect on future financial statements.

                                    Page 20
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


     On June 29,  2005,  the FASB  ratified the  consensus  reached for Emerging
Issues Task Force (EITF)  Issue No. 05-5,  Accounting  for Early  Retirement  or
Postemployment  Programs  with  Specific  Features  (Such As Terms  Specified in
Altersteilzeit  Early  Retirement  Arrangements).  The  consensus  in this Issue
should be applied  to fiscal  years  beginning  after  December  15,  2005,  and
reported as a change in accounting  estimate  effected by a change in accounting
principle as described in paragraph 19 of FASB  Statement  154. The Company does
not expect that EITF 05-5 will have any significant  effect on future  financial
statements.

     On September 28, 2005,  the FASB  ratified the  consensus  reached for EITF
Issue No. 05-7,  Accounting for Modifications to Conversion  Options Embedded in
Debt  Instruments  and Related  Issues.  The  provisions of this Issue should be
applied  to future  modifications  of debt  instruments  beginning  in the first
interim or annual  reporting  period  beginning  after  December 15,  2005.  The
Company  expects  that the  application  of EITF  05-7  could  have an effect on
interest and debt valuations in future financial statements.  It is not possible
to determine the impact, if any, from the application since the Company does not
presently have any convertible debt.

     On July 13, 2006, the FASB issued  Interpretation No. 48 for Uncertainty in
Income  Taxes  and  interpretation  of FASB  Statement  109.  Interpretation  48
clarifies  the  accounting  for  uncertainty  in income  taxes  recognized  in a
company's  financial  statements  in  accordance  with  Statement  No.  109  and
prescribes a  recognition  threshold  and  measurement  attribute  for financial
statements  disclosure  of tax  position  taken or expected to be taken on a tax
return.  Additionally,  Interpretation No. 48 provides guidance on depreciation,
classification, interest and penalties accounting in interim periods, disclosure
and  transition.  Interpretation  No. 48 is effective for fiscal years beginning
after December 15, 2006, with early adoption permitted. 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.

     In July 2006,  the FASB issued  Staff  Position  ("FSB") on FAS 13, FSP FAS
13-2,  Accounting  for a Change or Projected  Change in the Timing of Cash Flows
Relating to Income Taxes  Generated by a Leveraged  Lease  transaction.  FSP FAS
13-2  addresses  how a change or  projected  change in the  timing of cash flows
relating to income taxes generated by a leveraged lease transaction  affects the
accounting by a lessor for that lease and amends FAS 13  Accounting  for Leases.
FSP FAS 13-2 is effective  for fiscal years  beginning  December 15, 2006,  with
earlier  application  permitted.  The Company  does not expect that FSP FAS 13-2
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 this  pronouncement  will have any  significant
effect on future financial statements.

     FASB Staff Position (FSP) No. FIN 46(R)-6,  Determining  the Variability to
Be Considered in Applying FASB  Interpretation  No. 46 (revised  December 2003),
Consolidation  of  Variable  Interest  Entities.  Posted on April 13,  2006.  An
enterprise  shall apply the guidance in this FSP  prospectively  to all entities
(including  newly created  entities)  with which that  enterprise  first becomes
involved  and  to  all  entities   previously  required  to  be  analyzed  under
Interpretation  46(R) when a  reconsideration  event has  occurred  pursuant  to
paragraph  7 of  Interpretation  46(R)  beginning  the  first  day of the  first
reporting period  beginning after June 15, 2006. Early  application is permitted
for  periods  for  which   financial   statements  have  not  yet  been  issued.
Retrospective   application   to  the  date  of  the  initial   application   of
Interpretation 46(R) is permitted but not required.  Retrospective  application,

                                    Page 21
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


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
this  pronouncement  will  have  any  significant  effect  on  future  financial
statements.

     FASB  Interpretation  No. 47,  Accounting for Conditional  Asset Retirement
Obligations - an interpretation of FASB Statement No. 143 (FIN 47) was issued in
March 2005.  FIN 47 is  effective  no later than the end of fiscal  years ending
after  December 15, 2005  (December 31, 2005,  for  calendar-year  enterprises).
Retrospective  application for interim financial information is permitted but is
not required.  Early adoption of this Interpretation is encouraged.  The Company
does not expect that FIN 47 will 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) No.  FTB  85-4-1  will  have any  effect on future
financial statements.

Results of Operations

Three Months Ended August 31, 2006 and 2005

     Net  revenue  from sales,  leases and  service of our EECP  systems for the
three-month  periods  ended  August  31,  2006  and  2005,  was  $2,081,856  and
$3,536,371,  respectively,  which represented a decline of $1,454,515 or 41%. We
reported a net loss of $539,457 compared to $892,862 for the three-month periods
ended August 31, 2006 and 2005, respectively.  Our net loss per common share was
$.01 for the three-month  period ended August 31, 2006 compared to a net loss of
$0.03 per share for the three-month period August 31, 2005.

Revenues

     Revenue from equipment sales declined  approximately  56% to $1,073,216 for
the  three-month  period ended August 31, 2006 as compared to $2,456,909 for the
same period for the prior year. The decline in equipment  sales is due primarily
to a 46%  decline in the number of  equipment  shipments  and a 16%  decrease in
average sales  prices.  A higher mix of used  equipment  verses both newer model
equipment  and new  equipment  was the primary  cause of the decrease in average
sales prices.

     We believe the decline in domestic units shipped  reflects  weakened demand
in the  refractory  angina market as existing  capacity is more fully  utilized,
coupled with increased  competition from surgical procedures,  mainly the use of
drug-eluting stents. We anticipate that demand for EECP systems will remain soft
until  there is  greater  clinical  acceptance  for the use of EECP  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,  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.  We sold an
unusually high  percentage of used equipment in the first quarter of fiscal 2007
compared to the first quarter of fiscal 2006,  which reduced the average selling
price  in  that  period.  The  average  price  of  new  systems  sales  declined
approximately 3% in the first quarter of fiscal 2007 compared to the same period
in  the  prior  year.  Lastly,  we  continue  to  reorganize  certain  territory
responsibilities  in our  sales  department  due to vacant  and/or  unproductive

                                    Page 22
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

territories.  Our  revenue  from  the  sale of  EECP  systems  to  international
distributors in the first quarter of fiscal 2007 increased  approximately 34% to
$418,350 compared $313,334 in same period of the prior year reflecting increased
volume.

     The above  decline in revenue  was also  partially  due to a 7% decrease in
revenue from  equipment  rental and services  for the  three-month  period ended
August 31, 2006,  from the same  three-month  period in the prior year.  Revenue
from  equipment  rental and services  represented  48 % of total  revenue in the
first  quarter of fiscal  2007  compared  to 31% in the first  quarter of fiscal
2006. The decrease in the absolute amounts and the increase in the percentage of
total revenue resulted primarily from a less than a 1% change in service related
revenue,  offset by a 71%  decline in rental  revenue.  The decline was due to a
decrease in the rental install base from the prior period ended August 31, 2005.

Gross Profit

     The  gross  profit  declined  to  $1,117,246  or 54% of  revenues  for  the
three-month  period  ended  August 31, 2006,  compared to  $2,113,187  or 60% of
revenues for the three-month  period ended August 31, 2005.  Gross profit margin
as a  percentage  of revenue for the  three-month  period ended August 31, 2006,
decreased compared to the same year of the prior fiscal mainly due to the higher
production  units costs associated with reduced  production  volumes in the last
two fiscal quarters. In addition, adoption of SFAS No. 151 lowered the amount of
fixed  overhead  costs  absorbed  into  inventory in the first quarter of fiscal
2007.  The decline in gross  profit when  compared to the prior year in absolute
dollars is a direct result of the lower sales volume.

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

Selling, General and Administrative

     Selling,  general and administrative ("SG&A") expenses for the three-months
ended  August  31,  2006  and  2005,  were  $1,323,826  or 64% of  revenues  and
$2,409,149 or 68% of revenues,  respectively reflecting a decrease of $1,085,323
or approximately  45%. The decrease in SG&A expenditures in the first quarter of
fiscal 2007 compared to fiscal 2006 resulted  primarily from decreased sales and
marketing  expenditures  reflecting  lower  sales and  marketing  personnel  and
travel, plus reduced market research and advertising costs.

Research and Development

     Research and  development  ("R&D")  expenses of $328,495 or 16% of revenues
for the three months ended August 31, 2006,  decreased by $183,511 or 36%,  from
the prior three months ended August 31 2005, of $512,006 or 14% of revenues. The
decrease is primarily attributable to lower new product development spending and
reduced spending on clinical trials.

Provision for Doubtful Accounts

     During the  three-month  period ended August 31, 2006, the Company  charged
$1,681 to its provision for doubtful  accounts as compared to $70,575 during the
three-month  period ended August 31,  2005.  The decrease in the  provision is a
direct  result  of the  first  quarter  of  fiscal  2007  decrease  in  accounts
receivable and sales from the corresponding quarter ended August 31, 2005.

Interest Expense and Financing Costs

     Interest   expense  and  financing   costs  decreased  to  $18,889  in  the
three-month  period ended  August 31, 2006,  from $23,509 for the same period in
the prior year. Interest expense primarily reflects interest on loans secured to
refinance the November 2000 purchase of the Company's headquarters and warehouse
facility,  as well as on loans secured to finance the cost and implementation of
a new management information system.

                                    Page 23
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


Interest and Other Income, Net

     Interest  and other  income for the first  quarter  of 2007 and 2006,  were
$20,738 and $19,016, respectively.

Income Tax Expense, Net

     During the  three-months  ended  August 31,  2006 and 2005,  we  recorded a
provision for state income taxes of $4,550 and $9,826, respectively.

     As of August 31, 2006, the recorded  deferred tax assets were  $19,741,653,
reflecting an increase of $182,195  during fiscal 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
February 2006, 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

     We have financed our operations in fiscal 2007 and fiscal 2006 from working
capital and in fiscal 2006 from the issuance of preferred  stock.  At August 31,
2006, we had cash,  cash  equivalents,  and  certificates  of deposit balance of
$1,790,851  and  working  capital  of  $2,255,109  as  compared  to  cash,  cash
equivalents,  and  certificates  of deposit  balance of  $2,385,778  and working
capital  of  $2,867,288  at May  31,  2006.  Our  cash,  cash  equivalents,  and
certificates  of  deposit  balances  decreased  $594,927  in  fiscal  year  2007
primarily  due to cash used in operating  activities  of $510,479 and $84,448 in
cash used in financing activities.

     The decrease in cash used in operating  activities during the first quarter
of fiscal  year  2007  resulted  primarily  from the net loss of  $539,457  plus
adjustments  to reconcile net loss to net cash provided by operating  activities
of $28,979.  Changes in our operating assets and liabilities  were $65,335.  The
changes in the asset  components  primarily  reflect  an  increase  in  accounts
receivable of $159,269  offset by lower  inventory of $308,059 and other current
assets of $23,486.  The changes in our operating liability  components reflect a
decrease in accounts  payable and accrued  liabilities of $87,437 and a decrease
in  other  liabilities  of  $148,599.  Non-cash  adjustments  for  depreciation,
amortization,  allowance  for doubtful  accounts  and  allowance  for  inventory
write-offs of $95,994  partially offset the above. Net accounts  receivable were
48% of  quarterly  revenues  for the  three-month  period ended August 31, 2006,
compared to 70% at the end of the three-month  period ended August 31, 2005, and
accounts  receivable  turnover  increased to 7.0 times as of August 31, 2006, as
compared to 4.0 times as of August 31, 2005.

     Standard payment terms on our domestic equipment sales are generally net 30
to 90 days from  shipment and do not contain  "right of return"  provisions.  We
have  historically  offered a  variety  of  extended  payment  terms,  including
sales-type  leases,  in certain  situations and to certain customers in order to
expand the  market for our EECP  products  in the US and  internationally.  Such
extended payment terms were offered in lieu of price concessions, in competitive
situations,  when opening new markets or geographies  and for repeat  customers.
Extended payment terms cover a variety of negotiated terms, including payment in
full - net 120, net 180 days or some fixed or variable  monthly  payment  amount
for a six to twelve month period followed by a balloon  payment,  if applicable.
During the first quarter of fiscal 2007 and 2006,  less than 1% of revenues were
generated  from sales in which  initial  payment terms were greater than 90 days
and we offered no sales-type leases during either period.  In general,  reserves
are calculated on a formula basis  considering  factors such as the aging of the
receivables,  time past due, and the customer's credit history and their current
financial status. In most instances where reserves are required, or accounts are
ultimately  written-off,  customers have been unable to  successfully  implement
their EECP  program.  As we are  creating a new market for the EECP  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.

                                    Page 24
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS


     There were no  investing  activities  during the  three-month  period ended
August 31, 2006.

     Our financing activities used cash of $84,448 during the three-month period
ended August 31, 2006, reflecting payments on our outstanding notes and loans.

     We believe that our projected cash flow from  operations  together with our
current  cash  reserves  and  working  capital  will be  sufficient  to fund our
business  plan and  projected  capital  requirements  through at least May 2007,
assuming  current revenue rate,  however,  we have incurred  significant  losses
during the last four fiscal years and our long-term  ability to maintain current
operations  is  dependent  upon  achieving  profitable   operations  or  through
additional debt or equity  financing.  In the event that  additional  capital is
required,  we may seek to raise such capital through public or private equity or
debt financings. Future capital funding, if available, may result in dilution to
current shareholders.

     The following table presents the Company's  expected cash  requirements for
contractual obligations outstanding as of August 31, 2006.

<TABLE>
<CAPTION>

                                                                       Due as of        Due as of
                                                       Due as of      8/31/08 and      8/31/10 and         Due
                                        Total           8/31/07         8/31/09          8/31/11        Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>              <C>             <C>              <C>
Long-Term Debt                          $903,441          $68,441        $138,595        $155,705         $540,700
Notes Payable                            154,729          154,729              --              --               --
Operating Leases                           3,560            3,560              --              --               --
Employment Agreements                    470,000          260,000         210,000              --               --
                                 -----------------------------------------------------------------------------------
Total Contractual Cash                $1,531,730        $ 486,730        $348,595        $155,705         $540,700
    Obligations
                                 ===================================================================================
</TABLE>

Effects of Inflation

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

                                    Page 25
<PAGE>

                       Vasomedical, Inc. and Subsidiaries

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4 - CONTROLS AND PROCEDURES

     We  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation of our management, including our Chief Executive Officer and Chief
Financial  Officer,  of the  effectiveness  of the design and  operation  of our
disclosure controls and procedures  pursuant to Exchange Act Rule 13a-15.  Based
upon that evaluation,  the Chief Executive  Officer and Chief Financial  Officer
concluded  that, as of August 31, 2006, our  disclosure  controls and procedures
are effective to provide reasonable assurances that such disclosure controls and
procedures  satisfy their  objectives  and that the  information  required to be
disclosed  by us in the  reports we file  under the  Exchange  Act is  recorded,
processed,  summarized and reported within the required time periods. There were
no changes  during the fiscal  quarter  ended  August 31,  2006 in our  internal
controls  or in other  factors  that  could  have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.


                                    Page 26
<PAGE>

                               Vasomedical, Inc.

                          PART II - OTHER INFORMATION

ITEM 1 -LEGAL PROCEEDINGS:

        None

ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:

        None

ITEM 3 -DEFAULTS UPON SENIOR SECURITIES:

        None

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

        None

ITEM 5 -OTHER INFORMATION:

        None

ITEM 6 -EXHIBITS

Exhibits

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

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

                                    Page 27
<PAGE>

                       Vasomedical, Inc. and Subsidiaries



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


                                        VASOMEDICAL, INC.

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

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

Date:  October 16, 2006