UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q (Mark One)  xQuarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  For the quarterly period ended: May 31, 2007 or
  oTransition 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. Employerincorporation 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. YesxNoo  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  Large accelerated fileroAccelerated filerxNon-accelerated filero  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesoNox  The number of shares of the registrants common stock outstanding on July 5, 2007: 17,046,198.     QMED, INC. AND SUBSIDIARIES FORM 10-Q  For the Quarter Ended May 31, 2007  INDEX  PagePart I.
        Financial InformationItem 1.
        Financial StatementsCondensed Consolidated Balance Sheets as of May 31, 2007 and November 30, 2006
        1Condensed Consolidated Statements of Operations for the Three and Six Months Ended
May 31, 2007 and 2006
        2Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended May 31, 2007 and 2006
        3Condensed Consolidated Statements of Stockholders Equity for the Six Months Ended May 31, 2007
        4Condensed Consolidated Statements of Cash Flows for the Six Months Ended May 31, 2007 and 2006
        5Notes to Condensed Consolidated Financial Statements
        6Item 2.
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        19Item 3.
        Quantitative and Qualitative Disclosures About Market Risk
        26Item 4.
        Controls and Procedures
        26Part II
        Other InformationItem 1.
        Legal Proceedings
        27Item 2.
        Unregistered Sales of Equity Securities and Use of Proceeds
        27Item 3.
        Defaults Upon Senior Securities
        27Item 4.
        Submission of Matters to a Vote of Security Holders
        27Item 5.
        Other Information
        28Item 6.
        Exhibits
        28SignatureCertifications
  i    Part I. Item 1. Financial Statements  QMED, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS  May 31, 2007
        
        November 30, 2006ASSETS
        
        (unaudited)Current assetsCash and cash equivalents
        $
        3,629,517
        $
        3,039,695Investments
        
        5,447,155
        
        10,867,815Accounts receivable, net of allowances of  $35,887 and $59,505, respectively
        
        2,596,799
        
        2,005,485Inventory, net of reserve
        
        14,967
        
        36,631Prepaid commissions
        
        459,681
        
        Prepaid expenses and other current assets
        
        757,867
        
        301,28212,905,986
        
        16,250,908Restricted cash and cash equivalents, non-current
        
        2,957,288
        
        705,881Property and equipment, net of accumulated depreciation
        
        856,405
        
        989,329Product software development costs, net
        
        2,113,721
        
        2,104,788Acquired intangibles, net
        
        504,126
        
        587,027Other assets
        
        144,838
        
        149,202Investment in joint ventures
        
        19,050
        
        23,703$
        19,501,414
        $
        20,810,838LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable and accrued expenses
        $
        2,081,966
        $
        2,827,223Medical claims payable
        
        2,717,312
        
        364,830Leases payable, current portion
        
        29,458
        
        65,881Accrued salaries and commissions
        
        449,187
        
        446,740Fees reimbursable to health plans
        
        14,990
        
        47,005Contract billings in excess of revenue
        
        1,564,667
        
        1,396,423Deferred warranty revenue
        
        9,700
        
        16,5836,867,280
        
        5,164,685Leases payable  long term
        
        
        
        11,645Accrued severance payable, long term
        
        317,863
        
        619,6437,185,143
        
        5,795,973Commitments and ContingenciesStockholders equity
Common stock $.001 par value; 40,000,000 shares authorized;
17,007,489 and 16,858,539 shares issued and 16,985,489 and
16,836,539 outstanding, respectively
        
        17,007
        
        16,859Paid-in capital
        
        54,600,015
        
        53,433,095Accumulated deficit
        
        (42,221,669)
        
        (38,354,696)Accumulated other comprehensive loss
Unrealized loss on securities available for sale
        
        (3,457)
        
        (4,768)12,391,896
        
        15,090,490Less treasury stock at cost, 22,000 common shares
        
        (75,625)
        
        (75,625)Total stockholders equity
        
        12,316,271
        
        15,014,865$
        19,501,414
        $
        20,810,838
  See Accompanying Notes to Condensed Consolidated Financial Statements  1     QMED, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)  For the Three
Months Ended
May 31, 2007
        For the Three
Months Ended
May 31, 2006
        For the Six
Months Ended
May 31, 2007
        For the Six
Months Ended
May 31, 2006Revenue
        $
        9,451,323
        $
        1,921,695
        $
        15,793,121
        $
        5,104,318Cost of revenue
        
        8,240,565
        
        1,680,566
        
        13,310,781
        
        3,579,455Gross profit
        
        1,210,758
        
        241,129
        
        2,482,340
        
        1,524,863Selling, general and
administrative expenses
        
        4,038,774
        
        3,599,776
        
        8,045,628
        
        7,073,864Research and development expenses
        
        521,260
        
        430,698
        
        949,055
        
        882,030Loss from operations
        
        (3,349,276)
        
        (3,789,345)
        
        (6,512,343)
        
        (6,431,031)Interest expense
        
        (6,962)
        
        (4,960)
        
        (14,941)
        
        (10,809)Interest income
        
        159,481
        
        189,359
        
        321,375
        
        375,319Loss in operations of
joint ventures
        
        (6,827)
        
        (18,678)
        
        (24,973)
        
        (38,438)Other income
        
        400,000
        
        450,000
        
        2,375,400
        
        450,000Loss before income tax
Provision
        
        (2,803,584)
        
        (3,173,624)
        
        (3,855,482)
        
        (5,654,959)(Provision) benefit for income taxes
        
        (5,613)
        
        (1,725)
        
        (11,491)
        
        47,414Net loss
        $
        (2,809,197)
        $
        (3,175,349)
        $
        (3,866,973)
        $
        (5,607,545)Basic and diluted loss per shareWeighted average shares outstanding
        
        16,978,568
        
        16,802,768
        
        16,935,840
        
        16,794,636Basic and diluted loss per share
        $
        (0.17)
        $
        (0.19)
        $
        (0.23)
        $
        (0.33)
   See Accompanying Notes to Condensed Consolidated Financial Statements  2     QMED, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)  For the Three
Months Ended
May 31, 2007
        For the Three
Months Ended
May 31, 2006
        For the Six
Months Ended
May 31, 2007
        For the Six
Months Ended
May 31, 2006Net loss
        $
        (2,809,197)
        $
        (3,175,349)
        $
        (3,866,973)
        $
        (5,607,545)Other comprehensive incomeUnrealized gain on securities
available for sale
        
        536
        
        9,106
        
        1,311
        
        18,161Comprehensive loss
        $
        (2,808,661)
        $
        (3,166,243)
        $
        (3,865,662)
        $
        (5,589,384)
    See Accompanying Notes to Condensed Consolidated Financial Statements 3    QMED, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY For the Six Months Ended May 31, 2007 (Unaudited)  Common Stock
     
     Paid-in
     
     Accumulated
     
     Accumulated Other
Comprehensive
     
     Common Stock Held in TreasuryShares
     
     Amount
     
     Capital
     
     Deficit
     
     Loss
     
     Shares
     
     Amount
     
     TotalBalance  November 30, 2006
     
     
     16,858,539
        
     $16,859
        
     $53,433,095
        
     $(38,354,696
        )
     $(4,768
        )
     22,000
        
     $(75,625
        )
     $15,014,865Exercise of stock options andWarrants
     137,941
        
     137
        
     381,867
        
     
        
     
        
     
        
     
        
     382,004Issuance in connection withthe Directors Equity Plan
     11,009
        
     11
        
     47,927
        
     
        
     
        
     
        
     
        
     47,938Share-based employeecompensation expense
     
        
     
        
     737,126
        
     
        
     
        
     
        
     
        
     737,126Net loss for the six monthsended May 31, 2007
     
        
     
        
     
        
     (3,866,973
        )
     
        
     
        
     
        
     (3,866,973
        )Change in unrealized holdinggains on securities availablefor sale
     
        
     
        
     
        
     
        
     1,311
        
     
        
     
        
     1,311Balance  May 31, 2007
     17,007,489
        
     $17,007
        
     $54,600,015
        
     $(42,221,669
        )
     $(3,457
        )
     22,000
        
     $(75,625
        )
     $12,316,271   See Accompanying Notes to Condensed Consolidated Financial Statements  4    QMED, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)  For the Six
Months Ended
May 31, 2007
        For the Six
Months Ended
May 31, 2006Cash flows from operating activities:Net loss
        $
        (3,866,973)
        $
        (5,607,545)Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Loss in operations of joint ventures
        
        24,973
        
        38,438Depreciation and amortization
        
        581,509
        
        375,716Provision for loss on accounts receivable
        
        20,190
        
        4,464Provision for slow-moving inventory
        
        11,859
        
        Stock compensation expense
        
        47,938
        
        27,738Share-based employee compensation expense
        
        737,126
        
        946,628Amortization of non-employee stock options
        
        
        
        55,375Amortization of bond discounts and premiums
        
        518
        
        (45,549)(Increase) decrease inAccounts Receivable
        
        (611,504)
        
        1,427,620Inventory
        
        9,805
        
        1,230Prepaid expenses and other current assets
        
        (916,266)
        
        131,690Increase (decrease) inAccounts payable and accrued liabilities
        
        (1,076,605)
        
        (170,161)Medical claims payable
        
        2,352,482
        
        123,862Contract billings in excess of revenues and deferred revenue
        
        161,361
        
        560,080Other, net
        
        
        
        (73,645)Total adjustments
        
        1,343,386
        
        3,403,486Net cash used in operating activities
        
        (2,523,587)
        
        (2,204,059)Cash flows from investing activities:Proceeds from sale of securities available for sale
        
        5,588,996
        
        5,260,001Purchases of securities available for sale
        
        (167,543)
        
        (481,507)Increase in restricted cash and cash equivalents  long term
        
        (2,251,407)
        
        (705,881)Capital expenditures
        
        (62,633)
        
        (97,137)Product software development expenditures
        
        (307,621)
        
        (491,818)Investment in joint venture
        
        (20,319)
        
        (60,005)Net cash provided by investing activities
        
        2,779,473
        
        3,423,653Cash flows from financing activities:Payments for capital leases
        
        (48,068)
        
        (73,031)Proceeds from exercise of stock options
        
        382,004
        
        111,819Net cash provided by financing activities
        
        333,936
        
        38,788Net increase in cash and cash equivalents
        
        589,822
        
        1,258,382Cash and cash equivalents at beginning of period
        
        3,039,695
        
        4,051,046Cash and cash equivalents at end of period
        $
        3,629,517
        $
        5,309,428Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
        $
        5,449
        $
        10,809Income taxes
        
        12,389
        
        89,655
   See Accompanying Notes to Condensed Consolidated Financial Statements  5     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, 2007 are not necessarily indicative of the results that may be expected for the current fiscal year ending November 30, 2007. 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; QMedCare of New Jersey, Inc., and Positive Directions, Inc. (formerly Forward Health, Inc.). 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, 2006.  Note 2 Revenue Recognition Managed Care Services  The Companys captive insurance company, LakeShore Captive Insurance Company, entered into an agreement whereby the captive insurance company assumes 100% of the risk associated with the operations of a Special Needs Plan (SNP) in South Dakota. In addition, on January 1, 2007, QMedCare of New Jersey commenced operations of its SNP in New Jersey. The SNPs offer 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 captured by claims data from the prior year. 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 paid (IBNP), classified
as medical claims payable on the condensed consolidated balance sheet. The Companys estimates are initially based upon an independent actuarial model of expected costs. This model included factors such as age, gender and demographics. As the plan matures, the Company will develop these estimates using standard actuarial methods which may 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 IBNP 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. Revenue for the Managed Care segment totaled approximately $8,233,000 and $313,000 for the three months ended May 31, 2007 and 2006, respectively. Revenue for the Managed Care segment totaled approximately $12,824,000 and $438,000 for the six months ended May 31, 2007 and 2006, respectively. For the three and six months ended May 31, 2007, revenue derived from this segment was approximately 87% and 81% of total revenue, respectively.  Generally, pharmacy benefits under Medicare Advantage (MA) plans (collectively referred to as Part D plans) may vary in terms of coverage levels and out-of-pocket costs for beneficiary premiums, deductibles and co-insurance. However, all Part D plans must offer either standard coverage or its actuarial equivalent (with out-of-pocket threshold and deductible amounts that do not exceed those of standard coverage). These defined standard benefits represent the minimum level of benefits mandated by Congress. In addition to defined standard plans, the Company offers prescription drug plans containing benefits in excess of the standard coverage limits as part of the monthly premium.  The monthly payment for Part D received from the Centers for Medicare and Medicaid Services, or CMS, generally represents the Companys actuarially certified bid amount for providing prescription drug insurance coverage. However, our CMS payment is subject to 1) plan liability risk corridors and 2) low income cost sharing in order for the Company  6     QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Note 2 Revenue Recognition  (continued) Managed Care Services  (continued)  and CMS to share the risk associated with financing the ultimate costs of our Part D benefit. Since the Company participates in the Flexible Capitation Reinsurance Demonstrations, there will not be reconciliation items for the Federal
Reinsurance component of the Part D Reconciliation.  The amount of revenue payable to a plan by CMS is subject to adjustment, positive or negative, based upon the application of risk corridors that compare a plans revenue targeted in their bids (target amount) to actual prescription drug costs. Variances exceeding certain thresholds may result in CMS making additional payments to the Company or
require the Company to refund to CMS a portion of the premiums received. Actual prescription drug costs subject to risk sharing with CMS are limited to the costs that are, or would have been, incurred under the CMS defined standard benefit plan (allowable risk corridor costs). Included in the medical claims payable is an estimate of this adjustment totaling approximately $51,000.  The Company recognizes pharmacy benefit costs as incurred. The Company has subcontracted the pharmacy claims administration to a third party pharmacy benefit manager.  The Company also entered into a services agreement with DAKOTACARE, a large health maintenance organization, to administer the SNP in South Dakota and New Jersey. In accordance with the agreement, the Company records revenue on a monthly basis as services are rendered.  Broker commissions related to the SNPs are paid at the time of enrollment and amortized on a straight-line basis over twelve months beginning with the effective date of coverage. Commissions are adjusted for subsequent disenrollments during the period. As a result, the unamortized balance of the commission payments are classified as prepaid on the balance sheet.  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 for a small portion of the Companys fees may be performance-based. The Company bills its customers each month for the entire amount of the fees contractually due based on previous months 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. 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.  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, 2007, based on information and data available, the Company has deferred approximately $1,565,000 of revenue, which may be subject to refund. This deferral has been reflected as contract billings in excess of revenues on the balance sheet.  7      QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  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 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 reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.  Note 5  Investments in Securities  Investment in securities treated as available-for-sale as of May 31, 2007 and November 30, 2006 were as follows:  2007
        
        Cost
        
        Market Value
        
        Unrealized Gain (Loss)Corporate debt securities
        $
        5,450,612
        $
        5,447,155
        $
        (3,457)
  2006
        
        Cost
        
        Market Value
        
        Unrealized Gain (Loss)Corporate debt securities
        $
        10,872,583
        $
        10,867,815
        $
        (4,768)
  Note 6 Accounts Receivable  Accounts receivable primarily represent fees and insurance premiums receivable that are contractually due in the ordinary course of providing a service, net of contractual adjustments and the allowance for doubtful accounts.  8     QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  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:  May 31, 2007 (Unaudited)
        
        November 30, 2006Raw materials (component parts)
        $
        115,812
        $
        114,225Finished units
        
        22,074
        
        33,466Total inventory
        $
        137,886
        $
        147,691Reserve for slow moving inventory
        
        (122,919)
        
        (111,060)Net inventory
        $
        14,967
        $
        36,631
  Note 8 Product Software Development Costs  During the three months ended May 31, 2007 and 2006, the Company capitalized approximately $83,000 and $294,000, respectively, in product software development costs. During the six months ended May 31, 2007 and 2006, the Company capitalized approximately $308,000 and $492,000, respectively. These costs are being amortized over a two to five-year useful life.  During the three months ended May 31, 2007 and 2006, amortization expense related to product software development costs was approximately $158,000 and $55,000, respectively. During the three months ended May 31, 2007 and 2006 amortization expense related to product software development costs was approximately $299,000 and $99,000, respectively. Accumulated amortization was $1,200,072 and $714,768 at May 31, 2007 and 2006, respectively. Estimated amortization expense is $316,000 for the remainder of fiscal year 2007, $591,000 for fiscal year 2008, $556,000 for fiscal year 2009, $363,000 for fiscal year 2010, $257,000 for fiscal year 2011 and $31,000 thereafter.  Note 9 Restricted Cash and Cash Equivalents  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, 2007. These funds were classified as noncurrent assets as the cash was not available for current operations and the Company had intent on extending the letter of credit at the time of expiration. In May 2007, the letter of credit was released by the State of South Carolina and accordingly, the funds are classified as current assets as the cash is available for current operations. The funds are currently invested in a money market account.  In May 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 an administrative reserve in the amount of approximately $456,000. These funds are classified as noncurrent assets as the cash is not available for current operations. The funds are currently invested in certificates of deposit.  In December 2006, the Company funded an additional $2.5 million representing an insolvency reserve established for QMedCare of New Jersey, Inc. as required by the State of New Jersey Department of Banking and Insurance. These funds are classified as noncurrent assets as the cash is not available for current operations. The funds are held in trust currently invested in certificates of deposit.  9      QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Note 10 Acquired Intangibles  In April 2005, the Company acquired all of the outstanding common stock of Positive Directions, Inc. (formerly Forward Health, Inc.). Positive Directions had developed a 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. The targets for 2006 were not achieved and as a result, the Company has no obligation to release these shares. Pursuant to FAS No. 141 the direct costs to acquire Positive Directions 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 Positive Directions existing 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. The targets for 2006 were not achieved and as a result, the Company has no obligation to release these shares. 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, 2007:  Original Fair
Value
        
        Accumulated
Amortization
        
        Net Book
Value
        Useful Life
in YearsPositive Directions:Covenant not to compete
        $
        483,363
        $
        (205,429)
        $
        277,934
        5Acquired technology
        
        46,307
        
        (19,680)
        
        26,627
        5DMT:Software and contents
        
        299,348
        
        (99,783)
        
        199,565
        5Assembled workforce
        
        45,117
        
        (45,117)
        
        
        $
        874,135
        $
        (370,009)
        $
        504,126
  During the three months ended May 31, 2007, amortization expense related to the covenant not to compete, acquired technology, and software and contents was $24,168, $2,315, and $14,968, respectively. 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 $24,168, $2,315, $14,967 and $2,820, respectively. During the six months ended May 31, 2007, amortization expense related to the covenant not to compete, acquired technology and software and contents was $48,336, $4,630, and $29,935, 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. Estimated amortization expense is $83,000 for the remainder of fiscal
year 2007, $166,000 for fiscal years 2008 and 2009, and $90,000 for the fiscal year thereafter.  10     QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Note 11 Investment in Joint Ventures  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, 2007, the Company has recorded losses to date of approximately $254,000 bringing its investment in this joint venture to approximately $19,000. 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, 2007, approximately $704,000 is due from this joint venture, which is included in accounts receivable, $655,000 of which represents a withhold against performance guarantees.  Note 12 Accounts Payable and Accrued Expenses  Accounts payable and accrued expenses include the following:  May 31,
2007
(Unaudited)
     
     November 30,
2006Accounts payable trade
     
     
     $930,142
        
     $1,378,999Insurance premiums payable
     39,387
        
     79,124Professional fees payable
     516,634
        
     609,553Accrued severance payable, current
     316,785
        
     323,776Other accrued expenses  none inexcess of 5% of current liabilities
     279,018
        
     435,771$2,081,966
        
     $2,827,223  Note 13 Medical Claims Payable  The following table represents a roll-forward of our medical claims reserve inclusive of our incurred but not reported or paid (IBNP) reserve as of the period indicated:  For the Six
Months Ended
May 31, 2007IBNP as of December 1, 2006
     
     
     $364,830Health care claim expenses incurred during the period
     4,125,800Health care claims paid during the period
     (2,167,886
        )IBNP as of February 28, 2007
     $2,322,744Health care claim expenses incurred during the period
     7,255,937Health care claims paid during the period
     (6,861,369
        )IBNP as of May 31, 2007
     $2,717,312  11    QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Note 13 Medical Claims Payable  (continued)  Included in the health care claim expenses incurred during the period is our provision for the IBNP reserve. The IBNP reserve for the SNP in South Dakota was estimated utilizing an independent actuarial analysis performed at November  30, 2006. For 2007, with the significant increase in enrollment in the South Dakota SNP and the commencement of the QMedCare of New Jersey, Inc. SNP, the Companys estimates for the six months ended May 31, 2007 are based upon an independent actuarial model of expected costs.  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, 2007 and November 30, 2006, there were $14,990 and $47,005 outstanding under these provisions, respectively.  Note 15 Accrued Severance Payable  On November 28, 2006, the Company incurred certain obligations under the terms of the employment agreement related to separation of service of its former CEO. These obligations consist of: (i) three times last base salary, to be paid in three equal annual installments, with the first installment to be paid no later than thirty (30) days after November 28, 2006 (the Payment Date), and thereafter, the second and third installments on each of the next two annual anniversaries of the payment date; (ii) immediate vesting of all options; and (iii) continued coverage, at the Companys expense for a period of 36 months from November 28, 2006 under all executive health plans in which the Executive participates as of November 28, 2006. As of May 31, 2007, the Company has a liability of $634,648 representing the present value of these obligations using an interest rate of 4% of which $316,785 is
included within accounts payable and accrued expenses and $317,863 is classified as long term.  Note 16  Income Taxes  The Company has cumulative pre-tax losses through the period ended May 31, 2007 for financial reporting purposes. Recognition of deferred tax assets will require generation of future taxable income. Given the recent non-renewal of disease management contracts and the costs associated with the new business segments, there can be no assurance that the Company will generate earnings in future years. Therefore, the Company established a 100% valuation allowance on its deferred tax assets.  Note 17 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 has decided to incorporate the health and wellness programs of Positive Directions, Inc. as part of its disease management offerings. As a result, the Company is currently organized into two business units, disease-management services and specialty managed care services, 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, sales and marketing, operations 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 general corporate expenses.  12    QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Note 17 Business Segment Information  (continued)  Summarized financial information by operating segment for three and six months ended May 31, 2007 and 2006 is as follows:  Three Months Ended May 31, 2007Disease
Management
Services
     
     Managed
Care
Services
     
     General
Corporate
     
     Elimination
     
     Total
ConsolidatedRevenue
     
     
     $1,218,328
        
     $8,232,995
        
     $
        
     $
        
     $9,451,323Revenue  related parties
     621,120
        
     
        
     
        
     (621,120
        )
     Cost of revenue/medical expenses
     778,302
        
     7,225,937
        
     
        
     
        
     8,034,239Cost of revenue - reinsurance
     
        
     206,326
        
     
        
     
        
     206,326General operating expenses
     1,701,430
        
     2,269,588
        
     1,064,444
        
     (621,120
        )
     4,414,342Settlement proceeds
     400,000
        
     
        
     
        
     
        
     400,000Loss before income taxes
     (240,284
        )
     (1,498,856
        )
     (1,064,444
        )
     
        
     (2,803,584
        )Depreciation and amortization
     209,437
        
     4,706
        
     84,942
        
     
        
     299,085Expenditures for long-lived assets
     83,123
        
     13,375
        
     27,766
        
     
        
     124,264   Three Months Ended May 31, 2006Disease
Management
Services
     
     Managed
Care
Services
     
     General
Corporate
     
     Elimination
     
     Total
ConsolidatedRevenue
     
     
     $1,608,699
        
     $312,996
        
     $
        
     $
        
     $1,921,695Revenue  related parties
     20,610
        
     
        
     
        
     (20,610
        )
     Cost of revenue/medical expenses
     1,413,359
        
     267,207
        
     
        
     
        
     1,680,566General operating expenses
     2,117,808
        
     902,563
        
     414,992
        
     (20,610
        )
     3,414,753Loss before income taxes
     (1,901,858
        )
     (856,774
        )
     (414,992
        )
     
        
     (3,173,624
        )Depreciation and amortization
     125,816
        
     442
        
     67,505
        
     
        
     193,763Expenditures for long-lived assets
     310,591
        
     35,135
        
     9,760
        
     
        
     355,486   Six Months Ended May 31, 2007Disease
Management
Services
     
     Managed
Care
Services
     
     General
Corporate
     
     Elimination
     
     Total
ConsolidatedRevenue
     
     
     $2,969,673
        
     $12,823,448
        
     $
        
     $
        
     $15,793,121Revenue  related parties
     961,320
        
     
        
     
        
     (961,320
        )
     Cost of revenue/medical expenses
     1,722,718
        
     11,381,737
        
     
        
     
        
     13,104,455Cost of revenue - reinsurance
     
        
     206,326
        
     
        
     
        
     206,326General operating expenses
     3,437,534
        
     4,137,480
        
     2,099,128
        
     (961,320
        )
     8,712,822Settlement proceeds
     2,375,000
        
     
        
     
        
     
        
     2,375,000Income (loss) before income taxes
     1,145,741
        
     (2,902,095
        )
     (2,099,128
        )
     
        
     (3,855,482
        )Depreciation and amortization
     406,284
        
     9,033
        
     166,192
        
     
        
     581,509Expenditures for long-lived assets
     304,421
        
     16,575
        
     49,258
        
     
        
     370,254Identifiable assets
     6,043,252
        
     8,378,701
        
     15,111,501
        
     (10,032,040
        )
     19,501,414   13      QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Note 17 Business Segment Information  (continued)   Six Months Ended May 31, 2006Disease
Management
Services
     
     Managed
Care
Services
     
     General
Corporate
     
     Elimination
     
     Total
ConsolidatedRevenue
     
     
     $4,666,233
        
     $438,085
        
     $
        
     $
        
     $5,104,318Revenue  related parties
     28,620
        
     
        
     
        
     (28,620
        )
     Cost of revenue/medical expenses
     3,208,424
        
     371,031
        
     
        
     
        
     3,579,455General operating expenses
     4,507,346
        
     1,841,634
        
     859,462
        
     (28,620
        )
     7,179,822Loss before income taxes
     (3,020,917
        )
     (1,774,580
        )
     (859,462
        )
     
        
     (5,654,959
        )Depreciation and amortization
     241,173
        
     442
        
     134,101
        
     
        
     375,716Expenditures for long-lived assets
     508,713
        
     35,135
        
     45,107
        
     
        
     588,955Identifiable assets
     8,110,681
        
     730,942
        
     19,094,668
        
     (1,361,491
        )
     26,574,800   Related party revenue represents an agreement entered into by QMedCare Dakota, LLC with QMed Inc. for disease management services in connection with the administration of the SNP in South Dakota and New Jersey.  Note 18 Share-Based Compensation  The Company has shareholder-approved stock incentive plans for employees. 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 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 ended May 31, 2007, we recognized share-based compensation cost of $342,878, which consisted of $32,930 in cost of services, $291,197 in selling, general and administrative expenses and $18,751 in research and development. For the three months ended May 31, 2006, we recognized share-based compensation cost of $504,042, which consisted of $60,739 in cost of services, $408,862 in selling, general and administrative expenses and $34,441 in research and development.  For the six months ended May 31, 2007, we recognized share-based compensation cost of $737,126, which consisted of $55,860 in cost of services, $642,624 in selling, general and administrative expenses and $38,642 in research and development. For the six months ended May 31, 2006, we recognized share-based compensation cost of $946,628, which consisted of $130,045 in cost of services, $745,610 in selling, general and administrative expenses and $70,973 in research and development. 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 months ended May 31, 2007 and 2006 totaling $342,878 and $504,042, respectively, were lower than if the Company had continued to account for share-based compensation under APB 25. As a result of adopting Statement 123(R), loss before income taxes and net loss for the six months ended May 31, 2007 and 2006 totaling $737,126 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 was $.02 and $.03 for the three months ended May 31, 2007 and 2006, respectively, and $.04 and $.06 for the six months ended May, 31, 2007 and 2006, 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.  14      QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Note 18 Share-Based Compensation  (continued)  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, 2007.  Potentially dilutive options and warrants to purchase 968,555 and 1,585,263 shares of the common stock were outstanding for the three months ending May 31, 2007 and 2006, respectively, but were not included in the computation of diluted loss per share because the effect of their inclusion would have been anti-dilutive. Potentially dilutive options and warrants to purchase 1,039,826 and 1,697,800 shares of the common stock were outstanding for the six months ending May 31, 2007 and 2006, respectively, 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 995,529 and 342,694 shares of common stock were outstanding as of May 31, 2007 and 2006, respectively, but were also not included in the computation of diluted loss per share for the three months ended May 31, 2007 and 2006 and options to
purchase 920,058 and 406,194 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 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.  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, 2007, we have reserved approximately
1,177,000 shares for future equity grants.  As of May 31, 2007, there was $2.4 million 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 of2.1 years.  Stock Options  For the three and six months ended May 31, 2007 and 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.  15      QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Note 18 Share-Based Compensation  (continued)  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, 2007 and 2006:  Three Months Ended
        
        Six Months EndedMay 31,
        
        May 31,2007
        2006
        
        2007
        2006Weighted average grant -date fair value of options
        $2.41
        $3.12
        
        $2.53
        $4.65Assumptions:Expected volatility
        66.96%
        64.1%
        
        66.96%
        64.1%Expected dividends
        
        
        
        
        Expected term (in years)
        4.0
        4.0
        
        4.0
        4.0Risk-free rate
        4.6%
        4.9%
        
        4.6%
        4.4%
   A summary of option activity as of May 31, 2007 and changes during the three months then ended is presented below:   Options
        Shares
        
        WeightedAverageExercise Price
        WeightedAverageRemainingContractual Term
        Aggregate IntrinsicValueOutstanding at December 1, 2006
        2,022,983
        
        $7.43Granted
        515,000
        
        5.46Exercised
        (127,274)
        
        2.75Forfeited or expired
        (35,866)
        
        10.14Outstanding at February 28, 2007
        2,374,843
        
        $7.22Granted
        104,000
        
        4.43Exercised
        (10,667)
        
        3.00Forfeited or expired
        (319,663)
        
        7.93Outstanding at May 31, 2007
        2,148,513
        
        $6.97Exercisable at May 31, 2007
        1,217,020
        
        $7.26
        5.2
        $22,968
  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, 2007 and 2006 was $15,155 and $8,637, 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, 2007 and 2006 was $265,049 and $62,487, respectively. The total fair value of options vested during the three and six months ended May 31, 2007 was $193,865 and $1,142,487, respectively.  Cash received from option and warrant exercises under all share-based payment arrangements for the six months ended May 31, 2007 and 2006 was $382,004 and $111,819, respectively. No tax benefit was realized from option exercises of the share-based payment arrangements for the three and six months ended May 31, 2007 and 2006.  As of May 31, 2007, the Company also has 1,672,522 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.  16    QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  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  The action against Healthcare First, a division of Gallagher Insurance Services, Inc., and of Arthur J. Gallagher & Co. (HCF), described in prior filings, and pending in the Superior Court of New Jersey, Law Division, Monmouth County has been resolved. Following a mediation process, the matter was resolved on terms including a payment to the Company of $400,000, which was received in June 2007. At May 31, 2007, this amount was included in prepaid expenses and other current assets.  On November 21, 2005, the Company brought an arbitration proceeding against Alere Medical Incorporated (Alere), seeking damages and an award for unjust enrichment, 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.  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, claimed Alere, the Companys claims were 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.  Following extensive discovery, these matters were mediated, and both the arbitration and the litigation were resolved during December, 2006. As part of the resolution, in December 2006, the Company received a payment totaling $1,975,000 bringing these matters to a conclusion.  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 maintains an administrative statutory reserve and a minimum net worth as required by the State of New Jersey Department of Banking and Insurance. Accordingly, the Company deposited funds of approximately $456,000 for the administrative reserve and contributed capital to meet its minimum net worth requirements.  In December 2006, the Company funded an additional $2.5 million representing an insolvency reserve established for QMedCare of New Jersey, Inc. as required by the State of New Jersey Department of Banking and Insurance. These funds will be classified as noncurrent assets as the cash is not available for current operations. The funds are held in trust currently invested in certificates of deposit.  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, 2007, the Company was in compliance with this requirement.  17     QMED, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Note 20 Commitments and Contingencies  (continued)  Guaranty  New Jersey The Company has provided the State of New Jersey Department of Banking and Insurance with a capital and surplus guaranty dated May 10, 2006 whereby the Company has guaranteed that QMedCare of New Jersey, Inc. will have and maintain capital and surplus at a minimum amount as required by law or such additional surplus as required by the Commissioner of Banking and Insurance of the State of New Jersey. The guaranty also requires that these capital and surplus funds are maintained in assets under the investment laws governing health maintenance organizations in the State of New Jersey. At May 31, 2007, QMedCare of New Jersey, Inc. was in full compliance with its capital and surplus obligations.  Government Contracts  The Companys Managed Care business, which accounted for approximately 87% and 81% of our total revenues for the three and six months ended May 31, 2007, respectively, primarily consisted of products covered under Medicare Advantage contracts with the federal government. These contracts are renewed generally for a one-year term each January 1, unless CMS notifies the Company or DAKOTACARE of its decision not to renew by August of the contract year, or the Company OR DAKOTACARE notifies CMS of its decision not to renew in June through August of the contract year depending on the results of the final bid submission. For the year beginning January 1, 2007, we have entered into a Medicare Advantage contract with CMS for New Jersey.  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.  Leases In March 2007, the Company executed a five-year extension of its lease for its corporate office space under similar terms of the original lease.  Major Customers In a letter dated October 4, 2006, the Company was notified by HealthSuite Partners, a joint venture with Alere Medical, Airlogix and the Company, that the HealthSuite Partners contract with HealthPartners, a Minnesota managed care organization, would not be extended beyond April 5, 2007.  18     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 contain 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 Company is facing risk factors in connection with the operations of its Managed Care segment. These risk factors may include, but not be limited, to the following:  
        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;
 
        our ability to maintain certain levels of equity (referred to as surplus) that may be required by state regulations;
 
        our 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);
 
        our ability to reasonably estimate appropriate medical claims reserves and related benefit expenses;
 
        our 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;
 
        our 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.
 
        the ability to maintain and develop existing and new contracts with providers, hospitals and other health care systems.
 
        the legislation providing for Special Needs Plans expires at the end of 2008 and must be renewed in order for SNPs to continue beyond 2008.
  Some additional factors include: 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;  
        our ability to execute new contracts for health plan disease management services;
 
        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;
 
        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;
 
        our ability to effectively integrate new technologies into our care management information technology platform;
 
        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;
 
        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;
 
        the impact of the introduction of new technologies;
 
        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;
 
        our ability to attract and/or retain and effectively manage the employees required to implement our agreements with health plan organizations;
 
        the impact of future state and federal healthcare legislation and regulations on our business;
 
        the financial health of our customers and their willingness to purchase our services;
 
        the impact of litigation or arbitration;
 
        our ability to accurately estimate our performance and revenue recognition under the terms of our contracts;
  19     
        our ability to develop new products and deliver outcomes on those products;
 
        our ability to implement our strategy within expected cost estimates;
 
        general economic conditions
  Overview  We manage, own and operate Medicare Advantage Special Needs Plans for chronically ill Medicare beneficiaries. We also provide disease management services to health plans and to the federal government through its Medicare program. Our services provide Care Management Solutions to assist health plans and government organizations in managing the cost and care of diabetes, cardiovascular disease, coronary artery disease (CAD), congestive heart failure (CHF), chronic obstructive pulmonary disease (COPD), stroke, weight and obesity and all associated co-morbid conditions. By leveraging our innovative clinical practices and proprietary analytical technology, our model improves patient outcomes, reduces practice variation, and measures quality.  Recent Developments  Managed Care Segment  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 health maintenance organization in South Dakota. The SNP is being marketed as HeartLinePlus and is providing exclusive health coverage for CAD, heart failure and stroke patients.  LakeShore Captive Insurance Company, a wholly owned subsidiary of QMedCare, Inc., entered into an agreement  whereby the captive insurance company assumes 100% of the risk associated with the operations of DAKOTACAREs HeartLinePlus SNP.  The Company formed QMedCare of New Jersey, Inc. on January 17, 2006 in order to fulfill 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 (DOBI) and has a license to operate as an HMO within the State.  In September 2006, the Company executed a contract with CMS to operate its SNP in New Jersey and DAKOTACARE executed two contracts, which are comprised of a renewal of the HeartLinePlus program for 2007 and a new SNP for dual eligibles. Dual eligibles are individuals that are eligible for both Medicare and Medicaid programs.  In March 2007, the Company submitted an expansion application to add an additional disease state for its two chronic SNPs in New Jersey and South Dakota.  Positive Directions, Inc. (formerly Health e Monitoring, Inc.)  Positive Directions, Inc. is a wholly owned subsidiary of QMed, Inc. In May of 2005, QMed, Inc. acquired Positive Directions, Inc., (formerly Health e Monitoring, Inc.), a privately owned firm offering a  program for healthy weight and lifestyle management. In October 2005, QMed, Inc. acquired all of the assets of Disease Management Technologies, Inc. (DMT). DMT has developed a website for a health and wellness program.  Its program focuses on the role of wellness and prevention to establish healthy lifestyle habits, dietary and nutrition education, exercise regimens and behavioral modifications. Since the direction of this program will be primarily focused on our care coordination programs for our SNP initiatives, we expect that minimal revenue will be derived from third parties.  20      Recently Issued Accounting Pronouncements  In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Liabilities, or SFAS 159. SFAS 159 allows an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements. We are required to adopt SFAS 159 in the first quarter of 2008. We currently are evaluating the provisions of SFAS 159 and do not expect the adoption of SFAS 159 to have a material impact on our financial position or results of operations.  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 six months ended May 31, 2007. 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  Premiums For its SNP plans, the Company records revenue from health care premiums received in the month that enrollees are entitled to coverage.  Managed Care Services  The Companys captive insurance company entered into an agreement whereby the captive insurance company assumes 100% of the risk associated with the operations of a Special Needs Plan (SNP) in South Dakota. In addition, on January 1, 2007, QMedCare of New Jersey commenced operations of its SNP in New Jersey. The SNPs offer 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 captured by claims data from the prior year. 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 paid (IBNP), classified as medical claims payable
on the condensed consolidated balance sheet. Since this is a new plan, the Companys estimates are initially based upon an independent actuarial model of expected costs. This model included factors such as age, gender and demographics. As the plan matures, the Company will develop these estimates using standard actuarial methods which may 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 also entered into an agreement with DAKOTACARE, a health maintenance organization, to administer the SNP in South Dakota and New Jersey. In accordance with the agreement, the Company records revenue on a monthly basis as services are rendered.  The Companys Managed Care business, which accounted for approximately 87% and 81% of our total revenues for the three and six months ended May 31, 2007, respectively, primarily consisted of products covered under Medicare Advantage contracts with the federal government.  21      Disease Management Services  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, and 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 a small portion of our fees may be performance-based.  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. 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 review these estimates periodically and make adjustments, as interim information is
available.  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.  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 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.  22      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.   For the Three Months Ended May 31,
     
     For the Six Months
Ended May 31,
     
     For the Three
Months Ended May 31,
     
     For the Six
Months
Ended May 31,2007
     
     2006
     
     2007
     
     2006
     
     2007 vs. 2006
     
     2007 vs. 2006Revenue
     
     
     100
        .0%
     100
        .0%
     100
        .0%
     100
        .0%
     391
        .8%
     209
        .4%Cost of revenue
     87
        .2
     87
        .5
     84
        .3
     70
        .1
     390
        .3
     271
        .9Gross Profit
     12
        .8
     12
        .5
     15
        .7
     29
        .9
     402
        .1
     62
        .8Selling general and administrative
     42
        .7
     187
        .3
     50
        .9
     138
        .6
     12
        .2
     13
        .7Research and development
     5
        .5
     22
        .4
     6
        .0
     17
        .3
     21
        .0
     7
        .6Loss from operations
     (35
        .4)
     (197
        .2)
     (41
        .2)
     (126
        .0)
     (11
        .6)
     1
        .3Interest expense
     (0
        .1)
     (0
        .3)
     (0
        .1)
     (0
        .2)
     40
        .4
     38
        .2Interest income, net
     1
        .7
     9
        .9
     2
        .0
     7
        .4
     (15
        .8)
     (14
        .4)Loss on operations of joint venture
     (0
        .1)
     (1
        .0)
     (0
        .2)
     (0
        .8)
     (63
        .5)
     (35
        .0)Other income
     4
        .2
     23
        .4
     15
        .0
     8
        .8
     (11
        .1)
     427
        .9Loss before tax benefit (provision)
     (29
        .7)
     (165
        .1)
     (24
        .4)
     (110
        .8)
     (11
        .7)
     (31
        .8)Income tax (provision) benefit
     (0
        .1)
     (0
        .1)
     (0
        .1)
     0
        .9
     *
        
     *Net loss
     (29
        .8)
     (165
        .2)
     (24
        .5)
     (109
        .9)
     (11
        .5)
     (31
        .0)  * Not meaningful  Three Months Ended May 31, 2007 Compared to Three Months Ended May 31, 2006  Revenue for the three months ended May 31, 2007 increased approximately $7.5 million as compared to the three months ended May 31, 2006. This increase is attributable to an increase of approximately $7.9 million in premium and service revenue related to increased enrollment in the South Dakota Special Needs Plan (SNP) project and the commencement of operations of the QMedCare SNP in New Jersey on January 1, 2007. This increase was offset by a decrease of approximately $408,000 in disease management services revenue. The decrease was primarily attributable to a decrease of $738,000 related to the expiration of two contracts offset by an increase of approximately $330,000 primarily related to the commencement of a new contract during the first quarter of fiscal 2007.  Cost of revenue for the three months ended May 31, 2007 increased by approximately $6.6 million as compared to the three months ended May 31, 2006. This increase was attributable to an increase of approximately $7.0 million related to the medical claims associated with the SNP projects. This increase was offset by: (i) the decrease of approximately $150,000 related to the outsourcing of certain call center services for our disease management programs; and (ii) a decrease of approximately $412,000 of labor costs associated with the reduction in workforce and operating costs related to the non-renewal of two disease management contracts.  Gross profit margins for the three months ended May 31, 2007 increased to 12.8% from 12.5% for the three months ended May 31, 2006. This increase represents the net increase in revenue over cost of revenue.  Selling, general and administrative expenses for the three months ended May 31, 2007 increased by approximately $439,000 over the three months ended May 31, 2006. The increase was attributable to (i) an increase of approximately  23     $130,000 in salaries and related costs for the operations of the managed care business; (ii) an increase of approximately $289,000 associated with the operations of the SNP for costs related to claims processing, broker commissions, reinsurance premiums, registration services and office space; (iii) an increase in depreciation and amortization of approximately $113,000 primarily related to capitalized product software development costs; (iv) an increase of approximately $52,000 in actuarial services primarily attributable to the SNP projects; (v) an increase of approximately $36,000 in software licensing fees related to the operations of the managed care business; (vi) an increase of approximately $14,000 in premium tax related to our captive insurance company for HeartLine Plus and; (vii) an increase of approximately $106,000 in consulting fees primarily related to HeartLine Plus and QMedCare SNPs. This
increase was offset by (i) a reduction of approximately $58,000 in advertising and promotion expenses related to more cost effective marketing for HeartLine Plus and QMedCare SNPs; (ii) a decrease of approximately $40,000 in personnel recruiting costs; (iii) a decrease of approximately $118,000 in compensation costs associated with SFAS No. 123(R) Share Based Payment and; (iv) a decrease of approximately $95,000 in legal expenses primarily related to the settlement with Alere in the first quarter of 2007.  Research and development expenses for the three months ended May 31, 2007 increased approximately $91,000 or 21% over the three months ended May 31, 2006. 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 $89,000 in salaries and related costs associated with new hires and a reduction in capitalization of salaries for product software development; and (ii) an increase of approximately $50,000 in consulting fees associated with special projects and a decrease in capitalization of software development costs as software is transitioned into production. This increase was offset by a decrease of approximately $16,000 in compensation costs associated
with the adoption of SFAS No. 123(R) Share Based Payment and a decrease of approximately $25,000 in personnel recruiting costs. During the three months ended May 31, 2007, there was an increase of approximately $211,000 in capitalization of costs, which include salaries and consultant fees, incurred for product software development as compared to the three months ended May 31, 2006. 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 telecommunications, data management, and security and information technology. We intend to continue to improve and expand the capabilities of all of our technologies since it has a direct impact on our ability to manage our Medical Loss Ratio (MLR).  Interest income for the three months ended was approximately $159,000 as compared to $189,000 for the three months ended May 31, 2006. This decrease is attributable to the reduction in funds available for investment.  Other income of $400,000 for the three months ended May 31, 2007 represents the proceeds from the settlement agreement with Healthcare First within the second quarter.
Other income for the three months ended May 31, 2006 represents the proceeds from the sale of a patent for $450,000 to a third party in May 2006.  Six Months Ended May 31, 2007 Compared to Six Months Ended May 31, 2006  Revenue for the six months ended May 31, 2007 increased approximately $10.7 million as compared to the six months ended May 31, 2006. This increase is attributable to an increase of approximately $12.4 million in premium and service revenue related to increased enrollment in the South Dakota Special Needs Plan (SNP) project and the commencement of operations of the QMedCare SNP in New Jersey on January 1, 2007. This increase was offset by a decrease of approximately $1.7 million in disease management services revenue. The decrease was primarily attributable to a decrease of $2.3 million related to the expiration of four contracts offset by an increase of approximately $600,000 primarily related to the commencement of a new contract during the first quarter of fiscal 2007.  Cost of revenue for the six months ended May 31, 2007 increased by approximately $9.7 million as compared to the six months ended May 31, 2006. This increase was attributable to (ii) an increase of approximately $11 million related to the medical claims associated with the SNP projects; and (ii) the increase of approximately $181,000 primarily related to a purchase commitment. This increase was offset by: (i) approximately $951,000 of labor and related cost reductions associated with the reduction in workforce and operating costs related to the non-renewal of contracts and in efficiencies related to enhancements in our programs; and (ii) an increase of approximately $221,000 in cost reductions related to the outsourcing of certain call center services for our disease management programs.  Gross profit margins for the six months ended May 31, 2007 decreased to 15.7% from 29.9% for the six months ended May 31, 2006. This decrease represents the net increase in revenue as compared to cost of revenue.  24     Selling, general and administrative expenses for the six months ended May 31, 2007 increased by approximately $972,000 over the six months ended May 31, 2006. The increase was attributable to (i) an increase of approximately $480,000 in salaries related to additional new hires for the operations of the managed care business; (ii) an increase of approximately $603,000 associated with the operations of the SNP for costs related to claims processing, broker commissions, registration services and office space; (iii) an increase in depreciation and amortization of approximately $221,000 primarily related to capitalized product software development costs; (iv) an increase of approximately $176,000 in consulting fees primarily related to the SNP projects; and (v) an increase of approximately $79,000 in actuarial services primarily attributable to the SNP projects. These increases were offset by (i) a decrease of
approximately $341,000 in advertising and promotion expenses related to primarily our second year of operation in South Dakota in which our branding costs are substantially reduced for HeartLine Plus and we are just starting to build QMedCare of New Jerseys SNP; (ii) a decrease of approximately $94,000 in travel and entertainment expenses related to the reduction of costs incurred with respect to the development and/or launch activities associated with the SNP and Positive Directions, Inc. in 2006; and (iii) a decrease of approximately $77,000 of legal fees primarily related to the settlement agreement with Alere in the first quarter of 2007;  Research and development expenses for the six months ended May 31, 2007 increased approximately $67,000 or 7.6% over the six months ended May 31, 2006. 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 $109,000 in salaries and related costs associated with new hires and a reduction in capitalization of salaries for product software development; (ii) an increase of approximately $46,000 in consulting fees associated with special projects and a decrease in capitalization of software development costs as software is transitioned into production. These increases were offset by: (i) a decrease of approximately $32,000 in compensation costs
associated with the adoption of SFAS No. 123(R) Share Based Payments; (ii) a decrease of approximately $31,000 in travel expenses; and (iii) a decrease of approximately $25,000 in personnel recruitment costs. During the six months ended May 31, 2006 there was a decrease of approximately $184,000 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. We intend to continue to improve and expand the capabilities of all of our technologies since it has a direct impact on our ability to manage our Medical Loss Ratio (MLR).  Interest income for the six months ended May 31, 2007 was approximately $321,000 as compared to $375,000 for the six months ended May 31, 2006. This decrease is attributable to the reduction in funds available for investment.  Other income for the six months ended May 31, 2007 increased approximately $1,925,000 as compared to the six months ended May 31, 2006. The increase represents the proceeds from the settlement agreement with Alere and Healthcare First.  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 $6.0 million at May 31, 2007 compared to approximately $11.1 million at November 30, 2006 and ratios of current assets to current liabilities of 1.9:1 as of May 31, 2007 and 3.2:1 as of November 30, 2006. The working capital decrease of approximately $5.1 million was primarily due to the net loss of approximately $3.9 million resulting in cash used in operations of approximately $2.5 million along with an additional $2.5 million of cash classified as long term restricted cash in order to establish a required insolvency reserve for QMedCare of New Jersey, Inc. 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. In May 2007, this letter of credit was released by the State of 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. Accordingly, the Company deposited funds of approximately $456,000 for the administrative reserve and contributed capital to meet its minimum net worth requirements. In December 2006, the Company deposited an additional $2.5 million in an insolvency reserve account as required by the New Jersey Department of Banking and Insurance.  25      We anticipate that we will expend cash to fund our current operations, fund our continuing implementation costs associated with our managed care 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. Although we expect to incur these expenditures, we believe that our cash and investments will be sufficient to fund our current level of growth and our existing and anticipated commitments. However, to the extent any future 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, 2007 in the periods indicated:  Contractual
Obligations
        Payments Due by PeriodTotal
        Less than 1 year
        1-3 years
        4-5 years
        After 5 yearsLong-Term Debt
        $            
        $              
        $              
        $          
        $       Capital Lease Obligations
        30,710
        30,710
        
        
        Operating Leases
        2,806,000
        634,000
        1,484,000
        688,000
        Unconditional Purchase Obligations
        
        
        
        
        Other Long-Term Obligations
        1,637,943
        1,234,788
        403,155
        
        Total Contractual Cash Obligations
        $ 4,474,653
        $   1,899,498
        $   1,887,155
        $  688,000
        $       
  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.  Item4. 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, 2007, 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.  No changes in the Companys internal controls over financial reporting have occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to material affect the Companys internal controls over financial reporting.  26    Part II. Other Information  Item 1.
        Legal Proceedings
  The action against Healthcare First, a division of Gallagher Insurance Services, Inc., and of Arthur J. Gallagher & Co. (HCF), described in prior filings, and pending in the Superior Court of New Jersey, Law Division, Monmouth County has been resolved. Following a mediation process, the matter was resolved on terms including a payment to the Company of $400,000.  On November 21, 2005, the Company brought an arbitration proceeding against Alere Medical Incorporated (Alere), seeking damages and an award for unjust enrichment, 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.  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, claimed Alere, the Companys claims were 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.  Following extensive discovery, these matters were mediated, and both the arbitration and the litigation were resolved during December 2006. As part of the resolution, in December 2006, the Company received a payment totaling $1,975,000 bringing these matters to a conclusion.  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.  Item 1A.
        Risk Factors
  See Managements Discussion and Analysis and Risk Factors contained earlier in this report.  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 26, 2007.  The proposal to elect seven directors, as described in the Companys proxy statement for its annual meeting of shareholders held on April 26, 2007, 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:  27     Director
        Votes For
        Withhold Authority
  Bruce F. Wesson
        15,424,748
        446,328
 Jane A. Murray
        15,584,372
        286,704
 Richard I. Levin
        15,555,294
        315,782
 Lucia L. Quinn
        13,693,572
        2,177,504
 John J. Gargana, Jr.
        15,702,368
        168,708
 A. Bruce Campbell
        15,728,524
        142,552
 John P. Zanotti
        15,700,868
        170,208
  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, 2007 was approved. The tabulation was as follows:  Votes For
        Votes Against
        Votes Abstain
  14,881,586
        367,599
        621,891
  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.
  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.  28    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.  QMed, Inc.
    By:/s/ Jane A. Murray
 Jane A. Murray
 Chief Executive Officer
   By:/s/ William T. Schmitt, Jr.
 William T. Schmitt, Jr.
 Senior Vice President, Chief Financial
 Officer and Treasurer
  July 9, 2007  29