UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q
(Mark One)

         [X]      Quarterly Report pursuant to Section 13 or 15(d) of the
                  Securities Exchange Act of 1934

                  For the quarterly period ended: May 31, 2006 or

         [ ]      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: 0-11411

                                   QMed, Inc.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           Delaware                                               22-2468665
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

25 Christopher Way, Eatontown, New Jersey                           07724
-----------------------------------------                        ----------
 (Address of principal executive offices)                        (Zip Code)

                                 (732) 544-5544
               --------------------------------------------------
              (Registrant's telephone number, including area code)

                                       N/A
               --------------------------------------------------
               Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report


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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]


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

The number of shares of the registrant's common stock outstanding on July 5,
2006: 16,884,474.

<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                                    FORM 10-Q

                       For the Quarter Ended May 31, 2006

                                      INDEX

                                                                            Page
Part I. Financial Information

        Item 1.   Financial Statements

                  Condensed Consolidated Balance Sheets as of May 31, 2006
                    and November 30, 2005....................................  1

                  Condensed Consolidated Statements of Operations for
                    the Three and Six Months Ended May 31, 2006 and 2005.....  2

                  Condensed Consolidated Statements of Comprehensive
                    Income (Loss) for the Three and Six Months Ended
                    May 31, 2006 and 2005....................................  3

                  Condensed Consolidated Statements of Stockholders'
                    Equity for the Six  Months Ended May 31, 2006............  4

                  Condensed Consolidated Statements of Cash Flows for
                    the Six Months Ended May 31, 2006 and 2005...............  5

                  Notes to Condensed Consolidated Financial Statements.......  6

        Item 2.   Management's Discussion and Analysis of Financial
                    Condition and Results of Operations...................... 20

        Item 3.   Quantitative and Qualitative Disclosures About
                    Market Risk.............................................. 28

        Item 4.   Controls and Procedures.................................... 28

Part II Other Information

        Item 1.   Legal Proceedings.......................................... 29

        Item 2.   Unregistered Sales of Equity Securities and Use
                    of Proceeds.............................................. 30

        Item 3.   Defaults Upon Senior Securities............................ 30

        Item 4.   Submission of Matters to a Vote of Security Holders........ 30

        Item 5.   Other Information.......................................... 30

        Item 6.   Exhibits................................................... 30

Signature

Certifications

<PAGE>

Part I.
Item 1.  Financial Statements
<TABLE>
<CAPTION>
                                           QMED, INC. AND SUBSIDIARIES
                                      CONDENSED CONSOLIDATED BALANCE SHEETS


                                                                                                    November 30,
                                                                               May 31, 2006            2005
                                                                             ---------------      ---------------
ASSETS                                                                         (unaudited)
<S>                                                                          <C>                  <C>
Current assets
Cash and cash equivalents                                                    $     5,309,428      $     4,051,046
Investments                                                                       14,633,719           19,348,503
Accounts receivable, net of allowances of  $40,175 and $76,518,
respectively                                                                       1,544,172            3,377,495
Inventory, net of reserve                                                             29,657               30,887
Prepaid expenses and other current assets                                            279,918              411,608
                                                                             ---------------      ---------------
                                                                                  21,796,894           27,219,539

Property and equipment, net of accumulated depreciation                              972,006            1,058,295
Product software development costs, net                                            1,553,412            1,161,083
Restricted cash, non-current                                                         705,881                    -
Accounts receivable, non-current                                                     673,048              271,809
Acquired intangibles, net                                                            707,306              795,848
Other assets                                                                         135,570              128,794
Investment in joint ventures                                                          30,683               37,998
                                                                             ---------------      ---------------
                                                                             $    26,574,800      $    30,673,366
                                                                             ===============      ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses                                        $     1,579,458      $     1,577,385
Medical claims reserve                                                               123,862                    -
Leases payable, current portion                                                      120,002              146,483
Accrued salaries and commissions                                                     455,736              721,792
Fees reimbursable to health plans                                                    103,940               39,000
Contract billings in excess of revenues                                              909,295              744,743
Deferred warranty revenue                                                              6,542               12,253
Income taxes payable                                                                       -               62,610
                                                                             ---------------      ---------------
                                                                                   3,298,835            3,304,266

Leases payable - long term                                                            29,455               76,005
Contract billings in excess of revenue, long term                                    673,048              271,809
                                                                             ---------------      ---------------
                                                                                   4,001,338            3,652,080

Commitments and Contingencies                                                              -                    -
Stockholders' equity
   Common stock $.001 par value; 40,000,000 shares authorized;
     16,845,765 and 16,804,846 shares issued and 16,823,765 and
     16,782,846 outstanding, respectively                                             16,846               16,805
Paid-in capital                                                                   52,361,136           51,219,617
Accumulated deficit                                                              (29,726,017)         (24,118,472)
Accumulated other comprehensive loss
  Unrealized loss on securities available for sale                                    (2,878)             (21,039)
                                                                             ---------------      ---------------
                                                                                  22,649,087           27,096,911

Less treasury stock at cost, 22,000 common shares                                    (75,625)             (75,625)
                                                                             ---------------      ---------------
Total stockholders' equity                                                        22,573,462           27,021,286
                                                                             ---------------      ---------------
                                                                             $    26,574,800      $    30,673,366
                                                                             ===============      ===============

                       See Accompanying Notes to Condensed Consolidated Financial Statements

                                                       1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                   QMED, INC. AND SUBSIDIARIES
                                         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                           (Unaudited)



                                                  For the Three      For the Three       For the Six        For the Six
                                                   Months Ended       Months Ended       Months Ended       Months Ended
                                                   May 31, 2006       May 31, 2005       May 31, 2006       May 31, 2005
                                                  --------------     --------------     --------------    --------------
<S>                                               <C>                <C>                <C>               <C>
Revenue                                           $    1,921,695     $    5,462,897     $    5,104,318    $   10,218,383

Cost of revenue                                        1,680,566          1,850,521          3,579,455         3,672,007
                                                  --------------     --------------     --------------    --------------

Gross profit                                             241,129          3,612,376          1,524,863         6,546,376
                                                  --------------     --------------     --------------    --------------

Selling, general and
  administrative expenses                              3,599,776          2,092,306          7,073,864         3,791,098
Research and development expenses                        430,698            308,826            882,030           576,852
                                                  --------------     --------------     --------------    --------------

(Loss) income from operations                         (3,789,345)         1,211,244         (6,431,031)        2,178,426

Interest expense                                          (4,960)            (7,083)           (10,809)          (14,085)
Interest income                                          189,359             80,122            375,319           121,282
Loss in operations of
  joint ventures                                         (18,678)          (386,393)           (38,438)         (457,278)
Other income                                             450,000              1,101            450,000             2,849
                                                  --------------     --------------     --------------    --------------
(Loss) income before income tax
  Provision                                           (3,173,624)           898,991         (5,654,959)        1,831,194

(Provision) benefit  for income taxes                     (1,725)           (28,000)            47,414           (85,400)
                                                  --------------     --------------     --------------    --------------

Net (loss) income                                 $   (3,175,349)    $      870,991     $   (5,607,545)   $    1,745,794
                                                  ==============     ==============     ==============    ==============

Basic (loss) earnings per share
  Weighted average shares outstanding                 16,802,768         16,578,310         16,794,636        16,212,014
                                                  --------------     --------------     --------------    --------------
   Basic (loss) earnings per share                $        (0.19)    $          .05     $        (0.33)   $          .11
                                                  ==============     ==============     ==============    ==============

Diluted (loss) earnings income per share
  Weighted average shares outstanding                 16,802,768         18,454,850         16,794,636        18,291,267
                                                  --------------     --------------     --------------    --------------
  Diluted (loss) earnings per share               $        (0.19)    $          .05     $        (0.33)   $          .10
                                                  ==============     ==============     ==============    ==============


                          See Accompanying Notes to Condensed Consolidated Financial Statements

                                                               2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                   QMED, INC. AND SUBSIDIARIES
                                CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
                                                           (Unaudited)




                                                  For the Three      For the Three       For the Six        For the Six
                                                   Months Ended       Months Ended       Months Ended       Months Ended
                                                   May 31, 2006       May 31, 2005       May 31, 2006       May 31, 2005
                                                  --------------     --------------     --------------    --------------
<S>                                               <C>                <C>                <C>               <C>
Net (loss) income                                 $   (3,175,349)    $      870,991     $   (5,607,545)   $    1,745,794

Other comprehensive income
  Unrealized gain (loss) on securities
  available for sale                                       9,106            (13,399)            18,161           (13,787)

Less:  reclassification adjustment for (gains)
  losses included in net income (loss)                         -              6,584                  -             6,584
                                                  --------------     --------------     --------------    --------------

Comprehensive (loss) income                       $   (3,166,243)    $      864,176     $   (5,589,384)   $    1,738,591
                                                  ==============     ==============     ==============    ==============




                              See Accompanying Notes to Condensed Consolidated Financial Statements

                                                               3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                   QMED, INC. AND SUBSIDIARIES
                                    CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                              For the Six Months Ended May 31, 2006
                                                           (Unaudited)


                                                                                   Accumulated
                                                                                   Other     Common Stock Held
                                    Common Stock                                   Compre-     in Treasury
                                -------------------    Paid-in      Accumulated    hensive  ------------------
                                  Shares     Amount     Capital       Deficit       Loss     Shares    Amount      Total
                                ----------  -------   -----------  ------------   --------   ------   --------  -----------
<S>                             <C>         <C>       <C>          <C>            <C>        <C>      <C>       <C>
Balance - November 30, 2005     16,804,846  $16,805   $51,219,617  $(24,118,472)  $(21,039)  22,000   $(75,625) $27,021,286

Exercise of stock options and
  warrants                          38,745       39       111,780                                                   111,819

Issuance in connection with
  the Directors Equity Plan          2,174        2        20,303                                                    20,305

Share-based employee
  compensation expense                                    946,628                                                   946,628

Share-based non-employee
  compensation expense                                      7,433                                                     7,433

Amortization of non-employee
  stock options                                            55,375                                                    55,375

Net loss for the six months
  ended May 31, 2006                                                 (5,607,545)                                 (5,607,545)

Change in unrealized holding
  losses on securities available
  for sale                                                                          18,161                          18,161
                                ----------  -------   -----------  ------------   --------   ------   --------  -----------

Balance - May 31, 2006          16,845,765  $16,846   $52,361,136  $(29,726,017)  $ (2,878)  22,000   $(75,625) $22,573,462
                                ==========  =======   ===========  ============   ========   ======   ========  ===========



                               See Accompanying Notes to Condensed Consolidated Financial Statements

                                                               4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                           QMED, INC. AND SUBSIDIARIES
                                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (Unaudited)


                                                                               For the Six           For the Six
                                                                               Months Ended          Months Ended
                                                                               May 31, 2006          May 31, 2005
                                                                             ---------------       ---------------
<S>                                                                          <C>                   <C>
Cash flows from operating activities:
  Net (loss) income                                                          $    (5,607,545)      $     1,745,794

Adjustments to reconcile net (loss) income to net cash
  (used in) provided by operating activities:
    Gain on sale of investments                                                            -                 6,584
    Loss in operations of joint ventures                                              38,438               457,278
    Depreciation and amortization                                                    375,716               276,996
    Provision for loss on accounts receivable                                          4,464                18,800
    Share-based employee compensation expense                                        946,628                     -
    Share-based non-employee compensation expense                                     27,738                 8,003
    Amortization of non-employee stock options                                        55,375                31,250
    Amortization of bond discounts and premiums                                      (45,549)              (16,625)
    (Increase) decrease in
      Accounts Receivable                                                          1,427,620              (793,870)
      Inventory                                                                        1,230                (3,338)
      Prepaid expenses and other current assets                                      131,690                90,681
    Increase (decrease) in
      Accounts payable and accrued liabilities                                      (170,161)              321,263
      Medical claims reserve                                                         123,862                     -
      Contract billings in excess of revenues and deferred revenue                   560,080               877,337
      Other, net                                                                     (73,645)              (46,695)
                                                                             ---------------       ---------------
     Total adjustments                                                             3,403,486             1,227,664
                                                                             ---------------       ---------------
     Net cash (used in) provided by operating activities                          (2,204,059)            2,973,458
                                                                             ---------------       ---------------

Cash flows from investing activities:
  Proceeds from sale of securities available for sale                              5,260,001             4,626,012
  Purchases of securities available for sale                                        (481,507)          (21,461,042)
  Investment in restricted cash - long term                                         (705,881)                    -
  Capital expenditures                                                               (97,137)              (15,855)
  Product software development expenditures                                         (491,818)             (146,288)
  Cash paid for acquisition                                                                -              (200,000)
  Investment in joint venture                                                        (60,005)             (262,130)
                                                                             ---------------       ---------------
  Net cash provided by (used in) investing activities                              3,423,653           (17,459,303)
                                                                             ---------------       ---------------

Cash flows from financing activities:
  Payments for capital leases                                                        (73,031)              (68,513)
  Proceeds from issuance of common stock and investment rights, net                        -            13,818,850
  Proceeds from exercise of stock options                                            111,819               428,809
                                                                             ---------------       ---------------
  Net cash provided by financing activities                                           38,788            14,179,146
                                                                             ---------------       ---------------

Net increase (decrease) in cash and cash equivalents                               1,258,382              (306,699)
Cash and cash equivalents at beginning of period                                   4,051,046             3,292,571
                                                                             ---------------       ---------------

Cash and cash equivalents at end of period                                   $     5,309,428       $     2,985,872
                                                                             ===============       ===============

Supplemental disclosure of cash flow information:
  Cash paid during the period for:
    Interest                                                                 $        10,809       $        14,085
    Income taxes                                                                      89,655               113,965

Non-cash investing activities:
  Issuance of 36,425 shares of common stock in connection
    with acquisition                                                         $             -       $       300,000


                       See Accompanying Notes to Condensed Consolidated Financial Statements

                                                       5
</TABLE>
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Interim Financial Reporting

The accompanying unaudited condensed consolidated financial statements of QMed,
Inc. and its subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six month period ended May 31, 2006 are not
necessarily indicative of the results that may be expected for the current
fiscal year ending November 30, 2006. These condensed consolidated financials
statements include the accounts of QMed, Inc., its wholly owned subsidiaries;
Interactive Heart Management Corp. ("IHMC"); QMedCare, Inc., its wholly owned
subsidiaries; Forward Health, Inc. (formerly Health E Monitoring Inc.); and
QMed, Inc.'s majority owned (83%) inactive subsidiary HeartMap, Inc. In December
2005, the Company dissolved HeartMap, Inc. resulting in no impact to the
condensed consolidated financial statements. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended November 30, 2005.


Note 2 - Revenue Recognition

Disease Management

The Company enters into contractual arrangements with health plans and
government agencies to provide disease management services. Fees under the
Company's health plan contracts are generally determined by multiplying a
contractually negotiated rate per health plan member per month ("PMPM") by the
number of health plan members covered by the Company's services during the
month. The PMPM rates usually differ between contracts due to the various types
of health plan product groups (e.g. PPO, HMO, Medicare Advantage). These
contracts are generally for terms of one to three years with provisions for
subsequent renewal, and typically provide that all or a portion of the Company's
fees may be "performance-based". Performance-based contracts have varying
degrees of risk associated with the Company's ability to deliver the guaranteed
financial cost savings. In most cases, the Company guarantees a percentage
reduction of disease costs compared to a prior baseline year determined by
actuarial analysis and other estimates used as a basis to measure performance
objectives. The measurement of the Company's performance against the base year
information is a data intensive and time-consuming process that is typically not
completed until six to eight months after the end of the contract year. The
Company bills its customers each month for the entire amount of the fees
contractually due based on previous months membership, which always includes the
amount, if any that may be subject to refund for member retroactivity and a
shortfall in performance. The Company adjusts or defers revenue for contracts
where it believes performance is short of contractual obligations, possibly
resulting in a refund of fees or where fees generated may be subject to further
retroactive adjustment associated with a contract or plan's decision to
completely terminate its coverage in a geographic market as well as membership
changes. For example, general terminations can be due to death, member change of
health plan, etc. Adjustments for shortfalls in performance targets under the
terms of the contract or other factors affecting revenue recognition are accrued
on an estimated basis in the period the services are provided and are adjusted
in future periods when final settlement is determined. The Company reviews these
estimates periodically and makes adjustments, as interim information is
available.

The Company determines its level of performance at interim periods based on
medical claims data, achievement of enrollment targets or other data supplied by
the health plan. In the event these interim performance measures indicate that
performance targets are not being met or sufficient data is unavailable, fees
subject to refund are not recorded as revenues but rather are recorded as a
liability entitled "contract billings in excess of revenues." Under performance
based arrangements, the ability to make estimates at interim periods can be
challenging due to the inherent nature of the medical claims process and the
claims lag time associated with it. In most cases, paid claims data is not
available until up to six months after claims are incurred. Although interim
data measurement is indicative of performance objectives; actual results could
differ from those estimates. As of May 31, 2006, based on information and data
available, the Company has deferred approximately $1,582,000 of revenue, which
may be subject to refund. This deferral has been reflected as contract billings
in excess of revenues on the balance sheet.

                                       6
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 2 - Revenue Recognition - (continued)

Disease Management - (continued)
-------------------------------
The majority of contract billings in excess of revenues on the balance sheet are
subject to reconciliation at future periods. If future reconciliations provide
positive results, revenue will be recorded at that time. The Company believes
these estimates adequately provide for any potential adjustments that may be
applied to revenues from these contracts. During the three months ended May 31,
2006, approximately 54% of disease management services were derived from one
customer. During the six months ended May 31, 2006 approximately 67% of disease
management services was derived from three customers that each comprised more
than 10% of the Company's revenues.

Managed Care Services
---------------------
The Company's captive insurance company entered into an agreement with a
reinsurer whereby the captive insurance company assumes 100% of the risk
associated with the operations of a Special Needs Plan ("SNP") in South Dakota.
The SNP offers comprehensive health care coverage and prescription drug benefits
for chronically ill Medicare recipients. The Company receives a fixed monthly
member premium and a Medicare risk-adjusted premium, which is based upon the
diagnoses of the enrolled member as billed by the physician. The cost of health
care provided is accrued in the period it is dispensed to the enrolled members,
based in part on estimates for services and other health care costs that have
been incurred but not yet reported, or IBNR classified as "medical claims
reserve" on the condensed consolidated balance sheet. Since this is a new plan,
the Company estimates are initially based upon independent actuarial models of
expected costs. These models included factors such as age, gender and
demographics. As the plan matures, the Company will develop these estimates
using standard actuarial methods which include, among other factors, the average
interval between the dates services are rendered and the date claims are paid,
denied claims activity, disputed claims activity, expected health care cost
inflation, utilization, seasonality patterns and changes in membership. The
Company records its best estimate of the liability for incurred claims; however,
such estimates could materially understate or overstate our actual liability for
medical and benefits payable. The estimates for submitted claims and IBNR claims
liabilities are made on an accrual basis and adjusted in future periods as
required. Adjustments to prior period estimates or financial results, if any,
are included in current operations.

The Company records revenue from health care premiums received in the month that
enrollees are entitled to coverage.

The Company also entered into an agreement with DAKOTACARE, a large health
maintenance organization, to administer the SNP in South Dakota. In accordance
with the agreement, the Company records revenue on a monthly basis as services
are rendered.


Note 3 - Impairment of Intangible Assets

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company is required to review intangible assets for impairment on an annual
basis or more frequently whenever events or circumstances indicate that the
carrying value may not be recoverable.

The Company amortizes other identifiable intangible assets, such as acquired
technologies, customer contracts, and other intangibles, on the straight-line
method over their estimated useful lives, except for trade names, which have an
indefinite life and are not subject to amortization. The Company reviews
intangible assets not subject to amortization on an annual basis or more
frequently whenever events or circumstances indicate that the assets might be
impaired. The Company also assesses the potential impairment of intangible
assets subject to amortization whenever events or changes in circumstances
indicate that the carrying values may not be recoverable.

If the Company determines that the carrying value of other identifiable
intangible assets may not be recoverable, the Company calculates any impairment
using an estimate of the asset's fair value based on the projected net cash
flows expected to result from that asset, including eventual disposition.


Note 4 - Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of deferral, contingent assets and liabilities at the
date of the financial statements, and the

                                       7
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 4 - Use of Estimates - (continued)

reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.


Note 5 - Investments in Securities

Investment in securities available-for-sale as of May 31, 2006 were as follows:
<TABLE>
<CAPTION>
                                                                                             Unrealized
                                                       Cost              Market Value        Gain (Loss)
                                                   -------------        -------------       -------------
<S>                                                <C>                  <C>                 <C>
Corporate debt securities                          $  13,636,929        $  13,634,839       $      (2,090)
U.S. Government short term obligations                   999,668              998,880                (788)
                                                   -------------        -------------       -------------
                                                   $  14,636,597        $  14,633,719       $      (2,878)
                                                   =============        =============       =============
</TABLE>

Note 6 - Accounts Receivable

Accounts receivable primarily represent fees that are contractually due in the
ordinary course of providing a service, net of contractual adjustments and the
allowance for doubtful accounts. As of May 31, 2006, accounts receivable
included $39,707 of insurance premiums due from the reinsurer for coverage.

Note 7 - Inventory

Inventories, consisting of finished units and raw materials, are stated at the
lower of cost (determined on a moving weighted average method) or market.
Inventories consist of the following:
<TABLE>
<CAPTION>
                                                            May 31, 2006          November 30,
                                                             (Unaudited)             2005
                                                            -------------        -------------
<S>                                                         <C>                  <C>
          Raw materials (component parts)                   $     115,719        $     116,873
          Finished units                                           24,998               25,074
                                                            -------------        -------------
               Total inventory                              $     140,717        $     141,947
          Reserve for slow moving inventory                      (111,060)            (111,060)
                                                            -------------        -------------
          Net inventory                                     $      29,657        $      30,887
                                                            =============        =============
</TABLE>

Note 8 - Product Software Development Costs

During the three months ended May 31, 2006 and 2005, the Company capitalized
approximately $294,000 and $105,000, respectively, in product software
development costs. During the six months ended May 31, 2006 and 2005, the
Company capitalized approximately $492,000 and $146,000, respectively. These
costs are being amortized over a two to five-year useful life.

During the three months ended May 31, 2006 and 2005 amortization expense related
to product software development costs was approximately $55,000 and $43,000,
respectively. During the six months ended May 31, 2006 and 2005 amortization
expense related to product software development costs was approximately $99,000
and $79,000, respectively. Accumulated amortization was $714,768 and $525,609 at
May 31, 2006 and 2005, respectively. Estimated amortization expense is $288,000
for fiscal year 2006, $381,000 for fiscal year 2007, $324,000 for fiscal year
2008, $296,000 for fiscal year 2009 and $240,000 for the fiscal years
thereafter.

                                       8
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 9 - Restricted Cash

In December 2005, the Company established a $250,000 letter of credit with
Wachovia Bank, N.A. to establish the appropriate capital required for the
Company's captive insurance company in South Carolina. The letter of credit is
collateralized by cash and expires on December 31, 2006. These funds are
classified as noncurrent assets as the cash is not available for current
operations and the Company has intent on extending the letter of credit at the
time of expiration.

On May 18, 2006 the Company received approval of their application to obtain a
license to operate as a Health Maintenance Organization within the State of New
Jersey from the Department of Banking and Insurance. In accordance with
statutory requirements, the Company was required to establish a cash reserve in
the amount of approximately $456,000. The funds were deposited within the
reserve account in June 2006. These funds are classified as noncurrent assets as
the cash is not available for current operations.

Note 10 - Acquired Intangibles

In April 2005 the Company acquired all of the outstanding common stock of Health
e Monitoring, Inc. ("HEM"). HEM has developed a comprehensive weight management
program but had not yet commenced significant operations. In accordance with
SFAS No. 141 "Business Combinations," this transaction was accounted for as a
purchase of assets as defined by EITF Issue No. 98-3 "Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business"
rather than a business combination. Accordingly, no goodwill was recorded from
this acquisition, as consideration in excess of the fair value of identified
assets was allocated pro-rata to the identified intangible assets. The aggregate
purchase price was $500,000, which consisted of $200,000 in cash and $300,000 of
common stock. In addition, transaction costs were approximately $30,000. As
additional consideration under the purchase agreement, the company would be
obligated to release an additional 60,709 shares of common stock upon certain
targets being achieved in 2006. Pursuant to FAS No. 141 the direct costs to
acquire HEM have been allocated to the assets acquired based upon an independent
appraisal and the contingent consideration will be recorded if and when it
becomes due and payable.

In October 2005 the Company acquired all of the assets of Disease Management
Technologies, Inc. ("DMT"). DMT had developed a website for a weight management
program that will complement HEM's existing comprehensive weight management
program but had not yet commenced significant operations. In accordance with
SFAS No. 141 "Business Combinations," this transaction was accounted for as a
purchase of assets as defined by EITF Issue No. 98-3 "Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business"
rather than a business combination. Accordingly, no goodwill was recorded from
this acquisition, as consideration in excess of the fair value of identified
assets was allocated pro-rata to the identified intangible assets. The aggregate
purchase price was $302,000, which consisted of $250,000 in cash and $52,000 of
common stock. In addition, transaction costs were approximately $42,000. As
additional consideration under the purchase agreement, the company would be
obligated to issue an additional 87,664 shares of common stock upon certain
targets being achieved in 2006. Pursuant to FAS No. 141 the direct costs to
acquire DMT have been allocated to the assets acquired based upon an independent
appraisal and the contingent consideration will be recorded if and when it
becomes due and payable.

The following table summarizes the estimated fair value of the assets acquired
and their balances as of May 31, 2006:
<TABLE>
<CAPTION>
                                            Original Fair         Accumulated         Net Book       Useful Life
                                                Value            Amortization           Value         in Years
                                           ---------------      --------------     ---------------  -------------
<S>                                        <C>                 <C>                <C>                     <C>
HEM:
Covenant not to compete                    $       483,363     $      (108,757)   $        374,606        5
Acquired technology                                 46,307             (10,419)             35,888        5

DMT:
Software and contents                              299,348             (39,913)            259,435        5
Assembled workforce                                 45,117              (7,740)             37,377        4
                                           ---------------     ---------------     ---------------
                                           $       874,135     $      (166,829)    $       707,306
                                           ===============     ===============     ===============
</TABLE>
                                       9
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 10 - Acquired Intangibles - (continued)

During the three months ended May 31, 2006 amortization expense related to the
covenant not to compete, acquired technology, software and contents, and
assembled workforce was $24,169, $2,315, $14,967 and $2,820, respectively.
During the six months ended May 31, 2006 amortization expense related to the
covenant not to compete, acquired technology, software and contents, and
assembled workforce was $48,336, $4,631, $29,935 and $5,639, respectively.
During the three and six month period ended May 31, 2005, amortization expense
related to covenant not to compete and acquired technology were $12,084 and
$1,158, respectively, and no amortization expense related to software and
contents and assembled workforce was recorded as the acquisition of DMT did not
occur until the fourth quarter of fiscal 2005. Estimated amortization expense is
$177,000 for fiscal years 2006, 2007 and 2008 and $175,000 for fiscal year 2009
and $90,000 for the fiscal year thereafter.

Note 11 - Investment in Joint Ventures

The Company has a 50% interest in HeartMasters, L.L.C. ("HM"). The management
agreement provides for profits and losses to be allocated based on the Company's
50% interest. As of May 31, 2006, the Company has recorded losses to date of
approximately $1,799,000 bringing the investment in the joint venture to zero.
This joint venture was not a variable interest entity and therefore is not
required to be consolidated under the provisions of FIN 46R. In December 2005,
this joint venture was dissolved.

The Company has a 33.33% interest in HealthSuite Partners, LLC ("HSP"). The
management agreement provides for profits and losses to be allocated based on
the Company's 33.33% interest. As of May 31, 2006, the Company has recorded
losses to date of approximately $189,000 bringing its investment in this joint
venture to approximately $31,000. This joint venture is not a variable interest
entity and therefore is not required to be consolidated under the provisions of
FIN 46R. As of May 31, 2006 approximately $673,000 is due from this joint
venture, which is included in non-current accounts receivable representing a
withhold against performance guarantees.

Note 12 - Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses include the following:
<TABLE>
<CAPTION>
                                                             May 31, 2006         November 30,
                                                              (Unaudited)            2005
                                                            -------------        -------------
<S>                                                         <C>                  <C>
         Account payable trade                              $     855,297        $   1,010,163
         Insurance premiums payable                                40,292               58,867
         Professional fees payable                                372,112              305,080
         Other accrued expenses - none in
           excess of 5% of current liabilities                    311,757              203,275
                                                            -------------        -------------
                                                            $   1,579,458        $   1,577,385
                                                            =============        =============
</TABLE>
                                       10
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 13 - Medical Claims Reserve

The following table represents a roll-forward of our medical claims reserve
inclusive of our incurred but not reported (IBNR) reserve as of the period
indicated:
<TABLE>
<CAPTION>
                                                                                  For the Six
                                                                                  Months Ended
                                                                                  May 31, 2006
                                                                                ---------------
          <S>                                                                   <C>
          IBNR as of December 1, 2005                                           $             -
          Health care claim expenses incurred during the period                         103,824
          Health care claims paid during the period                                     (38,434)
                                                                                ---------------
          IBNR as of February 28, 2006                                          $        65,390

          Health care claim expenses incurred during the period                         267,207
          Health care claims paid during the period                                    (208,735)
                                                                                ---------------
          IBNR as of May 31, 2006                                               $       123,862
                                                                                ===============
</TABLE>

Included in the health care claim expenses incurred during the period is our
provision for the IBNR reserve. Since the SNP is a new plan, the Company's
estimates are initially based upon independent actuarial models of expected
costs. These models included factors such as age, gender and demographics.

Note 14 - Fees Reimbursable to Health Plans

Health plans utilizing the disease management program of the Company pay
participating physicians fees for their services related to use of the program.
Such fees are additional costs to the health plan, which in some cases are
deducted from fees paid to the Company. As of May 31, 2006 and November 30, 2005
there were $103,940 and $39,000 outstanding under these provisions,
respectively.

Note 15 - Business Segment Information

The Company presents segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
established reporting and disclosure standards for an enterprise's operating
segments. Operating segments are defined as components of an enterprise for
which separate financial information is available and regularly reviewed by the
Company's senior management.

The Company is organized into three business units, disease-management services,
specialty managed care services and health and wellness programs, which are
considered reportable segments. The segments are managed separately and the
Company evaluates performance on operating profits of the respective segments.
The Company supports these segments with shared human resources, financial,
clinical, marketing and information technology resources. The accounting
policies of the operating segments are substantially consistent with those
applied in the condensed consolidated financial statements. Income (loss) before
income taxes by operating segment excludes interest income, interest expense and
general corporate expenses.

                                       11
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 15 - Business Segment Information - (continued)

Summarized financial information by operating segment for three and six months
ended May 31, 2006 and 2005 is as follows:
<TABLE>
<CAPTION>
                                                Three Months Ended May 31, 2006

                                      Disease      Managed       Health &
                                    Management       Care        Wellness      General                      Total
                                     Services      Services      Programs     Corporate    Elimination   Consolidated
                                   -----------    ----------   -----------    ----------   -----------  -------------
<S>                                <C>            <C>          <C>            <C>          <C>          <C>
Revenues                           $ 1,608,699    $  312,996   $         -    $        -   $        -   $   1,921,695
Revenues - related parties              20,610             -             -             -      (20,610)              -
Cost of revenues/medical expenses    1,413,359       267,207             -             -            -       1,680,566
General operating expenses           1,561,867       902,563       555,941       414,992      (20,610)      3,414,753
Loss before income taxes            (1,345,917)     (856,774)     (555,941)     (414,992)           -      (3,173,624)

Depreciation and amortization           78,655           442        47,161        67,505            -         193,763
Expenditures for long-lived
  assets                               100,317        35,135       210,274         9,760            -         355,486

<CAPTION>
                                                Three Months Ended May 31, 2005

                                      Disease      Managed       Health &
                                    Management       Care        Wellness      General                      Total
                                     Services      Services      Programs     Corporate    Elimination   Consolidated
                                   -----------    ----------   -----------    ----------   -----------  -------------
<S>                                <C>            <C>          <C>            <C>          <C>          <C>
Revenues                           $ 5,462,897    $        -   $         -    $        -   $        -   $   5,462,897
Cost of revenues/medical expenses    1,850,521             -             -             -            -       1,850,521
General operating expenses           1,962,756       261,033        48,314       441,282            -       2,713,385
Income (loss) before income taxes    1,649,620      (261,033)      (48,314)     (441,282)           -         898,991
Depreciation and amortization           69,916             -        13,242        65,932            -         149,090
Expenditures for long-lived
  assets                                95,571             -       529,670        15,855            -         641,096
</TABLE>
                                       12
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 15 - Business Segment Information - (continued)
<TABLE>
<CAPTION>

                                                  Six Months Ended May 31, 2006

                                      Disease      Managed       Health &
                                    Management       Care        Wellness      General                      Total
                                     Services      Services      Programs     Corporate    Elimination   Consolidated
                                   -----------    ----------   -----------    ----------   -----------  -------------
<S>                                <C>            <C>          <C>            <C>          <C>          <C>
Revenues                           $ 4,666,233    $  438,085   $         -    $        -   $        -   $   5,104,318
Revenues - related parties              28,620             -             -             -      (28,620)              -
Cost of revenues/medical expenses    3,208,424       371,031             -             -            -       3,579,455
General operating expenses           3,454,049     1,841,634     1,053,297       859,462      (28,620)      7,179,822
Loss before income taxes            (1,967,620)   (1,774,580)   (1,053,297)     (859,462)           -      (5,654,959)
Depreciation and amortization          147,474           442        93,699       134,101            -         375,716
Expenditures for long-lived
  assets                               298,439        35,135       210,274        45,107            -         588,955
Identifiable assets                  7,146,937       730,942       963,744    19,094,668   (1,361,491)     26,574,800

<CAPTION>
                                                  Six Months Ended May 31, 2005

                                      Disease      Managed       Health &
                                    Management       Care        Wellness      General                      Total
                                     Services      Services      Programs     Corporate    Elimination   Consolidated
                                   -----------    ----------   -----------    ----------   -----------  -------------
<S>                                <C>            <C>          <C>            <C>          <C>          <C>
Revenues                           $10,218,383    $        -   $         -    $        -   $        -   $  10,218,383
Cost of revenues/medical expenses    3,672,007             -             -             -            -       3,672,007
General operating expenses           3,964,553       261,033        48,314       441,282            -       4,715,182
Income (loss) before income taxes    2,581,823      (261,033)      (48,314)     (441,282)           -       1,831,194
Depreciation and amortization          197,822             -        13,242        65,932            -         276,996
Expenditures for long-lived
  assets                               146,288             -       529,670        15,855            -         691,813
Identifiable assets                  7,153,164         4,592       520,985    21,257,535     (373,386)     28,562,890
</TABLE>


Related party revenue represents an agreement entered into by QMedCare Dakota,
LLC with QMed Inc. on January 1, 2006 for disease management services in
connection with the administration of the SNP in South Dakota.

                                       13
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 16 - Share-Based Compensation

The Company has shareholder-approved stock incentive plans for employees. Prior
to December 1, 2005, the Company accounted for these plans under the recognition
and measurement provisions of Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees" and related interpretations, as
permitted by Statement of Financial Accounting Standards ("SFAS" or "Statement")
No. 123, "Accounting for Stock-Based Compensation."

For the three months and six months ended May 31, 2005, we recorded compensation
expense under APB No. 25 of approximately $15,000 and $31,000, respectively.
This expense resulted from the grant of stock options to directors of the
Company in June 2004. The Company recognized compensation expense related to
these stock options on a straight-line basis over the vesting period.

Effective December 1, 2005, we adopted SFAS No. 123(R), "Share-Based Payment,"
using the modified prospective transition method. Under the modified prospective
transition method, recognized compensation cost for the six months ended May 31,
2006 includes 1) compensation cost for all share-based payments granted prior
to, but not yet vested as of, December 1, 2005, based on the grant date fair
value estimated in accordance with the original provisions of Statement 123; and
2) compensation cost for all share-based payments granted on or after December
1, 2005, based on the grant date fair value estimated in accordance with
Statement 123(R). In accordance with the modified prospective method, we have
not restated prior period results.

For the three months and six months ended May 31, 2006, we recognized
share-based compensation cost of $504,042 and $946,628, respectively, which
consisted of $60,739 and $130,045 in cost of services and $408,862 and $745,610
in selling, general and administrative expenses and $34,441 and $70,973 in
research and development, respectively. The Company did not capitalize any
share-based compensation cost.

As a result of adopting Statement 123(R), loss before income taxes and net loss
for the three and six months ended May 31, 2006 totaling $504,042 and $946,628,
respectively, were lower than if the Company had continued to account for
share-based compensation under APB 25. The effect of adopting Statement 123(R)
on basic and diluted earnings per share for the three and six months ended May
31, 2006 was $.03 and $.06 per share, respectively.

Prior to adopting Statement 123(R), we presented the tax benefit of stock option
exercises as operating cash flows. Statement 123(R) requires that tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options be classified as financing cash flows.

Statement 123(R) also requires companies to calculate an initial "pool" of
excess tax benefits available at the adoption date to absorb any tax
deficiencies that may be recognized under Statement 123(R). The pool includes
the net excess tax benefits that would have been recognized if the company had
adopted Statement 123 for recognition purposes on its effective date.

The Company has elected to calculate the pool of excess tax benefits under the
alternative transition method described in FASB Staff Position ("FSP") No. FAS
123(R)-3, "Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards," which also specifies the method we must use to
calculate excess tax benefits reported on the statement of cash flows. The
Company is in a net operating loss position; therefore, no excess tax benefits
from share-based payment arrangements have been recognized for the three and six
months ended May 31, 2006.

The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation for the three and six months ended May 31,
2005.

                                       14
<PAGE>


                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 16 - Share-Based Compensation - (continued)
<TABLE>
<CAPTION>
                                 Three Months Ended            Six Months Ended
                                    May 31, 2005                 May 31, 2005
                                  ---------------              ---------------
                                    (unaudited)                  (unaudited)
<S>                               <C>                          <C>
    Net income, as reported       $       870,991              $     1,745,794

    Deduct: Total stock-based
    employee compensation
    expense determined under
    fair value based method
    for all awards, net of
    related tax
    effects                              (318,546)                    (524,432)
                                  ---------------              ---------------

    Pro forma net income          $       552,445              $     1,221,362
                                  ===============              ===============

    Weighted average common
    shares outstanding                 16,578,310                   16,212,014

    Dilutive effect of stock
    options and warrants                1,876,540                    2,079,253
                                  ---------------              ---------------

    Diluted shares outstanding         18,454,850                   18,291,267
                                  ===============              ===============

    Income (loss) per share:

    Basic, as reported            $           .05              $           .11
                                  ===============              ===============

    Diluted, as reported          $           .05              $           .10
                                  ===============              ===============

    Basic, pro forma              $           .03              $           .08
                                  ===============              ===============

    Diluted, pro forma            $           .03              $           .07
                                  ===============              ===============
</TABLE>

Potentially dilutive options and warrants to purchase 1,585,263 and 1,697,800
shares of the common stock were outstanding for the three and six months ending
May 31, 2006 but were not included in the computation of diluted loss per share
because the effect of their inclusion would have been anti-dilutive.
Additionally, options to purchase 342,694 and 7,344 shares of common stock were
outstanding as of May 31, 2006 and 2005, respectively, but were also not
included in the computation of diluted (loss) earnings per share for the three
months ended May 31, 2006 and 2005 and options to purchase 406,194 and 99,009
shares of common stock were outstanding as of May 31, 2006 and 2005,
respectively, but were also not included in the computation of diluted (loss)
earnings per share for the six months ended May 31, 2006 and 2005 because the
option exercise price was greater than the average market price of the common
shares.

                                       15
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 16 - Share-Based Compensation - (continued)

As noted above, the Company has shareholder-approved stock incentive plans for
employees under which we have granted non-qualified and incentive stock options.
Options granted under these plans must be at a price per share not less than the
fair market value per share of common stock on the date the option is granted.
The options generally vest over a three-year period and expire ten years from
the date of grant. Certain option and share awards provide for accelerated
vesting upon a change in control or normal or early retirement (as defined in
the plans). At the Company's annual shareholder meeting on April 28, 2006, the
amendment to the 1999 Equity Incentive Plan to increase the number of shares
reserved for issuance under such plan from 2,000,000 to 3,000,000 and to ensure
compliance with Section 409A of the Internal Revenue Code was approved. At May
31, 2006, we have reserved approximately 1,395,896 shares for future equity
grants.

As of May 31, 2006, there was $3,142,444 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
stock incentive plans. That cost is expected to be recognized over a
weighted-average period of 2.2 years.

Stock Options

For the three and six months ended May 31, 2006, the Company based expected
volatility on both historical volatility and implied volatility on the Company's
stock. The expected term of options granted represents the period of time that
options granted are expected to be outstanding. The Company used historical data
to estimate expected option exercise and post-vesting employment termination
behavior. The Company utilized the risk-free interest rate for periods equal to
the expected term of the option based upon the U.S. Treasury yield curve in
effect at the time of the grant. The Company has no intention of declaring any
dividends for the foreseeable future.

For the three and six months ended May 31, 2005, we estimated the fair value of
each option award on the date of grant using the Black-Scholes model. The
Company based expected volatility on historical volatility. The Company
estimated the expected term of stock options using historical exercise and
employee termination experience.


The following table shows the weighted average grant date fair values and the
weighted average assumptions the Company used to develop the fair value
estimates under each of the option valuation models for three and six months
ended May 31, 2006 and 2005:
<TABLE>
<CAPTION>
                                          Three Months Ended           Six Months Ended
                                               May 31,                     May 31,
                                         2006          2005          2006         2005
                                      -------------------------  --------------------------
<S>                                      <C>           <C>          <C>           <C>
 Weighted average grant -
   date fair value of options            $3.12         $4.67        $4.65         $5.56

 Assumptions:
   Expected volatility                   64.1%         65.8%        64.1%         65.8%
   Expected dividends                      --            --           --             --
   Expected term (in years)               4.0           5.5          4.0           5.5
   Risk-free rate                         4.9%          4.0%         4.4%          3.8%
</TABLE>
                                       16
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 16 - Share-Based Compensation - (continued)
Stock Options - (continued)


A summary of option activity as of May 31, 2006 and changes during the six
months then ended is presented below:
<TABLE>
<CAPTION>
                                                                                      Weighted
                                                                                      Average           Aggregate
                                                              Weighted Average       Remaining       Intrinsic Value
                Options                         Shares         Exercise Price     Contractual Term       ($000s)
----------------------------------------- ------------------- ------------------ ----------------- -------------------
<S>                                             <C>                    <C>              <C>             <C>
Outstanding at December 1, 2005                    1,782,328              $7.02
Granted                                              283,741              10.50
Exercised                                             (9,347)              4.23
Forfeited or expired                                  (9,486)              8.52
                                          -------------------

Outstanding at February 28, 2006                   2,047,236               7.54
Granted                                               42,500               8.89
Exercised                                             (4,398)              6.94
Forfeited or expired                                  (6,763)              8.83
                                          -------------------

Outstanding at May 31, 2006                        2,078,575               7.57               7.1          $1,094,356
                                          ===================

Exercisable at May 31, 2006                        1,291,929               6.27               6.2          $1,050,841
                                          ===================
</TABLE>

The total intrinsic value, which represents the difference between the
underlying stock's market price and the option's exercise price, of options
exercised during the three months ended May 31, 2006 and 2005 was $8,637 and
$390,059, respectively. The total intrinsic value, which represents the
difference between the underlying stock's market price and the option's exercise
price, of options exercised during the six months ended May 31, 2006 and 2005
was $62,487 and $571,745, respectively.

Cash received from option and warrant exercises under all share-based payment
arrangements for the six months ended May 31, 2006 and 2005 was $111,819 and
$428,809, respectively. No tax benefit was realized from option exercises of the
share-based payment arrangements for the six months ended May 31, 2006 and 2005.

During the year ended November 30, 2005, the Company also granted stock options
to certain board members. The fair value of these options was estimated at the
date of grant, which was determined to be the measurement date, using a Black
Scholes option pricing model. The vesting period for these options is one year.
The value of these options for the year ended November 30, 2005 was
approximately $111,000 and is being amortized over their respective vesting
period. Amortization expense relating to these options for the three and six
months ended May 31, 2006 was approximately $27,500 and $55,000, respectively.

As of May 31, 2006, the Company also has 1,674,522 stock warrants outstanding at
a weighted average exercise price of $1.85. As of December 1, 2005, the adoption
date of Statement 123(R), these warrants were exercisable; therefore, no expense
has been recognized in the current period. The warrants expire in November 2007.

Note 17 - Line of Credit

In September 2001, the Company entered into a loan agreement with Wachovia Bank,
National Association, formerly First Union National Bank, for a $1 million line
of credit. The annual interest rate is the lower of the bank's reference rate
minus 1% or the LIBOR Market Index Rate plus 1.5%. The line is collateralized by
securities owned by the Company and expires on September 1, 2006. Borrowings
under this line of credit were $-0- at May 31, 2006 and November 30, 2005.

                                       17
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 18 - Stockholders' Equity

Private Placement Equity Transactions
-------------------------------------
On December 6, 2004, the Company issued to institutional investors 571,428
shares of the Company's common stock, together with additional investment rights
to acquire up to an additional 142,856 shares of common stock at a price of $11
per share, for $6,000,000. The fair value of these investment rights was
estimated at $207,000 and was included in additional paid-in capital. These
investment rights were exercised on February 14, 2005 for $1,572,000.

On February 14, 2005, the Company issued to institutional investors 635,555
shares of the Company's common stock, together with additional investment rights
to acquire up to an additional 158,888 shares of common stock at a price of
$11.75 per share, for $7,150,000. The fair value of these investment rights was
estimated at $174,000 and was included in additional paid-in capital. These
investment rights expired on June 1, 2005, thirty days after the registration
statement was declared effective by the US Securities and Exchange Commission.

Note 19 - Sale of Intellectual Property

On May 22, 2006 the Company entered into an agreement to amend a certain patent
license agreement with a third party resulting in the sale of the patent for
$450,000. The Company received the proceeds from the sale on May 26, 2006.
Accordingly, the proceeds from the transaction were recorded within other
income.

Note 20 - Commitments and Contingencies

Litigation
----------
On November 21, 2005, the Company brought an arbitration proceeding against
Alere Medical Incorporated ("Alere"), seeking damages of approximately
$17,000,000, on allegations that Alere materially misled and misrepresented to
the Company, its intentions to enter into long-term agreements with the Company
for the provision of disease management services. The Company alleges that, in
reliance on Alere's misrepresentations, the Company agreed to continue to
provide services to the six PacifiCare Health Systems, Inc. ("PacifiCare")
plans, on a short term basis, and as a subcontractor to Alere, after the
termination of its direct contracts with PacifiCare, and further agreed to give
Alere a discounted price during the interim periods. The Company asserts that
Alere acted improperly and misleadingly by misrepresenting its intentions with
regard to agreeing to a long-term contract between the parties, and that the
Company, inter alia, was damaged thereby.

In the arbitration, Alere counterclaimed, asserting that, under a seventh
agreement between the parties, there was no obligation to enter into a long term
agreement, and thus, claims Alere, the Company's claims are not well founded and
Alere is allegedly entitled to damages for breach of the duty of good faith and
fair dealing, as well as its attorneys' fees. Alere also filed a lawsuit in
state court, in the Second Judicial District Court of Nevada, Washoe County,
seeking essentially the same relief. Damages were sought by Alere in an
unspecified amount stated to be in excess of $40,000. The Company removed
Alere's State Court action to the United States District Court for the District
of Nevada, where it is now pending under case number 3:06-CV-00062. The Company
denied the material allegations of Alere's complaint, and asserted counterclaims
under the seventh agreement. In its counterclaims, the Company alleges: that the
seventh agreement on which Alere brought suit, deals with several issues,
including the HeartPartners CMS Demonstration Project; that Alere was one of the
partners and participants in the HeartPartners project, and that Alere had
fiduciary duties to the Company in connection with that project; and that, under
the seventh agreement on which Alere sued in this case, Alere also assumed
certain rights and obligations of PacifiCare in connection with the
QMed/HeartPartners Services Agreement. The Company alleged that Alere failed to
live up to its obligations to the HeartPartners, by failing to enroll
participants, and by failing, inter alia, to devote adequate resources to
HeartPartners. The Company alleges that Alere's failures were a cause of the
cancellation of the project, and seeks damages from Alere in the sum of $3.5
Million. Additional counterclaims are also alleged by the Company against Alere,
on claims of breach of fiduciary duty, and based on allegations that Alere
assumed PacifiCare's obligations to pay the Company for certain services, but
that Alere had failed to make full payment. Unspecified damages of not less than
$115,225 are claimed on this group of counterclaims. Alere has replied and
denied the material allegations of the counterclaims and asserted certain
defenses. Discovery will soon commence. At this stage, management is unable to
predict the outcome of this matter.

                                       18
<PAGE>


                           QMED, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Note 20 - Commitments and Contingencies - (continued)
Litigation - (continued)

HCF/Gallagher
-------------
On January 30, 2006, the Company filed an action against Healthcare First, a
division of Gallagher Insurance Services, Inc., and of Arthur J. Gallagher & Co.
("HCF"), seeking recovery in the amount of approximately $3,700,000 against the
financial intermediary/broker involved in obtaining the insurance policies from
Centre Insurance, which were the subject of the prior proceeding against Centre.
This case is pending in the Superior Court of New Jersey, Law Division, Monmouth
County. HCF has answered the complaint, denying all material allegations
thereof, and asserting certain affirmative defenses. Discovery has begun between
the parties with extensive document production. Some depositions have been
noticed. At this stage, management is unable to predict the outcome of this
matter.

Other Claims
------------
The Company is subject to claims and legal proceedings covering a wide range of
matters that arise in the ordinary course of business. Although management of
the Company cannot predict the ultimate outcome of these legal proceedings with
certainty, it believes that their ultimate resolution, including any additional
amounts we may be required to pay will not have a material effect on the
financial statements.

Statutory Reserves
------------------
New Jersey
----------
The Company has committed to maintain an administrative statutory reserve and a
minimum net worth requirement as required by the State of New Jersey Department
of Banking and Insurance. Accordingly, the Company deposited funds deposited
approximately $456,000, which has been properly reflected within the balance
sheet at May 31, 2006, in the statutory reserve account and made a capital
contribution of $2.5 million to QmedCare of New Jersey in June 2006.

South Carolina
--------------
The Company has committed to maintain a minimum 10 to 1 premium to capital ratio
in order to operate the captive insurance company. This capital reserve is
required by the South Carolina Department of Insurance. This ratio will be
monitored by the Company on an on-going basis and will be funded as required. As
of May 31, 2006, the Company was in compliance with this requirement.

Sales Guarantees
----------------
Typically, the Company's fees or incentives are higher in contracts with
increased financial risk such as those contracts with performance-based fees or
guarantees against cost increases. The failure to achieve targeted cost
reductions could, in certain cases, render a contract unprofitable and could
have a material negative impact on the Company's results of operations.

Purchase Commitments
--------------------
The Company is obligated to purchase heart-monitoring equipment under various
orders from one supplier, all of which are expected to be fulfilled with no
adverse consequences material to the company's operations or financial
condition. As of May 31, 2006 total open commitments under these purchase orders
are approximately $286,000.

Note 21 - Subsequent Events

Effective June 12, 2006, the Company changed the name of its subsidiary Health E
Monitoring, Inc. to Forward Health, Inc.

                                       19
<PAGE>

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

Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, which are based upon current
expectations and involve a number of risks and uncertainties. In order for us to
utilize the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, investors are hereby cautioned that these statements may be
affected by the important factors, among others, set forth below, and
consequently, actual operations and results may differ materially from those
expressed in these forward-looking statements. The important factors include:

         o  our ability to renew and/or maintain contracts with our customers
            under existing terms or restructure these contracts on terms that
            would not have a material negative impact on our results of
            operations;
         o  our ability to execute new contracts for health plan disease
            management services;
         o  the risks associated with a significant concentration of our
            revenues with a limited number of health plan customers;
         o  the timing and costs of implementation, and the effect of regulatory
            rules and interpretations relating to the Medicare Prescription
            Drug, Improvement, and Modernization Act 2003;
         o  our ability to effect estimated cost savings and clinical outcome
            improvements under health plan disease management contracts and
            reach mutual agreement with customers with respect to cost savings,
            or to effect such savings and improvements within the timeframes
            contemplated by us;
         o  the ability of our health plan customers to provide timely, complete
            and accurate data that is essential to the operation and measurement
            of our performance under the terms of our health plan contracts, and
            our accurate analysis of such data;
         o  our ability to resolve favorably contract billing and interpretation
            issues with our health plan customers;
         o  our ability to effectively integrate new technologies into our care
            management information technology platform;
         o  our ability to obtain adequate financing to provide the capital that
            may be needed to support the growth of our current and future
            operations and financing or insurance to support our performance in
            these operations;
         o  unusual and unforeseen patterns of healthcare utilization by
            individuals within the health plans with chronic conditions,
            including coronary artery disease ("CAD"), stroke, heart failure
            ("HF"), hypertension, hyperlipidemia and the cardiovascular
            complications of diabetes with which we have executed disease
            management contracts;
         o  the impact of the introduction of new technologies;
         o  the ability of the health plans to maintain the number of covered
            lives enrolled in the plans during the terms of the agreements
            between the health plans and us;
         o  our ability to attract and/or retain and effectively manage the
            employees required to implement our agreements with health plan
            organizations;
         o  the impact of future state and federal healthcare legislation and
            regulations on our business;
         o  the financial health of our customers and their willingness to
            purchase our services;
         o  the impact of litigation or arbitration;
         o  our ability to accurately estimate our performance and revenue
            recognition under the terms of our contracts;
         o  our ability to develop new products and deliver outcomes on those
            products;
         o  our ability to implement our strategy within expected cost
            estimates;
         o  general economic conditions

The Company is facing additional risk factors in connection with the initiation
of operations of QMedCare, Inc. These risk factors may include, but not be
limited, to the following:

         o  the risks inherent in starting a new venture including the incurring
            of significant start-up expenses, the time and number of enrollees
            in the Special Needs Plans, and the ability to achieve profitable
            operations;
         o  the ability to maintain certain levels of equity (referred to as
            surplus) that may be required by state regulations;
         o  the ability to maintain the Risk-Based Capital ratio (RBC ratio) as
            defined and utilized by the National Association of Insurance
            Commissioners (NAIC) to identify weakly capitalized companies by
            comparing each company's adjusted surplus to its required surplus
            (RBC ratio);

                                       20
<PAGE>

         o  the ability to reasonably estimate appropriate medical claims
            reserves and related benefit expenses;
         o  the ability to maintain regulatory compliance associated with
            governmental supervisory agencies including state health, insurance,
            managed care and securities departments which have the authority to
            grant, suspend, and revoke licenses to transact business, regulate
            many aspects of the products and services offered, assess fines,
            penalties and/or sanctions, monitor our solvency and reserve
            adequacy and regulate our investment activities on the basis of
            quality, diversification and other quantitative criteria;
         o  the ability to be competitive, set prices and renew business as
            pricing and underwriting regulations by states limit the Company's
            and other health insurers' flexibility to their underwriting and
            rating practices, particularly for small employer groups;

Overview
--------------------------------------------------------------------------------

We are a provider of disease management services to health plans and to the
federal government through its Medicare program. Our disease management services
are provided by QMed, Inc. and IHMC. Our services assist health plans and
government organizations in managing the care, and cost of diabetes,
cardiovascular conditions, including coronary artery disease ("CAD"), stroke,
heart failure ("CHF"), hypertension, hyperlipidemia and the cardiovascular
complications of diabetes. We also, to a limited extent, manufacture and sell
diagnostic medical equipment to primary care physicians. We also established
QMedCare, Inc., a wholly owned subsidiary, to provide health insurance services
and also acquired Health E Monitoring, Inc., a wholly owned subsidiary, to
provide wellness and weight management programs.

Acquisitions and Recent Developments

QMedCare, Inc.

In December 2004 we formed QMedCare, Inc. as a wholly owned subsidiary of QMed,
Inc. This organization acts as a management company that will operate a series
of specialty Managed Care products serving a high-risk population of Medicare
beneficiaries. The first of these products was offered in South Dakota,
beginning January 2006, as a Special Needs Plan ("SNP") for chronically ill
Medicare recipients. QMedCare Inc. specifically formed QMedCare Dakota, LLC to
administer this Plan for DAKOTACARE, a large health maintenance organization in
South Dakota. The SNP is being marketed as HeartLine Plus and is providing
exclusive health coverage for heart and stroke patients.

On January 1, 2006, Lakeshore Captive Insurance Company, a wholly owned
subsidiary of QMedCare, Inc., entered into an agreement with a reinsurer whereby
the captive insurance company assumes 100% of the risk associated with the
operations of DAKOTACARE's HeartLine Plus SNP.

On March 20, 2006, QMed Inc. through its wholly owned subsidiaries submitted
several applications for Medicare Advantage Special Needs Plans to the Centers
for Medicare and Medicaid Services (CMS). The Company fulfilled its previously
announced intention and filed an application for a wholly owned SNP in New
Jersey. On May 18, 2006, the Company received approval of its application from
the State of New Jersey Department of Banking and Insurance and has a license to
operate as an HMO within the State. In addition, the Company also filed for
programs through arrangements with existing health plans in other regions,
including two projects in Florida and an expansion in South Dakota.

Forward Health, Inc. (formerly Health e Monitoring, Inc.)

In April 2005, QMed acquired 100% of the stock of Health e Monitoring, Inc.
("HeM"). HeM will provide weight management and health promotion programs for
employer groups, health insurance plans and individual consumers interested in
weight management--ranging from the desire to maintain a healthy weight and
lifestyle--to those concerned about more serious weight and health management
issues.

In October 2005, QMed, Inc. acquired all of the assets of Disease Management
Technologies, Inc. ("DMT"). DMT has developed a website for a weight management
program that will complement HeM's existing comprehensive weight management
program. We believe this will provide the necessary tools to enhance our ability
to penetrate the marketplace.

Effective June 12, 2006, the Company changed the name of its subsidiary Health E
Monitoring, Inc. to Forward Health, Inc.

                                       21
<PAGE>

Critical Accounting Estimates

Our accounting policies are described in Note 2 of the condensed consolidated
financial statements included in this Report on Form 10-Q for the three and six
months ended May 31, 2006. The condensed consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the
United States of America, which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

We consider the following policies to be the most critical in understanding the
judgments involved in preparing the financial statements and the uncertainties
that could impact our results of operations, financial condition and cash flows.

Revenue Recognition

We enter into contractual arrangements with health plans and government agencies
to provide disease management services. Fees under our health plan contracts are
generally determined by multiplying a contractually negotiated rate per health
plan member per month ("PMPM") by the number of health plan members covered by
our services during the month. The PMPM rates usually differ among contracts due
to the various types of health plan product groups (e.g. PPO, HMO, Medicare
Advantage) that we interact with. These contracts are generally for terms of one
to three years with provisions for subsequent renewal, and typically provide
that all or a portion of our fees may be "performance-based." Performance-based
contracts have varying degrees of risk associated with our ability to deliver
the guaranteed financial cost savings. In most cases we guarantee a percentage
reduction of disease costs compared to a prior baseline year determined by
actuarial analysis and other estimates used as a basis to measure performance
objectives. The measurement of our performance against the base year information
is a data intensive and time-consuming process that is typically not completed
until six to eight months after the end of the contract year. We bill our
customers each month for the entire amount of the fees contractually due based
on previous months membership, which always includes the amount, if any, that
may be at risk due to retroactive member terminations or a shortfall in
performance. We adjust or defer revenue for contracts where we believe
performance is short of contractual obligations, possibly resulting in a refund
of fees or where fees generated may be subject to further retroactive adjustment
associated with a contract or plan's decision to completely terminate its
coverage in a geographic market as well as general membership changes. For
example, general terminations can be due to a member's death, member change of
health plan, etc. We recognize revenue, in accordance with SEC Staff Accounting
Bulletins No. 101 and No. 104, as follows: 1.) we recognize the fixed portion of
our monthly fee as revenue during the period we perform the services; 2.) we
recognize the performance - based portion of the monthly fees based on
indicators of performance to date in the contract year; and 3.) we recognize
previously recorded deferred revenue upon final settlement of the contract
measurement year. Adjustments for shortfalls in performance targets under the
terms of the contracts or other factors affecting revenue recognition are
accrued on an estimated basis in the period the services are provided and are
adjusted in future periods when final settlement is determined. We assess our
estimates by analyzing various information including but not limited to medical
claims data, prior performance under the contract and review of physician and
patient participation levels. We review these estimates periodically and make
adjustments, as interim information is available.

We determine our level of performance at interim periods based on medical claims
data, achievement of physician and patient participation levels, or other data
supplied by the health plan. In the event these interim performance measures
indicate that performance targets are not being met or that there is
insufficient information available, fees, which could be subject to refund, are
not recorded as revenue but rather are recorded as a current liability entitled
"contract billings in excess of revenues." Under performance based arrangements,
the ability to make estimates at interim periods can be challenging due to the
inherent nature of the medical claims process and the lag time associated with
it. In most cases, complete paid claims data is not available until up to six
months after claims are incurred. Although interim data measurements are
indicative of performance objectives, actual results could differ from our
estimates.

The settlement process under a contract, which includes the settlement of any
performance-based fees and involves reconciliation of health-care claims and
clinical data, is generally not completed until after the end of the contract
year. Data reconciliation differences between the Company and the customer can
arise due to health plan data deficiencies, omissions and/or data discrepancies,
for which the Company negotiates with the customer until agreement is reached
with respect to identified issues.

                                       22
<PAGE>

During the three months ended May 31, 2006, approximately 54% of disease
management services were derived from one customer. During the six months ended
May 31, 2006, approximately 67% of disease management services were derived from
three customers that each comprised more than 10% of the Company's revenue. As
of May 31, 2005, approximately 65.0% of disease management services were derived
from these three health plans.

Premiums

For its SNP plan, the Company records revenue from health care premiums received
in the month that enrollees are entitled to coverage.

Managed Care Services

The Company also entered into an agreement with DAKOTACARE, a large health
maintenance organization, to administer the SNP in South Dakota. In accordance
with the agreement, the Company records revenue on a monthly basis as services
are rendered.

Impairment of Intangible Assets

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company is required to review intangible assets for impairment on an annual
basis or more frequently whenever events or circumstances indicate that the
carrying value may not be recoverable.

The Company amortizes other identifiable intangible assets, such as acquired
technologies, customer contracts, and other intangibles, on the straight-line
method over their estimated useful lives, except for trade names, which have an
indefinite life and are not subject to amortization. The Company reviews
intangible assets not subject to amortization on an annual basis or more
frequently whenever events or circumstances indicate that the assets might be
impaired. The Company also assesses the potential impairment of intangible
assets subject to amortization whenever events or changes in circumstances
indicate that the carrying values may not be recoverable.

If the Company determines that the carrying value of other identifiable
intangible assets may not be recoverable, the Company calculates any impairment
using an estimate of the asset's fair value based on the projected net cash
flows expected to result from that asset, including eventual disposition.

Future events could cause the Company to conclude that impairment indicators
exist and that acquired intangible assets are impaired. Any resulting impairment
loss could have a material adverse impact on our financial condition and results
of operations.

Share-Based Compensation

On December 1, 2005, we adopted SFAS No. 123(R), which requires the measurement
and recognition of compensation expense for all share-based payment awards based
on estimated fair values at the date of grant. Determining the fair value of
share-based awards at the grant date requires judgment in developing
assumptions, which involve a number of variables. These variables include, but
are not limited to, the expected stock price volatility over the term of the
awards, and expected stock option exercise behavior. In addition, we also use
judgment in estimating the number of share-based awards that are expected to be
forfeited.

                                       23
<PAGE>

Results of Operations

The following table presents the percentage of total revenues for the periods
indicated and changes from period to period of certain items included in our
Condensed Consolidated Statements of Operations.
<TABLE>
<CAPTION>
                                                                                             For the           For the
                                                                                              Three              Six
                              For the Three Months Ended         For the Six Months           Months            Months
                                        May 31,                     Ended May 31,           Ended May 31,    Ended May 31,
                              ----------------------------    --------------------------    -------------    -------------
                                                                                              2006 vs.         2006 vs.
                                 2006             2005           2006           2005            2005             2005
                              ------------     -----------    -----------    -----------    -------------    -------------
<S>                             <C>              <C>           <C>            <C>             <C>               <C>
Revenue                         100.0  %         100.0  %      100.0  %       100.0  %        (64.8)  %         (50.0) %
Cost of revenue                  87.5             33.9          70.1           35.9            (9.2)             (2.5)
                              ---------        -------        --------       --------
Gross Profit                     12.5             66.1          29.9           64.1           (93.3)            (76.7)
Selling general and
  administrative                187.3             38.3         138.6           37.1            72.0              86.6

Research and development         22.4              5.7          17.3            5.6            39.5              52.9
                              ---------        -------        --------       --------

(Loss) income from
  operations                   (197.2)            22.1        (126.0)          21.4          (412.8)           (395.2)

Interest expense                 (0.3)            (0.1)         (0.2)          (0.1)          (30.0)            (23.3)
Interest income, net              9.9              1.5           7.4            1.2           136.3             209.5

Loss on operations of joint
  venture                        (1.0)            (7.1)         (0.8)          (4.6)          (95.2)            (91.6)
Other income                     23.4              *             8.8            *               *                 *
                              ---------        -------        --------       --------

(Loss) income before tax
  benefit (provision)          (165.1)            16.4        (110.8)          17.9          (453.0)           (408.8)
Income tax (provision)
  benefit                        (0.1)            (0.5)          0.9           (0.8)            *                 *
                              ---------        -------        --------       --------
Net (loss) income              (165.2)            15.9        (109.9)          17.1          (464.6)           (421.2)
                              =========        =======        ========       ========
</TABLE>
* Not meaningful

                                       24
<PAGE>

Three Months Ended May 31, 2006 Compared to Three Months Ended May 31, 2005

Revenue for the three months ended May 31, 2006 decreased approximately $3.5
million or 64.8% as compared to the three months ended May 31, 2005. This
decrease is attributable to (i) a decrease of approximately $3.5 million in
revenue related to the expiration of four contracts that were not renewed; (ii)
a decrease of approximately $159,000 of revenue related to a reduction in health
plan membership and/or fees associated with existing contracts; and (iii) a
decrease of approximately $234,000 related to the deferred revenue that was
recognized under contract with SummaCare in the second quarter of 2005. These
decreases were offset by (i) an increase in revenue of approximately $82,000
related to increasing enrollment in three existing contracts and the
commencement of a new contract during the first quarter of fiscal 2006; and (ii)
the recognition of approximately $313,000 of premium and service revenues from
the commencement of the operations of DAKOTACARE'S HeartLine Plus Special Needs
Plan (SNP) on January 1, 2006.

Gross profit margins for the three months ended May 31, 2006 decreased to 12.5%
from 66.1% for the three months ended May 31, 2006. This decrease is related to
(i) a decrease in revenue of approximately $3.5 million attributable to the
expiration of four contracts that were not renewed; (ii) approximately $142,000
related to the outsourcing of certain call center services for our disease
management programs; (iii) the increase of approximately $61,000 in compensation
costs associated with the adoption of SFAS No. 123(R) "Share Based Payments";
and (iv) an increase of approximately $267,000 related to the medical claims
associated with SNP since the commencement of operations on January 1, 2006. The
decrease in gross profit margins was offset by an increase of approximately
$641,000 of labor and related cost reductions associated with the reduction in
workforce and operating costs related to the recent loss of contracts and in
efficiencies related to enhancements in our programs.

Selling, general and administrative expenses for the three months ended May 31,
2006 increased by approximately $1.5 million over the three months ended May 31,
2005. The increase was attributable to (i) an increase of approximately $374,000
in salaries related to two new executives and additional new hires for the
operations of QMedCare, Inc. and Forward Health, Inc.; (ii) an increase of
approximately $42,000 in travel and entertainment expenses related to
development and/or launch activities associated with the SNP and Forward Health,
Inc.; (iii) an increase of approximately $409,000 in compensation costs
associated with the adoption of SFAS No. 123(R) "Share Based Payments"; (iv) an
increase of approximately $73,000 in recruitment costs associated with new
hires; (v) an increase of approximately $244,000 in marketing and advertising
expenses primarily related to the SNP and Forward Health, Inc.; (vi) an increase
of approximately $198,000 of legal fees related to general corporate matters;
(vii) an increase of approximately $119,000 associated with the operations of
the SNP for costs related to claims processing, broker commissions, registration
services and office space; (viii) an increase in depreciation and amortization
of approximately $48,000 attributable to the intangibles associated with the
acquisition of Health E Monitoring in the second quarter of fiscal year 2005 and
DMT in the fourth quarter of 2006; and (ix) an increase of approximately $83,000
in actuarial services primarily attributable to the SNP projects. These
increases were offset by a decrease of approximately $47,000 in fees for
accounting services related to compliance with the Sarbanes Oxley Act and a
decrease of approximately $80,000 in consulting fees which primarily related to
the filing of the CMS application for the SNP Project in South Dakota in the
second quarter of 2005. Included within selling, general and administrative
expenses for the three months ended May 31, 2006 was approximately $872,000 of
costs incurred related to the Managed Care Segment, of which $257,000 was
related to the implementation costs of the SNP project in New Jersey and the
remaining costs related to the implementation and operation of the SNP in South
Dakota. Additionally, approximately $555,000 of costs recorded during the second
quarter of 2006 (of which $459,000 was included within selling, general and
administrative expenses) were incurred as implementation costs of Forward Health
Inc. We anticipate recording revenue from Forward Health, Inc. in the third
quarter of fiscal year 2006. We expect to continue to incur implementation costs
for both QMedCare Inc. and Forward Health, Inc. during fiscal year 2006 and
anticipate these costs to increase until product launch.

Research and development expenses for the three months ended May 31, 2006
increased approximately $122,000 or 39.5% over the three months ended May 31,
2005. Our accounting policy is to capitalize certain software development costs
during development and amortize them upon implementation. Subsequent to
implementation any further costs (i.e. maintenance costs) are expensed as
incurred. The increase in expenses is primarily attributable to (i) an increase
of approximately $65,000 in salaries and related costs associated with new
hires; (ii) an increase of approximately $22,000 in recruitment and consulting
costs; and (iii) approximately $34,000 in compensation costs associated with the
adoption of SFAS No. 123(R) "Share Based Payments." During the three months
ended May 31, 2006, there was an increase of approximately $189,000 in
capitalization of costs, which include salaries and consultant fees, incurred
for development as compared to the three months ended May 31, 2005. We continue
to focus our efforts on the development of new, advanced software programs to

                                       25
<PAGE>

assist in the identification and evaluation of patients who are at risk for
developing various disease conditions. These programs incorporate state of the
art telecommunications, data management, and security and information
technology. Certain costs associated with the development of new product
software to be incorporated into our disease management programs are capitalized
and amortized over a two to five year useful life. We intend to continue to
improve and expand the capabilities of all of our technologies.

Interest income for the three months ended was approximately $189,000 as
compared to $80,000 for the three months ended May 31, 2005. This increase is
attributable to the investment of the funds that were generated by the private
placements in the first six months of fiscal year 2005 along with the cash
generated from operations in fiscal 2005.

Loss on operations of joint ventures for the three months ended May 31, 2006
decreased approximately $368,000 as compared to the three months ended May 31,
2005. The decrease is primarily attributable to reduction in costs incurred
associated with the settlement with The Regence Group and Centre Insurance in
fiscal 2005 and the dissolution of the respective joint venture in December
2005. The decrease in costs was offset by costs related to a joint venture
entered into with two partners to provide services under a disease management
contract in Minnesota.

Other income for the three months ended May 31, 2006 increased approximately
$449,000 as compared to the three months ended May 31, 2005. The increase was
attributable to the sale of a patent for $450,000 to a third party in May 2006.

Six Months Ended May 31, 2006 Compared to Six Months Ended May 31, 2005

Revenue for the six months ended May 31, 2006 decreased approximately $5.1
million or 50.0% as compared to the six months ended May 31, 2005. This decrease
is attributable to (i) a decrease of approximately $5.1 million in revenue
related to the expiration of four contracts that were not renewed; (ii) a
decrease of approximately $291,000 of revenue related to a reduction in health
plan membership and/or fees associated with existing contracts; and (iii) a
decrease of approximately $234,000 related to the deferred revenue that was
recognized under contract with SummaCare in the second quarter of 2005. These
decreases were offset by (i) an increase in revenue of approximately $127,000
related to increasing enrollment in three existing contracts and the
commencement of a new contract during the first quarter of fiscal 2006; and (ii)
the recognition of approximately $438,000 of premium and service revenues from
the commencement of the operations of DAKOTACARE'S HeartLine Plus Special Needs
Plan (SNP) on January 1, 2006.

Gross profit margins for the six months ended May 31, 2006 decreased to 29.9%
from 64.1% for the six months ended May 31, 2006. This decrease is related to
(i) a decrease in revenue of approximately $5.1 million attributable to the
expiration of four contracts that were not renewed; (ii) approximately $285,000
related to the outsourcing of certain call center services for our disease
management programs; (iii) the increase of approximately $130,000 in
compensation costs associated with the adoption of SFAS No. 123(R) "Share Based
Payments"; and (iv) an increase of approximately $371,000 related to the medical
claims associated with SNP since the commencement of operations on January 1,
2006. The decrease in gross profit margins was offset by an increase of
approximately $900,000 of labor and related cost reductions associated with the
reduction in workforce and operating costs related to the recent loss of
contracts and in efficiencies related to enhancements in our programs.

Selling, general and administrative expenses for the six months ended May 31,
2006 increased by approximately $3.3 million over the six months ended May 31,
2005. The increase was attributable to (i) an increase of approximately $734,000
in salaries related to two new executives and additional new hires for the
operations of QMedCare, Inc. and Forward Health, Inc.; (ii) an increase of
approximately $141,000 in travel and entertainment expenses related to
development and/or launch activities associated with the SNP and Forward Health,
Inc.; (iii) an increase of approximately $746,000 in compensation costs
associated with the adoption of SFAS No. 123(R) "Share Based Payments"; (iv) an
increase of approximately $699,000 in marketing and advertising expenses
primarily related to the SNP and Forward Health, Inc.; (v) an increase of
approximately $342,000 of legal fees related to general corporate matters; (vi)
an increase of approximately $212,000 associated with the operations of the SNP
for costs related to claims processing, broker commissions, registration
services and office space; (vii) an increase in depreciation and amortization of
approximately $106,000 attributable to the intangibles associated with the
acquisition of Health E Monitoring in the second quarter of fiscal year 2005 and
DMT in the fourth quarter of 2006; and (viii) an increase of approximately
$83,000 in actuarial services primarily attributable to the SNP projects.
Included within selling, general and administrative expenses for the six months
ended May 31, 2006 was approximately $1,815,000 of costs incurred related to the
Managed Care Segment, of which $361,000 was related to the implementation costs
of the SNP project in New Jersey and the remaining costs related to the
implementation and operation of the SNP in South Dakota. Additionally,
approximately $1,053,000 of costs recorded during the first six months of 2006
(of which $834,000 was included within selling, general and administrative

                                       26
<PAGE>

expenses) were incurred as implementation costs of Forward Health Inc. We
anticipate recording revenue from Forward Health, Inc. in the third quarter of
fiscal year 2006. We expect to continue to incur implementation costs for both
QMedCare Inc. and Forward Health, Inc. during fiscal year 2006 and anticipate
these costs to increase until product launch.

Research and development expenses for the six months ended May 31, 2006
increased approximately $305,000 or 52.9% over the six months ended May 31,
2005. Our accounting policy is to capitalize certain software development costs
during development and amortize them upon implementation. Subsequent to
implementation any further costs (i.e. maintenance costs) are expensed as
incurred. The increase in expenses is primarily attributable to (i) an increase
of approximately $210,000 in salaries and related costs associated with new
hires; (ii) an increase of approximately $24,000 in travel and entertainment
expenses; and (iii) approximately $71,000 in compensation costs associated with
the adoption of SFAS No. 123(R) "Share Based Payments." During the six months
ended May 31, 2006 there was an increase of approximately $346,000 in
capitalization of costs, which include salaries and consultant fees, incurred
for development as compared to the six months ended May 31, 2005. We continue to
focus our efforts on the development of new, advanced software programs to
assist in the identification and evaluation of patients who are at risk for
developing various disease conditions. These programs incorporate state of the
art telecommunications, data management, and security and information
technology. Certain costs associated with the development of new product
software to be incorporated into our disease management programs are capitalized
and amortized over a two to five year useful life. We intend to continue to
improve and expand the capabilities of all of our technologies.

Interest income for the six months ended was approximately $375,000 as compared
to $121,000 for the six months ended May 31, 2005. This increase is attributable
to the investment of the funds that were generated by the private placements in
the first six months of fiscal year 2005 along with the cash generated from
operations in fiscal 2005.

Loss on operations of joint ventures for the six months ended May 31, 2006
decreased approximately $419,000 as compared to the six months ended May 31,
2005. The decrease is primarily attributable to reduction in costs incurred
associated with the settlement with The Regence Group and Centre Insurance in
fiscal 2005 and the dissolution of the respective joint venture in December
2005. The decrease in costs was offset by costs related to a joint venture
entered into with two partners to provide services under a disease management
contract in Minnesota.

Other income for the six months ended May 31, 2006 increased approximately
$447,000 as compared to the six months ended May 31, 2005. The increase was
attributable to the sale of a patent for $450,000 to a third party in May 2006.

Liquidity and Capital Resources

To date, our principal sources of working capital have been the proceeds from
public and private placements of securities. We had working capital of
approximately $18.5 million at May 31, 2006 compared to approximately $23.9
million at November 30, 2005 and ratios of current assets to current liabilities
of 6.6:1 as of May 31, 2006 and 8.2:1 as of November 30, 2005. The working
capital decrease of approximately $5.4 million was primarily due to the net loss
of approximately $5.6 million resulting in cash used in operations of
approximately $2.2 million. In September 2001, we entered into a $1,000,000 line
of credit agreement with Wachovia Bank, National Association. The agreement is
collateralized by securities owned by the Company and expires on September 1,
2006. Outstanding balances under the loan bear interest at an annual rate equal
to the lower of the bank's reference rate minus 1% or LIBOR plus 1.5%. As of May
31, 2006, no funds had been drawn and the entire $1,000,000 continued to be
available under this credit line. In December 2005, the Company established a
$250,000 letter of credit with Wachovia Bank, N.A. to establish the capital
required by regulation for the Company's captive insurance company in South
Carolina.

On May 18, 2006 the Company received approval of their application to obtain a
license to operate as a Health Maintenance Organization within the state of New
Jersey from the Department of Banking and Insurance. In accordance with
statutory requirements, the Company was required to establish a statutory
reserve and must maintain a minimum net worth requirement. Accordingly, the
Company deposited funds deposited approximately $456,000 in the statutory
reserve account and made a capital contribution of $2.5 million to QmedCare of
New Jersey in June 2006.

We anticipate that we will expend cash to fund our current operations, fund our
continuing implementation costs associated with our managed care and wellness
segments, and for establishing and maintaining certain levels of capital
reserves as required by regulatory agencies in connection with the operations of
our insurance subsidiary.

                                       27
<PAGE>

Although we expect to incur these expenditures, we believe that our cash and
investments, and availability under our credit line will be sufficient to fund
our current level of growth and our existing and anticipated commitments.
However, to the extent the expansion of our operations requires significant
additional resources or certain forms of financial guarantees to assure our
performance under the terms of new health plan contracts or to file for approval
and implement additional SNP's, we may be required to seek additional financing.
No assurance can be given that such financing would be available on terms that
would be acceptable to us.

Material Commitments

The following schedule summarizes our contractual cost obligation as of May 31,
2006 in the periods indicated.
<TABLE>
<CAPTION>
              Contractual
              Obligations                                       Payments Due by Period
---------------------------------------- -----------------------------------------------------------------------------
                                             Total      Less than 1 year    1-3 years      4-5 years    After 5 years
---------------------------------------- -------------- ----------------- --------------- ------------- --------------
<S>                                      <C>            <C>               <C>             <C>           <C>
Long-Term Debt                           $          -   $          -      $         -     $          -  $          -
Capital Lease Obligations                     158,000        128,000           30,000                -             -
Operating Leases                            1,206,000        648,000          529,000           29,000             -
Unconditional Purchase Obligations            286,000        286,000                -                -             -
Other Long-Term Obligations                   963,000        903,000           60,000                -             -
Total Contractual Cash Obligations       $  2,613,000   $  1,965,000      $   619,000     $     29,000  $          -
---------------------------------------- -------------- ----------------- --------------- ------------- --------------
</TABLE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk for changes in interest rates relates primarily to
the market-driven increase or decrease in interest rates, and the impact of
those changes on the Company's ability to realize a return on invested or
available funds. We ensure the safety and preservation of our invested principal
funds by limiting default risk, market risk and reinvestment risk. We mitigate
default risk by investing in short term high-credit investment grade securities.

Item 4. Evaluation of Disclosure Controls and Procedure

We have established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify the Company's financial reports and to
other members of senior management and the Board of Directors.

Based on their evaluation as of May 31, 2006, the principal executive officer
and principal financial officer of the Company have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) are effective to ensure that the
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.

                                       28
<PAGE>

Part II. Other Information

     Item 1.      Legal Proceedings

                  Alere
                  -----
                  On November 21, 2005, the Company brought an arbitration
                  proceeding against Alere Medical Incorporated ("Alere"),
                  seeking damages of approximately $17,000,000, on allegations
                  that Alere materially misled and misrepresented to the
                  Company, its intentions to enter into long-term agreements
                  with the Company for the provision of disease management
                  services. The Company alleges that, in reliance on Alere's
                  misrepresentations, the Company agreed to continue to provide
                  services to the six PacifiCare Health Systems, Inc.
                  ("PacifiCare") plans, on a short term basis, and as a
                  subcontractor to Alere, after the termination of its direct
                  contracts with PacifiCare, and further agreed to give Alere a
                  discounted price during the interim periods. The Company
                  asserts that Alere acted improperly and misleadingly by
                  misrepresenting its intentions with regard to agreeing to a
                  long-term contract between the parties, and that the Company,
                  inter alia, was damaged thereby.

                  In the arbitration, Alere counterclaimed, asserting that,
                  under a seventh agreement between the parties, there was no
                  obligation to enter into a long term agreement, and thus,
                  claims Alere, the Company's claims are not well founded and
                  Alere is allegedly entitled to damages for breach of the duty
                  of good faith and fair dealing, as well as its attorneys'
                  fees. Alere also filed a lawsuit in state court, in the Second
                  Judicial District Court of Nevada, Washoe County, seeking
                  essentially the same relief. Damages were sought by Alere in
                  an unspecified amount stated to be in excess of $40,000. The
                  Company removed Alere's State Court action to the United
                  States District Court for the District of Nevada, where it is
                  now pending under case number 3:06-CV-00062. The Company
                  denied the material allegations of Alere's complaint, and
                  asserted counterclaims under the seventh agreement. In its
                  counterclaims, the Company alleges: that the seventh agreement
                  on which Alere brought suit, deals with several issues,
                  including the HeartPartners CMS Demonstration Project; that
                  Alere was one of the partners and participants in the
                  HeartPartners project, and that Alere had fiduciary duties to
                  the Company in connection with that project; and that, under
                  the seventh agreement on which Alere sued in this case, Alere
                  also assumed certain rights and obligations of PacifiCare in
                  connection with the QMed/HeartPartners Services Agreement. The
                  Company alleged that Alere failed to live up to its
                  obligations to the HeartPartners, by failing to enroll
                  participants, and by failing, inter alia, to devote adequate
                  resources to HeartPartners. The Company alleges that Alere's
                  failures were a cause of the cancellation of the project, and
                  seeks damages from Alere in the sum of $3.5 Million.
                  Additional counterclaims are also alleged by the Company
                  against Alere, on claims of breach of fiduciary duty, and
                  based on allegations that Alere assumed PacifiCare's
                  obligations to pay the Company for certain services, but that
                  Alere had failed to make full payment. Unspecified damages of
                  not less than $115,225 are claimed on this group of
                  counterclaims. Alere has replied and denied the material
                  allegations of the counterclaims and asserted certain
                  defenses. Discovery will soon commence. At this stage,
                  management is unable to predict the outcome of this matter.

                  HCF/Gallagher
                  -------------
                  On January 30, 2006, the Company filed an action against
                  Healthcare First, a division of Gallagher Insurance Services,
                  Inc., and of Arthur J. Gallagher & Co. ("HCF"), seeking
                  recovery in the amount of approximately $3,700,000 against the
                  financial intermediary/broker involved in obtaining the
                  insurance policies from Centre Insurance, which were the
                  subject of the prior proceeding against Centre. This case is
                  pending in the Superior Court of New Jersey, Law Division,
                  Monmouth County. HCF has answered the complaint, denying all
                  material allegations thereof, and asserting certain
                  affirmative defenses. Discovery has begun between the parties
                  with extensive document production. Some depositions have been
                  noticed. At this stage, management is unable to predict the
                  outcome of this matter.

                  Other Claims
                  The Company is subject to claims and legal proceedings
                  covering a wide range of matters that arise in the ordinary
                  course of business. Although management of the Company cannot
                  predict the ultimate outcome of these legal proceedings with
                  certainty, it believes that their ultimate resolution,
                  including any additional amounts we may be required to pay
                  will not have a material effect on the financial statements.

                                       29
<PAGE>

         Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
                  (a) Non applicable
..                 (b) Non applicable
                  (c) None

         Item 3.  Defaults upon Senior Securities
                  None.

         Item 4.  Submission of Matters to a Vote of Security Holders
                  The following is a report of the voting results of the
                  Company's annual shareholders meeting held on April 28, 2006.

                  The proposal to elect nine directors, as described in the
                  Company's proxy statement for its annual meeting of
                  shareholders held on April 28, 2006, was approved. The
                  directors were elected until the next annual meeting of
                  shareholders or until their successors are duly elected and
                  qualified. The tabulation was as follows:

                       Director              Votes For        Withhold Authority

                    Michael W. Cox           15,565,143           786,422
                    Jane A. Murray           15,997,154           354,411
                    Bruce F. Wesson          15,564,410           787,155
                    David Feldman            16,295,858            55,707
                    Richard I. Levin         15,440,706           910,859
                    Lucia L. Quinn           16,296,458            55,107
                    John J. Gargana, Jr.     16,296,191            55,374
                    A. Bruce Campbell        16,296,691            54,874
                    John P. Zanotti          16,296,358            55,207

                  The proposal to ratify the appointment of Amper, Politziner &
                  Mattia, P.C. as the Company's independent auditors for the
                  fiscal year ending November 30, 2006 was approved. The
                  tabulation was as follows:

                      Votes For          Votes Against        Votes Abstain

                      16,269,840              17,900             63,825

                  The proposal to ratify the amendments to the Company's 1999
                  Equity Incentive Plan to increase the number of shares
                  reserved for issuance under such plan from 2,000,000 to
                  3,000,000 and to ensure compliance with Section 409A of the
                  Internal Revenue Code was approved. The tabulation was as
                  follows:

                      Votes For          Votes Against        Votes Abstain

                      8,185,084             1,135,027            100,077

         Item 5.  Other Information

                  (a) None
                  (b) There have been no material changes to the procedures by
                      which security holders may recommend nominees to the
                      Company's Board of Directors.

                                       30
<PAGE>

         Item 6.  Exhibits

                  (a) The following exhibits are filed as part of this report:

                  31.1     Certification of Chief Executive Officer of Periodic
                           Report pursuant to Rule 13a-14a and Rule 15d-14(a).


                  31.2     Certification of Chief Financial Officer of Periodic
                           Report pursuant to Rule 13a-14a and Rule 15d-14(a).

                  32.1     Certification of Chief Executive Officer and Chief
                           Financial Officer pursuant to 18 U.S.C. - Section
                           1350.

                                       31
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


July 5, 2006                                  QMed, Inc.


                                              By:  /s/ Michael W. Cox
                                                 -------------------------------
                                                 Michael W. Cox
                                                 President and Chief Executive
                                                 Officer


                                              By: /s/ William T. Schmitt, Jr.
                                                 -------------------------------
                                                 William T. Schmitt, Jr.
                                                 Senior Vice President, Chief
                                                 Financial Officer and Treasurer

                                       32