UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                   FORM 10-QSB


[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934 For the quarterly period ended August 31, 2007

[ ] 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 small business issuer 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)

Issuer'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 12, 2007                93,618,004


<PAGE>
Vasomedical, Inc. and Subsidiaries

<TABLE>
<CAPTION>

                                      INDEX

                                                                                               Page
                                                                                               ----
<S>                                                                                             <C>
PART I - FINANCIAL INFORMATION

         Item 1 - Financial Statements (unaudited)

                  Consolidated Condensed Balance Sheets as of
                           August 31, 2007 and May 31, 2007                                      3

                  Consolidated Condensed Statements of Operations for the
                           Three Months Ended August 31, 2007 and 2006                           4

                  Consolidated Condensed Statement of Changes in Stockholders'
                           Equity for the Period from June 1, 2007 to August 31, 2007            5

                  Consolidated Condensed Statements of Cash Flows for the
                           Three Months Ended August 31, 2007 and 2006                           6


                  Notes to Consolidated Condensed Financial Statements                           7


         Item 2 - Management's Discussion and Analysis or Plan of Operation                     13

         Item 3 - Controls and Procedures                                                       27

PART II - OTHER INFORMATION

         Item 1 - Legal Proceedings                                                             28

         Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds                   28

         Item 3 - Defaults upon Senior Securities                                               28

         Item 4 - Submission of Matters to a Vote of Security Holders                           28

         Item 5 - Other Information                                                             28

         Item 6 - Exhibits                                                                      28
</TABLE>
                                     Page 2
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS

                       Vasomedical, Inc. and Subsidiaries
                      CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                 August 31,            May 31,
                                                                                   2007                 2007
                                                                             -----------------     ----------------
                                                                                (Unaudited)         (Derived from
                                                                                                   audited financial
                                                                                                     statements)

<S>                                                                               <C>                    <C>
                                 ASSETS
CURRENT ASSETS
     Cash                                                                        $2,791,016              $850,288
     Accounts receivable, net of an allowance for doubtful accounts of
       $333,448 at August 31, 2007 and $364,809 at May 31, 2007                     442,877               733,655
     Inventories, net                                                             1,939,230             2,117,627
     Other current assets                                                           237,310                34,761
                                                                             -----------------     ----------------
         Total current assets                                                     5,410,433             3,736,331

PROPERTY AND EQUIPMENT, net of accumulated depreciation of  $2,136,295
   at August 31, 2007 and $2,836,938 at May 31, 2007                                145,386             1,286,880
DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of $25,444
   at August 31, 2007                                                               483,432                    --
OTHER ASSETS                                                                        248,514               260,240
                                                                             -----------------     ----------------
                                                                                  $6,287,765           $5,283,451
                                                                             =================     ================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                         $529,359              $575,793
     Current maturities of long-term debt and notes payable                              --                65,769
     Sales tax payable                                                              140,254               159,542
     Deferred revenue                                                             1,244,920             1,286,726
     Deferred gain on sale of building                                               53,245                    --
     Accrued director fees                                                           23,000                79,000
     Accrued warranty and customer support expenses                                  15,250                15,750
     Accrued professional fees                                                      109,374               143,521
     Accrued commissions                                                             89,236                89,883
                                                                             -----------------     ----------------
         Total current liabilities                                                2,204,638             2,415,984

LONG-TERM DEBT                                                                           --               785,246
DEFERRED REVENUE                                                                    374,711               469,626
DEFERRED GAIN ON SALE OF BUILDING                                                   208,545                    --
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock, $.01 par value; 1,000,000 shares authorized; none
       issued and outstanding                                                            --                    --
     Common stock, $.001 par value; 110,000,000 shares authorized;
       93,618,004 shares issued and outstanding at August 31, 2007 and
       65,198,592 at May 31, 2007                                                    93,618                65,198
     Additional paid-in capital                                                  48,043,640            46,165,998
     Accumulated deficit                                                        (44,637,387)          (44,618,601)
                                                                             -----------------     ----------------
         Total stockholders' equity                                               3,499,871             1,612,595
                                                                             -----------------     ----------------
                                                                                 $6,287,765            $5,283,451
                                                                             =================     ================
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  condensed
financial statements.

                                     Page 3
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                        Three months ended
                                                                                            August 31,
                                                                              --------------------------------------
                                                                                    2007                 2006
                                                                              -----------------    -----------------
<S>                                                                               <C>                  <C>
Revenues
   Equipment sales                                                                $493,268             $1,073,216
   Equipment rentals and services                                                  846,808              1,008,640
                                                                              -----------------    -----------------
     Total revenues                                                              1,340,076              2,081,856

Cost of Sales and Services
   Cost of sales, equipment                                                        340,638                609,342
   Cost of equipment rentals and services                                          314,699                355,268
                                                                              -----------------    -----------------
     Total cost of sales and services                                              655,337                964,610
                                                                              -----------------    -----------------
   Gross profit                                                                    684,739              1,117,246

Operating Expenses
   Selling, general and administrative                                             583,612              1,323,826
   Research and development                                                        139,175                328,495
   Provision for doubtful accounts                                                 (25,456)                 1,681
                                                                              -----------------    -----------------
     Total operating expenses                                                      697,331              1,654,002

                                                                              -----------------    -----------------
LOSS FROM OPERATIONS                                                               (12,592)              (536,756)

Other Income (Expense)
   Interest and financing costs                                                    (16,666)               (18,889)
   Interest and other income, net                                                   12,331                 20,738
    Gain on Sale of Fixed Assets                                                     4,437                     --
                                                                              -----------------    -----------------
     Total other income (expense)                                                      102                  1,849

NET LOSS BEFORE INCOME TAXES                                                       (12,490)              (534,907)
   Income tax expense, net                                                           6,296                  4,550
                                                                              -----------------    -----------------
NET LOSS AFTER TAXES ATTRIBUTABLE TO COMMON STOCKHOLDERS                          $(18,786)             $(539,457)
                                                                              =================    =================
Net loss per common share
     - basic                                                                         $0.00                  $(.01)
                                                                              =================    =================
     - diluted                                                                       $0.00                  $(.01)
                                                                              =================    =================
Weighted average common shares outstanding                                      87,748,778             65,198,592
                                                                              =================    =================
     - diluted                                                                  87,748,778             65,198,592
                                                                              =================    =================
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  condensed
financial statements.


                                     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, 2007                   65,198,592          $65,198        $46,165,998            $(44,618,601)        $1,612,595
   Common  stock  and  warrant  issued to
      Kerns   Manufacturing   Corp. for
      Securities Purchase Agreement       21,428,572           21,429          1,354,461                     --           1,375,890
   Common  stock  issued to  Living  Data
      Technology Corporation for
      distribution and supplier agreement  6,990,840            6,991            461,395                     --             468,386
   Stock based compensation                       --               --             61,786                     --              61,786
   Net loss                                       --               --                 --                 (18,786)           (18,786)

                                         ---------------    ------------    ----------------    ------------------     -------------
Balance at August 31, 2007                93,618,004          $93,618        $48,043,640            $(44,637,387)        $3,499,871
                                         ===============    ============    ================    ==================     =============
</TABLE>
The  accompanying  notes are an  integral  part of this  consolidated  condensed
financial statement.

                                     Page 5


<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                           Three months ended
                                                                                               August 31,
                                                                                   -------------------------------------
                                                                                        2007                 2006
                                                                                   ----------------     ----------------
<S>                                                                                      <C>                 <C>
Cash flows from operating activities
     Net loss                                                                            $(18,786)           $(539,457)
                                                                                   ----------------     ----------------
      Adjustments to reconcile net loss to net cash provided by (used in)
       operating activities
         Depreciation and amortization                                                     70,060               94,313
         Amortization of deferred gain on sale of building                                 (4,437)
         Provision for doubtful accounts                                                  (25,456)               1,681
         Amortization of deferred distributor costs                                        25,444                   --
         Expenses paid for distributor agreement                                          (40,490)
         Stock based compensation                                                          61,786                   --
         Changes in operating assets and liabilities:
              Accounts receivable                                                         316,234             (159,269)
              Inventories                                                                 216,928              308,059
              Other current assets                                                       (202,549)              23,486
              Other assets                                                                     --               (3,256)
              Accounts payable, accrued expenses and other current liabilities           (198,823)             (87,437)
              Other liabilities                                                           (94,915)            (148,599)
                                                                                   ----------------     ----------------
                                                                                          123,782               28,978
                                                                                    ----------------     ----------------
     Net cash provided by (used in) operating activities                                  104,996             (510,479)


     Cash flows provided by investing activities
         Proceeds from the building sale                                                1,400,000                   --
         Expenses paid for sale of building                                               (89,143)
                                                                                    ----------------     ----------------
     Net cash provided by investing activities                                          1,310,857                   --

     Cash flows provided by (used in) financing activities
         Payments on long term debt and notes payable                                    (851,015)             (84,448)
         Proceeds from Securities Purchase agreement                                    1,500,000                   --
         Expenses paid in relation to Securities Purchase Agreement                      (124,110)                  --
                                                                                   ----------------     ----------------
     Net cash provided by (used in) financing activities                                  524,875              (84,448)
                                                                                    ----------------     ----------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    1,940,728             (594,927)
     Cash and cash equivalents - beginning of period                                      850,288            2,385,778
                                                                                   ----------------     ----------------
      Cash and cash equivalents - end of period                                         $2,791,016           $1,790,851
                                                                                   ================     ================

Non-cash investing and financing activities were as follows:
     Inventories  transferred to (from)  property and equipment,  attributable to
       operating leases, net                                                             $(38,531)             $(3,009)
     Issue of note for purchase of insurance policy                                           $--             $192,120
     Common stock issued for distributor agreement                                       $468,386                  $--

Supplemental Disclosures
     Interest paid                                                                        $16,666              $18,889
     Income taxes paid                                                                     $2,983               $2,825
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  condensed
financial statements.
                                     Page 6
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2007



NOTE A - ORGANIZATION AND PLAN OF OPERATIONS

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

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

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

     During the first  quarter of fiscal  2008 the  following  events took place
which allowed us to raise additional  capital through a private equity financing
and by the sale of our facility under a leaseback agreement.

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

     o    We sold to  Kerns,  pursuant  to the  Securities  Purchase  Agreement,
          21,428,572  shares  of our  common  stock  at $.07  per  share  for an
          aggregate  of  $1,500,000  as well a  five-year  warrant  to  purchase
          4,285,714  shares of our common stock at an initial  exercise price of
          $.08 per  share  (the  "Warrant").  We also  have an option to sell an
          additional  $1  million of our common  stock to Kerns.  The  agreement
          further  provided for the appointment to our Board of Directors of two
          representatives of Kerns. In furtherance  thereof,  Mr. Jun Ma and Mr.
          Simon  Srybnik,  Chairman  of both  Kerns and Living  Data,  have been
          appointed  members of our Board of  Directors.  On July 10, 2007,  Mr.

                                     Page 7
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2007


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

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

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

NOTE B - STOCK-BASED COMPENSATION

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

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

     During the three-month period ended August 31, 2007, the Board of Directors
granted  non-qualified stock options under the 2004 Stock Option/Stock  Issuance
Plan to four  directors  to purchase an  aggregate  of 600,000  shares of common
stock,  at an  exercise  price of $0.12 per share,  which  represented  the fair
market  value of the  underlying  common  stock  at the  time of the  respective
grants.  These options vest  immediately,  and expire ten years from the date of
grant.

     Stock-based  compensation  expense  recognized  under  SFAS  123(R) for the
quarter ended August 31, 2007 was $61,786.  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.

                                     Page 8
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2007


     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).

     The fair value of the Company's  stock-based  awards was estimated assuming
the following weighted-average assumptions for the three months ended August 31,
2007:


                Expected life (years)                            5
                Expected volatility                           108.9%
                Risk-free interest rate                        4.95%
                Expected dividend yield                         0.0%

     During the  three-month  period ended August 31, 2007,  options to purchase
1,195,625  shares of common  stock at an  exercise  price of $0.20 - $3.96  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.

     The following  table sets forth the  computation  of basic and diluted loss
per common share:
<TABLE>
<CAPTION>
                                                                    Three months ended
                                                                        August 31,
                                                           --------------------------------------
                                                                 2007                 2006
                                                           -----------------    -----------------
     <S>                                                      <C>                 <C>
     Numerator:
        Net income/(loss)                                       $(18,876)           $(539,457)
                                                           -----------------    -----------------
     Denominator:
        Basic - weighted average common shares                87,748,778           65,198,592
          Stock options                                               --                   --
          Warrants                                                    --                   --
                                                          -----------------    -----------------
     Diluted - weighted average common shares                 87,748,778           65,198,592
                                                          =================    =================
     Basic and diluted loss per common share                       $0.00               $(0.01)
</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, 2007 and 2006,  respectively,  because the
effect of their inclusion would be antidilutive.

                                     Page 9
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2007
<TABLE>
<CAPTION>
                                                                              Three months ended
                                                                                  August 31,
                                                                     --------------------------------------
                                                                           2007                 2006
                                                                     -----------------    -----------------
<S>                                                                     <C>                  <C>
  Options to purchase common stock                                       5,996,710            7,878,508
  Warrants to purchase common stock                                      6,540,252            2,454,538
                                                                     -----------------    -----------------
                                                                        12,536,962           10,333,046
                                                                     =================    =================
</TABLE>

NOTE D - INVENTORIES, NET

     Inventories, net consist of the following:
<TABLE>
<CAPTION>
                                                                           August 31,             May 31,
                                                                             2007                  2007
                                                                       -----------------    -----------------
     <S>                                                                  <C>                  <C>
     Raw materials                                                          $745,236             $794,188
     Work in process                                                         932,109              915,744
     Finished goods                                                          261,885              407,695
                                                                       -----------------    -----------------
                                                                          $1,939,230           $2,117,627
                                                                       =================    =================
</TABLE>
     At August 31, 2007 and May 31, 2007, the Company has recorded  reserves for
excess and obsolete inventory of $677,166.

NOTE E - PROPERTY AND EQUIPMENT

     Property and equipment is summarized as follows:
<TABLE>
<CAPTION>

                                                                            August 31,           May 31,
                                                                               2007               2007
                                                                         ----------------    ---------------
     <S>                                                                    <C>               <C>
     Land                                                                         $--         $   200,000
     Building and improvements                                                     --           1,394,569
     Office, laboratory and other equipment                                 1,372,248           1,436,360
     EECP systems  under  operating  leases or under loan
        for clinical trials                                                   747,367             813,020
     Furniture and fixtures                                                   162,066             162,066
     Leasehold improvements                                                        --             117,803
                                                                         ----------------    ---------------
                                                                            2,281,681           4,123,818
     Less: accumulated depreciation and amortization                       (2,136,295)         (2,836,938)
                                                                         ----------------    ---------------
                                                                             $145,386          $1,286,880
                                                                         ================    ===============
</TABLE>
NOTE F - LONG-TERM DEBT

     The following table sets forth the computation of long-term debt:
<TABLE>
<CAPTION>
                                                                              August 31,          May 31,
                                                                                2007               2007
                                                                          -----------------    ---------------
     <S>                                                                           <C>            <C>
     Facility loans (a)                                                            $--            $851,015
     Less: current portion                                                          --             (65,769)
                                                                          -----------------    ---------------
                                                                                   $--            $785,246
                                                                          =================    ===============
</TABLE>
     (a)  The Company  purchased its  headquarters  and warehouse  facility with
          secured  notes of  $641,667  and  $500,000,  respectively,  under  two
          programs sponsored by New York State. These notes, which bore interest
          at 7.8% and 6%,  respectively,  were  payable in monthly  installments

                                    Page 10
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2007

          consisting of principal and interest payments over fifteen-year terms,
          expiring in September  2016 and January 2017,  respectively,  and were
          secured by the building.

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

NOTE G - DEFERRED REVENUES
     The changes in the Company's deferred revenues are as follows:
<TABLE>
<CAPTION>
                                                                                   Three months ended
                                                                                       August 31
                                                                          --------------------------------------
                                                                                2007                 2006
                                                                          -----------------    -----------------
     <S>                                                                      <C>                <C>
     Deferred revenue at the beginning of the period                          $1,756,352         $2,322,588
     ADDITIONS
          Deferred extended service contracts                                    411,900            390,534
          Deferred in-service training                                            10,000             17,500
          Deferred warranty obligations                                           50,000             52,500
          Deferred service contract promotion                                      4,500                 --
     RECOGNIZED AS REVENUE
          Deferred extended service contracts                                   (566,004)          (606,049)
          Deferred in-service training                                            (7,500)           (20,000)
          Deferred warranty obligations                                          (36,167)           (91,042)
          Deferred service contract promotion                                     (3,450)                --
                                                                          -----------------    -----------------
     Deferred revenue at end of period                                         1,619,631          2,066,031
          Less: current portion                                               (1,244,920)        (1,492,179)
                                                                          -----------------    -----------------
     Long-term deferred revenue at end of period                                $374,711           $573,852
                                                                          =================    =================
</TABLE>

NOTE H - SALE-LEASEBACK

     In August 2007,  the Company sold its warehouse and corporate  facility for
$1,400,000.  Under the agreement,  the Company is leasing back the property from
the purchaser  over a period of five years.  The Company is  accounting  for the
leaseback  as an  operating  lease.  The  gain  of  $266,226  realized  in  this
transaction  has been deferred and is being amortized to income ratably over the
term of the lease. At August 31, 2007, the unamortized deferred gain of $261,790
is shown as "Deferred  gain on sale of building" in the  Company's  consolidated
condensed balance sheet.

NOTE I - WARRANTY COSTS

     The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
                                                                            Three months ended
                                                                                August 31,
                                                                    ----------------------------------
                                                                         2007               2006
                                                                    ---------------    ---------------
     <S>                                                                 <C>                <C>
     Warranty liability at the beginning of the period                   $15,750            $32,000
          Expense for new warranties issued                                9,000             21,000
          Warranty amortization                                           (9,500)           (23,000)
                                                                    ---------------    ---------------
     Warranty liability at end of period                                  15,250             30,000
          Less: current portion                                           15,250             29,250
                                                                    ---------------    ---------------
     Long-term warranty liability at end of period                       $--                $750
                                                                    ===============    ===============
</TABLE>
                                    Page 11
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2007


NOTE  J - INCOME TAXES

     During the three-months  ended August 31, 2007 and 2006, state income taxes
were $6,296 and $4,550, respectively.

     As of August 31, 2007, the recorded  deferred tax assets were  $19,589,352,
reflecting no change  during the first quarter of fiscal 2008.  The deferred tax
asset was offset by a 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.

     At May 31,  2007,  the Company had net  operating  loss  carryforwards  for
Federal and state income tax purposes of approximately $53,290,050,  expiring at
various dates from 2008 through 2027.

NOTE K - COMMITMENTS AND CONTINGENCIES

Leases

     On  August  15,  2007 we sold  our  facility  under a  five-year  leaseback
agreement. Future rental payments under the operating lease are as follows:
<TABLE>
     <S>                                   <C>
     May 31, 2008                          $103,964
     May 31, 2009                           142,777
     May 31, 2010                           148,488
     May 31, 2011                           154,427
     May 21, 2012                           160,604
     May 31, 2013                            40,540
                                       -----------------
     Total                                 $750,800
                                       =================
</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.

                                    Page 12
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


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

General Overview

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

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

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

     During the first  quarter of fiscal 2008 the  following  events took place,
which allowed us to raise additional  capital through a private equity financing
and by the sale of our facility under a leaseback agreement.

                                    Page 13
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



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

          We sold to  Kerns,  pursuant  to the  Securities  Purchase  Agreement,
          21,428,572  shares  of our  common  stock  at $.07  per  share  for an
          aggregate  of  $1,500,000  as well a  five-year  warrant  to  purchase
          4,285,714  shares of our common stock at an initial  exercise price of
          $.08 per  share  (the  "Warrant").  We also  have an option to sell an
          additional  $1  million of our common  stock to Kerns.  The  agreement
          further  provided for the appointment to our Board of Directors of two
          representatives of Kerns. In furtherance  thereof,  Mr. Jun Ma and Mr.
          Simon  Srybnik,  Chairman  of both  Kerns and Living  Data,  have been
          appointed  members of our Board of  Directors.  On July 10, 2007,  Mr.
          Benham Movaseghi,  Treasurer of Kerns, was also appointed to our Board
          of Directors.  Pursuant to the Distribution  Agreement, we have become
          the  exclusive  distributor  in the United  States of the AngioNew ECP
          systems  manufactured by Living Data. As additional  consideration for
          such agreement,  we agreed to issue an additional  6,990,840 shares of
          our common stock to Living Data.  Pursuant to the Supplier  Agreement,
          Living  Data  now  will  be the  exclusive  supplier  to us of the ECP
          therapy systems that we market under the registered trademark EECP(R).
          The  Distribution  Agreement and the Supplier  Agreement  each have an
          initial term extending through May 31, 2012.

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

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

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

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

                                    Page 14
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


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

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

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

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

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

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

     The above 2 papers have been  submitted to CMS for  reconsideration  of our
application.  We had met with  representatives  of CMS on February  28, 2007 and
presented  our case.  CMS has  requested  more data from us. We will continue to
gather the data and continue our dialogue with CMS to obtain  coverage for heart
failure  patients.  However,  there is no  assurance  that the Company will have
sufficient  resources to gather the  necessary  data to be sufficient to support
expansion of the Medicare  national  coverage  policy for EECP(R)  treatment for
NYHA class II and III heart failure patients.

                                    Page 15
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


     We will  continue  to educate the  marketplace  that  EECP(R)  therapy is a
therapy for ischemic  cardiovascular  disease and that  patients  with a primary
diagnosis of heart failure, diabetes, peripheral vascular disease, etc. are also
eligible  for  reimbursement  under the current  coverage  policy,  provided the
primary  indication  for  treatment  with  EECP(R)  therapy  is angina or angina
equivalent symptoms and the patient satisfies other listed criteria.

Critical Accounting Policies

     Financial  Reporting  Release No. 60, which was released by the  Securities
and Exchange  Commission,  or SEC, in December  2001,  requires all companies to
include a  discussion  of critical  accounting  policies or methods  used in the
preparation  of  financial  statements.  Note B of  the  Notes  to  Consolidated
Financial  Statements  included in our Annual Report on Form 10-KSB for the year
ended May 31, 2007,  includes a summary of our significant  accounting  policies
and methods used in the  preparation of our financial  statements.  In preparing
these  financial  statements,  we have made our best  estimates and judgments of
certain amounts included in the financial  statements,  giving due consideration
to  materiality.  The  application  of these  accounting  policies  involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result,  actual  results  could  differ  from  these  estimates.   Our  critical
accounting policies are as follows:

Revenue Recognition

     The Company recognizes  revenue when persuasive  evidence of an arrangement
exists,  delivery has occurred or service has been rendered,  the price is fixed
or determinable and collectibility is reasonably  assured. In the United States,
we recognize revenue from the sale of our EECP(R) systems in the period in which
we deliver  the system to the  customer.  Revenue  from the sale of our  EECP(R)
systems to international markets is recognized upon shipment of the product to a
common carrier,  as are supplies,  accessories and spare parts delivered to both
domestic  and  international  customers.  Returns  are  accepted  prior  to  the
in-service  and  training  subject  to a 10%  restocking  charge  or for  normal
warranty  matters,  and we are not  obligated  for  post-sale  upgrades to these
systems.  In addition,  we use the installment method to record revenue based on
cash receipts in situations  where the account  receivable is collected  over an
extended  period of time and in our  judgment  the degree of  collectibility  is
uncertain.

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

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

     Each of these  elements  represent  individual  units of  accounting as the
delivered  item has value to a customer on a  stand-alone  basis,  objective and
reliable  evidence of fair value exists for undelivered  items, and arrangements
normally do not  contain a general  right of return  relative  to the  delivered
item. We determine fair value based on the price of the  deliverable  when it is
sold  separately  or based  on  third-party  evidence.  In  accordance  with the

                                    Page 16
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



guidance in EITF 00-21,  we use the residual  method to allocate the arrangement
consideration when it does not have fair value of the EECP(R) system sale. Under
the residual method, the amount of consideration allocated to the delivered item
equals the total arrangement  consideration less the aggregate fair value of the
undelivered items. Assuming all other criteria for revenue recognition have been
met, we recognize revenue for:

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

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

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

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

     The Company has also entered into lease agreements for our EECP(R) systems,
generally  for  terms of one year or less,  that  are  classified  as  operating
leases.  Revenues from operating leases are generally recognized,  in accordance
with the terms of the lease agreements,  on a straight-line  basis over the life
of the respective  leases.  For certain  operating leases in which payment terms
are  determined on a  "fee-per-use"  basis,  revenues are recognized as incurred
(i.e.,  as actual usage occurs).  The cost of the EECP(R) system  utilized under
operating  leases is recorded as a component  of property and  equipment  and is
amortized to cost of sales over the estimated useful life of the equipment,  not
to exceed five years.  There were no significant  minimum rental  commitments on
these operating leases at May 31, 2007.

Accounts Receivable, Net

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

                                    Page 17
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                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


Inventories, net

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

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

Deferred Revenues

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

Warranty Costs

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

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

     The factors  affecting our warranty  liability  include the number of units
sold and historical and anticipated rates of claims and costs per claim.

Net Loss per Common Share

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

Income Taxes

     Deferred  income taxes are  recognized  for temporary  differences  between
financial  statement  and income tax bases of assets  and  liabilities  and loss
carryforwards  for which  income tax  benefits  are  expected  to be realized in
future years. A valuation  allowance is established,  when necessary,  to reduce
deferred tax assets to the amount expected to be realized.  In estimating future
tax consequences, we generally consider all expected future events other than an

                                    Page 18
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                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


enactment  of  changes  in the tax laws or  rates.  The  deferred  tax  asset is
continually  evaluated for  realizability.  To the extent our judgment regarding
the  realization  of the  deferred  tax assets  changes,  an  adjustment  to the
allowance is recorded,  with an offsetting increase or decrease, as appropriate,
in income tax expense.  Such adjustments are recorded in the period in which our
estimate as to the  realizability  of the asset  changed that it is "more likely
than not" that 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.

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

     As new stock  options  are issued,  this may have a material  effect on the
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.

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

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

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

                                    Page 19
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


Recently Issued Accounting Standards

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

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

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

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

                                    Page 20
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                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


instruments issued prior to the effective date of this consensus, the assessment
as to whether a  substantive  conversion  feature  exists at issuance  should be
based  only  on  assumptions,  considerations,  and/or  marketplace  information
available  as  of  the  issuance   date.   The  Company  does  not  expect  that
pronouncement  EITF  Issue  05-1  will  have any  significant  effect  on future
financial statements.

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

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

     EITF Issue 06-3,  How Sales Taxes  Collected from Customers and Remitted to
Governmental  Authorities  Should Be Presented in the Income Statement (That Is,
Gross Versus Net  Presentation).  The issue concerns whether various  non-income

                                    Page 21
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


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

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

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

Results of Operations

Three Months Ended August 31, 2007 and 2006

     Net  revenue  from sales,  leases and  service of our EECP  systems for the
three-month  periods  ended  August  31,  2007  and  2006,  was  $1,340,076  and
$2,081,856,  respectively,  which  represented  a decline of $741,780 or 36%. We
reported  net  loss  of  $18,786  compared  to a net  loss of  $539,457  for the
three-month periods ended August 31, 2007 and 2006,  respectively.  Our net loss
per common  share was $0.00 for the  three-month  period  ended  August 31, 2007
compared to a net loss of $0.01 per share for the three-month  period August 31,
2006.  The  decrease in the net loss per common share was  primarily  due to the
significant  decrease  in our  operating  expenses  from the  comparative  prior
period.

Revenues

     Revenue from equipment sales declined approximately 54% to $493,268 for the
three-month  period ended August 31, 2007 as compared to $1,073,216 for the same
period for the prior year. The decline in equipment  sales is due primarily to a
29% decline in the number of equipment  shipments  and a 35% decrease in average

                                    Page 22
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



sales prices.  The overall  decrease in average sales prices is primarily due to
the decline of  equipment  sales as well as the  reduction in sales price due to
competition  in both the  domestic  and  international  markets,  from the prior
fiscal year.

     We believe the decline in domestic units shipped  reflects  weakened demand
in the  refractory  angina market as existing  capacity is more fully  utilized,
coupled with  increased  direct and indirect  competition.  We  anticipate  that
demand for EECP(R)  systems  will remain soft unless  there is greater  clinical
acceptance  for the use of EECP(R)  therapy in treating  patients with angina or
angina equivalent symptoms who meet the current  reimbursement  guidelines or an
expansion  of the current CMS national  reimbursement  policy to include some or
all  Class II & III  heart  failure  patients.  Patients  with  angina or angina
equivalent  symptoms eligible for  reimbursement  under current policies include
many with serious co-morbidities,  such as heart failure,  diabetes,  peripheral
vascular disease and/or others.  Despite this, many cardiology clinicians appear
to be waiting for  approval of  reimbursement  coverage  for heart  failure as a
primary  indication before they will move forward with the treatment of ischemic
heart failure patients with angina equivalent  symptoms.  Reluctance to bill for
ischemic  heart failure  patients  under the current  coverage  guidelines,  and
failure to get or maintain adequate  reimbursement coverage for angina and heart
failure would  adversely  affect our business  prospects.  We anticipate  that a
prevailing  trend of declining  prices will continue in the immediate  future as
our  competition  attempts  to capture  greater  market  share  through  pricing
discounts.  The average price of new systems sales declined by 20%, in the three
month period ended August 31,2007,  compared to prior year and the average sales
price of used systems  declined 46% three month period ended August 31,2007.  We
continue  to  reorganize  certain  territory   responsibilities   in  our  sales
department   due  to  the  reduction  in  our  sales  force  and  vacant  and/or
unproductive territories.

     Our  revenue  from the sale of EECP(R)  systems  and  related  products  to
international  distributors  in the three  month  period  ended  August  31,2007
decreased  approximately 66% to $155,991 compared to $455,178 in the three month
period ending August 31, 2006 reflecting decreased sales volume.

     The decline in revenue was also  partially due to a 16% decrease in revenue
from equipment  rental and services for the three-month  period ended August 31,
2007, from the same three-month period in the prior year. Revenue from equipment
rental and services  represented  63% of total  revenue in the first  quarter of
fiscal 2008 compared to 48% in the first quarter of fiscal 2007. The decrease in
revenue resulted  primarily from a 14% decrease in service related revenue and a
97%  decline  in rental  revenue.  The  decline in rental  revenue  was due to a
decrease in the rental install base from the prior period ended August 31, 2006.

Gross Profit

     The gross  profit  declined to  $684,739  or 47% of revenues  for the three
month period ended August 31, 2007,  compared to  $1,117,246  or 54% of revenues
for the three month period  ended  August 31, 2006.  The decline in gross profit
primarily reflects the reduced sales volume.

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

Selling, General and Administrative

     Selling,  general and administrative ("SG&A") expenses for the three-months
ended August 31, 2007 and 2006,  were $583,612 or 44% of revenues and $1,323,826
or  64%  of  revenues,   respectively  reflecting  a  decrease  of  $740,214  or
approximately  56%. The decrease in SG&A  expenditures  in the first  quarter of
fiscal  2008  compared  to fiscal  2007  resulted  primarily  from a decrease of
$259,841 due to reduced sales  personnel and associated  travel plus lower sales

                                    Page 23
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


commission due to reduced sales volume.  Marketing  expenses  decreased $163,525
due to reduced  personnel  in the  marketing  and clinical  application  support
areas,  as well as  associated  travel,  plus  lower  market  research,  product
promotion,   advertising,  and  trade  show  expenses.  Administrative  expenses
decreased  $316,848 as a result of decreased  expenditures in professional  fees
related to accounting and outside  consulting,  along with reduced personnel and
their associated costs.

Research and Development

     Research and  development  ("R&D")  expenses of $139,175 or 10% of revenues
for the three months ended August 31, 2007,  decreased by $189,320 or 58%,  from
the prior  three  months  ended  August 31 2006,  which was  $328,495  or 16% of
revenues. The decrease is primarily attributable to fewer engineering personnel,
lower new product development spending, and reduced spending on clinical trials.

Provision for Doubtful Accounts

     During the  three-month  period ended August 31, 2007, the Company  reduced
its  provision  for doubtful  accounts by $25,456 and  recorded a provision  for
doubtful  accounts of $1,681,  during the  three-month  period  ended August 31,
2006.  The change in the  provision  is a primarily a result of the  decrease in
sales volume.

Interest Expense and Financing Costs

     Interest   expense  and  financing   costs  decreased  to  $16,666  in  the
three-month  period ended  August 31, 2007,  from $18,889 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.  The slight  decrease  is a result of the loans to finance the cost of
implementation of a new management  information system being paid in full during
fiscal 2007.

Interest and Other Income, Net

     Interest and other income for the three-month periods ended August 31, 2007
and 2006,  were $12,331 and $20,738,  respectively.  Interest  income  primarily
reflects interest earned on the Company's cash balances.

Income Tax Expense, Net

     During the three-month periods ended August 31, 2007 and 2006, state income
taxes were $6,296 and $4,550, respectively.

     As of August 31, 2007, the recorded  deferred tax assets were  $19,589,352,
reflecting no change  during the first quarter of fiscal 2008.  The deferred tax
asset was offset by a 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

                                    Page 24
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


Cash and Cash Flow

     At August  31,  2007,  we had cash of  $2,791,016  and  working  capital of
$3,205,795  as compared  to cash and cash  equivalents  of $850,288  and working
capital of $1,320,347 at May 31, 2007. Our cash and cash  equivalents  increased
$1,940,728 in the first quarter of fiscal year 2008.

     Cash  provided by  operating  activities  was $104,996 for the three months
ended  August  31,2007.  The net loss of 18,786 after  adjustments  for non-cash
items provided cash of $86,907.  The changes in the account  balances  primarily
reflect a decrease  in accounts  receivable  of  $316,234,  lower  inventory  of
$216,928, which were partially offset by a increase in other current assets of $
202,549 and a decrease in accounts payable,  accrued expenses, and other current
liabilities  of $198,822  and a decrease in other  liabilities  of $94,915.  Net
accounts receivable were 33% of revenues for the three-month period ended August
31, 2007, as compared to 48% for the  three-month  period ended August 31, 2006,
and accounts receivable turnover improved to 8 times for the three-months period
August 31, 2007, as compared to 5 times for the three-months period ended August
31, 2006.

     Standard payment terms on our domestic equipment sales are generally net 30
to 90 days from  shipment and do not contain  "right of return"  provisions.  We
have  historically  offered a  variety  of  extended  payment  terms,  including
sales-type  leases,  in certain  situations and to certain customers in order to
expand the market for our EECP(R) products in the US and  internationally.  Such
extended payment terms were offered in lieu of price concessions, in competitive
situations,  when opening new markets or geographies  and for repeat  customers.
Extended payment terms cover a variety of negotiated terms, including payment in
full - net 120, net 180 days or some fixed or variable  monthly  payment  amount
for a six to twelve month period followed by a balloon  payment,  if applicable.
During the  three-month  periods  ended August 31, 2007 and 2006,  there were no
revenues  generated from sales in which initial  payment terms were greater than
90 days and we offered no sales-type  leases during either  period.  In general,
reserves are calculated on a formula basis considering factors such as the aging
of the receivables,  time past due, and the customer's  credit history and their
current  financial  status.  In most instances  where reserves are required,  or
accounts are ultimately written-off,  customers have been unable to successfully
implement their EECP(R) program. As we are creating a new market for the EECP(R)
therapy and  recognizing  the challenges  that some customers may encounter,  we
have opted, at times, on a customer-by-customer  basis, to recover our equipment
instead of pursuing other legal remedies, which has resulted in our recording of
a reserve or a write-off.

     Investing activities provided net cash of $1,310,857 during the three-month
period ended August 31,  2007,  which  represented  proceeds  received  from the
building sale, net of related costs.

     Our  financing   activities  provided  net  cash  of  $524,875  during  the
three-month period ended August 31, 2007,  reflecting  proceeds,  net of related
expenses, of $1,375,890 from the Securities Purchase Agreement, which was offset
by loan repayments on the building of $851,015.

     The following table presents the Company's  expected cash  requirements for
contractual obligations outstanding as of August 31, 2007.
<TABLE>
<CAPTION>
                                                                        Due as of        Due as of
                                                        Due as of      8/31/09 and      8/31/11 and         Due
                                         Total           8/31/08         8/31/10          8/31/12        Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>             <C>             <C>                   <C>
Operating Leases                        $750,800         $138,618        $294,092        $318,090              $--
                                 -----------------------------------------------------------------------------------
Total Contractual Cash
    Obligations                         $750,800         $138,618        $294,092        $318,090              $--
                                 ===================================================================================
</TABLE>
Liquidity

     During the first  quarter of fiscal 2008 the  following  events took place,
which allowed us to raise additional  capital through a private equity financing
and by the sale of our facility under a leaseback agreement.

                                    Page 25
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



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

          We sold to  Kerns,  pursuant  to the  Securities  Purchase  Agreement,
          21,428,572  shares  of our  common  stock  at $.07  per  share  for an
          aggregate  of  $1,500,000  as well a  five-year  warrant  to  purchase
          4,285,714  shares of our common stock at an initial  exercise price of
          $.08 per  share  (the  "Warrant").  We also  have an option to sell an
          additional  $1  million of our common  stock to Kerns.  The  agreement
          further  provided for the appointment to our Board of Directors of two
          representatives of Kerns. In furtherance  thereof,  Mr. Jun Ma and Mr.
          Simon  Srybnik,  Chairman  of both  Kerns and Living  Data,  have been
          appointed  members of our Board of  Directors.  On July 10, 2007,  Mr.
          Benham Movaseghi,  Treasurer of Kerns, was also appointed to our Board
          of Directors.  Pursuant to the Distribution  Agreement, we have become
          the  exclusive  distributor  in the United  States of the AngioNew ECP
          systems  manufactured by Living Data. As additional  consideration for
          such agreement,  we agreed to issue an additional  6,990,840 shares of
          our common stock to Living Data.  Pursuant to the Supplier  Agreement,
          Living  Data  now  will  be the  exclusive  supplier  to us of the ECP
          therapy systems that we market under the registered trademark EECP(R).
          The  Distribution  Agreement and the Supplier  Agreement  each have an
          initial term extending through May 31, 2012.

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

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

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

Effects of Inflation

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

                                    Page 26

<PAGE>
                       Vasomedical, Inc. and Subsidiaries


ITEM 3 - 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, 2007, 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,  2007 in our  internal
controls  or in other  factors  that  could  have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

                                    Page 27
<PAGE>
                       Vasomedical, Inc. and Subsidiaries



                           PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

         None.

ITEM 2 - 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 28
<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/ John C.K. Hui
                             ---------------------------
                             John C.K. Hui
                             Chief Executive Officer, Director, and
                             Chief Technology Officer (Principal Executive
                             Officer)

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

Date:  October 12, 2007