UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-Q


[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended August 31, 2008

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

Commission File Number: 0-18105

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

             (Exact name of registrant as specified in its charter)

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

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

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

                    (Address of principal executive offices)

Registrant's Telephone Number                         (516) 997-4600

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

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

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

     Indicate  by check mark  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the Exchange Act).

                        Yes  [ ]        No  [X]
                        ---             --

     Number of Shares  Outstanding of Common Stock,  $.001 Par Value, at October
     15, 2008                                                         93,868,004
<PAGE>
Vasomedical, Inc. and Subsidiaries
<TABLE>
<CAPTION>
                                      INDEX


                                                                                              Page
                                                                                              ----
PART I - FINANCIAL INFORMATION

<S>      <C>                                                                                    <C>
         Item 1 - Financial Statements (unaudited)

                  Consolidated Condensed Balance Sheets as of
                           August 31, 2008 and May 31, 2008                                      3

                  Consolidated Condensed Statements of Operations for the
                           Three Months Ended August 31, 2008 and 2007                           4

                  Consolidated Condensed Statement of Changes in Stockholders'
                           Equity for the Period from June 1, 2008 to August 31, 2008            5

                  Consolidated Condensed Statements of Cash Flows for the
                           Three Months Ended August 31, 2008 and 2007                           6


                  Notes to Consolidated Condensed Financial Statements                           7

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

         Item 3 - Controls and Procedures                                                       33

PART II - OTHER INFORMATION

         Item 1 - Legal Proceedings                                                             34

         Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds                   34

         Item 3 - Defaults upon Senior Securities                                               34

         Item 4 - Submission of Matters to a Vote of Security Holders                           34

         Item 5 - Other Information                                                             34

         Item 6 - Exhibits                                                                      34
</TABLE>
                                     Page 2
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                                                                 August 31, 2008           May 31, 2008
                                                                                ------------------       ------------------
                                   ASSETS                                          (Unaudited)            (Derived from
                                                                                                         audited financial
                                                                                                            statements)
CURRENT ASSETS
<S>                                                                                   <C>                      <C>
   Cash and cash equivalents                                                          $ 2,140,403              $ 2,653,999
   Accounts receivable, net of an allowance for doubtful accounts of
     $135,617 at August 31, 2008, and $270,183 at May 31, 2008                            881,685                  717,849
   Inventories, net                                                                     1,826,445                1,652,678
   Other current assets                                                                   135,310                   58,933
                                                                                ------------------       ------------------
         Total current assets                                                           4,983,843                5,083,459

PROPERTY AND EQUIPMENT, net of accumulated depreciation of
   $2,057,558 at August 31, 2008, and $2,178,566 at May 31, 2008                           60,052                   57,170
DEFERRED DISTRIBUTOR COSTS, net of accumulated amortization of
    $127,219 at August 31, 2008, and  $101,775 at May 31, 2008                            381,657                  407,101
OTHER ASSETS                                                                              201,610                  213,336
                                                                                ------------------       ------------------
                                                                                      $ 5,627,162              $ 5,761,066
                                                                                ==================       ==================

                    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable and accrued expenses                                              $ 1,151,831                $ 822,244
   Sales tax payable                                                                      138,023                  149,304
   Deferred revenue                                                                     1,151,556                1,132,445
   Deferred gain on sale of building                                                       53,245                   53,245
   Accrued professional fees                                                               52,563                   74,320
                                                                                ------------------       ------------------
        Total current liabilities                                                       2,547,218                2,231,558

LONG-TERM LIABILITIES
   Deferred revenue                                                                       511,126                  485,608
   Accrued rent expense                                                                    11,542                    8,656
   Deferred gain on sale of building                                                      155,299                  168,610
   Other long-term liabilities                                                             80,000                        -

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 at August 31, 2008, and 93,768,004 at
     May 31, 2008, issued and outstanding                                                  93,768                   93,768
   Additional paid-in capital                                                          48,073,746               48,068,432
   Accumulated deficit                                                                (45,845,537)             (45,295,566)
                                                                                ------------------       ------------------
Total stockholders' equity                                                              2,321,977                2,866,634
                                                                                ------------------       ------------------
                                                                                      $ 5,627,162              $ 5,761,066
                                                                                ==================       ==================

 The accompanying notes are an integral part of these consolidated condensed financial
                                   statements
</TABLE>
                                     Page 3

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                             Three months ended August 31,
                                                                         --------------------------------------
                                                                               2008                 2007
                                                                         -----------------    -----------------
<S>                                                                        <C>                  <C>
Revenues
  Equipment sales                                                          $    656,496         $    493,268
  Equipment rentals and services                                                655,225              846,808
                                                                         -----------------    -----------------
        Total revenues                                                        1,311,721            1,340,076

Cost of Sales and Services
  Cost of sales, equipment                                                      528,281              340,638
  Cost of equipment rentals and services                                        282,878              314,699
                                                                         -----------------    -----------------
        Total cost of sales and services                                        811,159              655,337
                                                                         -----------------    -----------------
Gross profit                                                                    500,562              684,739
                                                                         -----------------    -----------------

Operating Expenses
  Selling, general and administrative                                           943,759              558,156
  Research and development                                                      132,347              139,175
                                                                         -----------------    -----------------
        Total operating expenses                                              1,076,106              697,331
                                                                         -----------------    -----------------
Loss from operations                                                           (575,544)             (12,592)
                                                                         -----------------    -----------------

Other Income (Expenses)
  Interest and financing costs                                                        -              (16,666)
  Interest and other income, net                                                 16,012               12,331
  Recognition of deferred gain on sale of building                               13,311                4,437
                                                                         -----------------    -----------------
        Total other income (expenses)                                            29,323                  102
                                                                         -----------------    -----------------

Loss before income taxes                                                       (546,221)             (12,490)
  Income tax expense, net                                                        (3,750)              (6,296)
                                                                         -----------------    -----------------
Net loss                                                                  $    (549,971)        $    (18,786)
                                                                         =================    =================

Net loss per common share
  - basic                                                                 $       (0.01)        $      (0.00)
                                                                         =================    =================
  - diluted                                                               $       (0.01)        $      (0.00)
                                                                         =================    =================

Weighted average common shares outstanding
  - basic                                                                    93,768,004           87,748,778
                                                                         =================    =================
  - diluted                                                                  93,768,004           87,748,778
                                                                         =================    =================

 The accompanying notes are an integral part of these consolidated condensed financial
                                   statements
</TABLE>
                                     Page 4

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

<TABLE>
<CAPTION>
                                                                            Additional                                     Total
                                            Common Stock                      Paid-in              Accumulated         Stockholders'
                                   Shares                Amount               Capital                Deficit               Equity
                              -----------------     -----------------     -----------------     -----------------     --------------
<S>             <C>              <C>                  <C>                   <C>                  <C>                   <C>
Balance at June 1, 2008          93,768,004           $   93,768            $ 48,068,432         $ (45,295,566)        $ 2,866,634
Stock-based compensation                                                           5,314                                     5,314
Net loss                                                                                              (549,971)           (549,971)
                              -----------------     -----------------     -----------------     -----------------     --------------
Balance at August 31, 2008       93,768,004           $   93,768            $ 48,073,746         $ (45,845,537)        $ 2,321,977
                              =================     =================     =================     =================     ==============

 The accompanying notes are an integral part of these consolidated condensed financial
                                   statements
</TABLE>
                                     Page 5

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                       Three Months Ended August 31,
                                                                                   -------------------------------------
                                                                                         2008                2007
                                                                                   -----------------   -----------------
<S>                                                                                    <C>                  <C>
Cash flows provided by (used in) operating activities
   Net loss                                                                            $ (549,971)          $ (18,786)
   Adjustments to reconcile net loss to net cash provided by
   (used in) operating activities
    Depreciation and amortization                                                          29,497              70,060
    Amortization of deferred gain on sale of building                                     (13,311)             (4,437)
    Provision for doubtful accounts                                                             -             (25,456)
    Amortization of deferred distributor costs                                             25,444              25,444
    Expenses paid for distributor agreement                                                     -             (40,490)
    Stock based compensation                                                                5,314              61,786
    Changes in operating assets and liabilities:
      Accounts receivable                                                                (163,836)            316,234
      Inventories                                                                        (193,041)            216,928
      Other current assets                                                                (76,377)           (202,549)
      Accounts payable, accrued expenses and other current liabilities                    318,546            (198,823)
      Other liabilities                                                                   105,518             (94,915)
                                                                                   -----------------   -----------------
                                                                                           37,754             123,782
                                                                                   -----------------   -----------------
Net cash provided by operating activities                                                (512,217)            104,996
                                                                                   -----------------   -----------------

Cash flows provided by (used in) investing activities
      Proceeds from the building sale                                                           -           1,400,000
      Expenses paid for sale of building                                                        -             (89,143)
      Purchases of fixed assets                                                            (1,379)                  -
                                                                                   -----------------   -----------------
Net cash provided by (used in) investing activities                                        (1,379)          1,310,857
                                                                                   -----------------   -----------------

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

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     (513,596)          1,940,728
                                                                                   -----------------   -----------------
    Cash and cash equivalents - beginning of period                                     2,653,999             850,288
                                                                                   -----------------   -----------------
    Cash and cash equivalents - end of period                                         $ 2,140,403         $ 2,791,016
                                                                                   =================   =================

Non-cash investing and financing activities were as follows:
    Inventories transferred to property and equipment, attributable
     to operating leases, net                                                         $    19,274           $ (38,531)
    Common stock issued for distribution agreement                                    $         -           $ 468,386

Supplemental Disclosures
    Interest paid                                                                     $         -            $ 16,666
    Income taxes paid                                                                 $       665             $ 2,983

 The accompanying notes are an integral part of these consolidated condensed financial
                                   statements
</TABLE>
                                     Page 6

<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2008

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   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 pectoris  patients with moderate to severe
symptoms who are  refractory  to  medications  and not  candidates  for invasive
procedures,  including  patients  with  serious  co-morbidities,  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,  and to reduce cash usage through bringing our cost
structure   more  into  alignment   with  current   revenues.   By  engaging  in
restructurings  during March 2007 and April 2007, the Company has  substantially
reduced personnel and spending on sales,  marketing and development projects. In
addition,  during the first  quarter of fiscal year 2008,  we raised  additional
capital through a private equity financing and by the sale of our facility under
a leaseback agreement.


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

          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 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,  Jun Ma and 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.

                                     Page 7
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2008


          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 - STOCK-BASED COMPENSATION

     As of June 1, 2006, the Company  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.

     During the three-month period ended August 31, 2008, the Board of Directors
did not grant any non-qualified stock options.

     During the three-month period ended August 31, 2008, the Company's Board of
Directors  granted 150,000 shares of common stock to one employee of the Company
having a fair  market  value of $0.08  per  share at the time of the  respective
grant, but was not issued until the second quarter of fiscal 2009.

     Stock-based  compensation  expense  recognized under SFAS 123(R) was $5,314
and $61,786 for the three months  ended August 31, 2008 and 2007,  respectively.
For purposes of  estimating  the fair value of each option on the date of grant,
the Company utilized the Black-Scholes  option-pricing  model. The Black-Scholes
option  valuation  model was developed  for use in estimating  the fair value of
traded options,  which have no vesting  restrictions and are fully transferable.
In addition,  option  valuation  models  require the input of highly  subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics  significantly  different from those
of traded options and because  changes in the subjective  input  assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.

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

                                     Page 8
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2008

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

        Expected life (years)                               5
        Expected volatility                                93%
        Risk-free interest rate                             5%
        Expected dividend yield                             0%


NOTE C -LOSS PER COMMON SHARE

     The following  table sets forth the  computation  of basic and diluted loss
per share:
<TABLE>
<CAPTION>

                                                                       Three months ended August 31,
                                                                   ---------------------------------------
                                                                         2008                  2007
                                                                   -----------------     -----------------
Numerator:
<S>                                                                  <C>                   <C>
   Net loss                                                          $  (549,971)          $   (18,876)
Denominator:
   Basic - weighted average common shares                             93,768,004            87,748,778
    Stock options                                                                                    -
    Warrants                                                                                         -
                                                                   -----------------     -----------------
Diluted - weighted average common shares                              93,768,004            87,748,778
                                                                   =================     =================

Loss per share - basic                                              $      (0.01)          $     (0.00)
                                                                   =================     =================
               - diluted                                            $      (0.01)          $     (0.00)
                                                                   =================     =================
</TABLE>
     Options and warrants, in accordance with the following table, were excluded
from the computation of diluted loss per share for the three months ended August
31, 2008 and 2007, because the effect of their inclusion would be antidilutive.
<TABLE>
<CAPTION>
                                      Three months ended August 31,
                                 ----------------------------------------
                                       2008                   2007
                                  ---------------     -----------------
<S>                                   <C>                    <C>
    Options                           5,460,210              5,996,710
    Warrants                          6,540,252              6,540,252
                                 ------------------     -----------------
                                     12,000,462             12,536,962
                                 ==================     =================
</TABLE>
                                     Page 9
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2008

NOTE D - INVENTORIES, NET

     Inventories, net of reserves consist of the following:
<TABLE>
<CAPTION>
                                       August 31, 2008         May 31, 2008
                                     ------------------     ------------------

<S>                                      <C>                    <C>
     Raw materials                       $ 947,759              $ 936,035
     Work in process                       491,602                603,925
     Finished goods                        387,084                112,718
                                     ------------------     ------------------
                                       $ 1,826,445            $ 1,652,678
                                     ==================     ==================
</TABLE>
     At August 31, 2008 and May 31,  2008,  the Company had  reserves for excess
and obsolete inventory of $581,725 and $594,042, respectively.

NOTE E - PROPERTY AND EQUIPMENT

     Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
                                                        August 31, 2008         May 31, 2008
                                                       ------------------     ------------------
        <S>                                             <C>                    <C>
        Office, laboratory and other equipment          $   1,230,771          $  1,368,170
        EECP(R) systems under operating leases
        or under loan for clinical trials                     738,674               719,401
        Furniture and fixtures                                148,165               148,165
                                                       ------------------     ------------------
                                                            2,117,610             2,235,736
        Less:  accumulated depreciation                     2,057,558             2,178,566
                                                       ------------------     ------------------
        Property and equipment - net                    $      60,052          $     57,170
                                                       ==================     ==================
</TABLE>
     Depreciation  expense  amounted to $17,772 and $58,734 for the  three-month
periods ended August 31, 2008 and 2007, respectively.

NOTE F - DEFERRED REVENUE

                                    Page 10
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2008

     The changes in the Company's deferred revenues are as follows:
<TABLE>
<CAPTION>
                                                                  Three Months Ended August 31,
                                                           ---------------------------------------------
                                                                  2008                     2007
                                                           --------------------     --------------------
<S>                                                                <C>                      <C>
Deferred revenue at the beginning of the period                    $ 1,618,053              $ 1,756,352
Additions:
   Deferred extended service contracts                                 446,834                  411,900
   Deferred in-service and training                                     17,500                   10,000
   Deferred service arrangements                                           600                    4,500
   Deferred service arrangement obligations                             52,500                   50,000
Recognized as revenue:
   Deferred extended service contracts                                (410,126)                (566,004)
   Deferred in-service and training                                    (12,500)                  (7,500)
   Deferred service arrangements                                          (600)                  (3,450)
   Deferred service arrangement obligations                            (49,579)                 (36,167)
                                                           --------------------     --------------------
Deferred revenue at end of period                                    1,662,682                1,619,631
   Less: current portion                                             1,151,556                1,244,920
                                                           --------------------     --------------------
Long-term deferred revenue at end of period                          $ 511,126                $ 374,711
                                                           ====================     ====================
</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 August 31, 2008, the unamortized deferred gain of $208,544
is shown as "Deferred  gain on sale of building" in the  Company's  consolidated
condensed  balance sheet. The short-term  portion of $53,245 is shown in current
liabilities and the long-term  portion of $155,299 is in long-term  liabilities.
The amount recognized as a gain in the first quarter of fiscal 2008 was $13,311.

NOTE H - WARRANTY LIABILITY

     The changes in the Company's product warranty liability are as follows:
<TABLE>
<CAPTION>
                                                              August 31, 2008          August 31, 2007
                                                            --------------------     --------------------
<S>                                                          <C>                       <C>
Warranty liability at the beginning of the period            $     17,250              $     15,750
   Expense for new warranties issued                               18,000                     9,000
   Warranty claims                                                (11,750)                   (9,500)
                                                            --------------------     --------------------
Warranty liability at the end of the year                          23,500                    15,250
                                                            --------------------     --------------------
Long-term warranty liability at the end of the year          $          -               $         -
                                                            ====================     ====================
</TABLE>
NOTE I - RELATED-PARTY TRANSACTIONS

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

                                    Page 11
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2008

     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, Jun Ma and 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  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
or Kerns,  on the one hand, and the Company,  on the other hand, with respect to
the Securities Purchase Agreement,  the Distribution  Agreement and the Supplier
Agreement,  as well as  providing  consulting  services to the  Company  without
compensation.

     During the three-month  period ended August 31, 2008, the Company purchased
ECP therapy  systems under the Supplier  Agreement for $75,000 from Living Data.
In addition, Living Data purchased $3,162 worth of ECP therapy system components
from the Company.

     During the three-month  period ended August 31, 2008,  Living Data assigned
to the  Company  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 has
also agreed to 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 the three-month  period ended August 31, 2008,  Living Data assigned
to the  Company  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 has
also agreed to 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, the Company  agreed to purchase ECP therapy  systems under
its  Distributorship  Agreement  with Living Data for  $360,000  payable over 18
months.  The current portion of the outstanding  liability as of August 31, 2008
in the amount of $240,000 is reflected in accounts  payable and accrued expenses
and the remaining  balance of $80,000 is reflected in long-term  liabilities  on
the accompanying balance sheet.

     Further,  Kerns provides 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

                                    Page 12
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
                                 August 31, 2008

clinical applications support specialist and a service engineer from Living Data
may be used by the  Company to provide  customers  with  clinical  training  and
technical  service.  The  Company  was  charged  $2,100 for the  services of the
clinical  applications  support  specialist  and $1,350 for the  services of the
service engineer during the three-month period ended August 31, 2008.

NOTE J - INCOME TAXES

     During the  three-months  ended August 31, 2008 and August 31, 2007,  state
income taxes were $3,750 and $6,296, respectively.

     As of August 31, 2008, the recorded  deferred tax assets were  $20,001,852,
reflecting a $182,500  increase  during the first  quarter of fiscal  2009.  The
deferred  tax assets were 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.  The Company
has 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.

NOTE K - COMMITMENTS AND CONTINGENCIES

Leases

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

        For the years ended:

        May 31, 2009                      $  108,122
        May 31, 2010                         148,488
        May 31, 2011                         154,427
        May 31, 2012                         160,604
        May 31, 2013                          40,541
                                       ------------------
        Total                             $  612,182
                                       ==================

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 condensed financial condition of the Company.

NOTE L - SUBSEQUENT EVENT

     On September 9, 2008, the Company's  Board of Directors  granted,  but have
not  issued as of yet,  2,025,000  shares of our common  stock for  fiscal  2008
compensation to the Company's board members, having a fair market value of $0.06
per share at the time of the  respective  grant.  The total  amount  charged  to
compensation  expense,  for this grant,  at August 31, 2008 amounted to $121,500
with the  corresponding  liability  reflected  on the balance  sheet in accounts
payable and accrued expenses.

                                    Page 13
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

     Except for  historical  information  contained in this report,  the matters
discussed are  forward-looking  statements that involve risks and uncertainties.
When used in this  report,  words such as  "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  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  pectoris  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  several  years,  we  incurred  operating  losses.  We have
attempted to achieve  profitability by reducing  operating costs and halting the
trend of declining  revenue,  and to reduce cash usage through bringing our cost
structure   more  into  alignment   with  current   revenues.   By  engaging  in
restructurings  during March 2007 and April 2007, the Company has  substantially
reduced personnel and spending on sales,  marketing and development projects. In
addition,  during the first  quarter of fiscal year 2008,  we raised  additional
capital through a private equity financing and by the sale of our facility under
a leaseback agreement. See Note A for details of these events.

                                    Page 14
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

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  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  pectoris  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 refractory 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 refractory  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.

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

                                    Page 15
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

revascularization  procedures such as angioplasty and coronary stent  placement,
as  well  as  coronary  artery  bypass  grafting  (CABG).   However,  there  are
approximately  100,000 to 150,000 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  refractory  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)

     CHF is a condition in which the heart loses its 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
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

                                    Page 16
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

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,  the  competing  manufacturer  also 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
           0   NYHA Class II/III stable heart failure  symptoms with an ejection
               fraction of less than or equal to 35%
           0   NYHA Class II/III stable heart failure  symptoms with an ejection
               fraction of less than or equal to 40%
           0   NYHA Class IV heart failure
           0   Acute heart failure
     o    Cardiogenic shock
     o    Acute myocardial infarction."

     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)

                                    Page 17
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

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 refractory  angina or
angina  equivalent  symptoms and the patient  satisfies  other listed  criteria.
Additionally,  we will  continue to pursue  expansion  of  coverage  for EECP(R)
therapy with Medicare and other  third-party  payers as evidence of its clinical
utility develops.

Critical Accounting Policies

     Financial  Reporting  Release No. 60, which was released by the  Securities
and Exchange  Commission,  (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
Condensed 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:

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.

                                    Page 18
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

     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 condensed 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 August 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


                                    Page 19
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

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  $36,000  more  in  fixed
production  overhead into inventory during the first quarter of fiscal year 2009
as compared to the same period in fiscal 2008.

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
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.

                                    Page 20
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

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.

     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 utilizes 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.

                                    Page 21
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

     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.

     Effective for fiscal years beginning after December 15, 2008

     SFAS 157, "Fair Value  Measurements"  -- 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,  where the Board previously concluded
in those accounting  pronouncements that fair value is the relevant  measurement
attribute.  Accordingly,  this  Statement  does not  require  any new fair value
measurements. However, for some entities, the application of this Statement will
change current  practice.  This Statement is effective for financial  statements
issued for fiscal years  beginning  after November 15, 2007, and interim periods
within those fiscal years. Earlier application is encouraged,  provided that the
reporting entity has not yet issued  financial  statements for that fiscal year,
including financial statements for an interim period within that fiscal year.

     SFAS 159,  "The Fair  Value  Option  for  Financial  Assets  and  Financial
Liabilities--including  an  amendment  of FASB  Statement  No.  115" --  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".

                                    Page 22
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

     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.

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 133-1 and FIN  45-4,  "Disclosures  about  Credit  Derivatives  and
Certain   Guarantees:   An  Amendment  of  FASB   Statement  No.  133  and  FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161" -- amends FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, to require disclosures by sellers of credit derivatives,
including  credit  derivatives  embedded in a hybrid  instrument.  This FSP also
amends  FASB  Interpretation  No.  45,  Guarantor's  Accounting  and  Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of

                                    Page 23
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

Others,  to require an  additional  disclosure  about the current  status of the
payment/performance risk of a guarantee. Further, this FSP clarifies the Board's
intent about the effective  date of FASB  Statement No. 161,  Disclosures  about
Derivative  Instruments  and  Hedging  Activities.  This  FSP is  effective  for
reporting periods ending after November 15, 2008.

     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 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

                                    Page 24
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                       Vasomedical, Inc. and Subsidiaries

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

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.

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.  07-5,  "  Determining  Whether an  Instrument  (or Embedded
Feature)  Is Indexed to an  Entity's  Own  Stock" -- This  Issue  addresses  the
determination of whether an instrument (or an embedded feature) is indexed to an
entity's own stock,  which is the first part of the scope exception in paragraph
11(a) of Statement 133. If an instrument  (or an embedded  feature) that has the
characteristics of a derivative instrument under paragraphs 6-9 of Statement 133
is indexed to an entity's own stock, it is still  necessary to evaluate  whether
it  is   classified  in   stockholders'   equity  (or  would  be  classified  in
stockholders'  equity if it were a  freestanding  instrument).  For  example,  a
net-cash-settled stock purchase warrant may be indexed to an entity's own stock,
but it is not classified in stockholders' equity. Other applicable authoritative
accounting  literature,  including Issues 00-19 and 05-2,  provides guidance for
determining  whether an  instrument  (or an embedded  feature) is  classified in
stockholders'  equity (or would be classified in stockholders' equity if it were
a freestanding instrument).  This Issue does not address that second part of the
scope  exception in paragraph  11(a) of Statement 133.  Entities are required to
apply the guidance in this issue to fiscal years  beginning  after  December 15,
2008 and interim  periods within those fiscal years.  Earlier  application by an
entity  that has  previously  adopted an  alternative  accounting  policy is not
permitted.

     EITF Issue No. 08-3,  "Accounting by Lessees for  Maintenance  Deposits" --
The  objective  of this Issue is to clarify  how a lessee  shall  account  for a
maintenance  deposit under an arrangement  accounted for as a lease.  This Issue
applies to the lessee's  accounting  for  maintenance  deposits paid by a lessee
under an  arrangement  accounted  for as a lease that are  refunded  only if the
lessee performs specified  maintenance  activities.  Maintenance deposits within
the scope of this Issue shall be accounted for as a deposit asset. Lessees shall
continue to evaluate  whether it is probable  that an amount on deposit  will be
returned to reimburse the costs of the  maintenance  activities  incurred by the
lessee.  When an amount on deposit is less than probable of being  returned,  it
shall be recognized as additional  expense.  When the underlying  maintenance is
performed,  the maintenance costs shall be expensed or capitalized in accordance
with the lessee's  maintenance  accounting  policy.  This Issue is effective for
financial  statements issued for fiscal years beginning after December 15, 2008,
including interim periods within those fiscal years.  Earlier  application by an
entity  that has  previously  adopted an  alternative  accounting  policy is not
permitted.

     EITF Issue No. 08-5,  "Issuer's Accounting for Liabilities Measured at Fair
Value  with a  Third-Party  Credit  Enhancement"  -- This  issue  discusses  the
application of fair value to liabilities issued with an inseparable  contractual
third-party credit  enhancement (e.g., a guarantee).  In applying the fair value
option to  liabilities,  the question arises as to whether the liability and the

                                    Page 25
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                       Vasomedical, Inc. and Subsidiaries

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

third-party  enhancement should be accounted for as: (a) one unit of accounting,
which would result in the third-party  guarantee being taken into  consideration
in  determining  the fair value of the  liability,  or (b) two separate units of
accounting, which would not result in the third-party guarantee being taken into
consideration in determining the fair value of the liability.

     The EITF concluded that the scope of this issue applies to a liability that
is issued with an inseparable third-party credit enhancement that is measured or
disclosed  at fair value,  except a liability  with a guarantee  provided by the
government or government agencies.

     The final consensus requires that an entity: (a) apply the guidance in this
issue prospectively to its first reporting period beginning on or after December
15, 2008; (b) recognize the effect of the change prospectively,  with the effect
of initially  applying the guidance in this issue included in the change in fair
value in the period of  adoption,  and (c)  include  in the  period of  adoption
disclosure of -- (1) the existence of any third-party  credit enhancement on any
issued  liability  that is within  the scope of this  issue,  (2) the  valuation
technique(s)  used to measure  the fair value of issued  liabilities  within the
scope of this issue, and (3) any changes from valuation techniques used in prior
periods to measure liabilities within the scope of this issue. Early adoption is
permitted.

     EITF Issue No. 08-6, "Equity Method Investment  Accounting  Considerations"
-- The purpose of this issue is to resolve several  accounting issues that arise
in applying  the equity  method of  accounting.  Most of these  issues  arise or
become more prevalent upon the effective date of FASB Statement No. 141 (Revised
2007), "Business Combinations", and (or) FASB Statement No. 160, "Noncontrolling
Interests in Consolidated  Financial Statements." This is because the literature
that is being  replaced or amended by Statements  141R and 160 have been used by
analogy  in  addressing  certain  aspects  of  applying  the  equity  method  of
accounting,  which raises the question as to whether  these  aspects of applying
the  equity  method of  accounting  should  change  upon the  effective  date of
Statements  141R and 160 (which for  calendar  year-end  companies is January 1,
2009). The specific issues raised with Issue 08-6 include:

     Issue 1: How the  initial  carrying  value of an equity  method  investment
     should be determined.  In other words, should the initial carrying value of
     an  equity  method  investment  be  determined  as  if  the  equity  method
     investment  were any other  acquired asset or should it be determined as if
     the equity  method  investment  were a business  combination?  For example,
     should transaction costs be capitalized or expensed?

     Issue 2: How the  difference  between the  investor's  carrying  value,  as
     determined in Issue 1, and the underlying  equity of the investee should be
     allocated to the  underlying  assets and  liabilities  of the investee.  In
     other words,  should the allocation  method used be wholly  consistent with
     the  acquisition  method  included in  Statement  141R or should it be only
     partially  consistent  with the  acquisition  method  included in Statement
     141R?  For  example,   should  the  allocation  to  contingent  assets  and
     liabilities be consistent  with the model used in Statement 141R to account
     for  contingent   assets  and  liabilities  or  should  the  allocation  to
     contingent  assets and liabilities be consistent with FASB Statement No. 5,
     Accounting for  Contingencies  , and other  generally  accepted  accounting
     principles?

     Issue 3: How an impairment  assessment  of an  underlying  indefinite-lived
     intangible  asset of an equity method  investment  should be performed.  In
     other words,  should the underlying  indefinite-lived  intangible  asset be
     tested annually and as part of an other-than-temporary  impairment test, or
     only as part of an other-than-temporary impairment test?

     Issue 4: How should an equity method  investee's  issuance of shares should
     be accounted for?

     Issue 5: How should a change in an investment from the equity method to the
     cost method be accounted for?

     The EITF concluded on these issues:

                                    Page 26
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

     Issue 1: A cost accumulation  model should be used to determine the initial
     carrying  value  of an  equity  method  investment.  That is,  the  initial
     carrying value would include transaction costs.

     Issue 2: No additional guidance will be provided.

     Issue 3: Only an  other-than-temporary  impairment test should be performed
     on the overall  investment.  There should not be a separate impairment test
     for the underlying indefinite-lived intangible assets.

     Issue  4: The  equity  method  investee's  issuance  of  shares  should  be
     accounted for as the sale of a proportionate share of the investment, which
     would result in a gain or loss in income in many situations.

     Issue 5: No gain or loss should be  recognized  when changing the method of
     accounting  for an investment  from the equity method to the cost method of
     accounting.

     The guidance in this issue should be applied to transactions  that occur in
fiscal years,  and interim  periods  within those fiscal years,  beginning on or
after December 15, 2008.  Early adoption is not permitted for entities that have
previously adopted an alternative accounting policy.

     EITF Issue No. 08-7,  "Accounting for Defensive  Intangible Assets" -- This
issue  discusses the accounting  for defensive  intangible  assets.  A defensive
intangible asset, for purposes of this issue,  includes all acquired  intangible
assets that the acquirer  does not intend to actively use, but intend to hold to
prevent  its  competitors  from  obtaining  access to the asset.  The  following
questions have arisen in regards to these assets:

     Issue 1: Should the acquired  defensive  intangible  asset by accounted for
     separately or as part of another related  intangible  asset  (recognized or
     unrecognized) of the acquirer?

     Issue 2: How should the useful  life of the  acquired  intangible  asset be
     determined if it is accounted for as a separate asset?

     The EITF concluded on these issues:

     Issue 1: The value of an  acquired  defensive  intangible  asset  should be
     separately accounted for.

     Issue  2:  The  date  at  which  the  defensive  asset  is  expected  to be
     "effectively  abandoned"  should  be used to  determine  the  length of its
     useful life. In effect, the amortization period would be the period of time
     over which the defensive  intangible asset is expected to provide defensive
     value to the entity.  This  accounting  includes  in-process  R&D defensive
     intangible assets.

     The guidance in this issue should be applied  prospectively  to  intangible
assets acquired on or after the beginning of the first annual  reporting  period
beginning on or after December 15, 2008.

     EITF Issue No. 08-8, "Accounting for an Instrument (or an Embedded Feature)
with a Settlement Amount That Is Based on the Stock of an Entity's  Consolidated
Subsidiary " --  Paragraph  11(a) of FASB  Statement  No. 133,  "Accounting  for
Derivative  Instruments and Hedging Activities,"  provides for a contract issued
or held by a reporting entity that satisfies the following two conditions to not
be considered a derivative  financial instrument for purposes of that statement:
(a) the  contract is indexed to the  entity's  own stock and (b) the contract is
classified in stockholders'  equity.  When the instrument (or embedded  feature)
under  consideration is one whose "payoff to the counterparty is based, in whole
or in part, on the stock of a consolidated  subsidiary,"  the question arises as
to whether such an instrument (or embedded feature) should be considered indexed
to the entity's own stock. Certain aspects of this question have been dealt with
in the past by the EITF.  For  example,  EITF Issue No.  00-6,  "Accounting  for
Freestanding  Derivative  Financial  Instruments  Indexed  to,  and  Potentially
Settled in, the Stock of a Consolidated Subsidiary," indicates that freestanding
instruments  issued by the parent  whose  payoff is based in whole or in part on
the stock of a consolidated  subsidiary is not indexed to the parent's own stock
(i.e.,  it would not satisfy the first of the two conditions in paragraph  11(a)
of Statement  133).  In  addition,  EITF Issue No.  99-1,  "Accounting  for Debt
Convertible  into the Stock of a Consolidated  Subsidiary,"  indicates that debt
issued by a parent or subsidiary that is convertible  into the  subsidiary's own
stock can qualify for the scope exception in paragraph 11(a).  Many believe that

                                    Page 27
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

the  conclusions  in  Issues  99-1 and 00-6 are  inherently  inconsistent.  This
inherent  inconsistency  is expected to become magnified upon the effective date
of FASB Statement No. 160,  "Noncontrolling  Interests in Consolidated Financial
Statements."  This is due to Statement 160 requiring the  classification  of the
noncontrolling  interest  in a  subsidiary  within  equity  in the  consolidated
financial  statements.  Prior  to the  effective  date  of  Statement  160,  the
noncontrolling  (or minority)  interest is most often reflected in the mezzanine
of the balance  sheet  between  liabilities  and equity.  Upon the change in the
classification  of  the  noncontrolling  interest,  it  is  expected  that  more
instruments  will  qualify  for the  second of the two  conditions  included  in
paragraph  11(a)  of  Statement  133  (i.e.,   the  contract  is  classified  in
stockholders'  equity).  This  will,  in turn,  place  additional  attention  or
prominence on the  evaluation of whether the  instrument  (or embedded  feature)
should be  considered  indexed to the  entity's  own stock  (i.e.,  whether  the
instrument  qualifies for the first of the two conditions  included in paragraph
11(a) of Statement  133). As such,  this issue was added to the EITF's agenda to
address:

     Issue 1:  Whether  instruments  within  the scope of Issue  08-8  should or
     should not be precluded from being  considered  indexed to the entity's own
     stock for purposes of the consolidated financial statements

     Issue 2: Whether the instrument should be classified as: (a) a component of
     the noncontrolling  interest reflected in the stockholders'  equity section
     of the  consolidated  balance sheet,  or (b) a component of the controlling
     interest reflected in the stockholders'  equity section of the consolidated
     balance sheet.

     The EITF concluded on these issues:

     Issue 1: An instrument within the scope of this issue is not precluded from
     being  considered  indexed to the  entity's  own stock for  purposes of the
     consolidated   financial   statements  of  the  parent.   For  purposes  of
     determining whether the instrument is, in fact, indexed to the entity's own
     stock,  the  guidance  in EITF  Issue No.  07-5,  "Determining  Whether  an
     Instrument  (or an Embedded  Feature) Is Indexed to an Entity's Own Stock,"
     should be considered.  Issue 07-5 and other  applicable  literature  (e.g.,
     EITF Issue No. 00-19,  "Accounting  for  Derivative  Financial  Instruments
     Indexed to, and Potentially  Settled in, a Company's Own Stock ") should be
     referred  to  for  purposes  of  determining  the   classification  of  the
     instrument.

     Issue   2:   The   presentation   within   stockholders'   equity   of   an
     equity-classified  instrument  within  the  scope  of  this  issue  is  not
     dependent on whether the instrument was issued by the parent or subsidiary.
     In other words,  such an  instrument  should be presented as a component of
     the noncontrolling  interest reflected in the stockholders'  equity section
     of the  consolidated  balance sheet if the  instrument was issued by either
     the parent or the subsidiary. If, however, the instrument was issued by the
     parent and it goes unexercised, the carrying amount of the instrument would
     be  reclassified  from  the  noncontrolling  interest  to  the  controlling
     interest at that time.  Note:  The guidance in this issue is not applicable
     to  instruments  within the scope of and accounted  for in accordance  with
     FASB  Statement  No. 123 (Revised  2004),  "Share-Based  Payment," and EITF
     Issue No.  96-18,  "Accounting  for Equity  Instruments  That Are Issued to
     Other Than Employees for Acquiring,  or in Conjunction with Selling, Goods,
     or Services."  However,  once an  instrument  ceases to be accounted for in
     accordance  with Statement 123R or Issue 96-18,  the guidance in this issue
     is applicable to that instrument.

     The consensus requires that an entity: (a) apply the guidance in this issue
for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2008; (b) apply the guidance to  outstanding  instruments as of the
beginning  of the fiscal year in which this issue is  adopted;  (c) use the fair
value of an outstanding contract that was previously  classified as a derivative

                                    Page 28
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

asset or  liability  as its net  carrying  amount at the date of  adoption;  (d)
reclassify   the  net   carrying   amount  of  the   outstanding   contracts  to
noncontrolling  interest at the date of adoption; and (e) provide any transition
disclosure  required  by  paragraphs  17  and  18 of  FASB  Statement  No.  154,
"Accounting Changes and Error Corrections." Early adoption is not permitted.

Results of Operations

Three Months Ended August 31, 2008 and 2007

     Net revenue from sales,  leases and service of our EECP(R)  systems for the
three months  ended August 31, 2008 and 2007,  was  $1,311,721  and  $1,340,076,
respectively,  which represented a decrease of $28,355, or 2%. We reported a net
loss  attributable to common  stockholders of $549,971 and $18,786 for the first
quarter of fiscal 2009 and 2008, respectively.  The increase in the net loss was
primarily due to increases in our operating  expenses from the comparative prior
period.  Our net loss per  diluted  common  share was $0.01 for the  three-month
period ended August 31, 2008 compared to a net loss of $0.00 per diluted  common
share for the three-month period ended August 31, 2007.

Revenues

     Revenue from equipment  sales increased  approximately  33% to $656,469 for
the  three-month  period  ended  August 31, 2008 as compared to $493,268 for the
same period in the prior year. The increase in equipment  sales is due primarily
to a 40%  increase in the number of  equipment  shipments  offset  slightly by a
decrease in the average  blended  per unit sale price.  The 40%  increase in the
number  of  units  sold  reflects  a  50%  increase  in  new  unit  sales,  both
domestically and internationally, decreased minimally by the number of used unit
models sold from the prior fiscal quarter.

     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 22% which was
mainly  due to  increased  competition,  in the first  quarter  of  fiscal  2009
compared to the same three-month  period in the prior year and the average sales
price of used  systems  declined  11% in the first  quarter of fiscal  2009.  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 the  first  quarter  of  fiscal  2009  increased
approximately  103% to $315,984  compared  to  $155,991 in the same  three-month
period in the prior year reflecting increased sales volume.

     Our revenue from equipment rental and services decreased 23% to $655,225 in
the first  quarter of fiscal 2009 from  $846,808 in the first  quarter of fiscal
year 2008.  Revenue from equipment rental and services  represented 50% of total
revenue  in the first  quarter  of fiscal  2009 and 63% in the same  quarter  of
fiscal  2008.  The  decrease in revenue  generated  from  equipment  rentals and
services is due to a decrease in the service  business,  with respect to service
contract  sales,  and  service  related  income  generated  from units not under
contract,  as well as, a decrease  in  accessories  and  service  parts  shipped
compared to the same quarter of the prior fiscal year.

                                    Page 29
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

Gross Profit

     Gross  profit  declined  to  $500,562,  or 38% of  revenues,  for the first
quarter of fiscal 2009  compared to $684,739,  or 51% of revenues,  for the same
quarter of fiscal 2008.  The decrease in the gross profit margin as a percentage
of revenue for the first  quarter of fiscal 2009 compared to the same quarter of
the prior fiscal year was mainly due to lower revenue  generated  from equipment
rentals and services due to a decrease in the service business,  with respect to
service  contract  sales,  and service  related income  generated from units not
under contract,  as well as, a decrease in accessories and service parts shipped
of $169,000,  or 24%. The decline in gross  profit  related to equipment  sales,
when  compared  to the same  three-month  period in the prior  year in  absolute
dollars  is  principally  due to the lower  sales  price per unit from the first
quarter of fiscal 2008.

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

Selling, General and Administrative

     Selling, general and administrative ("SG&A") expenses for the first quarter
of fiscal 2009 and 2008 were $943,759, or 72% of revenues,  and $558,156, or 42%
of revenues,  respectively,  reflecting a increase of $385,603 or  approximately
69%.  The  increase  in SG&A  expenditures  in the first  quarter of fiscal 2009
resulted  primarily  from  increased  direct  expenditures  of  $66,078  due  to
increased  sales  personnel and associated  costs  including  travel,  offset by
decreases in other sales related costs. Marketing expenses increased $56,202 due
to  increased  expenditures  in  personnel  and  their  associated  costs in the
marketing and clinical  application  support areas, plus higher market research,
product promotion, advertising, and trade show expenses. Administrative expenses
increased  $263,323 as a result of increased  expenditures in professional  fees
related to accounting,  legal and consulting services,  corporate expenses,  and
directors'  compensation  offset slightly by decreases in insurance expenses and
other miscellaneous administrative expenses.

     During  the  first  quarter  of  fiscal  2009, there  was no  change in the
Company's  provision  for  doubtful  accounts  compared to the first  quarter of
fiscal  2008 when the  Company  reversed a provision  for  doubtful  accounts of
$25,246.

Research and Development

     Research and development ("R&D") expenses of $132,347,  or 10% of revenues,
for the first quarter of fiscal 2009 decreased by $6,828, or 10%, from $139,175,
or 10% of  revenues,  for the first  quarter of fiscal  2008.  The  decrease  is
primarily attributable to a decrease in product development spending,  offset by
an increase in  regulatory  affairs  expenses  related to  obtaining  regulatory
clearance for the ambulatory ECG recorders and Holter ABPM combination recorders
and ultrasound scanners.

Interest Expense and Financing Costs

     The  Company  had no interest  expense  and  financing  costs for the first
quarter of fiscal 2009  compared  to $16,666  for the same  quarter in the prior
year. Interest expense primarily reflects interest on loans secured to refinance
the November 2000 purchase of the Company's headquarters and warehouse facility.
The  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.

                                    Page 30
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

Interest and Other Income, Net

     Interest  and other  income for the first  quarter  of 2009 and 2008,  were
$16,012 and $12,331,  respectively.  Interest income reflects interest earned on
the Company's cash balances.

Recognition of Deferred Gain on Sale of Building

     The  Recognition of Deferred Gain on Sale of Building for the first quarter
of 2009 and 2008, were $13,311 and $4,437, respectively.  The gain resulted from
the Company's sale-leaseback of its facility. See Note G.

Income Tax Expense, Net

     During the first  quarters of fiscal 2009 and 2008 we  recorded a provision
for income taxes of $3,750 and $6,296, respectively.

     As of August 31, 2008, the recorded  deferred tax assets were  $20,001,852,
reflecting  an  increase of $182,500  during the first  quarter of fiscal  2009,
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,  a private
equity financing,  and by the sale of our facility under a leaseback  agreement.
At August 31, 2008, we had cash and cash  equivalents  of $2,140,403 and working
capital of $2,436,625  compared to cash and cash  equivalents  of $2,653,999 and
working capital of $2,851,901 at May 31, 2008.

     Cash used in operating  activities was $512,217 during the first quarter of
fiscal 2009,  which  consisted of a net cash loss after  adjustments of $503,027
and cash used by operating assets and liabilities of $9,190.  The changes in the
accounts  balances  primarily  reflects  increases  in  inventory  of  $193,041,
accounts receivable of $163,836, and other current assets of $76,377, which were
primarily offset by an increase in accounts payable, accrued expenses, and other
current  liabilities of $318,546.  Net accounts  receivable were 67% of revenues
for the  three-month  period ended  August 31, 2008,  as compared to 54% for the
three-month  period  ended August 31, 2007,  and  accounts  receivable  turnover
decreased  to 6.5 times as of August 31,  2008,  as  compared to 7.8 times as of
August 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)  therapy  system  products  in the US and
internationally.  Such  extended  payment  terms  were  offered in lieu of price
concessions,  in competitive situations, when opening new markets or geographies
and for repeat  customers.  Extended payment terms cover a variety of negotiated
terms,  including  payment  in full - net  120,  net 180  days or some  fixed or
variable  monthly  payment amount for a six to twelve month period followed by a
balloon payment, if applicable.  During the three-month periods ended August 31,
2008 and August 31, 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

                                    Psge 31
<PAGE>
                       Vasomedical, Inc. and Subsidiaries

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

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)  therapy
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  used net cash of $1,379  for the  purchase  of fixed
assets during the three-month period ended August 31, 2008.

     The Company had no financing activities during the three-month period ended
August 31, 2008.

     The following table presents the Company's  expected cash  requirements for
contractual obligations outstanding as of August 31, 2008.
<TABLE>
<CAPTION>
                                            Due thru      Due thru       Due thru
                                          9/1/2008 and  9/1/2009 and   9/1/2011 and     Due
                                Total      8/31/2009      8/31/2011     8/31/2013    Thereafter
                              ------------------------------------------------------------------
<S>                            <C>            <C>           <C>            <C>              <C>
Operating Leases               $ 612,182      $ 144,163     $ 305,856      $ 162,163        $ -
Other long-term liabilities      320,000        240,000        80,000              -          -
                              ------------------------------------------------------------------
Total Contractual Cash
 Obligations                   $ 932,182      $ 384,163     $ 385,856      $ 162,163        $ -
                              ==================================================================
</TABLE>
Liquidity

     During the first quarter of fiscal 2008, events took place, that allowed us
to raise  additional  capital through a private equity financing and by the sale
of our  facility  under a leaseback  agreement.  See Note A for details of these
events.

     Based  on  our  current  operations  and  the  amounts  received  from  the
transactions  described  in Note A, we believe that we have  sufficient  working
capital to continue our operations through at least the next twelve months.

Effects of Inflation

     We believe that inflation and changing prices over the past year have had a
significant impact on our revenue or on our results of operations.

                                    Page 32
<PAGE>

                       Vasomedical, Inc. and Subsidiaries



ITEM 3 - CONTROLS AND PROCEDURES

     We  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation of our management, including our Chief Executive Officer and Chief
Financial  Officer,  of the  effectiveness  of the design and  operation  of our
disclosure controls and procedures  pursuant to Exchange Act Rule 13a-15.  Based
upon that evaluation,  the Chief Executive  Officer and Chief Financial  Officer
concluded  that, as of August 31, 2008, our  disclosure  controls and procedures
are effective to provide reasonable assurances that such disclosure controls and
procedures  satisfy their  objectives  and that the  information  required to be
disclosed  by us in the  reports we file  under the  Exchange  Act is  recorded,
processed,  summarized and reported within the required time periods. There were
no changes  during the fiscal  quarter  ended  August 31,  2008 in our  internal
controls  or in other  factors  that  could  have  materially  affected,  or are
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.




                                    Page 33
<PAGE>

                       Vasomedical, Inc. and Subsidiaries



                           PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS:

         None.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:
         None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:

         None

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

         None

ITEM 5 - OTHER INFORMATION:

         None

ITEM 6 - EXHIBITS


Exhibits

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

                                    Page 34
<PAGE>
     In accordance  with the  requirements  of the Exchange Act, the  Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                       VASOMEDICAL, INC.

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

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


Date:  October 15, 2008

                                    Page 35