UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-Q


[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934 For the quarterly period ended November 30, 2006

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

Commission File Number: 0-18105

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

             (Exact name of registrant as specified in its charter)

         Delaware                                             11-2871434
--------------------------------------------------------------------------------

(State or other jurisdiction of             (IRS Employer Identification Number)
 incorporation or organization)

                    180 Linden Ave., Westbury, New York 11590
--------------------------------------------------------------------------------

                    (Address of principal executive offices)

Registrant's Telephone Number                               (516) 997-4600

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

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

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

     Number of Shares  Outstanding of Common Stock,  $.001 Par Value,
at January 16, 2007     65,198,592

                                     Page 1
<PAGE>
Vasomedical, Inc. and Subsidiaries



                                      INDEX
<TABLE>
<CAPTION>

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

         Item 1 - Financial Statements (unaudited)

                  Consolidated Condensed Balance Sheets as of
                           November 30, 2006 and May 31, 2006                                    3

                  Consolidated Condensed Statements of Operations for the
                           Six and Three Months Ended November 30, 2006 and 2005                 4

                  Consolidated Condensed Statement of Changes in Stockholders'
                           Equity for the Period from June 1, 2006 to November 30, 2006          5

                  Consolidated Condensed Statements of Cash Flows for the
                           Six Months Ended November 30, 2006 and 2005                           6


                  Notes to Consolidated Condensed Financial Statements                           7

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

                  and Results of Operations                                                     13

         Item 3 - Quantitative and Qualitative Disclosures About Market Risk                    28

         Item 4 - Controls and Procedures                                                       28

PART II - OTHER INFORMATION                                                                     29
</TABLE>
                                     Page 2
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS
                       Vasomedical, Inc. and Subsidiaries
                      CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                        November 30,            May 31,
                                                                                           2006                  2006
                                                                                      ----------------      ----------------
                                     ASSETS                                             (Unaudited)          (Derived from
                                                                                                                audited
                                                                                                               financial
                                                                                                              statements)
<S>                                                                                       <C>                   <C>
CURRENT ASSETS
     Cash and cash equivalents                                                            $1,441,816            $2,385,778
     Accounts receivable, net of an allowance for doubtful accounts of $364,809
       at November 30, 2006, and $410,691 at May 31, 2006                                    806,771               843,282
     Inventories, net                                                                      2,332,502             2,699,673
     Other current assets                                                                    266,377               108,049
                                                                                      ----------------      ----------------
         Total current assets                                                              4,847,466             6,036,782

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,708,201 at
   November 30, 2006, and $2,613,180 at May 31, 2006                                       1,407,151             1,569,588

OTHER ASSETS                                                                                 291,967               305,670
                                                                                      ----------------      ----------------
                                                                                          $6,546,584            $7,912,040
                                                                                      ================      ================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                                  $766,838              $938,095
     Current maturities of long-term debt and notes payable                                  161,200                97,309
     Sales tax payable                                                                       142,378               172,646
     Deferred revenue                                                                      1,500,038             1,600,887
     Accrued director and executive compensation                                              85,250               175,000
     Accrued warranty and customer support expenses                                           26,500                30,500
     Accrued professional fees                                                                70,571                61,875
     Accrued commissions                                                                     162,391                93,182
                                                                                      ----------------      ----------------
         Total current liabilities                                                         2,915,166             3,169,494

LONG-TERM DEBT                                                                               818,704               853,189

ACCRUED WARRANTY COSTS                                                                             -                 1,500

DEFERRED REVENUE                                                                             551,160               721,701

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Common stock, $.001 par value; 110,000,000 shares authorized; 65,198,592
       shares at November 30, 2006, and May 31, 2006, issued and outstanding                  65,198                65,198
     Additional paid-in capital                                                           46,152,283            46,148,493
     Accumulated deficit                                                                 (43,955,927)          (43,047,535)
                                                                                      ----------------      ----------------
         Total stockholders' equity                                                        2,261,554             3,166,156
                                                                                      ----------------      ----------------
                                                                                          $6,546,584            $7,912,040
                                                                                      ================      ================
</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>
                                                          Six Months Ended                       Three Months Ended
                                                            November 30,                            November 30,
                                                 -----------------------------------     -----------------------------------
                                                      2006                2005                2006                2005
                                                 ---------------    ----------------     ---------------    ----------------
<S>                                                 <C>                <C>                    <C>              <C>
Revenues
   Equipment sales                                  $1,648,148         $4,191,318             $574,932         $1,734,409
   Equipment rentals and services                    1,956,931          2,025,237              948,291            945,775
                                                 ---------------    ----------------     ---------------    ----------------
     Total revenues                                  3,605,079          6,216,555            1,523,223          2,680,184

Cost of Sales and Services
   Cost of sales, equipment                            908,829          1,857,405              299,487            825,148
   Cost of equipment rentals and services              772,389            663,608              417,121            272,681
                                                 ---------------    ----------------     ---------------    ----------------
     Total cost of sales and services                1,681,218          2,521,013              716,608          1,097,829
                                                 ---------------    ----------------     ---------------    ----------------
Gross Profit                                         1,923,861          3,695,542              806,615          1,582,355

Operating Expenses
   Selling, general and administrative               2,357,164          4,917,773            1,033,338          2,508,624
   Research and development                            469,285          1,115,702              140,790            603,696
   Provision for doubtful accounts                      (4,001)            70,575               (5,682)                --
                                                 ---------------    ----------------     ---------------    ----------------
     Total operating expenses                        2,822,448          6,104,050            1,168,446          3,112,320
                                                 ---------------    ----------------     ---------------    ----------------
LOSS FROM OPERATIONS                                  (898,587)        (2,408,508)            (361,831)        (1,529,965)

Other Income (Expense)
   Interest and financing costs                        (37,329)           (44,953)             (18,440)           (21,444)
   Interest and other income, net                       35,824             40,790               15,086             21,774
                                                 ---------------    ----------------     ---------------    ----------------
     Total other income (expense)                       (1,505)            (4,163)              (3,354)               330
                                                 ---------------    ----------------     ---------------    ----------------
LOSS BEFORE INCOME TAXES                              (900,092)        (2,412,671)            (365,185)        (1,529,635)
   Income tax expense, net                              (8,300)        (7,112,826)              (3,750)        (7,103,000)
                                                 ---------------    ----------------     ---------------    ----------------
NET LOSS                                              (908,392)        (9,525,497)            (368,935)        (8,632,635)
   Preferred Stock Dividend                                 --           (854,536)                  --            (48,913)
                                                 ---------------    ----------------     ---------------    ----------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS         $(908,392)      $(10,380,033)           $(368,935)       $(8,681,548)
                                                 ===============    ================     ===============    ================
Net loss per common share
     - basic                                            $(0.01)            $(0.18)              $(0.00)            $(0.15)
                                                 ===============    ================     ===============    ================
     - diluted                                          $(0.01)            $(0.18)              $(0.00)            $(0.15)
                                                 ===============    ================     ===============    ================
Weighted average common shares
  outstanding
     - basic                                        65,198,592         59,031,491           65,198,592         59,421,050
                                                 ===============    ================     ===============    ================
     - diluted                                      65,198,592         59,031,491           65,198,592         59,421,050
                                                 ===============    ================     ===============    ================
</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, 2006                 65,198,592          $65,198        $46,148,493          $(43,047,535)            $3,166,156
   Stock options granted for services           --               --              3,790                    --                  3,790
   Net loss                                     --               --                 --              (908,392)              (908,392)
                                       ---------------    ------------    ----------------    ------------------     ---------------
Balance at November 30, 2006            65,198,592          $65,198        $46,152,283          $(43,955,927)            $2,261,554
                                       ===============    ============    ================    ==================     ===============
</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>
                                                                                                Six months ended
                                                                                                   November 30,
                                                                                 -----------------------------------------------
                                                                                         2006                       2005
                                                                                 ----------------------       ------------------
<S>                                                                                   <C>                        <C>
Cash flows from operating activities
     Net loss                                                                         $(908,392)                 $(9,525,497)
                                                                                 ----------------------       ------------------
     Adjustments to reconcile net loss to net cash used in operating
       activities
         Depreciation and amortization                                                  194,021                      307,379
         Provision for doubtful accounts                                                 (4,001)                      70,575
         Reserve for excess and obsolete inventory                                           --                      (82,765)
         Deferred income taxes                                                               --                    7,093,000
         Common stock issued for services                                                    --                      101,250
         Stock options granted for services                                               3,790                           --
         Changes in operating assets and liabilities
              Accounts receivable                                                        40,512                     (246,611)
              Inventories                                                               358,654                      549,675
              Other current assets                                                       33,792                      155,274
              Other assets                                                               (9,364)                     (16,583)
              Accounts payable, accrued expenses and other current
                liabilities                                                            (318,219)                      25,843
              Other liabilities                                                        (172,041)                    (114,253)
                                                                                 ----------------------       ------------------
                                                                                        127,144                    7,842,784
                                                                                 ----------------------       ------------------
     Net cash used in operating activities                                             (781,248)                  (1,682,713)
                                                                                 ----------------------       ------------------

     Cash flows provided by investing activities
         Redemptions of certificates of deposit                                              --                    1,464,757
                                                                                 ----------------------       ------------------
     Net cash provided by investing activities                                               --                    1,464,757
                                                                                 ----------------------       ------------------

     Cash flows provided by (used in) financing activities
         Payments on long term debt and notes payable                                  (162,714)                    (250,579)
         Payments of preferred stock dividends                                               --                      (51,206)
         Payments of preferred stock issue costs                                             --                     (314,383)
         Proceeds from sale of convertible preferred stock                                   --                    2,500,000
                                                                                 ----------------------       ------------------
     Net cash provided by (used in) financing activities                               (162,714)                   1,883,832
                                                                                 ----------------------       ------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   (943,962)                   1,665,876
     Cash and cash equivalents - beginning of period                                  2,385,778                      989,524
                                                                                 ----------------------       ------------------
     Cash and cash equivalents - end of period                                       $1,441,816                   $2,655,400
                                                                                 ======================       ==================

Non-cash investing and financing activities were as follows:
     Inventories transferred to (from) property and equipment,  attributable to
       operating leases, net                                                             $8,517                     $(55,938)
     Issue of note for purchase of insurance policy                                    $192,120                     $302,052
     Preferred stock dividends                                                           $--                        $803,330
     Preferred stock issue costs                                                         $--                        $227,087

Supplemental Disclosures
     Interest paid                                                                      $37,329                      $44,953
     Income taxes paid                                                                   $6,534                      $22,086
</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)
                                November 30, 2006



NOTE A - ORGANIZATION AND PLAN OF OPERATIONS

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

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

     In order to reduce the  Company's  cash usage and bring its cost  structure
more into alignment with current revenue,  the Company initiated a restructuring
in January 2006, to reduce  personnel and spending on marketing and  development
projects.  Additional  cost  reductions  are  continuing.  However,  revenue has
continued to decline and the Company has not achieved its goal of profitability.

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

     The Company may seek to raise capital  through  public or private equity or
debt financings or by other means. If the Company is unable to raise  additional
funds when  needed,  it may need to further  scale  back  operations,  research,
marketing  or  sales   efforts  or  obtain  funds  through   arrangements   with
collaborative  partners  or others  that may  require  the Company to license or
relinquish  rights to  technologies  or products.  Future  capital  funding,  if
available,  may result in dilution to current  shareholders,  and new  investors
could have rights superior to existing stockholders.

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

Reclassifications

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

NOTE B - STOCK-BASED COMPENSATION

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

                                     Page 7
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                November 30, 2006

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

     The following  table  illustrates  the proforma effect on net loss and loss
per share had the  Company  applied  the fair value  recognition  provisions  of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation,"  to  stock-based  employee  compensation,  for the six and  three
months ended November 30, 2005.
<TABLE>
<CAPTION>
                                        --------------------    ---------------------
                                          Six Months Ended        Three Months Ended
                                          November 30, 2005       November 30, 2005
                                        --------------------    ---------------------
<S>                                         <C>                     <C>
Net  loss   attributable   to   common
stockholders, as reported                   $(10,380,033)           $(8,681,548)
     Deduct: Total stock-based
       employee compensation expense
       determined under fair
       value-based method for all
       awards                                   (433,742)              (221,448)
                                        --------------------    ---------------------
Pro forma net loss                          $(10,813,775)           $(8,902,996)
                                        ====================    =====================

Loss per share:
    Basic and diluted - as reported             $(0.18)                 $(0.15)
                                        ====================    =====================
    Basic and diluted - pro forma               $(0.18)                 $(0.15)
                                        ====================    =====================
</TABLE>
     During the six-month period ended November 30, 2006, the Board of Directors
granted  non-qualified stock options under the 1997 Stock Option/Stock  Issuance
Plan to one director to purchase an aggregate of 150,000 shares of common stock,
at an exercise price of $.09 per share, and granted  non-qualified stock options
under the 1999 Stock  Option/Stock  Issuance Plan to three directors to purchase
an aggregate of 450,000 shares of common stock, at an exercise price of $.09 per
share, and granted non-qualified stock options under the 2004 Stock Option/Stock
Issuance  Plan to one  officer to  purchase an  aggregate  of 200,000  shares of
common stock, at an exercise price of $.11 per share, which represented the fair
market  value of the  underlying  common  stock  at the  time of the  respective
grants. These options vest over a two year period, and expire ten years from the
date of grant.

     Stock-based  compensation expense recognized under SFAS 123 (R) for the six
months ended November 30, 2006 was $3,790 which  comprised the fair value of the
stock options discussed above.

     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  changesin  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)
                                November 30, 2006


     The fair value of the Company's  stock-based  awards was estimated assuming
no expected dividends and the following weighted-average assumptions for the six
months ended November 30, 2006:
<TABLE>
                <S>                                          <C>
                Expected life (years)                             5
                Expected volatility                          114.09%
                Risk-free interest rate                        4.76%
                Expected dividend yield                        0.00%
</TABLE>

     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).

     During the six-month  period ended  November 30, 2006,  options to purchase
1,219,026  shares of common  stock at an  exercise  price of $.22 - $3.875  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>
                                                           Six Months Ended                   Three Months Ended
                                                             November 30,                        November 30,
                                                  ----------------------------------    -------------------------------
                                                       2006               2005               2006             2005
                                                  ---------------    ---------------    --------------    -------------
<S>                                                   <C>              <C>                 <C>             <C>
Numerator:
   Net loss                                           $(908,392)       $(9,525,497)        $(368,935)      $(8,632,635)
     Deemed  dividend  related  to  beneficial
     conversion  feature on Series D preferred
     stock                                                   --           (786,247)               --                --
     Series D preferred stock dividends                      --            (68,289)               --           (48,913)
                                                  ---------------    ---------------    --------------    -------------
   Net loss attributable to common
   stockholders - basic and diluted                   $(908,392)      $(10,380,033)        $(368,935)      $(8,681,548)
                                                  ===============    ===============    ==============    =============
Denominator:
   Basic - weighted average common shares            65,198,592         59,031,491        65,198,592        59,421,050
     Stock options                                           --                 --                --                --
     Warrants                                                --                 --                --                --
     Convertible preferred stock                             --                 --                --                --
                                                  ---------------    ---------------    --------------    -------------
   Diluted - weighted average common shares
                                                     65,198,592         59,031,491        65,198,592        59,421,050
                                                  ===============    ===============    ==============    =============

Basic and diluted loss per common share                $(0.01)            $(0.18)            $(0.00)           $(0.15)
                                                  ===============    ===============    ==============    =============
</TABLE>

                                     Page 9
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                November 30, 2006


     Options,  warrants, and convertible preferred stock, in accordance with the
following  table,  were excluded from the  computation of diluted loss per share
for the six and three  months ended  November  30, 2006 and 2005,  respectively,
because the effect of their inclusion would be antidilutive.
<TABLE>
<CAPTION>
                                                                            Six and three months ended
                                                                                   November 30,
                                                                      --------------------------------------
                                                                            2006                 2005
                                                                      ----------------     -----------------
  <S>                                                                      <C>                <C>
  Options to purchase common stock                                         7,593,049          7,372,179
  Warrants to purchase common stock                                        2,254,538          2,454,538
  Convertible preferred stock                                                     --          5,125,000
                                                                      ----------------     -----------------
                                                                           9,847,587         14,951,717
                                                                      ================     =================
</TABLE>
NOTE D - INVENTORIES, NET

         Inventories, net consist of the following:
<TABLE>
<CAPTION>
                                                                        November 30,           May 31,
                                                                            2006                2006
                                                                     -----------------    -----------------
   <S>                                                                   <C>                 <C>
   Raw materials                                                           $720,063            $863,952
   Work in process                                                        1,017,413           1,243,986
   Finished goods                                                           595,026             591,735
                                                                     -----------------    -----------------
                                                                         $2,332,502          $2,699,673
                                                                     =================    =================
</TABLE>
     At November  30, 2006 and May 31, 2006,  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>
                                                                      November 30,          May 31,
                                                                          2006               2006
                                                                    ----------------    ---------------
<S>                                                                  <C>                 <C>
Land                                                                 $   200,000         $   200,000
Building and improvements                                              1,383,976           1,383,976
Office, laboratory and other equipment                                 1,436,362           1,444,850
EECP(R) systems under  operating  leases or under loan
   for clinical trials                                                   815,143             874,071
Furniture and fixtures                                                   162,068             162,068
Leasehold improvements                                                   117,803             117,803
                                                                    ----------------    ---------------
                                                                       4,115,352           4,182,768
Less: accumulated depreciation and amortization                       (2,708,201)         (2,613,180)
                                                                    ----------------    ---------------
                                                                      $1,407,151          $1,569,588
                                                                    ================    ===============
</TABLE>
NOTE F - NOTES PAYABLE

     The Company  financed the purchase of Director's  and  Officer's  Liability
Insurance through the issuance of a note with a principal value of $192,120. The
note,  which  bears  interest at 8.15%,  is payable in ten monthly  installments
consisting  of principal and  interest,  and expires in April 2007.  The balance
outstanding  at November 30, 2006,  of $97,685 is presented on the  consolidated
condensed  balance  sheet in  current  maturities  of  long-term  debt and notes
payable.

                                    Page 10
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                November 30, 2006


NOTE G - LONG-TERM DEBT

     The following table sets forth the computation of long-term debt:
<TABLE>
<CAPTION>

                                   November 30,           May 31,
                                       2006                2006
                                 -----------------    ---------------
<S>                                 <C>               <C>
Facility loans (a)                  $  882,219        $     914,528
Term loans (b)                               -               35,970
                                -----------------    ---------------
                                       882,219              950,498
Less: current portion                  (63,515)             (97,309)
                                -----------------    ---------------
                                    $  818,704        $     853,189
                                =================    ===============
</TABLE>
     (a) The Company  purchased  its  headquarters  and  warehouse  facility and
secured  notes of  $641,667  and  $500,000,  respectively,  under  two  programs
sponsored by New York State.  These notes,  which bear  interest at 7.8% and 6%,
respectively,  are payable in monthly  installments  consisting of principal and
interest  payments  over  fifteen-year  terms,  expiring in  September  2016 and
January 2017, respectively, and are secured by the building.

     (b) In  fiscal  years  2003 and 2004,  the  Company  financed  the cost and
implementation  of a management  information  system and secured  several notes,
aggregating  approximately  $305,219.  The notes,  which bear  interest at rates
ranging from 7.5% through 12.5%, were payable in monthly installments consisting
of principal and interest  payments over four-year terms, and expired at various
times  between  August and October  2006. As of November 30, 2006 the loans have
been paid in full.

NOTE H - DEFERRED REVENUES

     The changes in the Company's deferred revenues are as follows:
<TABLE>
<CAPTION>
                                                           Six Months Ended                   Three Months Ended
                                                             November 30,                        November 30,
                                                    ------------------------------       ------------------------------
                                                        2006             2005                2006             2005
                                                    -------------    -------------       -------------    -------------
<S>                                                   <C>              <C>                 <C>              <C>
Deferred Revenue at the beginning of the period       $2,322,588       $2,551,532          $2,066,031       $2,476,763
ADDITIONS
     Deferred extended service contracts               1,049,461        1,177,310             658,927          666,455
     Deferred in-service and training                     25,000           85,000               7,500           37,500
     Deferred service arrangements                        75,000          265,000              22,500          112,500
RECOGNIZED AS REVENUE
     Deferred extended service contracts              (1,241,476)      (1,143,855)           (635,427)        (563,855)
     Deferred in-service and training                    (25,000)         (85,000)             (5,000)         (35,000)
     Deferred service arrangements                      (154,375)        (288,957)            (63,333)        (133,333)
                                                    -------------    -------------       -------------    -------------
Deferred revenue at end of period                      2,051,198        2,561,030           2,051,198        2,561,030
     Less: current portion                            (1,500,038)      (1,718,581)         (1,500,038)      (1,718,581)
                                                    -------------    -------------       -------------    -------------
Long-term deferred revenue at end of period             $551,160         $842,449            $551,160         $842,449
                                                    =============    =============       =============    =============
</TABLE>

                                    Page 11
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                November 30, 2006


NOTE I - WARRANTY COSTS

         The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
                                                          Six Months Ended                   Three Months Ended
                                                            November 30,                         November 30,
                                                   -------------------------------      ------------------------------
                                                       2006              2005               2006             2005
                                                   -------------     -------------      -------------    -------------
<S>                                                     <C>              <C>                 <C>              <C>
Warranty liability at the beginning of the              $32,000          $118,333            $30,000          $95,000
   period
     Expense for new warranties issued                   30,000            15,000              9,000            3,000
     Warranty amortization                              (35,500)          (68,333)           (12,500)         (33,000)
                                                   -------------     -------------      -------------    -------------
Warranty liability at end of period                      26,500            65,000             26,500           65,000
     Less: current portion                              (26,500)          (62,000)           (26,500)         (62,000)
                                                   -------------     -------------      -------------    -------------
Long-term warranty liability at end of period           $    --            $3,000            $    --           $3,000
                                                   =============     =============      =============    =============
</TABLE>
NOTE J - INCOME TAXES

     During the  six-months  ended  November  30,  2006 and 2005,  we recorded a
provision for state income taxes of $8,300 and $20,000, respectively.

     As of November 30, 2006, the recorded deferred tax assets were $19,865,489,
reflecting  an increase of $306,031  during the six months  ended  November  30,
2006, which was offset by the valuation allowance of the same amount.

     Ultimate  realization  of any or all of  the  deferred  tax  assets  is not
assured, due to significant  uncertainties and material  assumptions  associated
with  estimates of future  taxable  income during the  carryforward  period.  In
February 2006, we concluded that,  based upon the weight of available  evidence,
it was  "more  likely  than not" that the net  deferred  tax asset  would not be
realized and  increased  the  valuation  allowance to bring the net deferred tax
asset carrying value to zero.


NOTE K - COMMITMENTS AND CONTINGENCIES

Employment Agreements
         The approximate aggregate minimum compensation obligation under active
employment agreements at November 30, 2006 is summarized as follows:
<TABLE>
<CAPTION>
Twelve months ended November 30,                                    Amount
------------------------------------------------------     ----------------
     <S>                                                            <C>
     2007                                                         $260,000
     2008                                                          210,167
                                                           ----------------
Total                                                             $470,167
                                                           ================
</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  OF  FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS


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

General Overview

     Vasomedical,   Inc.  incorporated  in  Delaware  in  July  1987,  develops,
manufactures and markets EECP(R) therapy systems to deliver its proprietary form
of enhanced external counterpulsation therapy. EECP(R) therapy is a noninvasive,
outpatient  therapy used in the treatment of ischemic  cardiovascular  diseases,
currently used to manage  chronic  stable angina and heart failure.  The therapy
increases  blood flow and oxygen supply to the heart muscle and other organs and
decreases  the  heart's  workload  and need for  oxygen,  while  also  improving
function of the  endothelium,  the inner lining of blood vessels  throughout the
body,  lessening  resistance to blood flow.  We provide  hospitals and physician
private  practices  with  EECP(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 or angina equivalent  symptoms in patients
with  moderate to severe  symptoms who are  refractory  to  medications  and not
candidates   for   invasive   procedures,   including   patients   with  serious
comorbidities,  such as heart failure,  diabetes,  peripheral  vascular disease,
etc.  Patients with primary  diagnoses of heart  failure,  diabetes,  peripheral
vascular disease, etc. are also reimbursed under the same criteria, provided the
primary  indication  for  treatment  with  EECP(R)  therapy  is angina or angina
equivalent symptoms.

     We recently 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  (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.  Results of the trial were initially published on line
by the Journal of the American College of Cardiology  (JACC) on August 25, 2006,
and in print in its  September 19, 2006 issue.  JACC is the official  journal of
the  American  College of  Cardiology.  The PEECH trial was a positive  clinical
trial,  having met the  statistical  requirement  of meeting at least one of its
co-primary  endpoints,  a significant  difference in the  proportion of patients
satisfying a prespecified  threshold of improvement  in exercise  duration.  The
trial also demonstrated  significant improvements in favor of EECP(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

                                    Page 13
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



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.

     Very  recently,  a second  report  of  results  from the  PEECH  trial  was
published in the  November-December  2006 issue of the journal  Congestive Heart
Failure,  focusing on the results of a prespecified  subgroup  analysis in trial
patients age 65 and over. This analysis  demonstrated a  statistically  positive
response on both co-primary endpoints of the trial in patients receiving EECP(R)
therapy  versus those who did not,  i.e. a  significantly  larger  proportion of
patients undergoing EECP(R) therapy met or exceeded  prespecified  thresholds of
improvement  in exercise  duration and peak oxygen  consumption.  Moreover,  the
patients age 65 and older who received EECP(R) therapy demonstrated the greatest
differences in exercise  duration,  peak oxygen consumption and functional class
(symptom status) compared with those who did not receive EECP(R) therapy.

     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 <, or = 35%, i.e. chronic, stable, mild-to-moderate
systolic  heart  failure  as a  primary  indication,  as well as  patients  with
Canadian  Cardiovascular Society Classification (CCSC) II, i.e. chronic,  stable
mild angina.

     On June 23, 2005, CMS also received a request from a competing manufacturer
of external  counterpulsation therapy equipment, to reconsider the reimbursement
coverage policy. They requested expansion of coverage to include 1) treatment of
congestive heart failure,  to include NYHA Class II, III with a left ventricular
ejection  fraction (LVEF) <, or = 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
          -    New York Heart  Association  Class II/III  stable  heart  failure
               symptoms with an ejection fraction of <, or = 35%
          -    New York Heart  Association  Class II/III  stable  heart  failure
               symptoms  with an  ejection  fraction  of <, or = 40%
          -    New York Heart Association Class IV heart failure
          -    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 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 <, or = 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."

     We will  continue  to educate the  marketplace  that  EECP(R)  therapy is a
therapy for ischemic  cardiovascular  disease and that  patients  with a primary

                                    Page 14
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



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

Critical Accounting Policies

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

Revenue Recognition

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

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

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

     Each of these  elements  represent  individual  units of  accounting as the
delivered  item has value to a customer on a  stand-alone  basis,  objective and
reliable  evidence of fair value exists for undelivered  items, and arrangements
normally do not  contain a general  right of return  relative  to the  delivered
item. We determine fair value based on the price of the  deliverable  when it is
sold  separately  or based  on  third-party  evidence.  In  accordance  with the
guidance in EITF 00-21,  we use the residual  method to allocate the arrangement
consideration when it does not have fair value of the EECP(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:

                                    Page 15
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



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

     We also recognize revenue generated from servicing EECP(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.

     We have  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 November 30, 2006.

Accounts Receivable, net

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

Inventories, net

     The Company values inventory at the lower of cost or estimated market, cost
being  determined  on a first-in,  first-out  basis.  The Company  often  places
EECP(R)  systems  at  various  field  locations  for  demonstration,   training,
evaluation,  and other similar purposes at no charge.  The cost of these EECP(R)

                                    Page 16
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



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  records a  provision  for excess and  obsolete
inventory  based  primarily on existing and  anticipated  design and engineering
changes to our products as well as forecasts of future product demand.

     Effective June 1, 2005, we adopted the provisions of Statement of Financial
Accounting  Standards No. 151,  "Inventory  Costs", on a prospective  basis. The
statement  clarifies that abnormal  amounts of idle facility  expense,  freight,
handling  costs,  and  wasted  materials  (spoilage)  should  be  recognized  as
current-period charges and requires the allocation of fixed production overheads
to inventory  based on the normal  capacity of the production  facilities.  As a
result of adopting SFAS No. 151, we absorbed approximately $89,000 less in fixed
production overhead into inventory.

Deferred Revenues

     We record revenue on extended  service  contracts  ratably over the term of
the related warranty  contracts.  Effective  September 1, 2003, we prospectively
adopted the  provisions of EITF 00-21.  Upon adoption of the  provisions of EITF
00-21 we began to defer  revenue  related to EECP(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,  we  adopted  the  provisions  of EITF 00-21 on a
prospective basis. Under EITF 00-21, for certain arrangements,  a portion of the
overall  system  price  attributable  to the first year service  arrangement  is
deferred and  recognized  as revenue  over the service  period.  As such,  we no
longer accrue  warranty  costs upon delivery but rather  recognize  warranty and
related  service  costs as incurred.  Prior to  September 1, 2003,  we accrued a
warranty  reserve for  estimated  costs to provide  warranty  services  when the
equipment sale was recognized.

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

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

Net Loss per Common Share

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

Income Taxes

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

                                    Page 17
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



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

Stock-based Employee Compensation

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

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

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

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

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

                                    Page 18
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



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

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

Recently Issued Accounting Standards

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

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

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

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

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

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

                                    Page 19
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



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

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

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

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

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

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

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

     Statement  of  Financial   Accounting   Standards   No.  157,   Fair  Value
Measurements.  This  Statement  defines fair value,  establishes a framework for
measuring fair value,  and expands  disclosures  about fair value  measurements.

                                    Page 20
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



This Statement  applies under other  accounting  pronouncements  that require or
permit fair value measurements,  the Board having previously  concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly,  this Statement  does not require any new fair value  measurements.
However,  for some  entities,  the  application  of this  Statement  will change
current  practice.  This Statement is effective for financial  statements issued
for fiscal years  beginning  after November 15, 2007, and interim periods within
those  fiscal  years.  Earlier  application  is  encouraged,  provided  that the
reporting entity has not yet issued  financial  statements for that fiscal year,
including  financial  statements  for an interim period within that fiscal year.
The Company does not expect that this  pronouncement  will have any  significant
effect on future financial statements.

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

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

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

Results of Operations

Three Months Ended November 30, 2006 and 2005

     Net revenue from sales,  leases and service of our EECP(R)  systems for the
three-month  periods  ended  November  30,  2006 and  2005,  was  1,523,223  and
$2,680,184,  respectively,  which represented a decline of $1,156,961 or 43%. We
reported a net loss of  $368,935  compared  to  $8,632,635  for the  three-month
periods ended November 30, 2006 and 2005, respectively.  Our net loss per common
share was $0.00 for the three-month period ended November 30, 2006 compared to a
net loss of $0.15 per share for the  three-month  period  November 30, 2005. The
decrease in the net loss per share is due  primarily to a $7,103,000  income tax
expense  valuation reserve recorded in November 30, 2005 for the remaining value
of the deferred tax asset.

Revenues

     Revenue from equipment sales declined approximately 67% to $574,932 for the
three-month  period ended  November 30, 2006 as compared to  $1,734,409  for the
same period for the prior year. The decline in equipment  sales is due primarily

                                    Page 21
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



to a 59%  decline in the number of  equipment  shipments  and a 68%  decrease in
average sales  prices.  A higher mix of used  equipment  versus both newer model
equipment  and new  equipment  was the primary  cause of the decrease in average
sales prices.

     We believe the decline in domestic units shipped  reflects  weakened demand
in the  refractory  angina market as existing  capacity is more fully  utilized,
coupled with  increased  direct and indirect  competition.  We  anticipate  that
demand for EECP(R)  systems  will  remain  soft until there is greater  clinical
acceptance  for the use of EECP(R)  therapy in treating  patients with angina or
angina equivalent symptoms who meet the current  reimbursement  guidelines or an
expansion  of the current CMS national  reimbursement  policy to include some or
all  Class II & III  heart  failure  patients.  Patients  with  angina or angina
equivalent  symptoms eligible for  reimbursement  under current policies include
many with serious  comorbidities,  such as heart failure,  diabetes,  peripheral
vascular disease and/or others.  Despite this, many cardiology clinicians appear
to be waiting for  approval of  reimbursement  coverage  for heart  failure as a
primary  indication before they will move forward with the treatment of ischemic
heart failure patients with angina equivalent  symptoms.  Reluctance to bill for
ischemic heart failure patients under the current coverage  guidelines,  failure
to get or maintain adequate  reimbursement coverage for angina and heart failure
would adversely affect our business  prospects.  We anticipate that a prevailing
trend  of  declining  prices  will  continue  in  the  immediate  future  as our
competition  attempts to capture greater market share through pricing discounts.
We sold an unusually high  percentage of used equipment in the second quarter of
fiscal 2007  compared to the second  quarter of fiscal 2006,  which  reduced the
average  selling  price in that period.  The average  price of new systems sales
declined  approximately 67% in the second quarter of fiscal 2007 compared to the
same  period in the prior  year.  Lastly,  we  continue  to  reorganize  certain
territory  responsibilities  in  our  sales  department  due  to  vacant  and/or
unproductive  territories.  Our  revenue  from the sale of  EECP(R)  systems  to
international  distributors  in the  second  quarter  of fiscal  2007  increased
approximately  255% to $230,000  compared to $90,000 in same period of the prior
year reflecting increased volume.

     The above  decline in revenue was also  partially  offset by a less than 1%
increase in revenue  from  equipment  rental and  services  for the  three-month
period ended November 30, 2006,  from the same  three-month  period in the prior
year.  Revenue  from  equipment  rental and  services  represented  62% of total
revenue  in the  second  quarter of fiscal  2007  compared  to 56% in the second
quarter of fiscal 2006. The increase in the absolute amounts and the increase in
the percentage of total revenue  resulted  primarily from a 1% change in service
related revenue,  offset by a 64% decline in rental revenue. The decline was due
to a decrease in the rental  install base from the prior  period ended  November
30, 2005.

Gross Profit

     The  gross  profit  declined  to  $806,615  or  53%  of  revenues  for  the
three-month  period ended  November 30, 2006,  compared to  $1,582,355 or 59% of
revenues for the three-month period ended November 30, 2005. Gross profit margin
as a percentage of revenue for the  three-month  period ended November 30, 2006,
decreased compared to the same period of the prior fiscal year mainly due to the
higher fixed  production unit costs  associated  with reduced  production in the
last two fiscal  quarters.  In  addition,  adoption  of SFAS No. 151 lowered the
amount of fixed  overhead costs absorbed into inventory in the second quarter of
fiscal  2007.  The decline in gross  profit  when  compared to the prior year in
absolute dollars is principally due to the lower sales volume.

     Gross profits are dependent on a number of factors, particularly the mix of
EECP(R) models sold 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  November  30,  2006 and 2005,  were  $1,033,338  or 68% of  revenues  and
$2,508,624 or 94% of revenues,  respectively reflecting a decrease of $1,475,286
or approximately 59%. The decrease in SG&A expenditures in the second quarter of

                                    Page 22
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



fiscal 2007 compared to fiscal 2006 resulted  primarily from decreased sales and
marketing  expenditures  reflecting  lower  sales and  marketing  personnel  and
travel, plus reduced market research and advertising costs.

Research and Development

     Research and development ("R&D") expenses of $140,790 or 9% of revenues for
the three months ended  November  30, 2006,  decreased by $462,906 or 77%,  from
$603,696 or 23% of revenues  for the three months  ended  November 30 2005.  The
decrease is primarily attributable to lower new product development spending and
reduced spending on clinical trials.

Provision for Doubtful Accounts

     During the three-month period ended November 30, 2006, the Company reversed
$5,682 from its provision  for doubtful  accounts as compared to not recording a
charge during the  three-month  period ended  November 30, 2005. The decrease in
the provision is a direct  result of the second  quarter of fiscal 2007 decrease
in accounts  receivable and sales from the corresponding  quarter ended November
30, 2005.

Interest Expense and Financing Costs

     Interest   expense  and  financing   costs  decreased  to  $18,440  in  the
three-month  period ended November 30, 2006, from $21,444 for the same period in
the prior year. Interest expense primarily reflects interest on loans secured to
refinance the November 2000 purchase of the Company's headquarters and warehouse
facility,  as well as on loans secured to finance the cost and implementation of
a new management  information  system. As of November 30, 2006 the loans related
to the cost and  implementation of the management  information  system have been
paid in full.

Interest and Other Income, Net

     Interest and other  income for the three months ended  November 30 2006 and
2005, were $15,086 and $21,774 respectively.

Income Tax Expense, Net

     During the  three-months  ended  November 30, 2006 and 2005,  we recorded a
provision for state income taxes of $3,750 and $10,000, respectively.

     As of November 30, 2006, the recorded deferred tax assets were $19,865,489,
reflecting  an increase of $123,836  during the three months ended  November 30,
2006, which was offset by the valuation allowance of the same amount.

     Ultimate  realization  of any or all of  the  deferred  tax  assets  is not
assured, due to significant  uncertainties and material  assumptions  associated
with  estimates of future  taxable  income during the  carryforward  period.  In
February 2006, we concluded that,  based upon the weight of available  evidence,
it was  "more  likely  than not" that the net  deferred  tax asset  would not be
realized and  increased  the  valuation  allowance to bring the net deferred tax
asset carrying value to zero.

Six Months Ended November 30, 2006 and 2005

     Net revenue from sales,  leases and service of our EECP(R)  systems for the
six-month  periods  ended  November  30,  2006  and  2005,  was  $3,605,079  and
$6,216,555,  respectively,  which represented a decline of $2,611,476 or 42%. We
reported a net loss of $908,392 compared to $9,525,497 for the six-month periods
ended  November 30, 2006 and 2005,  respectively.  Our net loss per common share
was $0.01 for the  six-month  period ended  November 30, 2006  compared to a net
loss of $0.18 per share for the six-month period November 30, 2005. The decrease
in the net loss per share is due primarily to a $7,112,826  income tax valuation
reserve established in November 2005 for the remaining value of the deferred tax
asset.

                                    Page 23
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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




Revenues

     Revenue from equipment sales declined  approximately  61% to $1,648,148 for
the six-month  period ended  November 30, 2006 as compared to $4,191,318 for the
same period for the prior year. The decline in equipment  sales is due primarily
to a 51% decline in the number of  equipment  shipments,  and a 63%  decrease in
average  sales  prices.  A higher mix of used  equipment  sold versus both newer
model  equipment  and new  equipment  was the primary  cause of the  decrease in
average sales prices.

     We believe the decline in domestic units shipped  reflects  weakened demand
in the  refractory  angina market as existing  capacity is more fully  utilized,
coupled with  increased  direct and indirect  competition.  We  anticipate  that
demand for EECP(R)  systems  will  remain  soft until there is greater  clinical
acceptance  for the use of EECP(R)  therapy in treating  patients with angina or
angina equivalent symptoms who meet the current  reimbursement  guidelines or an
expansion  of the current CMS national  reimbursement  policy to include some or
all  Class II & III  heart  failure  patients.  Patients  with  angina or angina
equivalent  symptoms eligible for  reimbursement  under current policies include
many with serious  comorbidities,  such as heart failure,  diabetes,  peripheral
vascular disease and/or others.  Despite this, many cardiology clinicians appear
to be waiting for  approval of  reimbursement  coverage  for heart  failure as a
primary  indication before they will move forward with the treatment of ischemic
heart failure patients with angina equivalent  symptoms.  Reluctance to bill for
ischemic heart failure patients under the current coverage  guidelines,  failure
to get or maintain adequate  reimbursement coverage for angina and heart failure
would adversely affect our business  prospects.  We anticipate that a prevailing
trend  of  declining  prices  will  continue  in  the  immediate  future  as our
competition  attempts to capture greater market share through pricing discounts.
We sold an unusually  high  percentage  of used  equipment in the second half of
fiscal  2007  compared  to the second  half of fiscal  2006,  which  reduced the
average  selling  price in that period.  The average  price of new systems sales
declined  approximately  72% in the first and  second  quarters  of fiscal  2007
compared to the same period in the prior year. Lastly, we continue to reorganize
certain territory  responsibilities in our sales department due to vacant and/or
unproductive  territories.  Our  revenue  from the sale of  EECP(R)  systems  to
international  distributors  in the first and  second  quarters  of fiscal  2007
increased  approximately 64% to $647,760 compared $395,000 in same period of the
prior year reflecting increased volume.

     The above  decline in revenue  was also  partially  due to a 3% decrease in
revenue  from  equipment  rental and  services  for the  six-month  period ended
November 30, 2006,  from the same  six-month  period in the prior year.  Revenue
from equipment rental and services represented 54% of total revenue in the first
and  second  quarter  of fiscal  2007  compared  to 33% in the first and  second
quarters of fiscal 2006.  The decrease in the absolute  amounts and the increase
in the  percentage of total  revenue  resulted  primarily  from a less than a 1%
change in service  related  revenue,  offset by a 69% decline in rental revenue.
The decline was due to a decrease  in the rental  installed  base from the prior
period ended November 30, 2005.

Gross Profit

     The  gross  profit  declined  to  $1,923,861  or 53% of  revenues  for  the
six-month  period  ended  November 30, 2006,  compared to  $3,695,542  or 59% of
revenues for the six-month  period ended November 30, 2005.  Gross profit margin
as a percentage  of revenue for the  six-month  period ended  November 30, 2006,
decreased compared to the same period of the prior fiscal year mainly due to the
higher fixed  production unit costs  associated  with reduced  production in the
last two fiscal  quarters.  In  addition,  adoption  of SFAS No. 151 lowered the
amount of fixed  overhead  costs absorbed into inventory in the first and second
quarters of fiscal 2007.  The decline in gross profit when compared to the prior
year in absolute dollars is a direct result of the lower sales volume.

     Gross profits are dependent on a number of factors, particularly the mix of
EECP(R) models sold 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.

                                    Page 24
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



Selling, General and Administrative

     Selling,  general and  administrative  ("SG&A") expenses for the six-months
ended  November  30,  2006 and 2005,  were  $2,357,164  or 65% of  revenues  and
$4,917,773 or 79% of revenues,  respectively reflecting a decrease of $2,560,609
or  approximately  52%. The decrease in SG&A  expenditures  in the first half of
fiscal 2007 compared to fiscal 2006 resulted  primarily from decreased sales and
marketing  expenditures  reflecting  fewer  sales and  marketing  personnel  and
reduced travel, plus lower market research, and advertising costs.

Research and Development

     Research and  development  ("R&D")  expenses of $469,285 or 13% of revenues
for the six months ended  November 30, 2006,  decreased by $646,417 or 58%, from
the six months ended  November 30 2005, of  $1,115,702  or 18% of revenues.  The
decrease is primarily attributable to lower new product development spending and
reduced spending on clinical trials.

Provision for Doubtful Accounts

     During the six-month  period ended November 30, 2006, the Company  reversed
$4,001 from its provision for doubtful accounts as compared to recording $70,575
during the  six-month  period  ended  November  30,  2005.  The  decrease in the
provision  is a direct  result of the  first  half of fiscal  2007  decrease  in
accounts receivable and sales from the corresponding  quarter ended November 30,
2005.

Interest Expense and Financing Costs

     Interest  expense and financing costs decreased to $37,329 in the six-month
period ended  November  30, 2006,  from $44,953 for the same period in the prior
year. Interest expense primarily reflects interest on loans secured to refinance
the November 2000 purchase of the Company's headquarters and warehouse facility,
as well as on loans  secured to  finance  the cost and  implementation  of a new
management  information system. As of November 30, 2006 the loans related to the
cost and  implementation of the management  information system have been paid in
full.

Interest and Other Income, Net

     Interest  and other  income  for the first  half of fiscal  2007 and fiscal
2006, were $35,824 and $40,790, respectively.

Income Tax Expense, Net

     During the  six-months  ended  November  30,  2006 and 2005,  we recorded a
provision for state income taxes of $8,300 and $20,000, respectively.

     As of November 30, 2006, the recorded deferred tax assets were $19,865,489,
reflecting  an increase of $306,031  during the six months  ended  November  30,
2006, which was offset by the valuation allowance of the same amount.

     Ultimate  realization  of any or all of  the  deferred  tax  assets  is not
assured, due to significant  uncertainties and material  assumptions  associated
with  estimates of future  taxable  income during the  carryforward  period.  In
February 2006, we concluded that,  based upon the weight of available  evidence,
it was  "more  likely  than not" that the net  deferred  tax asset  would not be
realized and  increased  the  valuation  allowance to bring the net deferred tax
asset carrying value to zero.

Liquidity and Capital Resources

     We have financed our operations in fiscal 2007 and fiscal 2006 from working
capital  mainly  provided by the  issuance of preferred  stock.  At November 30,
2006, we had cash, and cash  equivalents  of $1,441,816  and working  capital of
$1,932,300 as compared to cash, cash  equivalents,  and  certificates of deposit
totalling  $2,385,778  and working  capital of $2,867,288  at May 31, 2006.  Our
cash, cash equivalents,  and certificates of deposit balances decreased $943,962
in  fiscal  year 2007  primarily  due to cash used in  operating  activities  of
$781,248 and cash used in financing activities of $162,714.

                                    Page 25
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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



     The decrease in cash used in operating  activities during the first half of
fiscal  year  2007  resulted  primarily  from  the  net  loss of  $908,392  plus
adjustments  to reconcile  net loss to net cash used in operating  activities of
$781,248.  Changes in our operating  assets and  liabilities  were $66,666.  The
changes in the asset  components  primarily  reflect  an  increase  in  accounts
receivable  of $40,512,  lower  inventory  of $358,654  and an increase in other
current  assets of $33,792.  The changes in our operating  liability  components
reflect a decrease in accounts payable and accrued liabilities of $318,219 and a
decrease in other  liabilities  of $172,041.  Non-cash  adjustments  amounted to
$193,810 which partially offset the above.  Net accounts  receivable were 22% of
revenues for the six-month  period ended  November 30, 2006,  compared to 14% at
the end of the six-month period ended November 30, 2005, and accounts receivable
turnover was 6 times as of November 30, 2006, and November 30, 2005.

     Standard payment terms on our domestic equipment sales are generally net 30
to 90 days from  shipment and do not contain  "right of return"  provisions.  We
have  historically  offered a  variety  of  extended  payment  terms,  including
sales-type  leases,  in certain  situations and to certain customers in order to
expand the market for our EECP(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 first half of fiscal  2007 and 2006,  less than 1% of  revenues  were
generated  from sales in which  initial  payment terms were greater than 90 days
and we offered no sales-type leases during either period.  In general,  reserves
are calculated on a formula basis  considering  factors such as the aging of the
receivables,  time past due, and the customer's credit history and their current
financial status. In most instances where reserves are required, or accounts are
ultimately  written-off,  customers have been unable to  successfully  implement
their EECP(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.

     There were no  investing  activities  during  the  six-month  period  ended
November 30, 2006.

     Our financing  activities used cash of $162,714 during the six-month period
ended November 30, 2006, reflecting payments on our outstanding notes and loans.

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

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

                                    Page 26
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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




     The following table presents the Company's  expected cash  requirements for
contractual obligations outstanding as of November 30, 2006.
<TABLE>
<CAPTION>
                                                                       Due as of        Due as of
                                                        Due as of     11/30/08 and    11/30/10 and         Due
                                        Total           11/30/07        11/30/09        11/30/11        Thereafter
--------------------------------------------------------------------------------------------------------------------
<S>                                     <C>               <C>            <C>             <C>              <C>
Long-Term Debt                          $882,219          $63,515        $142,038        $136,966         $539,700
Notes Payable                             97,685           97,685               -               -                -
Employment Agreements                    470,167          260,000         210,167               -                -
                                 -----------------------------------------------------------------------------------
Total Contractual Cash                $1,450,071         $421,200        $352,205        $136,966         $539,700
    Obligations
                                 ===================================================================================
</TABLE>
Effects of Inflation

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

                                    Page 27
<PAGE>
                       Vasomedical, Inc. and Subsidiaries



ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4 - CONTROLS AND PROCEDURES

     We  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation of our management, including our Chief Executive Officer and Chief
Financial  Officer,  of the  effectiveness  of the design and  operation  of our
disclosure controls and procedures  pursuant to Exchange Act Rule 13a-15.  Based
upon that evaluation,  the Chief Executive  Officer and Chief Financial  Officer
concluded that, as of November 30, 2006, our disclosure  controls and procedures
are effective to provide reasonable assurances that such disclosure controls and
procedures  satisfy their  objectives  and that the  information  required to be
disclosed  by us in the  reports we file  under the  Exchange  Act is  recorded,
processed,  summarized and reported within the required time periods. There were
no changes  during the fiscal  quarter  ended  November 30, 2006 in our internal
controls  or in other  factors  that  could  have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

                                    Page 28

<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 29

<PAGE>
                       Vasomedical, Inc. and Subsidiaries



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


                                    VASOMEDICAL, INC.

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

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

Date:  January 16, 2007

                                    Page 30