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

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|                                                                                                                       | Page   |
|----------------------------------------------------------------------------------------------------------------------------|--------|
| PART I - FINANCIAL INFORMATION                                                                                             |   |
|                                                                                                                       |   |
|     Item 1-Financial Statements (unaudited)                                                                 |   |
|                                                                                                                       |   |
|         Consolidated Condensed Balance Sheets as of                                          |   |
|              August 31, 2010 and May 31, 2010                       | 3      |
|                                                                                                                       |   |
|         Consolidated Condensed Statements of Operations for the                         |   |
|              Three Months Ended August 31, 2010 and                 |   |
|              August 31, 2009                                   | 4      |
|                                                                                                                       |   |
|         Consolidated Condensed Statements of Cash Flows for the                         |   |
|              Three Months Ended August 31, 2010 and August 31, 2009 | 5      |
|                                                                                                                       |   |
|         Notes to Consolidated Condensed Financial Statements                            | 6      |
|                                                                                                                       |   |
|    Item 2 - Management's Discussion and Analysis of Financial Condition                                          |   |
|                  and Results of Operations      | 15     |
|                                                                                                                       |   |
|    Item 4T - Controls and Procedures                                                                             | 20     |
|                                                                                                                  |   |
| PART II - OTHER INFORMATION                                                                                                |   |
|                                                                                                                       |   |
|    Item 6 – Exhibits                                                                                       | 21     |

----

|                                                                                               |   | August 31, 2010 |        |   | May 31, 2010 |   |
|----------------------------------------------------------------------------------------------------|--------|-----------------|-------------|--------|--------------|--------|
| ASSETS                                                                                             |   | (unaudited)     |        |   | (audited)    |   |
| CURRENT ASSETS                                                                                     |   |            |        |   |         |   |
|    Cash and cash equivalents                                                             |   | $               | 477,110     |   |         | $      | 481,679 |   |
|    Short-term investment                                                                 |   |            | 68,850      |   |         |   | 68,850 |   |
|    Accounts and other receivables, net of an allowance for doubtful                      |   |            |        |   |         |   |   |   |
|       accounts and other adjustments of $221,525 at August 31, 2010, |   |            |        |   |         |
|       and $146,961 at May 31, 2010                                        |   |            | 1,537,663   |   |         |   | 473,878 |   |
|    Inventories, net                                                                      |   |            | 1,907,387   |   |         |   | 2,063,769 |   |
|    Other current assets                                                                  |   |            | 328,005     |   |         |   | 91,848 |   |
|        Total current assets                                          |   |            | 4,319,015   |   |         |   | 3,180,024 |   |
|                                                                                               |   |            |        |   |         |   |   |   |
| PROPERTY AND EQUIPMENT, net of accumulated depreciation of                                         |   |            |        |   |         |   |   |   |
|    $1,618,098 at August 31, 2010, and $1,612,098 at May 31, 2010                         |   |            | 310,121     |   |         |   | 303,038 |   |
| DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of                                     |   |            |        |   |         |
|     $370,214 at August 31, 2010, and $338,818 at May 31, 2010                       |   |            | 218,662     |   |         |   | 250,058 |   |
| OTHER ASSETS                                                                                       |   |            | 122,617     |   |         |   | 130,390 |   |
|                                                                                               |   | $               | 4,970,415   |   |         | $      | 3,863,510 |   |
|                                                                                               |   |            |        |   |         |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                               |   |            |        |   |         |   |   |   |
|                                                                                               |   |            |        |   |         |   |   |   |
| CURRENT LIABILITIES                                                                                |   |            |        |   |         |   |   |   |
|    Accounts payable                                                                      |   | $               | 661,994     |   |         | $      | 300,784 |   |
|    Accrued expenses and other liabilities                                                |   |            | 488,428     |   |         |   | 239,032 |   |
|    Sales tax payable                                                                     |   |            | 151,014     |   |         |   | 141,884 |    |
|    Deferred revenue - current portion                                                    |   |            | 1,637,549   |   |         |   | 854,403 |   |
|    Deferred gain on sale-leaseback of building - current portion                    |   |            | 53,245      |   |         |   | 53,245 |    |
|    Accrued professional fees                                                             |   |            | 46,098      |   |         |   | 86,985 |   |
|    Trade payable due to related party                                                    |   |            | 240,000     |   |         |   | 240,000 |   |
|       Total current liabilities                                           |   |            | 3,278,328   |   |         |   | 1,916,333 |   |
|                                                                                               |   |            |        |   |         |   |   |   |
| LONG-TERM LIABILITIES                                                                              |   |            |        |   |         |   |   |   |
|    Notes payable                                                                         |   |            | -           |   |         |   | 1,250,000 |   |
|    Deferred revenue                                                                      |   |            | 96,134      |   |         |   | 172,945 |   |
|    Accrued rent expense                                                                  |   |            | 17,712      |   |         |   | 17,655 |    |
|    Deferred gain on sale-leaseback of building                                           |   |            | 48,809      |   |         |   | 62,121 |   |
|    Other long-term liabilities                                                           |   |            | 11,900      |   |         |   | 11,900 |   |
|    Total long-term liabilities                                                           |   |            | 174,555     |   |         |   | 1,514,621 |   |
|                                                                                               |   |            |        |   |         |   |   |   |
| COMMITMENTS AND CONTINGENCIES (NOTE M)                                                             |   |            |        |   |         |   |   |   |
|                                                                                               |   |            |        |   |         |   |   |   |
| STOCKHOLDERS' EQUITY                                                                               |   |            |        |   |         |   |   |   |
|    Preferred stock, $.01 par value; 1,000,000 shares authorized;                         |   |            |        |   |         |   |   |   |
|        224,375 issued and outstanding at August 31, 2010             |   |            | 2,244       |   |         |   | - |   |
|    Common stock, $.001 par value; 250,000,000 shares authorized;                         |   |            |        |   |         |   |   |   |
|       110,271,131 shares at August 31, 2010 and May 31, 2010              |   |            |        |   |         |   |   |   |
|        issued and outstanding                                        |   |            | 110,271     |   |         |   | 110,271 |   |
|    Additional paid-in capital                                                            |   |            | 52,638,999  |   |         |   | 48,958,737 |   |
|    Accumulated deficit                                                                   |   |            | (51,233,982 | )      |         |   | (48,636,452 | )   |
|       Total stockholders’ equity                                    |   |            | 1,517,532   |   |         |   | 432,556 |   |
|                                                                                               |   | $               | 4,970,415   |   |         | $      | 3,863,510 |   |

----

|                                                      |   | Three months ended August 31, |        |
|-----------------------------------------------------------|--------|-------------------------------|-------------|
|                                                      |   | 2010                          |        |   | 2009 |   |
| Revenues                                                  |   |                          |        |   |   |   |
|    Equipment sales                              |   | $                             | 724,519     |   |   | $ | 794,648 |   |
|    Equipment rentals and services               |   |                          | 543,892     |   |   |   | 521,436 |   |
|    Commissions                                  |   |                          | 7,436       |   |   |   | - |   |
|       Total revenues             |   |                          | 1,275,847   |   |   |   | 1,316,084 |   |
|                                                      |   |                          |        |   |   |   |   |   |
| Cost of revenues                                          |   |                          |        |   |   |   |   |   |
|    Cost of sales, equipment                     |   |                          | 371,027     |   |   |   | 325,968 |   |
|    Cost of equipment rentals and services       |   |                          | 264,995     |   |   |   | 252,543 |   |
|    Cost of commissions                          |   |                          | 1,950       |   |   |   | - |   |
|       Total cost of revenues          |   |                          | 637,972     |   |   |   | 578,511 |   |
|  Gross profit                                        |   |                          | 637,875     |   |   |   | 737,573 |   |
|                                                      |   |                          |        |   |   |   |   |   |
| Operating expenses                                        |   |                          |        |   |   |   |   |   |
|    Selling, general and administrative          |   |                          | 3,104,679   |   |   |   | 648,327 |   |
|    Research and development                     |   |                          | 110,389     |   |   |   | 102,071 |   |
|       Total operating expenses        |   |                          | 3,215,068   |   |   |   | 750,398 |   |
| Operating loss                                            |   |                          | (2,577,193  | ) |   |   | (12,825 | ) |
|                                                      |   |                          |        |   |   |   |   |   |
| Other income (expenses)                                   |   |                          |        |   |   |   |   |    |
|    Interest and financing costs                 |   |                          | (3,643      | ) |   |   | - |   |
|    Interest and other income, net               |   |                          | 3,532       |   |   |   | 83,970 |   |
|    Amortization of deferred gain on             |   |                          |        |   |   |   |   |   |
|       sale-leaseback of building |   |                          | 13,311      |   |   |   | 13,311 |   |
|       Total other income, net    |   |                          | 13,200      |   |   |   | 97,281 |   |
|                                                      |   |                          |        |   |   |   |   |   |
| Income/(loss) before income taxes                         |   |                          | (2,563,993  | ) |   |   | 84,456 |   |
|    Income tax benefit/(expense), net            |   |                          | (5,830      | ) |   |   | 17,306 |   |
|  Net income/(loss)                                   |   |                          | (2,569,823  | ) |   |   | 101,762 |   |
|                                                      |   |                          |        |   |   |   |   |   |
| Preferred stock dividends                                 |   |                          | (27,708     | ) |   |   | - |   |
| Net income/(loss) applicable to common stockholders       |   | $                             | (2,597,531  | ) |   | $ | 101,762 |   |
|                                                      |   |                          |        |   |   |   |   |   |
| Net income/(loss) per common share                        |   |                          |        |   |   |   |   |   |
|      - basic and diluted         |   | $                             | (0.02       | ) |   | $ | 0.00 |   |
|                                                      |   |                          |        |   |   |   |   |   |
| Weighted average common shares outstanding                |   |                          |        |   |   |   |   |   |
|      - basic and diluted         |   |                          | 110,271,131 |   |   |   | 99,843,004 |   |
|                                                      |   |                          |        |   |   |   |   |   |
|                                                      |   |                          |        |   |   |   |   |   |
|                                                      |   |                          |        |   |   |   |   |   |

----

|                                                                                                           |   | Three months ended August 31, |       |
|----------------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                                           |   | 2010                          |       |   | 2009 |   |
| Cash flows used in operating activities                                                                        |   |                          |       |   |   |   |
|    Net income/(loss)                                                                                 |   | $                             | (2,569,823 | ) |   | $ | 101,762 |    |
|    Adjustments to reconcile net income/(loss) to net cash                                            |   |                          |       |   |   |   |   |   |
|       used in operating activities                                                    |   |                          |       |   |   |   |   |   |
|         Depreciation and amortization of property and equipment                  |   |                          | 37,737     |   |   |   | 25,976 |   |
|         Amortization of deferred gain on sale-leaseback of building         |   |                          | (13,311    | ) |   |   | (13,311 | ) |
|         Provision for doubtful accounts and commission adjustments          |   |                          | 74,564     |   |   |   | (31,135 | ) |
|         Amortization of deferred distributor costs                          |   |                          | 31,396     |   |   |   | 31,396 |   |
|         Share-based compensation                                            |   |                          | 92,506     |   |   |   | - |   |
|         Changes in operating assets and liabilities:                        |   |                          |       |   |   |   |   |   |
|            Accounts and other receivables                    |   |                          | (1,138,349 | ) |   |   | (183,365 | ) |
|            Inventories, net                                  |   |                          | 226,510    |   |   |   | (111,408 | ) |
|            Other current assets                              |   |                          | (236,157   | ) |   |   | 70,140 |   |
|            Other assets                                      |   |                          | (3,955     | ) |   |   | - |   |
|            Accounts payable                                  |   |                          | 361,210    |   |   |   | 206,809 |   |
|            Accrued expenses and other  liabilities |   |                          | 221,688    |   |   |   | (78,519 | ) |
|            Sales tax payable                                 |   |                          | 9,130      |   |   |   | 915 |   |
|            Deferred revenue                                  |   |                          | 706,335    |   |   |   | (110,947 | )  |
|            Accrued professional fees                         |   |                          | (40,887    | ) |   |   | 27,322 |   |
|            Trade payable due to related party                |   |                          | -          |   |   |   | (10,000 | ) |
|            Accrued rent expense                              |   |                          | 57         |   |   |   | 1,499 |   |
|    Net cash used in operating activities                                                             |   |                          | (2,241,349 | ) |   |   | (72,866 | ) |
|                                                                                                           |   |                          |       |   |   |   |   |   |
|    Cash flows provided by (used in) investing activities                                             |   |                          |       |   |   |   |   |    |
|            Purchases of property and equipment               |   |                          | (103,220   | ) |   |   | (19,263 | ) |
|            Purchases of short-term investments               |   |                          | -          |   |   |   | (68,850 | ) |
|            Redemption of short-term investments              |   |                          | -          |   |   |   | 299,722 |   |
|    Net cash provided by (used in) investing activities                                               |   |                          | (103,220   | ) |   |   | 211,609 |   |
|                                                                                                           |   |                          |       |   |   |   |   |   |
|    Cash flows provided by financing activities                                                       |   |                          |       |   |   |   |   |   |
|            Proceeds from preferred stock issuance            |   |                          | 2,340,000  |   |   |   | - |   |
|    Net cash provided by financing activities                                                         |   |                          | 2,340,000  |   |   |   | - |   |
|                                                                                                           |   |                          |       |   |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                           |   |                          | (4,569     | ) |   |   | 138,743 |   |
|    Cash and cash equivalents - beginning of period                                              |   |                          | 481,679    |   |   |   | 544,057 |   |
|    Cash and cash equivalents - end of period                                                    |   | $                             | 477,110    |   |   | $ | 682,800 |   |
|                                                                                                           |   |                          |       |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION                                                                    |   |                          |       |   |   |   |   |   |
|    Interest paid                                                                                     |   | $                             | 722        |   |   | $ | - |   |
|    Income taxes paid                                                                                 |   | $                             | 2,200      |   |   | $ | 3,231 |   |
|                                                                                                           |   |                          |       |   |   |   |   |   |
| SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES                                           |   |                          |       |   |   |
|    Inventories transferred to/(from) property and equipment, attributable to operating leases, net   |   | $                             | 70,128     |   |   | $ | (1,758 | ) |
|    Conversion of notes payable to preferred stock                                                    |   | $                             | 1,250,000  |   |   | $ | - |   |
|    Accrued preferred stock dividends                                                                 |   | $                             | (27,708    | ) |   | $ | - |   |
|                                                                                                           |   |                          |       |   |   |   |   |   |

----

----

----

|                                |                                                            |                                                      |      |                         |      |      |       |         |         |          |     |   |
|-------------------------------------|-----------------------------------------------------------------|-----------------------------------------------------------|-----------|------------------------------|-----------|-----------|------------|--------------|--------------|---------------|----------|--------|
|                                | As of or for the three months ended August 31, 2010   |
|                                |                                                            | Equipment Segment                                         |      | Sales Representation Segment | Corporate |      |       | Consolidated |
|                                |                                                            |                                                      |      |                         |      |      |       |         |         |          |     |   |
| Revenues from external customers    |                                                            | $                                                         | 1,268,411 |                         |      | $         | 7,436      |         |         | -             |     |   | $ | 1,275,847 |   |
| Segment operating income/(loss)     |                                                            | $                                                         | (80,956   | )                            |      | $         | (2,362,240 | )            |         | $             | (133,997 | )      |   | $ | (2,577,193 | ) |
| Total assets                        |                                                            | $                                                         | 3,573,012 |                         |      | $         | 1,316,692  |         |         |  $       | 80,711   |   |   | $ | 4,970,415 |   |
| Accounts and other receivables, net |                                                            | $                                                         | 761,480   |                         |      | $         | 776,183    |         |         |  $       | -        |   |   | $ | 1,537,663 |   |
| Other current assets                |                                                            | $                                                         | 83,541    |                         |      | $         | 163,753    |         |         | $             | 80,711   |   |   | $ | 328,005 |   |
|                                |                                                            |                                                      |      |                         |      |      |       |         |         |          |     |   |   |   |   |   |
|                                |                                                            |                                                      |      |                         |      |      |       |         |         |          |     |   |   |   |   |   |
|                                |                                                            |                                                      |      |                         |      |      |       |         |         |          |     |   |   |
|                                |                                                            | As of or for the three months ended August 31, 2009  |      |
|                                |                                                            | Equipment Segment                                         |      | Sales Representation Segment |      | Corporate |       |         | Consolidated |          |
|                                |                                                            |                                                      |      |                         |      |      |       |         |         |          |     |   |   |   |   |   |
| Revenues from external customers    |                                                            | $                                                         | 1,316,084 |                         |      |  $   | -          |         |         |  $       | -        |   |   | $ | 1,316,084 |   |
| Segment operating income/(loss)     |                                                            | $                                                         | 147,373   |                         |      |  $   | -          |         |         | $             | (160,198 | )      |   | $ | (12,825 | ) |
| Total assets                        |                                                            | $                                                         | 4,040,427 |                         |      |  $   | -          |         |         |  $  | 48,853   |   |   | $ | 4,089,280 |   |
| Accounts and other receivables, net |                                                            | $                                                         | 874,051   |                         |      |  $   | -          |         |         |  $       | -        |   |   | $ | 874,051 |   |
| Other current assets                |                                                            | $                                                         | 56,518    |                         |      |  $   | -          |         |         | $             | 48,853   |   |   | $ | 105,371 |   |

----

|                        |   | August 31, 2010 |       |   | August 31, 2009 |   |
|-----------------------------|--------|-----------------|------------|--------|-----------------|--------|
| Stock options               |   |            | 2,698,776  |   |            |   | 2,983,239 |   |
| Warrants                    |   |            | 4,285,714  |   |            |   | 6,540,252 |   |
| Convertible preferred stock |   |            | 22,610,677 |   |            |   | - |   |
| Common stock grants         |   |            | 3,750,000  |   |            |   | - |   |
|                        |   |            | 33,345,167 |   |            |   | 9,523,491 |   |

|                                                                                   |                                                                                                   | Quoted Prices    |                                                                                        | Significant                                                                                                               |   |                                                                                                           |                                                                                                                |       |                                                                                                     |                                                                           |
|----------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|------------------|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|
|                                                                                   |                                                                                                   |  in Active  |                                                                                        | Other                                                                                                                     |   | Significant                                                                                                    |                                                                                                                | Balance    |
|                                                                                   |                                                                                                   | Markets for      |                                                                                        | Observable                                                                                                                |   | Unobservable                                                                                                   |                                                                                                                | as of      |
|                                                                                   |                                                                                                   | Identical Assets |                                                                                        | Inputs                                                                                                                    |   | Inputs                                                                                                         |                                                                                                                | August 31, |
|                                                                                   |                                                                                                   | (Level 1)        |                                                                                        | (Level 2)                                                                                                                 |   | (Level 3)                                                                                                      |                                                                                                                |       |   2010                                  |
|                                                                                   |                                                                                                   |             |                                                                                        |                                                                                                                      |   |                                                                                                           |                                                                                                                |       |                                                                                                     |                                                                           |   |   |
| Assets                                                                                 |                                                                                                   |             |                                                                                        |                                                                                                                      |   |                                                                                                           |                                                                                                                |       |                                                                                                     |                                                                           |   |   |
|                                                                                   |                                                                                                   |             |                                                                                        |                                                                                                                      |   |                                                                                                           |                                                                                                                |       |                                                                                                     |                                                                           |   |   |
| Cash equivalents invested in money market fund (included in cash and cash equivalents) |  $             21,524            |             |                                                                                        |  $                 -            |   |                                                                                                           |  $                -            |       |                                                                                                     |  $         21,524            |
|                                                                                   |                                                                                                   |             |                                                                                        |                                                                                                                      |   |                                                                                                           |                                                                                                                |       |                                                                                                     |                                                                           |   |   |
| Investment in certificates of deposit (included in short-term investments)             |                 68,850 |             |                                                                                        |                     - |   |                                                                                                           |                    - |       |                                                                                                     |             68,850 |
|                                                                                   |                                                                                                   |             |  $             90,374 |                                                                                                                      |   |  $                 - |                                                                                                                |       |  $                - |                                                                           |   |  $         90,374 |
|                                                                                   |                                                                                                   |             |                                                                                        |                                                                                                                      |   |                                                                                                           |                                                                                                                |       |                                                                                                     |                                                                           |   |   |

----

|                                                                                  |                                                                                                   | Quoted Prices    |                                                                                        | Significant                                                                                                               |   |                                                                                                           |                                                                                                                |    |                                                                                                     |                                                                           |
|---------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|------------------|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------|----------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|
|                                                                                  |                                                                                                   |  in Active  |                                                                                        | Other                                                                                                                     |   | Significant                                                                                                    |                                                                                                                | Balance |
|                                                                                  |                                                                                                   | Markets for      |                                                                                        | Observable                                                                                                                |   | Unobservable                                                                                                   |                                                                                                                | as of   |
|                                                                                  |                                                                                                   | Identical Assets |                                                                                        | Inputs                                                                                                                    |   | Inputs                                                                                                         |                                                                                                                | May 31, |
|                                                                                  |                                                                                                   | (Level 1)        |                                                                                        | (Level 2)                                                                                                                 |   | (Level 3)                                                                                                      |                                                                                                                |    |   2010                                  |
|                                                                                  |                                                                                                   |             |                                                                                        |                                                                                                                      |   |                                                                                                           |                                                                                                                |    |                                                                                                     |                                                                           |   |   |
| Assets                                                                                |                                                                                                   |             |                                                                                        |                                                                                                                      |   |                                                                                                           |                                                                                                                |    |                                                                                                     |                                                                           |   |   |
|                                                                                  |                                                                                                   |             |                                                                                        |                                                                                                                      |   |                                                                                                           |                                                                                                                |    |                                                                                                     |                                                                           |   |   |
| Cash equivalents invested in money market fund (included in cash and cash equivalents |  $             21,516            |             |                                                                                        |  $                 -            |   |                                                                                                           |  $                -            |    |                                                                                                     |  $         21,516            |
|                                                                                  |                                                                                                   |             |                                                                                        |                                                                                                                      |   |                                                                                                           |                                                                                                                |    |                                                                                                     |                                                                           |   |   |
| Investment in certificates of deposit (included in short-term investments)            |                 68,850 |             |                                                                                        |                     - |   |                                                                                                           |                    - |    |                                                                                                     |             68,850 |
|                                                                                  |                                                                                                   |             |  $             90,366 |                                                                                                                      |   |  $                 - |                                                                                                                |    |  $                - |                                                                           |   |  $         90,366 |
|                                                                                  |                                                                                                   |             |                                                                                        |                                                                                                                      |   |                                                                                                           |                                                                                                                |    |                                                                                                     |                                                                           |   |   |

|                                       |   | August 31, 2010 |      |   | May 31, 2010 |   |
|--------------------------------------------|--------|-----------------|-----------|--------|--------------|--------|
|                                       |   |            |      |   |         |   |
| Trade receivables                          |   | $               | 1,630,636 |   |         | $      | 587,898 |   |
| Due from employees                         |   |            | 128,552   |   |         |   | 32,941 |   |
| Allowance for doubtful accounts and        |   |            |      |   |         |   |   |   |
|      other adjustments |   |            | (221,525  | )      |         |   | (146,961 | ) |
|                                       |   | $               | 1,537,663 |   |         | $      | 473,878 |   |
|                                       |   |            |      |   |         |   |   |   |

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|            |   | August 31, 2010 |      |   | May 31, 2010 |   |
|-----------------|--------|-----------------|-----------|--------|--------------|--------|
|            |   |            |      |   |         |   |
| Raw materials   |   | $               | 577,614   |   |         | $      | 585,991 |   |
| Work in process |   |            | 515,663   |   |         |   | 608,658 |   |
| Finished goods  |   |            | 814,110   |   |         |   | 869,120 |   |
|            |   | $               | 1,907,387 |   |         | $      | 2,063,769 |   |

|                                                               |   | Three months ended August 31, |      |
|--------------------------------------------------------------------|--------|-------------------------------|-----------|
|                                                               |   | 2010                          |      |   | 2009 |   |
| Deferred revenue at the beginning of the period                    |   | $                             | 1,027,348 |   |   | $ | 1,268,834 |   |
| Additions:                                                         |   |                          |      |   |   |   |   |   |
|       Deferred extended service contracts |   |                          | 353,613   |   |   |   | 234,677 |   |
|       Deferred in-service and training         |   |                          | 7,500     |   |   |   | 10,000 |   |
|       Deferred service arrangements            |   |                          | 15,000    |   |   |   | 42,500 |   |
|       Deferred commissions                |   |                          | 678,514   |   |   |   | - |   |
| Recognized as revenue:                                             |   |                          |      |   |   |   |   |   |
|       Deferred extended service contracts |   |                          | (323,464  | ) |   |   | (334,455 | ) |
|       Deferred in-service and training    |   |                          | (2,500    | ) |   |   | (10,000 | ) |
|       Deferred service arrangements       |   |                          | (14,892   | ) |   |   | (34,795 | ) |
|       Deferred commissions                |   |                          | (7,436    | ) |   |   | - |   |
|       Deferred revenue at end of period   |   |                          | 1,733,683 |   |   |   | 1,176,761 |   |
|       Less: current portion               |   |                          | 1,637,549 |   |   |   | 865,185 |   |
| Long-term deferred revenue at end of period                        |   | $                             | 96,134    |   |   | $ | 311,576 |   |

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| i.   | Face Amount. The face amount per share of the Series E Preferred Stock is $16.00. |
|----------------|-----------------------------------------------------------------------------------|

| ii.   | Dividends. Cumulative dividends will accrue at a rate of 5% per annum, payable semi-annually in additional shares of the Series E Preferred. Dividends on the Series E Preferred will be paid in preference to any dividends paid to the holders of the Company’s Common Stock or any other series of the Company’s preferred stock made junior to the Series E Preferred. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| iii.   | Liquidation Preference. On any liquidation, dissolution or winding-up of the Corporation, the holders of the Series E Preferred will receive payment of twice the aggregate face amount thereof, plus all accrued and unpaid dividends, before any payments or distributions are paid or provided for the Company’s Common Stock or any other series of the Company’s preferred stock made junior to the Series E Preferred. In the event of a sale of all or substantially all the Company’s stock or assets, the holders of the Series E Preferred will receive payment of 1.2 times the aggregate face amount thereof, plus all accrued and unpaid dividends, before any payments or distributions are paid or provided for the Company’s Common Stock or any other series of the Company’s preferred stock made junior to the Series E Preferred. |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| iv.   | Conversion Rights. Each share of the Series E Preferred will be convertible at any time or from time to time at the holder’s option commencing six months from the issuance date into 100 shares of Common Stock (an exercise price of $.16 per share of Common Stock, the “Conversion Price”), subject to anti-dilution adjustment as set forth below. Commencing at any time one year from the issuance date, one-half 50% of the Series E Preferred will be automatically converted into 100 shares of Common Stock for each share of Series E Preferred if the closing market price of the Common Stock is 3 times the Conversion Price for 30 consecutive trading days and the average daily trading volume during those 30 days is 250,000 shares or greater. Notwithstanding the foregoing, the Series E Preferred shall be automatically converted into Common Stock on June 1, 2015. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| v.   | Voting Rights. Investors in the Series E Preferred will have voting rights in the ratio of 100 votes for each share of Series E Preferred and shall vote together with the Common Stock as a single class. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| vi.   | Anti-Dilution Adjustments. The 100-to-1 conversion ratio of the Series E Preferred will be subject to proportional adjustment for stock dividends, stock splits and other similar changes in capitalization. If the Company issues or sells shares of its capital stock for consideration of a price of less than the lesser of its then current market price or the applicable Conversion Price, the Conversion Price shall be adjusted to be such lower price at which the Company issued or sold shares of its capital stock; provided, however, that the Company shall have the right to issue shares and options under its option plans. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| May 31, 2011 |   | $      | 152,639 |   |
|--------------|--------|--------|---------|--------|
| May 31, 2012 |   |   | 209,353 |   |
| May 31, 2013 |   |   | 88,323  |   |
| Total        |   | $      | 450,315 |   |

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| 31 | Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32 | Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

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| VASOMEDICAL, INC.                                                                  |
|------------------------------------------------------------------------------------|
|                                                                               |
| By:   /s/ Jun Ma                                                         |
|         Jun Ma                                  |
|         President & Chief Executive Officer |
|         (Principal Executive Officer)           |
|                                                                               |
|         /s/  Jonathan Newton          |
|         Jonathan Newton                         |
|         Chief Financial Officer                 |

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