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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934 For the fiscal year ended May 31, 2008

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

                           Commission File No. 0-18105


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

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

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

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

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

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

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

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

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

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

      State issuer's revenues for its most recent fiscal year. $5,182,768

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates  of the registrant based on the closing sale price of $0.07 as of
August 20, 2008, was  approximately  $3,943,747.  Shares of common stock held by
each  officer  and  director  and by  each  person  who  owns  5% or more of the
outstanding  common stock have been  excluded in that such persons may be deemed
to be affiliates.  This  determination of affiliates status is not necessarily a
conclusive determination for other purposes.

At August 20, 2008,  the number of shares  outstanding  of the  issuer's  common
stock was 93,768,004.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

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












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<PAGE>
                              INDEX TO FORM 10-KSB
<TABLE>
<CAPTION>
                                                                                                              Page
                                     PART I

<S>           <C>                                                                                              <C>
Item 1.       Description of Business...........................................................................1
Item 2.       Description of Property..........................................................................24
Item 3.       Legal Proceedings................................................................................25
Item 4.       Submission of Matters to a Vote of Security Holders..............................................25

                                     PART II

Item 5.       Market for Registrant's Common Equity, and Related Stockholder Matters and Small Business
              Issuer Purchases of Equity Securities............................................................26
Item 6.       Management's Discussion and Analysis or Plan of Operation........................................26
Item 7.       Financial Statements.............................................................................41
Item 8.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............41
Item 8A.      Controls and Procedures..........................................................................41
Item 8A.(T)   Controls and Procedures..........................................................................42
Item 8B.      Other Information................................................................................42

                                    PART III

Item 9.       Directors, Executive Officers, Promoters, Control Persons and Corporate
              Governance; Compliance with Section 16(a) of the Exchange Act....................................43
Item 10.      Executive Compensation...........................................................................43
Item 11.      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ..43
Item 12.      Certain Relationships and Related Transactions, and Director Independence........................43
Item 13.      Exhibits.........................................................................................43
Item 14.      Principal Accountant Fees and Services...........................................................44




Signatures    .................................................................................................45

                                    EXHIBITS

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

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

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

<PAGE>
                                     PART I


ITEM 1 - DESCRIPTION OF  BUSINESS

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

General Overview

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

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

     During the last two fiscal  years  ended May 31,  2008 and 2007 we incurred
large  operating  losses.  We  attempted  to achieve  profitability  by reducing
operating  costs and halting  the trend of  declining  revenues,  to reduce cash
usage by bringing our cost structure more into alignment with current revenue by
engaging in  restructurings  during  January 2006,  March 2007 and April 2007 to
substantially reduce personnel and spending on sales,  marketing and development
projects. In addition, we were seeking to obtain a strategic alliance within the
sales and marketing areas and/or to raise  additional  capital through public or
private equity or debt financings.

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

                                       1
<PAGE>

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

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

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

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

Market Overview

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

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

     We will  continue  to educate the  marketplace  that  EECP(R)  therapy is a
therapy for ischemic  cardiovascular  disease and that  patients  with a primary
diagnosis of heart  failure,  diabetes or peripheral  vascular  disease 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.

                                       2
<PAGE>
Angina

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

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

     There are  approximately  6.4 million angina  patients in the United States
and our EECP(R) therapy currently competes with other technologies in the market
for approximately 100,000 to 150,000 new refractory angina patients annually who
do not adequately respond to or are not amenable to medical and surgical therapy
and have the  potential  to meet the  guidelines  for  reimbursement  of EECP(R)
therapy.  Most angina  patients are treated  with  medications,  including  beta
blockers  to slow and  protect  the  heart  and  vasodilators,  which  are often
prescribed to increase blood flow to the coronary  arteries.  When drugs fail or
inadequately  correct the problem,  the patients are considered  unresponsive to
medical  therapy.   Most  angina  patients  are  readily  amenable  to  invasive
revascularization  procedures such as angioplasty and coronary stent  placement,
as  well  as  coronary  artery  bypass  grafting  (CABG).   However,  there  are
approximately  130,000 angina patients each year whose angina can not be stopped
by medication  and they are no longer  readily  amenable to palliative  invasive
procedures.

     In February 1999, the Centers for Medicare and Medicaid Services (CMS), the
federal agency that  administers  the Medicare  program for more than 39 million
beneficiaries,  issued  a  national  coverage  policy  for the  use of  external
counterpulsation  therapy in the  treatment  of angina.  Medicare  reimbursement
guidelines  have a significant  impact in determining  the available  market for
EECP(R)  therapy.  We believe that over 65% of the patients that receive EECP(R)
therapy are Medicare patients and many of the third-party payers follow Medicare
guidelines, which limit reimbursement for EECP(R) therapy to patients who do not
adequately respond to or are not amenable to medical therapy and are not readily
amenable to invasive therapy.  As a result, an important element of our strategy
is to grow the market for EECP(R) therapy by expanding reimbursement coverage to
include a broader  range of angina  patients  than the current  coverage  policy
provides and enable  EECP(R)  therapy to compete more with other  therapies  for
ischemic heart disease.  Please see the heading  "Reimbursement"  in the "Item-1
Business"  section  of  this  Form  10-KSB  for a more  detailed  discussion  of
reimbursement issues.

Congestive Heart Failure

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

     CHF is treated with medication and,  sometimes,  surgery on heart valves or
the coronary  arteries and, in certain  severe cases,  heart  transplants.  Left
ventricular assist devices (LVADs) and the use of cardiac  resynchronization and

                                       3
<PAGE>

implantable  defibrillators  are useful in selected patients with heart failure.
Still, no consensus therapy currently exists for CHF and patients must currently
suffer their symptoms chronically and have a reduced life expectancy.

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

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

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

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

         On March 20, 2006, 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    CCSC II angina
     o    Heart Failure
     o    NYHA Class  II/III  stable  heart  failure  symptoms  with an ejection
          fraction of less than or equal to 35%
     o    NYHA Class  II/III  stable  heart  failure  symptoms  with an ejection
          fraction of less than or equal to 40%
     o    NYHA Class IV heart failure
     o    Acute heart failure
     o    Cardiogenic shock

                                       4
<PAGE>
     o    Acute myocardial infarction."

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

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

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

     These  papers  were  submitted  to CMS and we were  advised to  continue to
gather more clinical evidence for future submission.

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

The EECP(R) Therapy Systems

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

     During EECP(R)  therapy,  the patient lies on a contoured  treatment  table
while  three sets of  inflatable  pressure  cuffs,  resembling  oversized  blood
pressure cuffs,  are wrapped around the calves,  and the lower and upper thighs,
including the buttocks.  The system is synchronized to the individual  patient's
cardiac  cycle   triggering   the  system  to  inflate  the  cuffs  rapidly  and
sequentially -- via computer-interpreted ECG signals -- starting from the calves
and  proceeding  upward to the  buttocks  during  the  relaxation  phase of each
heartbeat  (diastole).  This has the  effect  of  creating  a strong  retrograde
arterial wave in the arterial system,  forcing freshly  oxygenated blood towards
the heart and coronary arteries at a time when resistance to coronary blood flow
is at its lowest level. The inflation of cuffs also simultaneously increases the
volume of venous  blood that is  returned to the heart when the heart is filling
up for ejection in the contracting  phase. Just prior to the next heartbeat when
the heart  begins  to eject  blood by  contracting  (systole),  all three  cuffs

                                       5
<PAGE>
simultaneously  deflate,  leaving  an  empty  vascular  space to  receive  blood
ejecting  from the heart,  thereby  significantly  reducing  the workload of the
heart.  This is achieved because the vascular beds in the lower  extremities are
relatively  empty  when the  cuffs  are  deflated,  significantly  lowering  the
resistance,  and  provide  vascular  space to receive  the blood  ejected by the
heart, reducing the amount of work the heart must do to pump oxygenated blood to
the rest of the body. The  inflation/deflation  activity is monitored constantly
and  coordinated by a  computerized  console that  interprets  electrocardiogram
signals from the patient's  heart,  monitors heart rhythm and rate  information,
and actuates the  inflation and  deflation in  synchronization  with the cardiac
cycles. The end result of this sequential "squeezing" of the legs is to create a
pressure wave that significantly  increases peak diastolic  pressure  benefiting
circulation  to the heart muscle and other  organs,  increases  venous return so
that the heart has more blood volume to eject out, and increases cardiac output.
The release of  external  pressure  produces  reduction  of  systolic  pressure,
thereby  reducing  the  workload  of  the  heart.  This  reduction  of  vascular
resistance  insures  that the heart  does not have to work as hard to pump large
amounts of blood through the body to help supply its metabolic needs.

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

Clinical Studies

Early History

     Early   experiments   with   counterpulsation   at  Harvard  in  the  1950s
demonstrated that this technique markedly reduces the workload,  and thus oxygen
consumption, of the left ventricle. This basic effect has been demonstrated over
the past forty years in both animal  experiments  and in patients.  The clinical
benefits of external  counterpulsation  were not consistently  achieved in early
studies because the equipment used then lacked some of the features found in the
current EECP(R) systems,  such as the computerized  electrocardiographic  signal
for triggering,  and the use of pneumatic versus hydraulic  actuating media that
makes sequential cuff inflation possible.  As the technology improved,  however,
it became apparent that both internal (i.e.  intra-aortic  balloon  pumping) and
external  forms of  counterpulsation  were  capable  of  improving  survival  in
patients with cardiogenic shock following myocardial  infarction.  Later, in the
1980s, Dr. Zheng and colleagues in China reported on their extensive  experience
in treating angina using the newly developed "enhanced"  sequentially  inflating
EECP(R) device that incorporated three sets of cuffs including the buttocks cuff
instead of a single cuff used in the previous system. The Chinese  investigators
were able to show that a 36-hour  course of  treatment  with the EECP(R)  system
reduced the  frequency  and  severity of anginal  symptoms  during  normal daily
functions  and also  during  exercise,  and  also  that  the  improvements  were
sustained for years after therapy.

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

The MUST-EECP(R) Study

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

                                       6
<PAGE>
     This 139  patient  study,  which  included a  sham-EECP(R)  control  group,
demonstrated  that patients  treated with EECP(R)  therapy were able to increase
the amount of time on  exercise  testing  before  they  showed  signs of cardiac
ischemia (i.e. ST-segment depression on their electrocardiogram) and experienced
a reduction in the  frequency of their angina  attacks  compared to patients who
did not receive EECP(R) therapy. In 1999,  physician  collaborators  completed a
quality-of-life  study with the EECP(R)  system in a subset of the same patients
that  participated in MUST-EECP(R).  Two highly regarded  standardized  means of
measurement  were used to gauge  changes in  patients'  outlook  and  ability to
participate  in normal daily living during the treatment  phase and for up to 12
months  after  treatment.  Results of this study,  which have been  presented at
major  scientific  meetings  and  published  in  the  January  2002  Journal  of
Investigative  Medicine,  show that after  one-year  of  follow-up  the group of
patients  receiving  EECP(R) therapy enjoyed  significantly  improved aspects of
health-related quality of life compared to those who received a sham treatment.

The PEECH(TM) Study

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

     In summer  2000,  an IDE  supplement  to  proceed  with a pivotal  study to
demonstrate the efficacy of EECP(R) therapy in the most prevalent types of heart
failure  patients was approved.  This study,  known as PEECH(TM),  began patient
enrollment in March 2001. The PEECH(TM)  clinical  trial involved  nearly thirty
centers including:  the Cleveland Clinic,  Mayo Clinic,  Scripps Clinic,  Thomas
Jefferson University Hospital,  the University of North Carolina at Chapel Hill,
the Minnesota Heart Failure Consortium, Advocate Christ Hospital, Hull Infirmary
(UK), the University of California at San Diego Medical  Center,  the University
of  Pittsburgh  Medical  Center,  the  Lindner  Clinical  Trial  Center  and the
Cardiovascular Research Institute. Vasomedical obtained 510(k) clearance for CHF
from  FDA in June  2002,  obviating  the need to  continue  this  trial  for FDA
regulatory reasons.  However, we decided to complete the clinical trial in order
to use  the  anticipated  clinical  outcomes  to  help  establish  the  clinical
validation of EECP(R)  therapy as a treatment for CHF and to provide  additional
scientific support for Medicare, Medicaid and other third-party payers to expand
reimbursement coverage of EECP(R) therapy to include the CHF indication.

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

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

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

                                       7
<PAGE>
     1.   percentage  of  subjects  with  greater  than or equal  to 60  seconds
          improvement in exercise duration from baseline to six months, or
     2.   percentage of subjects with at least 1.25  mL/kg/min  increase in peak
          oxygen consumption from baseline to six months.

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

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

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

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

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

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

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

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

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

                                       8
<PAGE>
     The authors  summarize the results by stating "Most patients  experienced a
significant reduction in angina and improvement in quality of life after EECP(R)
therapy, and this reduction was sustained in most patients at 2-year follow-up."

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

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

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

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

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

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

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

Other studies and publications

     A search on the term  "external  counterpulsation"  of the PubMed  database
available through the National Library of Medicine conducted on August 21, 2006,
identified one-hundred-ninety-eight (198) citations of articles published in the
medical scientific literature,  including 28 review articles.  Over 99% of these
publications have reported results in patients with chronic stable angina and/or
heart failure  treated with EECP(R)  therapy,  while others have reported use of
the device in other cardiovascular or non-cardiovascular  indications.  The vast
majority of these  reports  are  generated  using  Vasomedical  EECP(R)  therapy
systems and equipment.  In summary,  this body of literature  contains  evidence

                                       9
<PAGE>

from a variety of  institutions  and  investigators  demonstrating  that EECP(R)
therapy can provide benefit to appropriate patients in the following ways:
     o    Enhancement  of  coronary  and  peripheral   circulation,   myocardial
          perfusion, ventricular function and hemodynamics,
     o    Improvement in endothelial function and vascular reactivity
     o    Elimination or reduction of cardiac ischemia,
     o    Elimination or reduction in symptoms and improved  functional class in
          angina and heart failure,
     o    Resolution  of  reversible  ischemic  defects  found  on  quantitative
          myocardial perfusion studies,
     o    Increased  exercise  duration and increased  time to ischemic  changes
          during treadmill  exercise in angina and increased  exercise  duration
          and peak oxygen  consumption  in heart  failure in  properly  selected
          patients,
     o    Elimination or reduction in use of anti-angina medications,
     o    Improved quality of life in patients with angina and heart failure.

Strategic Initiatives

    Our short-and long-term plans are to:

     a)   Maintain our cost  structure  alignment  with current  revenues in the
          short term by:

          i)   continuing to monitor,  reduce, or eliminate  spending on all but
               critical new product development and clinical research projects,
          ii)  focusing on rebuilding  our revenue base through  supporting  our
               direct sales effort and  expanding our use of  independent  sales
               representatives, and
          iii) maintaining tight cost control on all areas of personnel cost and
               spending.
     b)   Pursue possible strategic  investments and creative  partnerships with
          others who have distinctive  competencies or delivery capabilities for
          serving the  cardiovascular  and disease  management  marketplace,  as
          opportunities become available.
     c)   Increase market penetration in the domestic reimbursable user base for
          EECP(R) therapy by:
          i)   expanding  reimbursement to include coverage for the treatment of
               ischemic NYHA Class II and III CHF patients,
          ii)  marketing directly to third-party payers to increase  third-party
               reimbursement, and
          iii) expanding  reimbursement coverage in the angina market to include
               patients with CCS Class II angina.
     d)   Increase the clinical and scientific  understanding of EECP(R) therapy
          by:
          i)   resubmitting data to insurers,  including Medicare, for favorable
               coverage policies;
          ii)  continuing  to  support  on a limited  basis  academic  reference
               centers in the United  States and overseas in order to accelerate
               the growth and prestige of EECP(R) therapy and
     e)   Increase  awareness  of the  benefits  of the  EECP(R)  therapy in the
          medical community by:
          i)   developing  campaigns to market the  benefits of EECP(R)  therapy
               directly to clinicians, third-party payers and patients;
          ii)  engaging  in  educational  campaigns  for  providers  and medical
               directors  of  third-party  insurers  designed to  highlight  the
               cost-effectiveness  and  quality-of-life  advantages  of  EECP(R)
               therapy; and
          iii) continuing  the   development  of  EECP(R)   therapy  in  certain
               international  markets,  principally through the expansion of our
               distribution network and obtaining of reimbursement approvals.
     f)   Maintain  development efforts to improve the EECP(R) system and expand
          its intellectual  property estate by filing for additional  patents in
          the United States and other countries.

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

                                       10

<PAGE>
Sales and Marketing

Domestic Operations

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

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

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

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

International Operations

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

     Revenues  from  international  operations  is 16% of total  revenue for the
fiscal years ended May 31, 2008 and 2007. Our international marketing activities
include,  among other  things,  assisting in obtaining  national or  third-party
healthcare  insurance   reimbursement  approval  and  participating  in  medical
conferences  to create greater  awareness and  acceptance of EECP(R)  therapy by
clinicians.

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

                                       11
<PAGE>
Competition

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

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

Government Regulations

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

Device Classification

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

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

     Certain external  counterpulsation  devices were  commercially  distributed
prior to May 28, 1976. Our external counterpulsation devices were marketed after

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1976; however, they were found to be substantially equivalent to a preamendments
Class III device and  therefore  are  subject  to the same  requirements  as the
preamendments external counterpulsation devices.

Premarket Review

     The 510(k)  premarket  notification  process  requires an applicant to give
notice to FDA of its  intent to  introduce  its  device  into  commerce.  In its
premarket notification,  the applicant must demonstrate that its new or modified
medical device is  substantially  equivalent to a legally  marketed or predicate
device marketed before May 28, 1976. Prior to beginning commercialization of the
new or modified  product it must receive an order from the FDA  classifying  the
device under section 510(k) in the same  classification as the predicate device,
and as a result, the new device will be cleared for marketing.  Modifications to
a previously cleared medical device that do not significantly  affect its safety
and  effectiveness  or constitute a major change in the intended use can be made
without having to submit a new 510(k).  In February  1995, the Company  received
510(k) clearance to market the second-generation  version of its EECP(R) therapy
system, the MC2, which incorporated a number of technological  improvements over
the predicate system. In addition, in December 2000, the Company received 510(k)
clearance to market its third generation system, the TS3. The FDA's clearance in
these  cases was for the use of EECP(R)  therapy in the  treatment  of  patients
suffering from stable or unstable angina pectoris,  acute myocardial  infarction
and cardiogenic shock. In June 2002, the FDA granted 510(k) market clearance for
an upgraded TS3,  which  incorporated  the Company's  patented CHF treatment and
oxygen saturation monitoring technologies, and provided for a new indication for
the use of  EECP(R) in CHF,  which  applied  to all  then-current  models of the
Company's EECP(R) therapy systems.

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

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

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

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

Clinical Trials

     If human  clinical  trials of a device are  required,  whether to support a
510(k)  or  PMA  application,   the  trials'  sponsor,   which  is  usually  the
manufacturer  of the device,  first must obtain the approval of the  appropriate
institutional  review boards.  If a trial is of a significant  risk device,  the
sponsor  also must obtain an  investigational  device  exemption or IDE from FDA
before the trial may begin. A significant  risk device is a device that presents
a  potential   for  serious   risk  to  the  subject  and  is  an  implant;   is

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<PAGE>

life-sustaining or life-supporting; or is for a use of substantial importance in
diagnosing,  curing,  mitigating,  or treating disease, or otherwise  preventing
impairment of human health.  For all clinical  testing,  the sponsor must obtain
informed  consent from the patients  participating in each trial. The results of
clinical  testing  that a  sponsor  undertakes  may be  insufficient  to  obtain
clearance or approval of the tested product.

Pervasive and Continuing FDA Regulation

     We are also subject to other FDA regulations  that apply prior to and after
a product is commercially  released.  These include  Current Good  Manufacturing
Practice (CGMP) requirements set forth in FDA's Quality System Regulation (QSR),
that require manufacturers to have a quality system for the design, manufacture,
packaging,  labeling,  storage,  installation  and servicing of medical  devices
intended for  commercial  distribution  in the United  States.  This  regulation
covers  various areas  including  management  and  organization,  device design,
purchase and handling of  components,  production  and process  controls such as
those  related to buildings  and  equipment,  packaging  and  labeling  control,
distribution,   installation,  complaint  handling,  corrective  and  preventive
action, servicing, and records. We are subject to periodic inspection by the FDA
for compliance with the CGMP requirements and Quality System Regulation.

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

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

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

Foreign Regulation

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

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

     There  can  be  no   assurance   that  we  will  obtain   desired   foreign
authorizations to commercially  distribute our products in those markets or that
we will comply with all laws,  regulations  and  standards  that  pertain to our

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<PAGE>
products  in those  markets.  Failure  to  receive  or delays in receipt of such
authorizations  or  determinations  of conformity  could have a material adverse
effect on our financial condition and results of operations.

Patient Privacy

     Federal  and state laws  protect  the  confidentiality  of certain  patient
health  information,  including  patient  records,  and  restrict  the  use  and
disclosure  of that  protected  information.  The U.S.  Department of Health and
Human Services (HHS) published  patient privacy rules under the Health Insurance
Portability  and  Accountability  Act of  1996  (HIPAA  privacy  rule)  and  the
regulation was finalized in October 2002. The HIPAA privacy rule governs the use
and disclosure of protected health information by "Covered  Entities," which are
(1) health plans, (2) health care clearinghouses,  and (3) health care providers
that transmit  health  information in electronic form in connection with certain
health care  transactions such as benefit claims.  Currently,  the HIPAA privacy
rule affects us only indirectly in that patient data that we access, collect and
analyze may include protected health information.  Additionally,  we have signed
some Business Associate agreements with Covered Entities that contractually bind
us to protect  protected health  information,  consistent with the HIPAA privacy
rule's requirements.  We do not expect the costs and impact of the HIPAA privacy
rule to be material to our business.

Practice Guidelines

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

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

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

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

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

Reimbursement

     In addition to  regulatory  approvals for  commercialization  by government
agencies,  reimbursement  coverage and payment rates are factors in the sales of
our products and we depend in large part on the  availability  of  reimbursement

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programs.  Medicare,  Medicaid,  as well as private  health care  insurance  and
managed-care  plans  determine  eligibility for coverage of a product or therapy
based on a number of  factors,  including  the  payer's  determination  that the
product is  reasonable  and  necessary  for the  diagnosis  or  treatment of the
illness  or  injury  for  which it is  administered  according  to the  scope of
clinical evidence available, accepted standards of medical care in practice, the
product's  cost   effectiveness,   whether  the  product  is   experimental   or
investigational,  impact on health  outcomes  and  whether  the  product  is not
otherwise excluded from coverage by law or regulation.  The coverage process for
Medicare reimbursement is legislated by Congress and administered by the Centers
for  Medicare  and  Medicaid  Services  (CMS),  and is  highly  variable  in the
commercial  market.  There may be significant  delays in obtaining  coverage for
newly-approved  products, and coverage may be more limited than the purposes for
which  the  product  is  approved  or  cleared  by  FDA.  Even  when  we  obtain
authorization   from  the  FDA  or  a  foreign  authority  to  begin  commercial
distribution,  there may be limited  demand for the device  until  reimbursement
approval has been obtained from  governmental  and private  third-party  payers.
Moreover,  eligibility  for  coverage  does not  imply  that a  product  will be
reimbursed  in all cases or at a rate  that  allows  us to  market  our  EECP(R)
systems at a price that will enable us to make a profit or even cover our costs.
Reimbursement  rates  may  vary  according  to the  use of the  product  and the
clinical  setting  in which it is used,  may be based on  payments  allowed  for
lower-cost  products  that are  already  reimbursed,  may be  incorporated  into
existing  payments  for other  products or services,  and may reflect  budgetary
constraints  and/or   imperfections  in  Medicare  or  Medicaid  data.  Even  if
successful, demand for products may be driven more by the scope of peer-reviewed
evidence and  acceptance,  endorsement  by regulatory  and clinical  bodies,  or
foreign country authorities than by the reimbursement rates available.  Securing
coverage at adequate  reimbursement rates from government and third party payers
can be a time  consuming  and costly  process  that could  require us to provide
supporting scientific,  clinical, and cost-effectiveness data for the use of our
products to each payer. Our inability to promptly obtain coverage and profitable
reimbursement rates from  government-funded  and private payers for our products
could have a material  adverse  effect on our financial  condition and operating
results.

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

Current Medicare Coverage in Angina

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

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

          "for patients who have been diagnosed with disabling angina (class III
          or  class  IV,  Canadian   Cardiovascular  Society  Classification  or
          equivalent  classification)  who, in the opinion of a cardiologist  or
          cardiothoracic   surgeon,   are  not  readily   amenable  to  surgical
          interventions such as balloon angioplasty and cardiac bypass because:
          1.   their  condition  is  inoperable,  or at high  risk of  operative
               complications or post-operative failure;
          2.   their   coronary   anatomy  is  not  readily   amenable  to  such
               procedures; or
          3.   they have co-morbid states, which create excessive risk."

     The 2008 national  average payment rate per hourly session in the physician
office setting and the hospital outpatient facility is approximately $156.16 and
$109.47, respectively. Reimbursement rates vary throughout the country and range
from $98 to $215 per hourly session.  The 2007 national average payment rate per
hourly  session in the  physician  office  setting and the  hospital  outpatient
facility was  approximately  $147 and $107,  respectively.  Reimbursement  rates
varied  throughout  the country  and range from $98 to $215 per hourly  session.
Under the Medicare program,  physician reimbursement of the provision of EECP(R)
therapy is higher if the therapy is performed in a physician  office  setting as
compared  to a hospital  outpatient  facility in order to reflect  higher  costs

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<PAGE>
associated with the physician  office.  Since January 2000, the national average
payment rate has varied considerably.  The initial national average payment rate
for the physician  office setting and the hospital  outpatient  facility in 2000
was approximately  $130 and $112,  respectively per hourly session.  The average
payment rate for the  physician  office  setting  climbed to $208 per  treatment
session  in 2003  before  being  reduced  approximately  37% in 2004 to $132 per
treatment  session.  In 2005 the physician rate increased  approximately  5% and
remained unchanged in 2006. The average payment rate for the hospital outpatient
facility declined steadily to 2005 before increasing approximately 2% in 2006.

     In order to bill and receive payment from Medicare, an individual or entity
must be enrolled in the  Medicare  program for EECP(R)  therapy.  The  physician
office  setting  and the  hospital  outpatient  facility  are the only  entities
currently authorized to receive  reimbursement for the EECP(R) therapy under the
Medicare  program and  reimbursement  is not permitted to other  individuals  or
entity  types,  which  include,  but are not  limited to,  nurse  practitioners,
physical therapists,  ambulatory surgery centers,  nursing homes,  comprehensive
outpatient  rehabilitation  facilities,   outpatient  dialysis  facilities,  and
independent  diagnostic  testing  facilities.  For each of these  provider types
there is statutory  authorization  and accompanying  regulations that govern the
terms and conditions of Medicare program participation.

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

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

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

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

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

     On March 20, 2006,  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    CCSC II angina
          o    Heart Failure
          o    NYHA Class II/III stable heart failure  symptoms with an ejection
               fraction of less than or equal to 35%
          o    NYHA Class II/III stable heart failure  symptoms with an ejection
               fraction of less than or equal to 40%
          o    NYHA Class IV heart failure
          o    Acute heart failure
          o    Cardiogenic shock
          o    Acute myocardial infarction."

     They  commented  in their  decision  memorandum  that they were not able to
apply full weight to the evidence  generated by the PEECH(TM)  trial,  as it had
not yet been published in a peer-reviewed  medical journal by the time they were
required to issue a final decision on this application.  Moreover,  they did not

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<PAGE>
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 NYHA Class II/III stable heart
failure  symptoms  with an ejection  fraction of less than or equal to 35%. They
did,  however,  reiterate in the decision  memorandum that "Current  coverage as
described in Section 20.20 of the Medicare National Coverage Determination (NCD)
manual will remain in effect" for refractory angina patients.

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

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

     These  papers  were  submitted  to CMS and we were  advised to  continue to
gather more clinical evidence for future submission.

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

Expanding Coverage with Other Third-Party Payers

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

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

Reimbursement in International Markets

     The reimbursement  environment for EECP(R) therapy in international markets
is  fragmented  and  coverage  varies as a mix of  available  private and public
healthcare  providers  may not yet be aware of  coverage  of this  therapy.  Our
reimbursement  strategy has been  opportunistic  and  responsive  to the selling
opportunities  presented through our distribution  partners.  During this fiscal

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<PAGE>
year our  efforts on behalf of EECP(R)  therapy in both the  private  and public
healthcare sectors of selected  international markets have been initiated by our
distributors,  in  support  of  the  therapy,  in  their  designated  territory.
Additionally,  efforts  have been  initiated  to obtain  coverage  in the public
sector in certain overseas markets;  however,  we do not anticipate an impact on
financial  performance  in the next fiscal year,  given the long lead times from
submission  to  approval  of  international   dossiers  for  each  reimbursement
authority.

Patents and Trademarks

     We own eleven US patents  including  eight utility and three design patents
that expire at various times  between 2008 and 2021.  In addition,  more than 20
foreign patents have been issued that expire at various times from 2008 to 2022.
We are also  planning  to file  other  patent  applications  regarding  specific
enhancements to the current  EECP(R) models,  future  generation  products,  and
methods of treatment in the future.  Moreover,  trademarks  have been registered
for the names "EECP(R)" and "Natural Bypass".

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

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

Employees

     As of May 31, 2008, we employed 24 full-time and 1 part-time persons with 4
in direct sales,  sales and clinical  applications  support, 9 in manufacturing,
quality control and technical service, 3 in marketing and customer support, 2 in
engineering,  regulatory and clinical research and 7 in administration.  None of
our employees  are  represented  by a labor union.  We believe that our employee
relations are good.

Manufacturing

     Under our Supplier Agreement with Living Data Technology  Corporation dated
June 21, 2007, Living Data is our exclusive supplier for the ECP therapy systems
that  we  market  under  the  registered  trademark  EECP(R).  Living  Data  has
represented  to us that it is in  compliance  in all material  respects with all
applicable  laws,  rules and  regulations,  and has obtained  all the  necessary
licenses,  permits,  consents  and  approvals  necessary  for it to provide  the
products and services specified under the Supplier Agreement.

     Under the agreement with Living Data, we continue to  manufacture  products
from our existing inventory,  as well as other products,  at our leased facility
located in Westbury, New York.

RISK FACTORS

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

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<PAGE>

Financial Risks

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

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

Risks Related to Our Business

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

     We are currently  dependent on a single product  platform  which,  based on
current medical reimbursement policies, provides coverage for a restricted class
of heart patients. On May 31, 2005, we submitted an application to CMS to expand
the national coverage policy for external counterpulsation treatment to patients
with  Canadian  Cardiovascular  Class II stable  angina and to patients with New
York Heart  Association  (NYHA) Class II and III stable heart  failure  symptoms
with an ejection  fraction  less than 35%. The  application  was accepted by CMS
effective  June 20,  2005,  and CMS  announced  their  decision to maintain  the
existing  coverage as stated  prior to the  application  and not to expand it to
include  Class II Angina and Class II/III CHF on March 20, 2006.  Results of the
PEECH(TM)  trial have been  published in the Journal of the American  College of
Cardiology in September  2006, and the subgroup  analysis of CHF patients age 65
and over has also been  published  in the  November-December  2006  issue of the
Journal of Congestive Heart Failure. These two papers have been submitted to CMS
for reconsideration of our application. We had met with representatives from CMS
in February 2007 and presented our case. CMS has requested  additional data from
us. We will continue our dialogue with CMS to obtain  coverage for heart failure
patients.  However,  there is no assurance that the Company will have sufficient
resources to gather the necessary data to be sufficient to support  expansion of
the Medicare  National  Coverage Policy for EECP(R)  treatment for NYHA class II
and III heart failure patients.

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

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

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

     Increased acceptance by the medical community is important for growth.

     While many  abstracts and  publications  are  presented  each year at major
scientific meetings worldwide with respect to EECP(R) treatment efficacy,  there
is continued  skepticism  concerning EECP(R) therapy  methodology.  The American
Heart  Association and the American  College of Cardiology  Practice  Guidelines

                                       20
<PAGE>
currently list EECP(R) as a therapy currently under  investigation for treatment
of heart  failure and have a  classification  rating of IIb as a  treatment  for
patients  who are  refractory  to medical  therapy  and are not  candidates  for
percutaneous  intervention or revascularization.  A classification rating of IIb
indicates the usefulness/efficacy of EECP(R) therapy is less well established by
evidence/opinion.   The  medical   community   utilizes  these  guidelines  when
considering  the  various   treatment   options  for  their  patients.   Certain
cardiologists, in cases where the EECP(R) therapy is a viable alternative, still
appear to prefer percutaneous  coronary  interventions (e.g. balloon angioplasty
and stenting) and cardiac bypass surgery for their patients. Additional evidence
regarding  the  efficacy of EECP(R)  therapy  continues  to evolve,  however the
evidence may not be sufficient to warrant a modification of these  guidelines to
a  more  favorable  recommendation  and  increased  acceptance  by  the  medical
community.  We are dependent on consistency of favorable research findings about
EECP(R)  therapy  and  increasing  acceptance  of  EECP(R)  therapy  as a  safe,
effective and cost  effective  alternative  to other  available  products by the
medical community for growth.

     We face competition from other companies and technologies.

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

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

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

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

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

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

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

     We also  must  comply  with  Current  Good  Manufacturing  Practice  (CGMP)
requirements as set forth in the Quality System  Regulation (QSR) to receive FDA
approval to market new products and to continue to market current products.  The

                                       21
<PAGE>
QSR imposes certain procedural and documentation requirements on us with respect
to manufacturing and quality assurance activities, including packaging, storage,
and record  keeping.  Our  products  and  activities  are subject to  extensive,
ongoing regulation,  including  regulation of labeling and promotion  activities
and adverse event reporting.  Also, our FDA registered facilities are subject to
inspection by the FDA and other governmental authorities.  Any failure to comply
with  regulatory  requirements  could  delay or prevent our ability to market or
distribute our products.  Violation of FDA statutory or regulatory  requirements
could result in  enforcement  actions,  such as voluntary or mandatory  recalls,
suspension  or  withdrawal  of  marketing  clearances  or  approvals,  seizures,
injunctions,  fines, civil penalties,  and criminal  prosecutions,  all of which
could have a material  adverse  effect on our  business.  Most  states also have
similar postmarket regulatory and enforcement authority for devices.

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

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

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

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

     We depend on Living Data for the supply of our ECP therapy systems.

     Under our Supplier Agreement with Living Data Technology  Corporation dated
June 21, 2007, Living Data is our exclusive supplier for the ECP therapy systems
that we market under the registered trademark EECP(R).  With certain exceptions,
including  the use of existing  inventory,  we are  required  to  purchase  this
product  from  Living  Data at  specified  prices.  While we do not  foresee any
difficulties in timely receiving products at competitive  prices, this inability
would adversely affect our business.

     We depend on management and other key personnel.

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

     We may not have adequate intellectual property protection.

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

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

                                       22
<PAGE>
     Since patent  applications  in the United States are  maintained in secrecy
until such patent  applications are issued, our current product  development may
infringe  patents that may be issued to others.  If our  products  were found to
infringe  patents  held by  competitors,  we may have to modify our  products to
avoid  infringement,  and it is possible that our modified products would not be
commercially successful.

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

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

Risks Related to Our Industry

     Technological change is difficult to predict and to manage.

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

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

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

     We  currently  maintain  product  liability  insurance  at  $7,000,000  per
occurrence and $7,000,000 in the aggregate.  Our product liability insurance may
not be  adequate.  In the future,  insurance  coverage  may not be  available on
commercially reasonable terms, or at all. In addition,  product liability claims
or  product  recalls  could  damage  our  reputation  even if we  have  adequate
insurance coverage.

     We do not know the effects of healthcare reform proposals.

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

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

Risks Related to our Securities

     The  application  of the "penny  stock"  rules could  adversely  affect the
market  price of our common stock and increase  your  transaction  costs to sell
those shares.

     As long as the  trading  price of our common  shares is below $5 per share,
the  open-market  trading  of our  common  shares  will be subject to the "penny
stock"  rules.  The  "penny  stock"  rules  impose   additional  sales  practice
requirements  on  broker-dealers  who sell  securities  to  persons  other  than
established  customers and accredited  investors (generally those with assets in
excess of $1,000,000 or annual income  exceeding  $200,000 or $300,000  together
with their spouse).  For transactions  covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the  purchaser's  written  consent to the  transaction  before the
purchase.  Additionally,  for any  transaction  involving a penny stock,  unless

                                       23
<PAGE>
exempt,  the broker-dealer  must deliver,  before the transaction,  a disclosure
schedule  prescribed by the Securities and Exchange  Commission  relating to the
penny stock market. The broker-dealer also must disclose the commissions payable
to  both  the  broker-dealer  and  the  registered  representative  and  current
quotations  for  the  securities.  Finally,  monthly  statements  must  be  sent
disclosing recent price information on the limited market in penny stocks. These
additional  burdens  imposed  on  broker-dealers  may  restrict  the  ability or
decrease the willingness of  broker-dealers  to sell our common shares,  and may
result in decreased  liquidity for our common  shares and increased  transaction
costs  for  sales and  purchases  of our  common  shares  as  compared  to other
securities.

     Our common stock is subject to price volatility.

         The market price of our common stock historically has been and may
continue to be highly volatile. Our stock price could be subject to wide
fluctuations in response to various factors beyond our control, including, but
not limited to:
          o    medical reimbursement;
          o    quarterly variations in operating results;
          o    announcements  of  technological  innovations,  new  products  or
               pricing by our competitors;
          o    the rate of adoption by physicians of our technology and products
               in targeted markets;
          o    the timing of patent and regulatory approvals;
          o    the timing and extent of technological advancements;
          o    results of clinical studies;
          o    the sales of our common stock by affiliates or other shareholders
               with large holdings; and
          o    general market conditions.

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

Additional Information

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

ITEM 2 - DESCRIPTION OF PROPERTY

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

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


                                       24
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS

         There were no material legal proceedings under applicable rules.

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

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

                                       25
<PAGE>
                                     PART II

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

     Our common stock currently  trades on the  Over-the-Counter  Bulletin Board
under the symbol  VASO.OB.  On May 26, 2006,  our common stock ceased trading on
the Nasdaq  Capital  Market tier of the Nasdaq Stock Market and began trading on
the NASD Pink Sheets. Effective June 20, 2006, our common stock began trading on
the Over-the-  Counter  Bulletin Board (OTCBB).  The number of record holders of
common  stock as of August 20, 2008,  was  approximately  1,043,  which does not
include  approximately  17,079  beneficial  owners of shares held in the name of
brokers or other nominees.  The table below sets forth the range of high and low
trade prices of the common stock for the fiscal periods specified.
<TABLE>
<CAPTION>
                                    Fiscal 2008                Fiscal 2007
                                    -----------                -----------
                                  High         Low           High          Low
<S>                              <C>          <C>           <C>           <C>
First Quarter                    $0.19        $0.06         $0.17         $0.08
Second Quarter                   $0.13        $0.06         $0.15         $0.08
Third Quarter                    $0.10        $0.05         $0.12         $0.07
Fourth Quarter                   $0.09        $0.07         $0.09         $0.07
</TABLE>
     The last bid price of the  Company's  common stock on August 20, 2008,  was
$0.08 per share.

Dividend Policy

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

Entry Into A Material Definitive Agreement

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

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

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

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

     This  Management's  Discussion and Analysis or Plan of Operations  contains
descriptions of our expectations regarding future trends affecting our business.

                                       26
<PAGE>

These forward  looking  statements  and other  forward-looking  statements  made
elsewhere  in this  document  are made under the safe harbor  provisions  of the
Private Securities Litigation Reform Act of 1995. Please read the section titled
"Risk  Factors" in "Item One - Business"  to review  certain  conditions,  among
others,  which we believe  could cause results to differ  materially  from those
contemplated by the forward-looking statements.

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

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

Overview

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

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

     During the last two fiscal  years  ended May 31,  2008 and 2007 we incurred
large  operating  losses.  We  attempted  to achieve  profitability  by reducing
operating costs and halting the trend of declining revenue, to reduce cash usage
through  bringing our cost structure more into alignment with current revenue by
engaging in  restructurings  during  January 2006,  March 2007 and April 2007 to
substantially reduce personnel and spending on sales,  marketing and development
projects. In addition, we were seeking to obtain a strategic alliance within the
sales and marketing areas and/or to raise  additional  capital through public or
private equity or debt financings.

                                       27
<PAGE>
     During the first  quarter of fiscal  year 2008 the  following  events  took
place which  allowed us to raise  additional  capital  through a private  equity
financing and by the sale of our facility under a leaseback agreement.

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

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


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

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


Results of Operations

Fiscal Years Ended May 31, 2008 and 2007

     Net revenue from sales,  leases and service of our EECP(R)  systems for the
fiscal  years  ended  May 31,  2008 and 2007,  was  $5,182,768  and  $6,354,083,
respectively,  which represented a decline of $1,171,315,  or 18%. We reported a
net loss  attributable  to common  stockholders  of $676,965 and  $1,571,066 for
fiscal 2008 and 2007,  respectively.  The decrease in the net loss was primarily
due to the significant  decrease in our operating  expenses from the comparative
prior  period,  offset  slightly by the  decrease  in revenue.  Our net loss per
diluted  common share was $0.01 for the fiscal year ended May 31, 2008  compared
to a net loss of $0.02 per  diluted  common  share for the fiscal year ended May
31, 2007.

Revenues

     Revenue from equipment sales declined  approximately  18% to $2,087,365 for
the fiscal year ended May 31, 2008 as compared to $2,561,064 for the prior year.
The decline in  equipment  sales is due  primarily  to a 33% decrease in average
sales  prices,  which is  attributable  to a large number of system  upgrades or
trade-ups  of older EECP models from  existing  customers.  Although the average
sales price decreased domestically and internationally, generating lower revenue
per unit,  the  number of unit  sales for new and used  equipment  increased  by
approximately  53% within the domestic market while  remaining  constant for the
international market.

                                       28
<PAGE>
     We believe the decline in the sales price per unit reflects weakened demand
in the  refractory  angina market as existing  capacity is more fully  utilized,
coupled with  increased  direct and indirect  competition.  We  anticipate  that
demand for EECP(R)  systems  will remain soft unless  there is greater  clinical
acceptance  for the use of EECP(R)  therapy in treating  patients with angina or
angina equivalent symptoms who meet the current  reimbursement  guidelines or an
expansion  of the current CMS national  reimbursement  policy to include some or
all  Class II & III  heart  failure  patients.  Patients  with  angina or angina
equivalent  symptoms eligible for  reimbursement  under current policies include
many with serious  comorbidities,  such as heart failure,  diabetes,  peripheral
vascular disease and/or others.  Despite this, many cardiology clinicians appear
to be waiting for  approval of  reimbursement  coverage  for heart  failure as a
primary  indication before they will move forward with the treatment of ischemic
heart failure patients with angina equivalent  symptoms.  Reluctance to bill for
ischemic  heart failure  patients  under the current  coverage  guidelines,  and
failure to get or maintain adequate  reimbursement coverage for angina and heart
failure would  adversely  affect our business  prospects.  We anticipate  that a
prevailing  trend of declining  prices will continue in the immediate  future as
our  competition  attempts  to capture  greater  market  share  through  pricing
discounts.  The  average  price of new systems  sales  declined by 33% which was
mainly  due to a large  number of system  upgrades  or  trade-ups  of older EECP
models from  existing  customers,  in fiscal 2008 compared to the prior year and
the average sales price of used systems declined 37% in fiscal 2008. 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  and  related  products  to
international  distributors  in  fiscal  2008  decreased  approximately  16%  to
$836,000  compared  to  $991,000 in the prior year  reflecting  decreased  sales
volume.

     Our revenue from equipment rental and services  decreased 18% to $3,095,403
in fiscal 2008 from  $3,793,019  in fiscal  year 2007.  Revenue  from  equipment
rental and services  represented  60% of total revenue in fiscal 2008 and fiscal
2007. The decrease in revenue  generated from equipment  rentals and services is
due to a decrease in the service business compared to the prior fiscal year. The
decline  was also due to a decrease  in the rental  install  base from the prior
fiscal year ended May 31, 2007.

Gross Profit

     Gross  profit  declined to  $2,352,398,  or 45% of revenues for fiscal 2008
compared to $3,450,970 or 54% of revenues for fiscal 2007. The decrease of gross
profit  margin as a percentage  of revenue for fiscal 2008 compared to the prior
fiscal  year was due  mainly to the  higher  unabsorbed  fixed  production  cost
associated  with  reduced  production  volume,  and the effects of SFAS No. 151,
which  decreased  the amount of fixed costs  absorbed  into  inventory in fiscal
2008.  The decline in gross  profit when  compared to the prior year in absolute
dollars is principally due to the lower sales price per unit from fiscal 2007.

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

Selling, General and Administrative

     Selling,  general and administrative  ("SG&A") expenses for fiscal 2008 and
2007 were $2,626,045,  or 51% of revenues,  and $4,051,993,  or 64% of revenues,
respectively,  reflecting a decrease of  $1,425,525  or  approximately  35%. The
decrease in SG&A  expenditures in fiscal 2008 resulted  primarily from decreased
direct  expenditures  of $576,729 due to reduced sales  personnel and associated
travel plus lower sales commission due to reduced sales price, offset by minimal
increases in other sales related costs.  Marketing  expenses  decreased $451,658
due to reduced  expenditures  in  personnel  and their  associated  costs in the
marketing and clinical  application support areas, as well as associated travel,
plus lower  market  research,  product  promotion,  advertising,  and trade show
expenses.  Administrative  expenses  decreased $397,138 as a result of decreased
expenditures in personnel and their associated costs,  professional fees related
to accounting, legal and consulting services, reversal of bad debt reserves, and
insurance  expenses  offset  slightly  by  increases  in  other   administrative
expenses.

                                       29
<PAGE>
     During  fiscal  2008 the  Company  reversed  $42,837 of its  provision  for
doubtful  accounts compared to fiscal 2007 when the Company recorded a provision
for  doubtful  accounts of $423.  The  reversal of the  provision is primarily a
result of the  fiscal  2008  decrease  in sales in  addition  to the  continuous
efforts to ensure collection of accounts receivable.

Research and Development

     Research and development ("R&D") expenses of $474,111 or 9% of revenues for
fiscal 2008 decreased by $459,205, or 49%, from $933,316, or 15% of revenues for
the fiscal 2007. The decrease is primarily attributable to fewer engineering and
clinical personnel and associated  expenditures and reduced spending on clinical
trials, offset by a slight increase in new product spending.


Interest Expense and Financing Costs

     Interest  expense and financing  costs decreased to $16,616 for fiscal 2008
from $69,767 for the prior year. Interest expense primarily reflects interest on
loans  secured  to  refinance  the  November  2000  purchase  of  the  Company's
headquarters  and  warehouse  facility.  The decrease is a direct  result of the
sale-leaseback  agreements for the Company's headquarters and warehouse facility
which occurred during the first quarter of fiscal 2008.

Interest and Other Income, Net

     Interest  and  other  income  for  fiscal  2008 and 2007 were  $61,083  and
$53,648, respectively. Interest income primarily reflects interest earned on the
Company's  cash  balances.  Other  income has been  derived  primarily  from the
liquidation of equipment and fixtures used in previously leased properties.

Gain on Sale of Assets

     The Gain on Sale of Assets for fiscal  2008 of  $44,371  resulted  from the
Company's sale-leaseback of its facility.

Income Tax Expense, Net

     During  fiscal 2008 and 2007 we recorded a  provision  for income  taxes of
$18,045 and $20,608, respectively.

     As of May 31,  2008,  the recorded  deferred  tax assets were  $19,819,352,
reflecting  an increase of $230,000  during the fiscal year ended May 31,  2008,
which was offset by a valuation allowance of the same amount.

     Ultimate  realization  of any or all of  the  deferred  tax  assets  is not
assured due to significant  uncertainties  and material  assumptions  associated
with  estimates of future  taxable  income during the  carryforward  period.  In
November 2005, we concluded that,  based upon the weight of available  evidence,
it was  "more  likely  than not" that the net  deferred  tax asset  would not be
realized and  increased  the  valuation  allowance to bring the net deferred tax
asset carrying value to zero.

Liquidity and Capital Resources

Cash and Cash Flow

     We have  financed our  operations  primarily  from  working  capital and in
fiscal  2008 from a private  equity  financing  and by the sale of our  facility
under a leaseback  agreement.  At May 31, 2008, we had cash and cash equivalents
of  $2,653,999  and  working  capital of  $2,851,901  compared  to cash and cash
equivalents of $850,288 and working capital of $1,320,347 at May 31, 2007.

                                       30
<PAGE>
     Cash used in operating  activities  was $32,021  during fiscal 2008,  which
consisted of a net cash loss after  adjustments of $385,491 and cash provided by
operating  assets and  liabilities  of  $353,470.  The  changes in the  accounts
balances  primarily reflect lower inventory of $592,427 and increase in deferred
revenues - LT and other liabilities of $15,982,which  were partially offset by a
decrease in accounts  receivable  of  $27,031,  a decrease in accounts  payable,
accrued  expenses,  deferred  revenues - ST, and other  current  liabilities  of
$163,246  and  lower  other  current  assets  of  $24,172,  as well as  deferred
distributor costs of $40,490.  Net accounts  receivable were 14% of revenues for
the period ended May 31,  2008,  as compared to 12% for the period ended May 31,
2007,  and  accounts  receivable  turnover  decreased to 7.1 times as of May 31,
2008, as compared to 8.1 times as of May 31, 2007.

     Standard payment terms on our domestic equipment sales are generally net 30
to 90 days from  shipment and do not contain  "right of return"  provisions.  We
have  historically  offered a  variety  of  extended  payment  terms,  including
sales-type  leases,  in certain  situations and to certain customers in order to
expand the market for our EECP(R) products in the US and  internationally.  Such
extended payment terms were offered in lieu of price concessions, in competitive
situations,  when opening new markets or geographies  and for repeat  customers.
Extended payment terms cover a variety of negotiated terms, including payment in
full - net 120, net 180 days or some fixed or variable  monthly  payment  amount
for a six to twelve month period followed by a balloon  payment,  if applicable.
During  fiscal  2008 and 2007,  there were no revenues  generated  from sales in
which  initial  payment  terms  were  greater  than 90 days  and we  offered  no
sales-type leases during either period. In general, reserves are calculated on a
formula basis  considering  factors such as the aging of the  receivables,  time
past due, and the customer's  credit history and their current financial status.
In most  instances  where  reserves are  required,  or accounts  are  ultimately
written-off,  customers have been unable to successfully implement their EECP(R)
program. As we are creating a new market for the EECP(R) therapy and recognizing
the challenges that some customers may encounter,  we have opted, at times, on a
customer-by-customer  basis, to recover our equipment  instead of pursuing other
legal remedies, which has resulted in our recording of a reserve or a write-off.

     Investing activities provided net cash of $1,310,857 during the fiscal year
ended May 31, 2008,I which represented proceeds received from the building sale,
net of related costs.

     Our financing  activities  provided net cash of $524,875  during the fiscal
year  ended May 31,  2008,  reflecting  proceeds,  net of related  expenses,  of
$1,375,890  from the  Securities  Purchase  Agreement,  which was offset by loan
repayments on the building of $851,015.

Liquidity

     During the last two fiscal  years ended May 31, 2008 and 2007,  we incurred
large  operating  losses.  The Company  attempted  to achieve  profitability  by
reducing operating costs and halting the trend of declining  revenue,  to reduce
cash usage by bringing  its cost  structure  more into  alignment  with  current
revenue by engaging in restructurings  during January 2006, March 2007 and April
2007 to  substantially  reduce  personnel  and spending on sales,  marketing and
development projects. In addition, the Company was seeking to obtain a strategic
alliance within the sales and marketing areas and/or to raise additional capital
through public or private equity or debt financings.

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

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

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

                                       31
<PAGE>

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

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

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

     Based on the above transactions, we believe that we have sufficient working
capital to continue our operations through at least May 31, 2009.


Off-Balance Sheet Arrangements

     As part of our on-going  business,  we do not  participate in  transactions
that  generate   relationships   with   unconsolidated   entities  or  financial
partnerships,  such as  entities  often  referred  to as  structured  finance or
special  purpose  entities  (SPES),  which would have been  established  for the
purpose of facilitating  off-balance sheet  arrangements or other  contractually
narrow or limited  purposes.  As of May 31,  2008,  we are not  involved  in any
unconsolidated SPES.

Related Party Transactions

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

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

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

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<PAGE>
     On July 10, 2007,  the Board of Directors  appointed Mr. Behnam  Movaseghi,
Treasurer and Chief Financial Officer of Kerns Manufacturing Corporation, to our
Board of Directors.

     As  affiliates  of Living  Data and Kerns,  Mr. Ma, Mr.  Movaseghi  and Mr.
Srybnik have each been directly involved in the transactions between Living Data
and Kerns, and the Company,  with respect to the Securities  Purchase Agreement,
the  Distribution  Agreement and the Supplier  Agreement,  as well as consulting
servicesto the Company with no compensation.

     During fiscal 2008,  the Company  purchased  ECP therapy  systems under the
Supplier  Agreement for $120,000 from Living Data, which was paid in full by the
Company as of June 2008. In addition,  Living Data purchased $5,000 worth of ECP
therapy  system  components  from the Company,  which was paid in full by Living
Data as of June 2008.

     During  fiscal 2009 Living Data  assigned to  Vasomedical,  Inc. all of its
rights and  interests  under its  Distributorship  Agreement  with a corporation
organized and existing  under the laws of the People's  Republic of China,  that
manufactures  Ambulatory Blood Pressure  Monitors,  Ambulatory ECG Recorders and
Holter & ABPM Combiner  Recorders,  for $20,000  payable to Living Data based on
certain terms and conditions.  Vasomedical Inc., also must pay to Living Data 5%
of the selling price or 5% of the cost of all goods sold  (whichever is higher),
and 5% of the cost of all goods  transferred  but not sold under the  Assignment
Agreement to Living Data based on sales of this  equipment.  The Company intends
to sell  these  systems  in the United  States  and other  countries  subject to
obtaining regulatory clearance.

     During  fiscal 2009 Living Data  assigned to  Vasomedical,  Inc. all of its
rights and  interests  under its  Distributorship  Agreement  with a corporation
organized and existing  under the laws of the People's  Republic of China,  that
manufactures  Ultrasound  Scanners,  for $20,000 payable to Living Data based on
certain terms and conditions.  Vasomedical Inc., also must pay to Living Data 5%
of the selling price or 5% of the cost of all goods sold  (whichever is higher),
and 5% of the cost of all goods  transferred  but not sold under the  Assignment
Agreement to Living Data based on sales of this  equipment.  The Company intends
to sell  these  systems  in the United  States  and other  countries  subject to
obtaining regulatory clearance.

     In July of 2008  Vasomedical,  Inc.  has  agreed to  purchase  ECP  therapy
systems  under its  Distributorship  Agreement  with  Living  Data for  $360,000
payable over 18 months.

     Further,  Kerns is providing the Company,  free of charge, part time use of
one of its  Information  Technology  (IT)  employees  as well  one of  their  IT
consultants  to provide the Company with IT and database  support  services.  In
addition, a clinical applications support specialist and a service engineer from
Living Data may be used by Vasomedical,  Inc. to provide customers with clincial
training and technical service.

Effects of Inflation

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

Critical Accounting Policies

     Financial  Reporting  Release No. 60, which was released by the  Securities
and Exchange  Commission,  or SEC, in December  2001,  requires all companies to
include a  discussion  of critical  accounting  policies or methods  used in the
preparation  of  financial  statements.  Note B of  the  Notes  to  Consolidated
Financial  Statements  included in our Annual Report on Form 10-KSB for the year
ended May 31, 2008,  includes a summary of our significant  accounting  policies
and methods used in the  preparation of our financial  statements.  In preparing
these  financial  statements,  we have made our best  estimates and judgments of
certain amounts included in the financial  statements,  giving due consideration
to  materiality.  The  application  of these  accounting  policies  involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result,  actual  results  could  differ  from  these  estimates.   Our  critical
accounting policies are as follows:

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<PAGE>
Revenue Recognition

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

     In most cases, revenue from domestic EECP(R) system sales is generated from
multiple-element  arrangements  that  require  judgment in the areas of customer
acceptance,  collectibility,  the  separability of units of accounting,  and the
fair value of individual  elements.  We follow the provisions of Emerging Issues
Task Force,  or EITF,  Issue No.  00-21,  "Revenue  Arrangements  with  Multiple
Deliverables" ("EITF 00-21"). The principles and guidance outlined in EITF 00-21
provide a framework to determine (a) how the arrangement consideration should be
measured (b) whether the  arrangement  should be divided into separate  units of
accounting,  and (c) how the arrangement consideration should be allocated among
the separate  units of accounting.  We determined  that the domestic sale of our
EECP(R)  systems  includes  a  combination  of three  elements  that  qualify as
separate units of accounting:
     i.   EECP(R) equipment sale,
     ii.  provision of in-service and training  support  consisting of equipment
          set-up and training provided at the customer's facilities, and
     iii. a service  arrangement  (usually one year),  consisting of: service by
          factory-trained  service  representatives,  material  and labor costs,
          emergency and remedial service visits,  software  upgrades,  technical
          phone support and preferred response times.

     Each of these  elements  represent  individual  units of  accounting as the
delivered  item has value to a customer on a  stand-alone  basis,  objective and
reliable  evidence of fair value exists for undelivered  items, and arrangements
normally do not  contain a general  right of return  relative  to the  delivered
item. We determine fair value based on the price of the  deliverable  when it is
sold  separately  or based  on  third-party  evidence.  In  accordance  with the
guidance in EITF 00-21,  we use the residual  method to allocate the arrangement
consideration when it does not have fair value of the EECP(R) system sale. Under
the residual method, the amount of consideration allocated to the delivered item
equals the total arrangement  consideration less the aggregate fair value of the
undelivered items. Assuming all other criteria for revenue recognition have been
met, we recognize revenue for:
     i.   EECP(R)  equipment sales, when delivery and acceptance occurs based on
          delivery  and  acceptance   documentation  received  from  independent
          shipping companies or customers,
     ii.  in-service  and  training,  following  documented  completion  of  the
          training, and
     iii. the service  arrangement,  ratably over the service  period,  which is
          generally one year.

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

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

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

     The Company has also entered into lease agreements for our EECP(R) systems,
generally  for  terms of one year or less,  that  are  classified  as  operating
leases.  Revenues from operating leases are generally recognized,  in accordance
with the terms of the lease agreements,  on a straight-line  basis over the life
of the respective  leases.  For certain  operating leases in which payment terms
are  determined on a  "fee-per-use"  basis,  revenues are recognized as incurred
(i.e.,  as actual usage occurs).  The cost of the EECP(R) system  utilized under
operating  leases is recorded as a component  of property and  equipment  and is
amortized to cost of sales over the estimated useful life of the equipment,  not
to exceed five years.  There were no significant  minimum rental  commitments on
these operating leases at May 31, 2008.

Accounts Receivable, net

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

Inventories, net

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

     We have  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  $158,000  less in  fixed
production overhead into inventory during fiscal year 2008 as compared to fiscal
2007.

Deferred Revenues

     The Company records revenue on extended service  contracts ratably over the
term of the related contract  period.  In accordance with 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. Under
the provisions of EITF 00-21, for certain arrangements, a portion of the overall

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<PAGE>
system price attributable to the first year service  arrangement is deferred and
recognized  as  revenue  over the  service  period.  As such,  we do not  accrue
warranty  costs upon  delivery  but we rather  recognize  warranty  and  related
service costs as incurred.

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

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

Net Loss per Common Share

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

Income Taxes

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

     Deferred  tax  assets  and   liabilities   are  classified  as  current  or
non-current  based on the  classification  of the related asset or liability for
financial reporting. A deferred tax asset or liability that is not related to an
asset or  liability  for  financial  reporting,  including  deferred  tax assets
related to carryforwards, are classified according to the expected reversal date
of the  temporary  difference.  The  deferred  tax asset the Company  previously
recorded,  and then  reversed  fully in fiscal  2006,  related  primarily to the
realization of net operating loss carryforwards,  of which the allocation of the
current  portion,  if any,  reflected  the  expected  utilization  of  such  net
operating losses for the following  twelve months.  Such allocation was based on
the Company's  internal  financial forecast and may be subject to revision based
upon actual results.

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  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

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<PAGE>
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 adoption of
SFAS No.  123(R)  did not have an  immediate  material  effect on the  financial
statements.  However,  as new stock  options are issued by the Company  this may
have a material effect on its quarterly and annual financial statements,  in the
form  of  additional  compensation  expense.  It is not  possible  to  precisely
determine the expense impact of adoption since a portion of the ultimate expense
that is recorded  will likely  relate to awards that have not yet been  granted.
The expense  associated with these future awards can only be determined based on
factors such as the price for the  Company's  common  stock,  volatility  of the
Company's  stock  price and risk free  interest  rates as  measured at the grant
date.

     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 changes in the subjective input  assumptions can materially
affect the fair value estimate,  in management's opinion, the existing models do
not  necessarily  provide a reliable  measure of the fair value of its  employee
stock options.

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

Recently Issued Accounting Pronouncements Not Yet Effective

Statements of Financial Accounting Standards (SFAS):

     SFAS No.  141 (R),  "Business  Combinations"  --  retains  the  fundamental
requirements in Statement 141 that the acquisition  method of accounting  (which
Statement 141 called the purchase method) be used for all business  combinations
and for an  acquirer  to be  identified  for  each  business  combination.  This
Statement defines the acquirer as the entity that obtains control of one or more
businesses in the business  combination and establishes the acquisition  date as
the date that the acquirer achieves control.

     o    replaces  Statement  141's  cost-allocation  process  and  requires an
          acquirer to recognize the assets  acquired,  the liabilities  assumed,
          and any  noncontrolling  interest in the  acquiree at the  acquisition
          date, measured at their fair values as of that date,

     o    requires  the  acquirer in a business  combination  achieved in stages
          (sometimes  referred  to  as a  step  acquisition)  to  recognize  the
          identifiable  assets and  liabilities,  as well as the  noncontrolling
          interest in the acquiree, at the full amounts of their fair values,

     o    requires  that an  acquirer  evaluate  new  information  and measure a
          liability  at the  higher of its  acquisition-date  fair  value or the
          amount  that  would  be  recognized  if  applying  Statement  5,  then
          measuring an asset at the lower of its acquisition-date  fair value or
          the best estimate of its future settlement amount,

     o    requires  the acquirer to recognize  contingent  consideration  at the
          acquisition date, measured at its fair value at that date,

     SFAS No. 157, Fair Value  Measurements.  This Statement defines fair value,
establishes a framework for measuring fair value, and expands  disclosures about
fair  value   measurements.   This  Statement  applies  under  other  accounting
pronouncements that require or permit fair value measurements,  the Board having
previously  concluded in those accounting  pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement  will  change  current  practice.  This  Statement  is  effective  for

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<PAGE>
financial  statements issued for fiscal years beginning after November 15, 2007,
and  interim  periods  within  those  fiscal  years.   Earlier   application  is
encouraged,  provided  that the  reporting  entity has not yet issued  financial
statements for that fiscal year,  including financial  statements for an interim
period  within that fiscal  year.  The Company does not expect that SFAS No. 157
will have any significant effect on future financial statements.

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

Effective for fiscal years beginning after December 15, 2008

     SFAS  No.  160,   "Noncontrolling   Interests  in  Consolidated   Financial
Statements" -- changes the way the  consolidated  income statement is presented.
It requires  consolidated  net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated statement of income, of the
amounts  of  consolidated  net  income  attributable  to the  parent  and to the
noncontrolling   interest.   Previously,   net   income   attributable   to  the
noncontrolling  interest generally was reported as an expense or other deduction
in  arriving  at  consolidated  net  income.  It also  was  often  presented  in
combination with other financial  statement amounts.  Effective for fiscal years
beginning after December 15, 2008.

     SFAS  No.  161,  Disclosures  about  Derivative   Instruments  and  Hedging
Activities - an Amendment of FASB Statement 133 -- enhances required disclosures
regarding  derivatives and hedging  activities,  including enhanced  disclosures
regarding  how:  (a) an  entity  uses  derivative  instruments;  (b)  derivative
instruments  and related hedged items are accounted for under FASB Statement No.
133,  Accounting  for Derivative  Instruments  and Hedging  Activities;  and (c)
derivative  instruments  and related  hedged items affect an entity's  financial
position,  financial performance,  and cash flows. Specifically,  Statement SFAS
No. 161 requires:

     o    Disclosure  of the  objectives  for using  derivative  instruments  be
          disclosed in terms of underlying risk and accounting designation;

     o    Disclosure  of the fair  values of  derivative  instruments  and their
          gains and losses in a tabular format;

     o    Disclosure  of  information   about   credit-risk-related   contingent
          features; and

     o    Cross-reference  from the  derivative  footnote to other  footnotes in
          which derivative-related information is disclosed.

     Effective for fiscal years and interim periods beginning after November 15,
2008. Early application is encouraged. The Company does not expect that SFAS No.
161 will have any significant effect on future financial statements.

     SFAS No. 163,  "Accounting for Financial Guarantee Insurance  Contracts" --
clarifies how SFAS No. 60, "Accounting and Reporting by Insurance  Enterprises",
applies  to  financial   guarantee   insurance  contracts  issued  by  insurance
enterprises,  including the  recognition  and measurement of premium revenue and
claim  liabilities.  It  also  requires  expanded  disclosures  about  financial
guarantee  insurance  contracts.   SFAS  No.  163  is  effective  for  financial
statements  issued for fiscal years  beginning  after December 15, 2008, and all
interim  periods  within those fiscal years,  except for  disclosures  about the
insurance enterprise's risk-management activities, which are effective the first
period beginning after May 23, 2008.

                                       38
<PAGE>
FASB Staff Positions (FSP):

     FSP APB 14-1,  "Accounting for  Convertible  Debt  Instruments  That May Be
Settled  in  Cash  upon  Conversion  (Including  Partial  Cash  Settlement)"  --
clarifies that  convertible  debt  instruments  that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB  Opinion No. 14,  Accounting  for  Convertible  Debt and Debt Issued with
Stock Purchase Warrants.  Additionally,  this FSP specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's  nonconvertible debt borrowing rate when
interest cost is recognized  in  subsequent  periods.  This FSP is effective for
financial  statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years.

     FSP FAS 140-3, "Accounting for Transfers of Financial Assets and Repurchase
Financing  Transactions" -- amends FASB Statement 140 to state that a transferor
and transferee shall not separately  account for a transfer of a financial asset
and a related repurchase  financing unless (a) the two transactions have a valid
and distinct  business or economic purpose for being entered into separately and
(b) the repurchase financing does not result in the initial transferor regaining
control over the financial asset. This FSP is effective for financial statements
issued for fiscal years  beginning  after November 15, 2008, and interim periods
within those fiscal years. Earlier application is not permitted.

     FSP FAS 142-3,  "Determination of the Useful Life of Intangible  Assets" --
amends the factors that should be considered in developing  renewal or extension
assumptions  used to determine the useful life of a recognized  intangible asset
under FASB Statement No. 142,  Goodwill and Other Intangible  Assets.  Paragraph
11(d) of Statement 142 precluded an entity from using its own assumptions  about
renewal or extension of an  arrangement  where there is likely to be substantial
cost or material modifications. This FSP amends paragraph 11(d) of Statement 142
so that an entity will use its own assumptions  about renewal or extension of an
arrangement,  adjusted  for  the  entity-specific  factors  in  paragraph  11 of
Statement  142,  even when there is likely to be  substantial  cost or  material
modifications.  Therefore,  in  determining  the  useful  life of the  asset for
amortization  purposes,  an entity shall  consider  the period of expected  cash
flows  used to  measure  the fair  value  of the  recognized  intangible  asset,
adjusted for the entity-specific factors including,  but are not limited to, the
entity's  expected use of the asset and the entity's  historical  experience  in
renewing or extending  similar  arrangements.  This FSP shall be  effective  for
financial  statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited.

     FSP FAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No.
13 and Other Accounting  Pronouncements That Address Fair Value Measurements for
Purposes of Lease  Classification  or Measurement  under Statement 13" -- amends
SFAS No. 157, "Fair Value Measurements", to exclude SFAS No. 13, "Accounting for
Leases",   and  other   accounting   pronouncements   that  address  fair  value
measurements for purposes of lease classification or measurement under Statement
13.  However,  this  scope  exception  does not  apply to  assets  acquired  and
liabilities  assumed in a business  combination that are required to be measured
at fair value under SFAS No. 141, "Business  Combinations",  or No. 141 (revised
2007),  "Business   Combinations",   regardless  of  whether  those  assets  and
liabilities are related to leases.

     FSP FAS 157-2,  "Effective  Date of FASB  Statement  No. 157" -- delays the
effective  date of SFAS No. 157,  "Fair Value  Measurements",  for  nonfinancial
assets and  nonfinancial  liabilities,  except for items that are  recognized or
disclosed at fair value in the  financial  statements  on a recurring  basis (at
least  annually).  The delay is  intended  to allow  the Board and  constituents
additional  time to consider  the effect of various  implementation  issues that
have arisen,  or that may arise,  from the application of SFAS No. 157. This FSP
defers  the  effective  date of SFAS No.  157 to fiscal  years  beginning  after
November  15,  2008,  and interim  periods  within  those fiscal years for items
within the scope of this FSP.

     FSP  FIN  46(R)-7,   "Application  of  FASB  Interpretation  No.  46(R)  to
Investment  Companies" -- states that investments accounted for at fair value in
accordance  with the  specialized  accounting  guidance  in the AICPA  Audit and
Accounting  Guide,  Investment  Companies,  are  not  subject  to  consolidation
according to the requirements of FIN 46(R).

                                       39
<PAGE>
     FSP SOP 94-3-1 and AAG HCO-1, " Omnibus Changes to Consolidation and Equity
Method Guidance for  Not-for-Profit  Organizations " -- makes several changes to
the  guidance on  consolidation  and the equity  method of  accounting  in AICPA
Statement of Position  94-3,  "Reporting of Related  Entities by  Not-for-Profit
Organizations",   and  the  AICPA  Audit  and  Accounting  Guide,  "Health  Care
Organizations." This FSP:

     a.   Eliminates  the  temporary  control  exception to  consolidation  that
          currently  exists for  certain  relationships  between  not-for-profit
          organizations and makes two related changes:
          (1)  Amends the definition of majority voting interest in the board of
               another entity in SOP 94-3 and the health care Guide
          (2)  (2) Conforms the  categorization of sole corporate  membership in
               SOP 94-3 to that in the health care Guide
     b.   Confirms the continued  applicability to not-for-profit  organizations
          of the consensus guidance on consolidation of  special-purpose  entity
          (SPE) lessors in the following EITF Issues:
          (1)  No. 90-15,  "Impact of  Nonsubstantive  Lessors,  Residual  Value
               Guarantees, and Other Provisions in Leasing Transactions"
          (2)  No.  96-21,  "Implementation  Issues in  Accounting  for  Leasing
               Transactions involving Special-Purpose Entities"
          (3)  No.  97-1,   "Implementation   Issues  in  Accounting  for  Lease
               Transactions, including Those involving Special-Purpose Entities"
     c.   Requires that not-for-profit organizations apply the guidance in:

     AICPA  Statement of Position  78-9,  "Accounting  for  Investments  in Real
Estate  Ventures",  on the equity method of  accounting to their  noncontrolling
interests in for-profit real estate  partnerships,  limited liability  companies
(LLCs),  and similar  entities  unless  those  investments  are reported at fair
value, where permitted.

     (1)  FSP SOP 78-9-1,  "Interaction  of AICPA Statement of Position 78-9 and
          EITF Issue No. 04-5",  to help  determine  whether their  interests in
          for-profit  partnerships,  LLCs, and similar  entities are controlling
          interests or noncontrolling interests
     (2)  EITF Issue No. 03-16, "Accounting for Investments in Limited Liability
          Companies," to determine whether an LLC should be viewed as similar to
          a  partnership,   as  opposed  to  a  corporation,   for  purposes  of
          determining  whether  noncontrolling  interests in an LLC or a similar
          entity should be accounted for in accordance with SOP 78-9 and related
          guidance.

     FSP SOP 94-3-1 and AAG HCO-1 is effective for fiscal years  beginning after
June 15, 2008, and to interim periods therein.

     FSP SOP  07-1-1,  --  indefinitely  delays  the  effective  date  of  AICPA
Statement  of  Position  07-1,  "Clarification  of the  Scope of the  Audit  and
Accounting  Guide  Investment  Companies and Accounting by Parent  Companies and
Equity Method Investors for Investments in Investment Companies."

     FSP EITF 03-6-1, -- "Determining Whether Instruments Granted in Share-Based
Payment  Transactions  Are  Participating  Securities."  This FSP provides  that
unvested  share-based  payment  awards  that  contain  nonforfeitable  rights to
dividends or dividend  equivalents  (whether  paid or unpaid) are  participating
securities  and shall be  included  in the  computation  of  earnings  per share
pursuant to the two-class method. The FSP is effective for financial  statements
issued for fiscal years  beginning  after December 15, 2008, and interim periods
within  those years.  Upon  adoption,  a company is required to  retrospectively
adjust its earnings  per share data  (including  any amounts  related to interim
periods,  summaries of earnings and selected financial data) to conform with the
provisions in this FSP. Early application of this FSP is prohibited.

                                       40
<PAGE>

EITF Consensuses (EITF):

     EITF Issue No. 07-1,  "Accounting for Collaborative  Arrangements " -- when
entities enter into arrangements to participate in a joint operating  activity a
collaborative  arrangement  may provide that one participant has sole or primary
responsibility  for certain  activities  or that two or more  participants  have
shared  responsibility  for certain  activities.  Participants  should  evaluate
whether an  arrangement is a  collaborative  arrangement at the inception of the
arrangement based on the facts and circumstances  present at that time.  Revenue
generated and costs  incurred by  participants  from  transactions  with parties
should  be  reported  gross  or  net  on  the  appropriate  line  item  in  each
participant's  respective  financial  statements  depending on the nature of the
participation.  Disclosures  should  include  information  about the  nature and
purpose of its collaborative  arrangements,  the entity's rights and obligations
under the  collaborative  arrangements,  the accounting policy for collaborative
arrangements,  and the income statement  classification and amounts attributable
to  transactions  arising  from the  collaborative  arrangement.  Effective  for
financial  statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years.

     EITF  Issue No.  07-4,  "Application  of the  Two-Class  Method  under FASB
Statement No. 128,  Earnings per Share,  to Master Limited  Partnerships"  --The
scope  of this  issue  includes  Master  Limited  Partnerships  (MLPs)  that are
required to make incentive  distribution  rights (IDR)  payments,  regardless of
whether  the IDRs are  embedded in the GP  (General  Partner)  interest or are a
separate  LP  (Limited  Partner)  interest,  and the MLPs  account for these IDR
payments as equity distributions. The consensus is that when the IDR is embedded
in the  GP  interest,  undistributed  earnings  should  be  allocated  to the GP
(including  the  distribution  rights of the embedded IDR) and LPs utilizing the
distribution formula for available cash specified in the partnership  agreement.
The  undistributed  earnings  should be allocated to the GP (with respect to the
distribution  rights of an embedded IDR) based on the contractual  participation
rights  of the IDR to  share  in  current  period  earnings.  Therefore,  if the
partnership  agreement  includes  a  "specified  threshold,"  an MLP  should not
allocate  undistributed  earnings  to the GP (with  respect to the  distribution
rights of an embedded IDR) once the specified  threshold has been met. The final
consensus  requires that an entity:  (a) apply the guidance in this issue in its
first fiscal year beginning after December 15, 2008,  including  interim periods
within those fiscal years,  and (b)  transition to the guidance in this issue by
retrospectively   applying  the  guidance  to  all  periods   presented.   Early
application is prohibited.

ITEM 7 - FINANCIAL STATEMENTS

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

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

         None.

 ITEM 8A - CONTROLS AND PROCEDURES

Report on Disclosure Controls and Procedures

     The Company's Chief Executive  Officer ("CEO") and Chief Financial  Officer
("CFO") with the participation of the Company's  management  ("Management")  and
through  the  guidance  of  an  independent  internal  control  consulting  firm
("Consultants")  conducted an evaluation of the  effectiveness  of the Company's
disclosure controls and procedures. These disclosure controls and procedures are
designed to ensure that  information  required to be disclosed by the Company in
the reports that it files or submits under the Securities  Exchange Act of 1934,
within  the time  periods  specified  by the SEC rules and forms,  is  recorded,
processed,  summarized  and reported,  and is  communicated  to  Management,  as
appropriate, to allow for timely decisions based on the required disclosures.

     Based on this  evaluation,  the Company's  CEO and CFO  concluded  that the
Company's disclosure controls and procedures were effective as of May 31, 2008.

                                       41
<PAGE>
ITEM 8A(T) - CONTROLS AND PROCEDURES

Report on Internal Control over Financial Reporting

     Management  is  responsible  for  establishing  and  maintaining   adequate
internal  control over  financial  reporting as defined in Rule 13a-15(f) of the
Exchange Act. Internal control over financial reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with accounting  principles  generally accepted in the United States of America.
Under the  supervision  of the  Consultants  referred to in Item 8A and with the
participation of Management, the CEO and CFO, an evaluation was conducted of the
effectiveness  of the internal  control over  financial  reporting  based on the
framework set forth by the Committee of Sponsoring Organizations of the Treadway
Commission  (COSO) in Internal  Control -  Integrated  Framework.  Based on this
evaluation,  the  Company's CEO and CFO  concluded  that the Company's  internal
control over  financial  reporting  was  effective as of May 31, 2008.  However,
Management's  assessment  identified the following weaknesses in the Information
Technology System (IT) at May 31, 2008:
     (a)  Documenting the procedures  performed in the change management area of
          our internal control over Information Technology Systems (IT ). During
          the first quarter of fiscal 2009, we  remediated  these  weaknesses by
          ensuring that processes were documented properly.
     (b)  Excessive manual adjustments to the inventory module are required.  In
          fiscal 2009, we will be remediating this with our upgraded  accounting
          software.

     A control  system,  no matter how well conceived and operated,  can provide
only  reasonable,  not absolute,  assurance  that the  objectives of the control
system are met. Further, the benefits of controls must be considered relative to
their costs.  Because of the inherent  limitations  in all control  systems,  no
evaluation of controls can provide  absolute  assurance  that all control issues
and instances of fraud, if any, have been detected.  These inherent  limitations
include the realities that judgments in decision making can be faulty,  and that
breakdowns  can occur because of simple  errors.  Additionally,  controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people,  or by management  override of the control.  The design of any system of
controls is also based in part upon certain  assumptions about the likelihood of
future  events,  and there can be no  assurance  that any design will succeed in
achieving its stated goals under all potential future conditions. Because of the
inherent  limitations in a cost-effective  control system,  misstatements due to
error or fraud may occur  and not be  detected  . This  annual  report  does not
include an attestation report of the Company's Registered Public Accounting Firm
regarding internal control over financial reporting. Management's report was not
subject to  attestation  by the  Company's  Registered  Public  Accounting  Firm
pursuant to  temporary  rules of the  Securities  and Exchange  Commission  that
permit the Company to provide only Management's report in this Annual Report.

ITEM 8B - OTHER INFORMATION

         None.

                                       42
<PAGE>

                                    PART III

ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
         GOVERNANCE; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.

     The  information  required  by this Item is  intended to be included in our
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection  with our 2008 Annual  Meeting of  Stockholders  and is
incorporated herein by reference.

ITEM 10 - EXECUTIVE COMPENSATION

     The  information  required  by this Item is  intended to be included in our
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection  with our 2008 Annual  Meeting of  Stockholders  and is
incorporated herein by reference.

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

     The  information  required  by this Item is  intended to be included in our
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection  with our 2008 Annual  Meeting of  Stockholders  and is
incorporated herein by reference.

ITEM 12 - CERTAIN  RELATIONSHIPS  AND  RELATED   TRANSACTIONS,   AND  DIRECTOR
          INDEPENDENCE

     The  information  required  by this Item is  intended to be included in our
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection  with our 2008 Annual  Meeting of  Stockholders  and is
incorporated herein by reference.

ITEM 13 - EXHIBITS

(a)  Financial Statements and Financial Statement Schedules
     ------------------------------------------------------
     (1)  See  Index  to  Consolidated  Financial  Statements  on  page  F-1  at
          beginning of attached financial statements.

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

                                       43

<PAGE>
         (21)  Subsidiaries of the Registrant


                                                                  Percentage
               Name                      State of Incorporation Owned by Company
               ----                      ---------------------- ----------------
               Viromedics, Inc.                  Delaware            61%
               180 Linden Avenue Corp.           New York            100%

          (23) Consent of Miller Ellin & Company, LLP
          (31) Certification  Reports  pursuant to Securities  Exchange Act Rule
               13a - 14
          (32) Certification   Reports   pursuant   to   Section   906   of  the
               Sarbanes-Oxley Act of 2002


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

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

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The  information  required  by this Item is  intended to be included in our
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection  with our 2008 Annual  Meeting of  Stockholders  and is
incorporated herein by reference.

                                       44
<PAGE>
SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, we have duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 25th day of August, 2008.

                                  VASOMEDICAL, INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been  signed  below on August  25,  2008,  by the  following  persons in the
capacities indicated:

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

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

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

/s/Joseph Giacalone       Director
------------------------
Joseph Giacalone

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

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

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

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

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

------------------------  Director
Derek Enlander

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                        Page
                                                                                        ----
<S>                                                                                     <C>
Report of Independent Registered Public Accounting Firm                                 F-1

Financial Statements
         Consolidated Balance Sheet as of May 31, 2008                                  F-2

         Consolidated Statements of Operations for the years ended
         May 31, 2008 and 2007                                                          F-3

         Consolidated Statement of Changes in Stockholders'
         Equity for the years ended May 31, 2008 and 2007                               F-4

         Consolidated Statements of Cash Flows for the years ended
         May 31, 2008 and 2007                                                          F-5

         Notes to Consolidated Financial Statements                                     F-7
</TABLE>
                                       i
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Shareholders

  Vasomedical, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Vasomedical, Inc.
and Subsidiaries (the "Company") as of May 31, 2008 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years  ended  May  31,  2008  and  2007.  These  financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Vasomedical,  Inc.  and  Subsidiaries  as of May 31,  2008 and the  consolidated
results of their operations and their consolidated cash flow for the years ended
May 31,  2008  and  2007 in  conformity  with  accounting  principles  generally
accepted in the United States of America.




/s/ Miller Ellin & Company, LLP
MILLER ELLIN & COMPANY, LLP


New York, New York
August 20, 2008

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

                           CONSOLIDATED BALANCE SHEET
                                  May 31, 2008
<TABLE>
<CAPTION>
                                          ASSETS
CURRENT ASSETS
<S>                                                                                                <C>
     Cash and cash equivalents                                                                     $2,653,999
     Accounts receivable, net of an allowance for doubtful accounts of $270,183                       717,849
     Inventories, net                                                                               1,652,678
     Other current assets                                                                              58,933
                                                                                               ----------------
         Total current assets                                                                       5,083,459

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,178,566                                  57,170
DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of $101,775                               407,101
OTHER ASSETS                                                                                          213,336
                                                                                               ----------------
                                                                                                   $5,761,066
                                                                                               ================

                           LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                                                           $822,244
     Sales tax payable                                                                                149,304
     Deferred revenue                                                                               1,132,445
     Deferred gain on sale of building                                                                 53,245
     Accrued professional fees                                                                         74,320
                                                                                               ----------------
         Total current liabilities                                                                  2,231,558

DEFERRED REVENUE                                                                                      485,608
ACCRUED RENT EXPENSE                                                                                    8,656
DEFERRED GAIN ON SALE OF BUILDING                                                                     168,610

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and
       outstanding                                                                                         --
     Common stock, $.001 par value; 110,000,000 shares authorized; 93,768,004 shares
       issued and outstanding                                                                          93,768
     Additional paid-in capital                                                                    48,068,432
     Accumulated deficit                                                                          (45,295,566)
                                                                                               ----------------
         Total stockholders' equity                                                                 2,866,634
                                                                                               ----------------
                                                                                                   $5,761,066
                                                                                               ================

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

                                     F - 2
<PAGE>


                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                                                     Years Ended May 31,
                                                                                 2008                2007
                                                                            ----------------    -----------------
Revenues
<S>                                                                           <C>                  <C>
   Equipment sales                                                            $2,087,365           $2,561,064
   Equipment rentals and services                                              3,095,403            3,793,019
                                                                            ----------------    -----------------
     Total revenues                                                            5,182,768            6,354,083
                                                                            ----------------    -----------------

Cost of Sales and Services
   Cost of sales, equipment                                                    1,679,632            1,457,279
   Cost of equipment rentals and services                                      1,150,738            1,445,834
                                                                            ----------------    -----------------
     Total cost of sales and services                                          2,830,370            2,903,113
                                                                            ----------------    -----------------
   Gross profit                                                                2,352,398            3,450,970
                                                                            ----------------    -----------------

Operating Expenses
   Selling, general and administrative                                         2,626,045            4,051,993
   Research and development                                                      474,111              933,316
                                                                            ----------------    -----------------
     Total operating expenses                                                  3,100,156            4,985,309
                                                                            ----------------    -----------------
Loss from operations                                                            (747,758)          (1,534,339)
                                                                            ----------------    -----------------

Other Income (Expenses)
   Interest and financing costs                                                  (16,616)             (69,767)
   Interest and other income, net                                                 61,083               53,648
   Gain on sale of assets                                                         44,371                   --
                                                                            ----------------    -----------------
     Total other income (expenses)                                                88,838              (16,119)
                                                                            ----------------    -----------------

Loss before income taxes                                                        (658,920)          (1,550,458)
   Income tax expense, net                                                       (18,045)             (20,608)
                                                                            ----------------    -----------------
Net loss                                                                       $(676,965)         $(1,571,066)
                                                                            ================    =================


Net loss per common share
     - basic                                                                     $(0.01)               $(0.02)
                                                                            ================    =================
     - diluted                                                                   $(0.01)               $(0.02)
                                                                            ================    =================

Weighted average common shares outstanding
     - basic                                                                  92,211,788           65,198,592
                                                                            ================    =================
     - diluted                                                                92,211,788           65,198,592
                                                                            ================    =================

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

                                     F - 3

<PAGE>
                    Vasomedical, Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                 Additional                        Total
                                       Preferred Stock       Common Stock         Paid-in-     Accumulated     Stockholders'
                                       Shares   Amount     Shares    Amount       Capital        Deficit          Equity
                                       -----   ------     ----------  -------    -----------   -------------    ----------
<S>                                      <C>      <C>     <C>         <C>        <C>           <C>              <C>
Balance at May 31, 2006                  --       $--     65,198,592  $65,198    $46,148,493   $(43,047,535)    $3,166,156

Issuance of stock options in payment of
     outside director fees                                                            11,445                        11,445
Issuance of stock options in payment of
     salaries to company officers                                                      6,060                         6,060
  Net loss                                                                                       (1,571,066)    (1,571,066)
                                       -----   ------     ----------  -------    -----------   -------------    ----------
Balance at May 31, 2007                  --       $--     65,198,592  $65,198    $46,165,998   $(44,618,601)    $1,612,595
Common stock and warrants (net of
 expenses incurred) issued
 pursuant to Securities
 Purchase Agreement                      --        --     21,428,572   21,429      1,354,461             --      1,375,890
Common stock and warrants issued for
 Distribution and Supply agreement       --        --      6,990,840    6,991        461,395             --        468,386
Common stock issued to a Director        --        --        150,000      150          8,850             --          9,000
Stock based compensation                 --        --             --       --         77,728             --         77,728
Net loss                                                                                           (676,965)      (676,965)
                                       -----   ------     ----------  -------    -----------   -------------    ----------
Balance at May 31, 2008                  --       $--    $93,768,004  $93,768    $48,068,432   $(45,295,566)    $2,866,634
</TABLE>
     The accompanying notes are an integral part of this consolidated  financial
statement.

                                     F - 4
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                       Years ended May 31,
                                                                                     2008              2007
                                                                                 -------------    ---------------
Cash flows from operating activities
     <S>                                                                           <C>            <C>
     Net loss                                                                      $(676,965)     $(1,571,066)
                                                                                 -------------    ---------------
     Adjustments to reconcile net loss to net cash used in operating
       activities
         Depreciation and amortization                                               187,628          315,269
         Amortization of deferred gain on sale of building                           (44,371)              --
         Provision for doubtful accounts                                              42,837          (38,178)
         Amortization of deferred distributor costs                                  101,776
         Reserve for excess and obsolete inventory                                   (83,124)              --
         Stock based compensation                                                     86,728           17,505
         Changes in operating assets and liabilities
              Accounts receivable                                                    (27,031)         147,805
              Inventories                                                            592,427          606,580
              Other current assets                                                   (24,172)         265,408
              Other assets                                                                --           (1,072)
              Deferred distributor costs                                             (40,490)              --
              Accounts payable, accrued expenses and other current
                liabilities                                                         (163,246)        (721,970)
              Other liabilities                                                       15,982         (253,575)
                                                                                 -------------    ---------------
                                                                                     644,944          337,772
                                                                                 -------------    ---------------
     Net cash used in operating activities                                           (32,021)      (1,233,294)
                                                                                 -------------    ---------------

     Cash flows provided by (used in) investing activities
          Proceeds from the building sale                                          1,400,000               --
          Expenses paid for sale of building                                         (89,143)              --
          Purchase of property and equipment                                              --          (10,593)
                                                                                 -------------    ---------------
     Net cash provided by  (used in) investing activities                          1,310,857          (10,593)
                                                                                 -------------    ---------------

     Cash flows provided by (used in) financing activities
         Payments on long term debt and notes payable                               (851,015)        (291,603)
         Proceeds from Securities Purchase agreement                               1,500,000               --
         Expenses paid in relation to Securities Purchase Agreement
                                                                                    (124,110)              --
                                                                                 -------------    ---------------
     Net cash provided by (used in) financing activities                             524,875         (291,603)
                                                                                 -------------    ---------------

     NET INCREASE (DECREASE) IN CASH AND CASH
       EQUIVALENTS                                                                 1,803,711       (1,535,490)
                                                                                 -------------    ---------------
     Cash and cash equivalents - beginning of year                                   850,288        2,385,778
                                                                                 -------------    ---------------
     Cash and cash equivalents - end of year                                      $2,653,999         $850,288
                                                                                 =============    ===============
</TABLE>
     The accompanying notes are an integral part of this consolidated  financial
statement.

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

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

                                                                          Years ended May 31,
                                                                        2008              2007
                                                                   ---------------   -------------
<S>                                                                   <C>              <C>
NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
      Inventories transferred to)/from property and
       equipment, attributable to operating leases - net              $(44,354)        $(24,534)
     Issuance of note for purchase of insurance policy                     $--         $192,120

 SUPPLEMENTAL DISCLOSURES:
     Interest paid                                                     $16,616          $69,767
     Income taxes paid                                                 $11,685          $10,079
</TABLE>
     The accompanying notes are an integral part of this consolidated  financial
statement.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007



NOTE A - ORGANIZATION AND PLAN OF OPERATIONS

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

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

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

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

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

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

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007

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

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

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


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of Consolidation

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

Use of Estimates

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

Revenue Recognition

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

     In most cases, revenue from domestic EECP(R) system sales is generated from
multiple-element  arrangements  that  require  judgment in the areas of customer
acceptance,  collectibility,  the  separability of units of accounting,  and the
fair value of individual  elements.  We follow the provisions of Emerging Issues
Task Force Issue No. 00-21,  "Revenue  Arrangements with Multiple  Deliverables"
("EITF  00-21").  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:

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007



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

     Each of these  elements  represent  individual  units of  accounting as the
delivered  item has value to a customer on a  stand-alone  basis,  objective and
reliable  evidence of fair value exists for undelivered  items, and arrangements
normally do not  contain a general  right of return  relative  to the  delivered
item. We determine fair value based on the price of the  deliverable  when it is
sold  separately  or based  on  third-party  evidence.  In  accordance  with the
guidance in EITF 00-21,  we use the residual  method to allocate the arrangement
consideration when it does not have fair value of the EECP(R) system sale. Under
the residual method, the amount of consideration allocated to the delivered item
equals the total arrangement  consideration less the aggregate fair value of the
undelivered items. Assuming all other criteria for revenue recognition have been
met, we recognize revenue for:
     i.   EECP(R)  equipment sales, when delivery and acceptance occurs based on
          delivery  and  acceptance   documentation  received  from  independent
          shipping companies or customers,
     ii.  in-service  and  training,  following  documented  completion  of  the
          training, and
     iii. the service  arrangement,  ratably over the service  period,  which is
          generally one year.

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

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

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

     The Company has also entered into lease agreements for our EECP(R) systems,
generally  for  terms of one year or less,  that  are  classified  as  operating
leases.  Revenues from operating leases are generally recognized,  in accordance
with the terms of the lease agreements,  on a straight-line  basis over the life
of the respective  leases.  For certain  operating leases in which payment terms
are  determined on a  "fee-per-use"  basis,  revenues are recognized as incurred
(i.e.,  as actual usage occurs).  The cost of the EECP(R) system  utilized under
operating  leases is recorded as a component  of property and  equipment  and is
amortized to cost of sales over the estimated useful life of the equipment,  not
to exceed five years.  There were no significant  minimum rental  commitments on
these operating leases at May 31, 2008.

Shipping and Handling Costs

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

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007



Research and Development

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

Stock-Based Employee Compensation

     As of  June 1,  2006,  the  Company  has  adopted  Statement  of  Financial
Standards  No. 123 (revised  2004),  Share-Based  Payment  ("SFAS No. 123 (R)"),
which is a revision of SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees,  and amends FASB Statement No. 95,
Statement of Cash Flows.

     Generally,  the approach to accounting for share-based payments in SFAS No.
123(R) is similar to the approach  described in SFAS No. 123. However,  SFAS No.
123(R)  requires all  share-based  payments to  employees,  including  grants of
employee stock options,  to be recognized in the financial  statements  based on
their  fair  values.  Pro  forma  disclosure  of the fair  value of  share-based
payments is no longer an alternative to financial statement recognition.

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

     During the  twelve-month  period ended May 31, 2008, the Board of Directors
granted  non-qualified stock options under the 2004 Stock Option/Stock  Issuance
Plan to four  directors  to purchase an  aggregate  of 600,000  shares of common
stock, at an exercise price of $.12 per share, which represented the fair market
value of the underlying common stock at the time of the respective grants. These
options vested immediately and expire ten years from the date of grant.

     During the  twelve-month  period ended May 31, 2008, the Company's Board of
Directors  granted  150,000  shares of common  stock  under the 2004 Plan to one
director  of the Company  having a fair  market  value of $0.06 per share at the
time of the respective grant.

     Stock-based  compensation  expense  recognized  under  SFAS  123(R) for the
fiscal year ended May 31, 2008 was $81,406,  which  comprised  the fair value of
the stock options  issued during the year.  For purposes of estimating  the fair
value  of  each  option  on  the  date  of  grant,   the  Company  utilized  the
Black-Scholes option-pricing model.

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

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007



The fair value of the  Company's  stock-based  awards were  estimated  using the
following weighted-average assumptions:
<TABLE>
<CAPTION>
                               Years Ended May 31,
                                                       2008               2007
                                                  ---------------    -------------
        <S>                                          <C>                 <C>
        Expected life (years)                            5                  5
        Expected volatility                          103.25%              99%
        Risk-free interest rate                       4.95%              4.5%
        Expected dividend yield                       0.0%               0.0%
</TABLE>
Cash and Cash Equivalents

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

Certificates of Deposit

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

Accounts Receivable, net

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

         The changes in the Company's allowance for doubtful accounts are as
follows:
<TABLE>
<CAPTION>
                                                             May 31, 2008
                                                         -------------------
        <S>                                                     <C>
        Beginning balance                                       $364,809
            (Reversal)/Provision for losses on
            accounts receivable                                  (53,142)
            Direct write-offs, net of recoveries                 (41,484)
                                                          -------------------
        Ending balance                                          $270,183
                                                          ===================
</TABLE>
Concentrations of Credit Risk

     We market the EECP(R) system principally to hospitals and physician private
practices.  We perform credit evaluations of our customers'  financial condition

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007



and, as a  consequence,  believe  that our  receivable  credit risk  exposure is
limited. Receivables are generally due 30 to 90 days from shipment. For the year
ended  May 31,  2008,  no  customer  accounted  for 10% or more of  revenues  or
accounts receivable.

     Our revenues were derived from the following geographic areas:

<TABLE>
<CAPTION>
                                                             Years Ended May 31,
                                                   -----------------------------------
                                                        2008                2007
                                                   ---------------     ---------------
     <S>                                             <C>                 <C>
     Domestic (United States)                        $4,347,222          $5,363,138
     Non-domestic (foreign)                             835,546             990,945
                                                   ---------------     ---------------
                                                     $5,182,768          $6,354,083
                                                   ===============     ===============
</TABLE>
Inventories, net

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

     We have  adopted  the  provisions  of  Statement  of  Financial  Accounting
Standards No. 151,  "Inventory  Costs" (SFAS 151). 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  overhead to inventory  based on the normal
capacity of the production facilities.  As a result of adopting SFAS No. 151, we
absorbed approximately $158,000 less in fixed production overhead into inventory
during fiscal year 2008 as compared to fiscal 2007.

Property and Equipment

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

Deferred Revenue

     We record revenue on extended  service  contracts  ratably over the term of
the related warranty contracts.  Under the provisions of EITF 00-21, we began to
defer revenue related to EECP(R) system sales for the fair value of installation
and  in-service  training to the period when the  services  are rendered and for
warranty  obligations  ratably over the service  period,  which is generally one
year. (See Note F.)

Warranty Costs

     Equipment sold is generally covered by a warranty period of one year. Under
the provisions of EITF 00-21, for certain arrangements, a portion of the overall
system price attributable to the first year service  arrangement is deferred and
recognized  as  revenue  over the  service  period.  As such,  we do not  accrue
warranty costs upon delivery but rather  recognize  warranty and related service
costs as incurred.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007



     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  include the number of units
sold and the  historical  and  anticipated  rates of claims and costs per claim.
(See Note G.)

Income Taxes

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

     Deferred  tax  assets  and   liabilities   are  classified  as  current  or
non-current  based on the  classification  of the related asset or liability for
financial reporting. A deferred tax asset or liability that is not related to an
asset or  liability  for  financial  reporting,  including  deferred  tax assets
related to carryforwards, are classified according to the expected reversal date
of the temporary difference.

Fair Value of Financial Instruments

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

Net Loss Per Common Share

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

Reclassifications

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

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007



The fair value of the  Company's  stock-based  awards were  estimated  using the
following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                         Years Ended May 31,
                                                        2008            2007
                                                    -------------   -------------
      <S>                                              <C>               <C>
      Expected life (years)                               5                5
      Expected volatility                              103.25%            99%
      Risk-free interest rate                            4.95%           4.5%
      Expected dividend yield                             0.0%           0.0%
</TABLE>


Recently Issued Accounting Pronouncements Not Yet Effective

The  Company  does  not  believe  that  adoption  of  any  relevant   accounting
pronouncements  that  have been  issued  but are not yet  effective  will have a
significant effect on future financial statements.

The following is a list of accounting pronouncements issued but not yet
effective.

Statements of Financial Accounting Standards (SFAS):

     SFAS 141 (R), "Business Combinations"

     SFAS 157, Fair Value Measurements

     SFAS  159,  The Fair  Value  Option  for  Financial  Assets  and  Financial
Liabilities - Including an Amendment to FASB Statement No. 115

     SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements"

     SFAS 161, "Disclosures about Derivative  Instruments and Hedging Activities
- an Amendment of FASB Statement 133"

     SFAS 163, "Accounting for Financial Guarantee Insurance Contracts"

FASB Staff Positions (FSP):

     FSP APB 14-1,  "Accounting for  Convertible  Debt  Instruments  That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement)"

     FSP FAS 140-3, "Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions"

     FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets.

     FSP FAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No.
13 and Other Accounting  Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13"

     FSP FAS 157-2, "Effective Date of FASB Statement No. 157"

     FSP  FIN  46(R)-7,   "Application  of  FASB  Interpretation  No.  46(R)  to
Investment Companies"

     FSP SOP 94-3-1 and AAG HCO-1, " Omnibus Changes to Consolidation and Equity
Method Guidance for  Not-for-Profit  Organizations " -- makes several changes to

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007



the  guidance on  consolidation  and the equity  method of  accounting  in AICPA
Statement of Position  94-3,  "Reporting of Related  Entities by  Not-for-Profit
Organizations",   and  the  AICPA  Audit  and  Accounting  Guide,  "Health  Care
Organizations.

     FSP SOP  07-1-1,  --  indefinitely  delays  the  effective  date  of  AICPA
Statement  of  Position  07-1,  "Clarification  of the  Scope of the  Audit  and
Accounting  Guide  Investment  Companies and Accounting by Parent  Companies and
Equity Method Investors for Investments in Investment Companies."

     FSP EITF 03-6-1, -- "Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities"

EITF Consensuses (EITF):

     EITF Issue No. 07-1, "Accounting for Collaborative Arrangements "

     EITF  Issue No.  07-4,  "Application  of the  Two-Class  Method  under FASB
Statement No. 128, Earnings per Share, to Master Limited Partnerships"


NOTE C -LOSS PER COMMON SHARE

     The following  table sets forth the  computation  of basic and diluted loss
per share:
<TABLE>
<CAPTION>
                                                         Years Ended May 31,
                                                       2008               2007
                                                  ---------------    ---------------
     Numerator:
        <S>                                           <C>              <C>
        Net loss                                      $(676,695)       $(1,571,066)
                                                  ---------------    ---------------
     Denominator:
        Basic - weighted average shares              92,211,788         65,198,592
              Stock options                                  --                 --
              Warrants                                       --                 --
                                                  ---------------    ---------------
        Diluted - weighted average shares            92,211,788         65,198,592
                                                  ===============    ===============

     Loss per share - basic                              $(0.01)            $(0.02)
                                                  ===============    ===============
                    - diluted                            $(0.01)            $(0.02)
                                                  ===============    ===============
</TABLE>
     Options and warrants to purchase  12,000,462 and 8,846,876 shares of common
stock were excluded from the  computation of diluted  earnings per share for the
years  ended May 31,  2008 and 2007,  respectively,  because the effect of their
inclusion would be antidilutive.

NOTE D - INVENTORIES, NET

     Inventories, net of reserves consist of the following:
<TABLE>
<CAPTION>
                                                                  May 31, 2008
                                                                -----------------
     <S>                                                             <C>
     Raw materials                                                   $936,035
     Work in process                                                  603,925
     Finished goods                                                   112,718
                                                                -----------------
                                                                   $1,652,678
                                                                =================
</TABLE>
                                     F - 15
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007





     At May 31,  2008 and 2007 the  Company  reserves  for excess  and  obsolete
inventory of $594,042 and $677,166, respectively.

NOTE E - PROPERTY AND EQUIPMENT

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

                                                                     May 31, 2008
                                                                    ----------------
     <S>                                                              <C>
     Office, laboratory and other equipment                           $1,368,170
     EECP(R) systems under  operating  leases or under loan
        for clinical trials                                              719,401
     Furniture and fixtures                                              148,165
                                                                    ----------------
                                                                       2,235,736
     Less:  accumulated depreciation                                   2,178,566
                                                                    ----------------
        Property and equipment - net                                     $57,170
                                                                    ================
</TABLE>
     Depreciation  expense amounted to $140,724 and $300,532 for the years ended
     May 31, 2008 and 2007, respectively.

NOTE F - DEFERRED REVENUE

     The changes in the Company's deferred revenues are as follows:
<TABLE>
<CAPTION>
                                                                 May 31, 2008
                                                             ------------------

     <S>                                                            <C>
     Deferred revenue at beginning of year                          $1,756,351
     Additions
        Deferred extended service contracts                          1,849,831
        Deferred in-service and training                                47,500
        Deferred service contract promotion                              9,150
        Deferred service arrangement obligations                       213,750
     Recognized as revenue
        Deferred extended service contracts                          2,046,823
        Deferred in-service and training                                40,000
        Deferred service contract promotion                             13,950
        Deferred service arrangement obligations                       157,756
                                                             ------------------
     Deferred revenue at end of year                                 1,618,053
        Less: current portion                                        1,132,445
                                                             ------------------
     Long-term deferred revenue at end of year                        $485,608
                                                             ==================
</TABLE>
NOTE G - SALE-LEASEBACK

     In August 2007,  the Company sold its warehouse and corporate  facility for
$1,400,000.  Under the agreement,  the Company is leasing back the property from
the purchaser  over a period of five years.  The Company is  accounting  for the
leaseback  as an  operating  lease.  The  gain  of  $266,226  realized  in  this
transaction  has been deferred and is being amortized to income ratably over the
term of the lease. At May 31, 2008, the unamortized deferred gain of $221,855 is
shown as  "Deferred  gain on sale of  building"  in the  Company's  consolidated
balance sheet. The short-term portion of $53,245 is shown in current liabilities
and the long-term  portion is in other  liabilities.  The amount recognized as a
gain in fiscal 2008 was $44,371.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007





NOTE H - WARRANTY LIABILITY

     The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
                                                                May 31, 2008
                                                            ---------------------
  <S>                                                            <C>
   Warranty liability at the beginning of the year               $ 15,750
     Expense for new warranties issued                             39,000
     Warranty claims                                              (37,500)
                                                            ---------------------
   Warranty liability at the end of the year                       17,250
                                                            ---------------------
   Long-term warranty liability at the end of the year           $--
                                                            =====================
</TABLE>
NOTE I - LONG-TERM DEBT

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

     On August 15, 2007, we sold our facility for $1.4 million under a sale with
a  five-year   leaseback   agreement.   The  net  proceeds  from  the  sale  was
approximately  $425,000,  after  payment in full of the two secured notes in the
amount  of  $851,015,  brokers  fees,  closing  costs,  and  the  opening  of  a
certificate of deposit in accordance with the provisions of the new lease

NOTE J - RELATED-PARTY TRANSACTIONS

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

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


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

     On July 10, 2007,  the Board of Directors  appointed Mr. Behnam  Movaseghi,
Treasurer and Chief Financial Officer of Kerns Manufacturing Corporation, to our
Board of Directors.

     As  affiliates  of Living  Data and Kerns,  Mr. Ma, Mr.  Movaseghi  and Mr.
Srybnik have each been directly involved in the transactions between Living Data
and Kerns, and the Company,  with respect to the Securities  Purchase Agreement,
the  Distribution  Agreement and the Supplier  Agreement,  as well as consulting
servicesto the Company with no compensation.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007


     During fiscal 2008,  the Company  purchased  ECP therapy  systems under the
Supplier  Agreement for $120,000 from Living Data, which was paid in full by the
Company as of June 2008. In addition,  Living Data purchased $5,000 worth of ECP
therapy  system  components  from the Company,  which was paid in full by Living
Data as of June 2008.

     During  fiscal 2009,  Living Data assigned to  Vasomedical,  Inc.all of its
rights and  interests  under its  distributorship  Agreement  with a corporation
organized  and existing  under the laws of the  People's  Republic of China that
manufactures  Ambulatory Blood Pressure  Monitors,  Ambulatory ECG Recorders and
Holter & ABPM Combiner  Recorders,  for $20,000  payable to Living Data based on
certain terms and conditions. The Company must also pay to Living Data 5% of the
selling price or 5% of the cost of all goods sold (whichever is higher),  and 5%
of the cost of all goods transferred but not sold under the Assignment Agreement
to Living Data based on sales of this  equipment.  The  Company  intends to sell
these  systems in the United  States and other  countries  subject to  obtaining
regulatory clearance.

     During fiscal 2009,  Living Data assigned to  Vasomedical,  Inc. all of its
rights and  interests  under its  Distributorship  Agreement  with a corporation
organized and existing  under the laws of the People's  Republic of China,  that
manufactures  Ultrasound  Scanners,  for $20,000 payable to Living Data based on
certain terms and conditions. The Company must also pay to Living Data 5% of the
selling price or 5% of the cost of all goods sold (whichever is higher),  and 5%
of the cost of all goods transferred but not sold under the Assignment Agreement
to Living Data based on sales of this  equipment.  The  Company  intends to sell
these  systems in the United  States and other  countries  subject to  obtaining
regulatory clearance.

     In July of 2008,  Vasomedical,  Inc.  has agreed to  purchase  ECP  therapy
systems  under its  Distributorship  Agreement  with  Living  Data for  $360,000
payable over 18 months.

     Further,  Kerns is providing the Company,  free of charge, part time use of
one of its  Information  Technology  (IT)  employees  as well  one of  their  IT
consultants  to provide the Company with IT and database  support  services.  In
addition a clinical  applications support specialist and a service engineer from
Living Data may be used by Vasomedical,  Inc. to provide customers with clinical
training and technical service.

NOTE K - SERIES D PREFERRED STOCK AND WARRANTS

     On July 19,  2005,  we entered into a Securities  Purchase  Agreement  that
provided us with gross proceeds of $2.5 million  through a private  placement of
preferred stock with M.A.G.  Capital,  LLC through its designated funds, Monarch
Pointe Fund Ltd., Mercator Momentum Fund III, LP, and Mercator Momentum Fund, LP
(the Investors). The agreement provided for a private placement of 25,000 shares
of Vasomedical's Series D Preferred Stock at $100 per share. The preferred stock
was convertible into shares of  Vasomedical's  common stock at 85 percent of the
volume weighted  average price per share for the five trading days preceding any
conversion,  but not at more than  $0.6606  or less than  $0.40 per  share.  The
Investors also acquired  warrants for the purchase of 1,892,219 shares of common
stock. The warrants may be exercised at a price of $0.69 per share for a term of
five years,  ending July 19, 2010. As of February 28, 2006,  all of the Series D
Preferred Stock had been converted into 6,112,209 shares of common stock.

     Under the terms of a  Registration  Rights  Agreement  with the  Investors,
Vasomedical  filed a Form S-3  registration  statement  with the  Securities and
Exchange  Commission  (SEC) on August 22, 2005, for 10,787,871  shares of common
stock representing up to 8,533,333 shares issuable in connection with conversion
of our Series D Convertible  Preferred Stock and up to 2,254,538 shares issuable
upon the exercise of our common stock  purchase  warrants.  The SEC declared the
registration  statement  effective  on  September  1, 2005.  The total number of
shares  registered  was based on a  conversion  price of $0.30 per share,  which
would  only  have an  affect  in the  event of  default  by  Vasomedical  of its
obligation to holders of the Series D Convertible Preferred Stock.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007




     These  securities  were  offered  and sold to the  Investors  in a  private
placement  transaction  made  in  reliance  upon  exemptions  from  registration
pursuant  to Section  4(2) of the  Securities  Act of 1933.  The  Investors  are
accredited  investors as defined in Rule 501 of Regulation D  promulgated  under
the Securities Act of 1933. Vasomedical applied the funds to working capital.

Warrants and Beneficial Conversion Feature

     The Company applied  Emerging Issues Task Force Issue No. 98-5  "Accounting
for Convertible  Securities with Beneficial  Conversion Features or Contingently
Adjustable  Conversion  Ratios"(EITF  No. 98-5) and  Emerging  Issues Task Force
(EITF 00-27) Application of Issue No. 98-5 to Certain Convertible Instruments in
accounting  for the  preferred  stock  issuance.  EITF No.  98-5  provides  that
detachable  warrants issued with convertible  securities are valued  separately,
and that the  beneficial  conversion  feature  of the  convertible  security  be
measured and recognized over the minimum period over which the  shareholders can
realize the return.

     The Task Force reached a consensus that  convertible  preferred  securities
with a non-detachable  conversion feature that is in-the-money at the commitment
date  represents  an  embedded  beneficial  conversion  feature  that  should be
recognized as a dividend and recorded to additional paid-in capital. That amount
should be  calculated  at the  commitment  date as the  difference  between  the
allocated  portion of the gross proceeds to the convertible  preferred stock and
the fair value of the common stock or other  securities  into which the security
is  convertible,  multiplied  by the number of shares into which the security is
convertible (intrinsic value method).

     The beneficial conversion feature is treated analogous to a dividend and is
recognizable  immediately  over the minimum  period  during which the  preferred
shareholders  can realize that return.  The imputed  dividend  will increase the
Company's  loss for the purpose of computing  the  loss-per-share  applicable to
common  shareholders.  The  beneficial  conversion  feature is calculated at its
intrinsic  value at the  commitment  date (that is, the  difference  between the
total gross proceeds  allocated to the preferred  stock as compared to the total
market value of the common stock into which the Preferred  Stock is  convertible
on the commitment date). The computed value of the beneficial conversion feature
is treated as a deemed dividend  immediately  with a  corresponding  increase to
paid-in capital.  No additional amount will be recognized at the conversion date
in recognition of an increase in the fair value of the stock conversion.

     In circumstances in which convertible securities are issued with detachable
warrants,  the Task  Force  noted  that in order to  determine  the amount to be
allocated to the beneficial  conversion feature,  the issuer must first allocate
the proceeds  between the  convertible  instrument and the  detachable  warrants
using the relative fair value method of APB Opinion Number 14.

     The investors and consultants acquired detachable warrants for the purchase
of 1,892,219 and 362,319 shares of common stock, respectively, which were valued
at $345,071 and $66,087,  respectively. The warrants may be exercised at a price
of $0.69 per share for a term of five years,  ending July 18, 2010. For purposes
of estimating the intrinsic fair value of these warrants as of July 19, 2005, we
utilized the Black-Scholes  option-pricing model. We estimated the fair value of
the warrants using the following weighted-average assumptions:


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

     We determined the intrinsic fair value of the  convertible  preferred stock
as of July 19, 2005, to be $2,941,176  based on the number of common shares that
could be acquired as of the date of closing  times $0.63,  the closing  price of
the common stock on the date preceding the close of the transaction. In applying
EITF No. 98-5, we then  allocated the gross  proceeds of $2,500,000  between the
warrants and preferred stock based on intrinsic value of each  instrument.  As a

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007






result, we allocated  $2,154,929 of gross proceeds to the convertible  preferred
stock and $345,071 to the detachable warrants. The beneficial conversion feature
of  $786,247  was then  determined  by  subtracting  the  allocated  proceeds of
convertible  preferred  stock  from the  intrinsic  fair  value  of  convertible
preferred stock. The beneficial conversion feature was immediately recognized as
a preferred stock dividend, as the preferred stock can be converted immediately.

Dividends

     By the placement of the convertible  preferred  stock  described  above, we
became  obligated to pay a cash dividend  monthly on the  outstanding  shares of
convertible  preferred  stock. The dividend rate was the higher of (i) the prime
rate as reported by the Wall Street Journal on the first day of the month,  plus
three  percent or, (ii) 8.5% times $100 per share,  but in no event greater than
10% annually.  For the fiscal year ended May 31, 2006, cash dividends of $91,623
were paid.  Preferred  stock  dividends  for the fiscal 2006 are  summarized  as
follows:
<TABLE>
<CAPTION>
                                                            Amount
                                                            ------
                <S>                                       <C>
                Cash dividends paid                        $91,623
                Beneficial conversion feature              786,247
                                                       --------------
                                                          $877,870
                                                       ==============
</TABLE>
NOTE L - STOCKHOLDERS' EQUITY AND WARRANTS

Common stock

     The  Company  issued  200,000  shares of  common  stock in lieu of cash for
$126,000 in  consultant  services  associated  with the issuance of the Series D
Convertible  Preferred  Stock.  These issue costs were treated as a reduction in
the paid-in capital  associated  with the preferred stock issuance.  On July 19,
2005, we granted  warrants for the purchase of 2,254,538  shares of common stock
to investors and consultants  associated with the issuance of Series D Preferred
Stock, (See Note I). The warrants may be exercised at a price of $0.69 per share
for a term of five years,  ending July 19, 2010. The remaining  200,000 warrants
expired in October 2006.

     On June 21, 2007, a five-year  warrant to purchase  4,285,714 shares of our
common stock at an initial  exercise  price of $.08 per share to Kerns under the
Securities Purchase Agreement.

Warrants

     Warrant activity for the years ended May 31, 2007 and 2008 is summarized as
follows:

<TABLE>
<CAPTION>
                                        Employees        Consultants               Total              Weighted
                                                                                                    Average Price
<S>                                              <C>      <C>                   <C>                     <C>
Balance at May 31, 2006                          --       2,454,538             2,454,538               $0.71
  Warrants expired                               --        (200,000)             (200,000)              $0.91
                                      --------------- ------------------- ------------------------ ----------------
Balance at 2007                                  --       2,254,538             2,254,538               $0.69
                                      --------------- ------------------- ------------------------ ----------------
     Warrants issued                                      4,285,714             4,285,714               $0.08
                                      --------------- ------------------- ------------------------ ----------------
Number of shares exercisable                     --       6,540,252             6,540,252               $0.29
                                      =============== =================== ======================== ================
</TABLE>
                                     F - 20
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007





NOTE M - OPTION PLANS

1995 Stock Option Plan

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

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

     In fiscal 2008, there was no activity under the 1995 Stock Option Plan.

Outside Director Stock Option Plan

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

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

     In fiscal 2008, there was no activity under the OD Plan.

1997 Stock Option Plan

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

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

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

     In fiscal 2007, the Board of Directors granted  non-qualified stock options
under the 1997 plan to a Director to purchase  150,000 shares of common stock at
an exercise  price of $0.09 per share (which  represent the fair market value of
the underlying common stock at the time of the respective grants). These options
expire 10 years  from  grant  date.  In fiscal  2007,  there  were no options to
purchase shares of common stock under the 1997 Plan. In fiscal 2007,  options to
purchase  494,167 shares of common stock under the 1997 Plan at exercise  prices
ranging from $0.88 to $1.91 were retired or cancelled.

     In fiscal  2008,  the Board of  Directors  did not grant any  non-qualified
stock options under the 1997 plan, and there were no options to purchase  shares
of common stock under the 1997 plan. In fiscal 2008, options to purchase 714,601
shares of common stock under the 1997 Plan at exercise prices ranging from $0.88
to $1.91 were retired or cancelled.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007




1999 Stock Option Plan

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

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

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

     In fiscal  2008,  the Board of  Directors  did not grant any  non-qualified
stock  options  under the 1999 Plan.  In fiscal  2008,  there were no options to
purchase shares of common stock under the 1999 Plan. In fiscal 2008,  options to
purchase 1,006,500 shares of common stock under the 1999 Plan at exercise prices
ranging from $0.20 to $5.00 were retired or cancelled.

     At May 31, 2008,  there were 1,068,532  shares  available for future grants
under the 1999 Plan.

2004 Stock Option and Stock Issuance Plan

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

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

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007





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

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

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

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

     In fiscal 2008,  the  Company's  Board of Directors  granted  non-qualified
stock options under the 2004 Plan to four  directors to purchase an aggregate of
600,000  shares of common stock,  at an exercise price of $0.12 per share (which
represented the fair market value of the underlying  common stock at the time of
the  respective  grants) and the Company's  Board of Directors  granted  150,000
shares of common stock under the 2004 Plan to one director of the Company having
a fair  market  value of $0.06  per share at the time of the  respective  grant.
These options expire ten years from the date of grant.  In fiscal 2008,  options
to  purchase  236,461  shares of common  stock  under the 2004 Plan at  exercise
prices $0.57 and $0.58 were retired or cancelled.

     At May 31, 2008,  there were 593,928  shares  available  for future  grants
under the 2004 Plan.

     Stock option  activity under all the plans for the years ended May 31, 2007
and 2008 is summarized as follows:
<TABLE>
<CAPTION>
                                                                         Outstanding Options
                                                      ------------------------------------------------------------
                                         Shares                                 Range of             Weighted
                                     Available for        Number of             Exercise             Average
                                         Grant              Shares           Price per Share      Exercise Price
                                    ----------------- ------------------- ---------------------- -----------------
<S>                                    <C>               <C>                  <C>                     <C>
Balance at May 31, 2006                 749,872           8,012,075           $0.20 - $5.15           $1.20
  Options granted                      (800,000)            800,000           $0.09 - $0.11           $0.10
  Options exercised                        --                 --                   --                   --
  Options canceled                    1,747,987          (2,219,737)          $0.20 - $5.00           $1.28
                                    ----------------- ------------------- ---------------------- -----------------
Balance at May 31, 2007               1,697,859           6,592,338           $0.20 - $5.00           $1.04
  Common shares granted                (150,000)              --                   --                   --
  Options granted                      (600,000)            600,000               $.12                 $.12
  Options exercised                          --               --                   --                   --
  Options canceled                      714,601          (1,737,128)           $.20-$3.96             $1.29
                                    ----------------- ------------------- ---------------------- -----------------
Balance at May 31, 2008               1,662,460           5,455,210            $.09-$4.28              $.86
<FN>
     (1) May be issued under the Stock Issuance Program.
</FN>
</TABLE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007



     The following table summarizes  information about stock options outstanding
and exercisable at May 31, 2008:
<TABLE>
<CAPTION>

                                             Options Outstanding                           Options Exercisable
                              ---------------------------------------------------    --------------------------------
                                                    Weighted
                                                     Average         Weighted                            Weighted
                                   Number           Remaining        Average              Number          Average
                               Outstanding at      Contractual       Exercise         Exercisable at     Exercise
  Range of Exercise Prices      May 31, 2008       Life (yrs.)        Price            May 31, 2008        Price
                              ------------------ ---------------- ---------------    ----------------- --------------
<C>                                 <C>                 <C>              <C>             <C>                  <C>
$0.09 - $0.58                       2,561,710           7.8              $.21            2,345,044            $.21
$0.71 - $0.95                         614,500           3.6              $.88              614,500            $.88
$1.00 - $1.31                       1,760,000           5.2             $1.09            1,760,000           $1.09
$1.69 - $2.49                          75,000           1.1             $1.69               75,000           $1.69
$2.91 - $4.28                         444,000           2.8             $3.57              444,000           $3.57
                              ------------------ ---------------- ---------------    ----------------- --------------
                                    5,455,210           4.4              $.86            5,238,544            $.88
                              ================== ================ ===============    ================= ==============
</TABLE>
     The  weighted-average  fair value  exercise  price of options and  warrants
granted during fiscal years 2008 and 2007 was $0.08 and $0.10, respectively.  At
May 31, 2008, there were approximately  2,569,074 remaining authorized shares of
common stock after reserves for all stock option plans and stock warrants.

NOTE N - INCOME TAXES

     During  the  fiscal  years  ended May 31,  2008 and  2007,  we  recorded  a
provision for income taxes of $18,045 and $20,608, respectively.

     As of May 31,  2008,  the  recorded  deferred  tax asset  was  $19,819,352,
reflecting  an increase of $230,000  during  fiscal 2008,  which was offset by a
valuation allowance of the same amount.


     The Company's deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
                                                               2008               2007
                                                          ---------------    ---------------
        <S>                                                 <C>                <C>
        Net operating loss and other carryforwards          $17,952,000        $18,120,000
        Accrued compensation                                         --              2,400
        Bad debts                                                91,900            125,000
        Other                                                 1,775,452          1,341,952
                                                          ---------------    ---------------
        Total gross deferred tax assets                      19,819,352         19,589,352
              Valuation allowance                           (19,819,352)       (19,589,352)
                                                          ---------------    ---------------
        Net deferred tax assets                                     $--                $--
                                                          ===============    ===============
</TABLE>
     At May 31,  2008,  the Company had net  operating  loss  carryforwards  for
Federal and state income tax purposes of approximately $52,800,000,  expiring at
various  dates from 2009 through  2028. In fiscal 2008 $558,968 of net operating
loss   carryforwards   expired.   Future   expirations  of  net  operating  loss
carryforwards are as follows:

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              May 31, 2008 and 2007

<TABLE>
<CAPTION>
                  Fiscal Year               Amount
             -------------------       --------------
                <S>                     <C>
                2009                    $    470,994
                2010                       2,454,162
                2011                       5,449,051
                2012                       6,084,213
                2013                       4,386,716
                Thereafter                33,954,864
                                       --------------
                Total                    $52,800,000
                                       ==============
</TABLE>
     Under current tax law, the utilization of tax attributes will be restricted
if an ownership change, as defined,  were to occur.  Section 382 of the Internal
Revenue Code  provides,  in general,  that if an "ownership  change" occurs with
respect to a corporation with net operating and other loss  carryforwards,  such
carryforwards  will be available to offset  taxable  income in each taxable year
after the ownership change only up to the "Section 382 Limitation" for each year
(generally,  the product of the fair market value of the corporation's  stock at
the time of the  ownership  change,  with certain  adjustments,  and a specified
long-term  tax-exempt bond rate at such time). The Company's  ability to use its
loss carryforwards will be limited in the event of an ownership change.

     The following is a  reconciliation  of the effective income tax rate to the
federal statutory rate:
<TABLE>
<CAPTION>
                                                    2008             2007
                                                     %                 %
                                              ----------------- ----------------
        <S>                                        <C>               <C>
        Federal statutory rate                     (34.0)            (34.0)
        State taxes, net                             2.7               1.3
        Permanent differences                        1.8               2.7
        Change in valuation allowance
          relating to operations                    28.6              31.4
        Other                                       (1.8)             (2.7)
                                              ----------------- ----------------
                                                    (2.7)             (1.3)
                                              ================= ================
</TABLE>

NOTE O - COMMITMENTS AND CONTINGENCIES

Leases

     On August  15,  2007,  we sold our  facility  under a  five-year  leaseback
agreement. Future rental payments under the operating lease are as follows:
<TABLE>
<CAPTION>

     For the years ended:
        <S>                                            <C>
        May 31, 2009                                   $142,777
        May 31, 2010                                    148,488
        May 31, 2011                                    154,427
        May 31, 2012                                    160,604
        May 31, 2013                                     40,540
                                                   -----------------
       Total                                           $646,836
                                                   =================
</TABLE>

                                     F - 25
<PAGE>
Litigation

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

NOTE P - 401(K) PLAN

     In April 1997, the Company  adopted the  Vasomedical,  Inc.  401(k) Plan to
provide retirement  benefits for its employees.  As allowed under Section 401(k)
of the Internal Revenue Code, the plan provides  tax-deferred  salary deductions
for  eligible  employees.  Employees  are  eligible to  participate  in the next
quarter  enrollment  period after  employment.  Participants  may make voluntary
contributions to the plan up to 15% of their  compensation.  In fiscal year 2008
and 2007, the Company made discretionary  contributions of approximately  $9,000
and $15,000, respectively, to match a percentage of employee contributions.


                                     F - 26