FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended: November 30, 2001

                        Commission File Number: 0-11411

                                   Q-MED, INC.
                                   -----------
             (Exact Name of Registrant as Specified in its Charter)

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

100 Metro Park South, Laurence Harbor, New Jersey               08878
-------------------------------------------------               -----
(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:  (732) 566-2666

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

Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.001 par value

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]

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

         As of January 28, 2002, the aggregate value of the registrant's voting
stock held by non-affiliates was $136,826,521 (computed by multiplying the last
reported sale price on January 28, 2002 by the number of shares of common stock
held by persons other than officers, directors or by record holders of 10% or
more of the registrant's outstanding common stock. This characterization of
officers, directors and 10% or more beneficial owners as affiliates is for
purposes of computation only and is not an admission for any purposes that such
person are affiliates of the registrant).

                                       1
<PAGE>

         As of January 28, 2002, there were 14,323,277 shares of the
registrant's common stock, $.001 par value, issued and outstanding.

         Documents incorporated by reference:

         Document                                            Form 10-K Reference
         --------                                            -------------------

         Portions of the Registrant's Proxy Statement for           III
         its 2002 Annual Meeting (to be filed in definitive
         form within 120 days of the Registrant's Fiscal
         Year End)

                                       2
<PAGE>

                                     PART I

Item 1.  BUSINESS

Forward-Looking Statements

         Certain matters discussed herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and as such may involve risks and uncertainties. In this report, the words
"anticipates," "believes," "expects," "intends," "future" and similar
expressions identify certain forward-looking statements. These forward-looking
statements relate to, among other things, expectations of the business
environment in which we operate, projections of future performance, perceived
opportunities in the market and statements regarding our mission and vision. Our
actual results, performance, or achievements may differ significantly from the
results, performance, or achievements expressed or implied in such
forward-looking statements. For discussion of the factors that might cause such
a difference, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations." We undertake no obligation to update or
revise such forward-looking statements.

General

         Q-Med, Inc. is a Delaware corporation and is the successor by merger to
the business of a New Jersey corporation organized on February 1, 1983.
Interactive Heart Management Corp. ("IHMC(R)"), a subsidiary founded during the
year ended November 30, 1995 ("fiscal 1995"), developed and is marketing an
integrated cardiovascular disease management system under the name "ohms|cvdsm"
(Online Health Management System for Cardiovascular Disease). It includes
related systems to assist health plans, government organizations and employer
groups in managing the incidence, treatment, and cost of cardiovascular
conditions, including coronary artery disease ("CAD"), stroke, congestive heart
failure ("CHF"), hypertension, hyperlipidemia and the cardiovascular
complications of diabetes. These systems are designed to aid primary health care
physicians in the use of optimal medical management for patients with these
conditions, as well as those at high risk of developing these conditions. The
net impact of this approach is the improvement in cardiovascular health and the
associated reduction in its cost. Our system and services are uniquely suited to
assist primary health care physicians in discharging their greater medical
responsibilities, and assisting in their efforts to reduce the overall cost of
health care while improving the cardiovascular health of their patients. As of
November 30, 2001, we had contracts to provide these services to 10 health plans
in multiple markets in 8 states covering approximately 1.1 million health plan
members.

         The ohms|cvd system consists of Monitor One(TM) STRx ambulatory ECG
monitoring technology; an on-line analysis, reporting and archiving center (The
ohms Center); and an integrated cardiology consultant practice. This entire
system noninvasively and reliably quantifies the probable risk of a heart
attack, unstable angina and cardiovascular complications and provides the
physician with appropriate patient-specific medical therapy recommendations. The
emphasis throughout the process is on early identification and prevention of
cardiovascular events, modification of critical risk-factors and the

                                       3
<PAGE>

optimization of appropriate medicine. Early treatment, with emphasis on medical
intervention results in an overall lowering of the cost of cardiovascular
disease and its complications.

         We also produce, sell and support a line of ischemic heart monitors and
a system that analyzes heart rate variability under the name, Monitor One
nDx(TM) ("nDx"). Determining the diminishment and/or loss of variation in heart
rate may assist the physician in making a diagnosis of the severity of autonomic
neuropathy. Autonomic neuropathy, a deterioration of the autonomic nervous
system, is associated with diabetic patients and may lead to complications in
the functioning of the heart, respiratory systems, digestion, body temperature,
metabolism, perspiration and the secretion of certain endocrine glands.

         Our executive offices are located at 100 Metro Park South, Laurence
Harbor, New Jersey 08878 and our telephone number is (732) 566-2666.

ohms|cvdsm Systems

         ohms|cvd is the Company's medical "expert system" designed as a total
disease management process for CAD utilizing "best practice" solutions in the
management of this disease. It consists of Monitor One STRx, our ambulant
ischemia technology, a remote on-line diagnostic center (The ohms Center), and
an integrated cardiology consultant practice. The entire system noninvasively
and reliably quantifies the probable risk of a heart attack, unstable angina and
its complications, and rationally directs the patient to appropriate therapy
with the accent on early detection, the modification of critical risk factors
and medical intervention. The ohms|cvd system expands upon our core technology,
first incorporated in our ohms|cad(R) system, adding the capability to manage
patients that have congestive heart failure, diabetic cardiovascular
complications and the risk of stroke.

         The systems are evidence based, relational mechanisms, using patient
descriptors which include:

         o        demographics,
         o        medical history,
         o        current medical therapy, including aspirin,
         o        lipid and hypertension profiles,
         o        obesity and lifestyle,
         o        smoking,
         o        glucose levels,
         o        ambulant ischemia, and
         o        rate and rhythm disturbances and other ECG abnormalities.

In its decision making process, recommendations for management are relational
and are tailored to an individual patient. Significantly, each individual
patient's medical history including risk factor profile, current medication and
other relevant patient specific information are entered into the systems' "best
practices" database for primary and secondary prevention analysis and treatment.

                                       4
<PAGE>

         The systems' centralized digital storage of each patient's iterative
review allows for the continuous description and analysis of quantifiable
results including:

         o        success of the stratification,
         o        proportion of patients assigned to various therapies,
         o        objective outcomes,
         o        interplay with pharmacy benefit managers, and
         o        physician and patient compliance.

         For example, in its risk prevention mode (myocardial infarction,
unstable angina, coronary complications), it centers on the presence or absence
of ambulant ischemia as a risk stratifier utilizing our specialized non-invasive
STRx technology for evaluation of this phenomena in each patient. This test data
is uploaded in near real-time to our central database (The ohms Center), which
in turn stratifies each individual patient into high or low risk. It then
proposes to lower a high risk patient's risk with specific anti-ischemic medical
therapies as one treatment option, or, if necessary, recommends further local
cardiology consultation leading to possible invasive intervention. If the data
indicate that the patient is at low risk, a message is sent back to the primary
care physician site within minutes with recommendations for optimization of
medical therapy that will maintain the patient in the low-risk pool. In both
circumstances, therapeutic actions are guided by our proprietary disease
management algorithm, which in turn is based on national practice guidelines and
evidence based medicine. Outcome information is available continuously because
all of the interactions and data are stored electronically in The ohms Center.

         Because ohms|cad and ohms|cvd are active disease management processes
emphasizing a continuum of care, derived from early detection of ambulant
ischemia and modification of patient risk factors, important cost-effective
improvements in cardiac events can result from its use, which have been verified
by empirical health and cost outcomes. Plans utilizing the systems have reported
savings of 16% to 20% in the first year of implementation. The ohms|cvd system
continuously monitors the care process, and thus, results are reported as
outcomes. Favorable outcomes increase our market share, decrease our economic
risk and increase our product differentiation.

         The systems utilize our Monitor One product, which is technology
designed to detect changes in the ECG signal which may be associated with
diseases of the heart. Our Monitor One may be worn on a belt or carried in the
patient's pocket, and is capable of interpreting a wide variety of ECG signals
which may be associated with cardiac conditions. Monitor One technology has been
independently validated in controlled research studies for the detection of
ischemic episodes associated with coronary ST-segment deviations in patients
with diagnosed CAD.

                                       5
<PAGE>

         At November 30, 2001, we had contracts with 10 health plans to provide
disease management services in multiple health plan markets in 8 states. The
number of members under contract was as follows:

         At November 30,                      2001        2000        1999
                                              ----        ----        ----
         Members under contract             1,073,046    373,700     126,400

         At November 30, 2001, of the 1,073,046 plan members under contract, we
had 913,627 commercial members and 159,419 Medicare+Choice members.

         Disease management contracts require sophisticated management
information systems to enable us to manage the care of large populations of
patients with certain chronic diseases such as CAD, stroke, diabetes, and heart
failure as well as certain other medical conditions. They also require us to
assist in reporting outcomes and costs before and after our involvement with a
health plan's enrollees. We have developed and continually expand and improve
our systems which we believe meet our information management needs for disease
management. We have installed and utilize the systems for the benefit of
enrollees in all of the health plans which we contract as customers. The
anticipated expansion and improvements in our information management systems
will continue to require significant investments by us in information technology
software, hardware and our information technology staff.

Medicare Coordinated Care Demonstration

         We have been awarded and selected to participate in the Medicare
Coordinated Care Demonstration (MCCD) project. Our ohms|cad program is the only
one that will be evaluated specifically for management of CAD.

         The Centers for Medicare and Medicaid Services ("CMS"), which
administer Medicare, designed MCCD to evaluate the cost-effectiveness of
reimbursing disease management services in the Medicare fee for service model.
In accordance with the Balanced Budget Act of 1997, which mandated the
demonstration, CMS "... may issue regulations to implement, on a permanent
basis, the components of the demonstration projects that are proven to be
cost-effective for the Medicare program."

         Under the award, we are implementing our ohms|cad disease management
technology in a controlled randomized study of Medicare beneficiaries who have
been diagnosed previously with CAD. Patient enrollment in California will begin
in early 2002 and we will receive fees from CMS for up to four years.

         MCCD was authorized by the Balanced Budget Act of 1997. It is intended
to test coordinating the care of Medicare beneficiaries with chronic conditions
that represent high costs to the Medicare program. Coordinated care programs
serving patients with chronic conditions were solicited and evaluated.
Conditions included heart disease, diabetes, liver and lung diseases, stroke and
other vascular diseases, psychotic disorders, major depressive disorders,

                                       6
<PAGE>

drug/alcohol dependence, Alzheimer's or other dementia, cancer or HIV/AIDS.
Participant selection was made through a national competitive process.

Business Strategy

         Our strategy is to develop additional relationships with health plans
to provide disease management services and to further develop and expand our
cardiovascular disease management business. We anticipate that we will utilize
our state-of-the-art medical information technologies to gain a competitive
advantage in delivering disease management services. We anticipate that
significant investments will be made during fiscal 2002 in the development of
the clinical programs, the associated information technology support for these
expanded initiatives and that many of these investments will be made prior to
the initiation of revenues from contracts. It is also anticipated that some of
these new capabilities and technologies may be added through strategic alliances
with other entities.

         We anticipate that additional disease management contracts that we may
sign with health plans, employer groups and governmental agencies may take one
of several forms, including per member per month payments to us, some form of
shared savings of overall enrollee healthcare costs, fee for services for
enrolled members, or some combination of these arrangements. We anticipate that
under most contracts, some portion of our fees will be at risk and subject to
our performance against financial cost savings and clinical improvements. When
we believe it is prudent to do so, we may insure or reserve against a portion of
revenue.

Industry and Other Risk Considerations

         In the process of executing our business strategy, our operations and
financial condition are subject to certain risks. The primary industry risks are
described below and readers of this Annual Report on Form 10-K should take such
risks into account in evaluating any investment decision involving the company.
This section does not describe all risks applicable to our business and is
intended only as a summary of certain material factors that impact our
operations in the industry in which we operate. More detailed information
concerning these and other risks is contained in other sections of this Annual
Report on Form 10-K.

         The healthcare industry in which we operate is currently subject to
significant cost reduction pressures as a result of constrained revenues from
governmental and private sources as well as from increasing underlying cost of
medical care. We believe that these pressures will continue and possibly
intensify. While we believe that our services are geared specifically to assist
health plans, employer groups and governmental agencies in controlling the high
costs associated with the treatment of chronic diseases, the pressures to reduce
costs immediately may have a negative effect in certain circumstances on the
ability of or the length of time required for us to sign new contracts.

         Health plans and employers are subject to considerable state and
federal government regulation. Many of these regulations are vaguely written and
subject to differing interpretations that may, in certain cases, result in
unintended consequences that may impact our ability to effectively deliver our

                                       7
<PAGE>

services. The current focus on regulatory and legislative efforts to protect the
confidentiality of patient identifiable medical information, as evidenced by the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), is one
such example. We believe that our ability to obtain patient identifiable medical
information for disease management purposes from health plans with which we
contract is protected in recently released federal regulations governing medical
record confidentiality. State legislation or regulation of this information may
be more restrictive and may preempt federal legislation. We are continually
determining the extent to which specific state legislation or regulations govern
our health plan operations. New federal or state legislation or regulation in
this area which prohibitively restricts the availability of certain critical
information to us would have a material negative impact on our disease
management operations.

         The disease management industry, which is growing rapidly, is a
relatively new segment of the overall healthcare industry and has many entrants
marketing various services and products labeled as "disease management." The
generic label of disease management has been utilized to characterize a wide
range of activities from the sale of medical supplies and drugs to services
aimed at demand management. Because the industry is relatively new, health plan
purchasers of these services have not had significant experience purchasing,
evaluating or monitoring such services which generally results in a lengthy
sales cycle for new health plan contracts. In addition, because the industry is
still relatively new and health plans have only recently entered into disease
management contracts, we have a significant concentration of our revenues
represented by contracts with two health plans, PacifiCare of California and
Regence Blue Cross/Blue Shield of Oregon, which collectively accounted for 63%
of our revenues in fiscal 2001. Until additional significant health plan
contracts are signed and implemented by us, our results of operations and
financial condition would be negatively and materially impacted by the loss or a
downward restructuring of a contract with a single large health plan customer.

         The disease management industry is dependent on the effective use of
information technology. While we believe that our state-of-the-art technology
provides us with a competitive advantage in the industry, we expect to
continually invest in updating and expanding technology and, in some cases, will
be required to make systems investments in advance of the generation of revenues
from contracts. In addition, these system requirements expose us to technology
obsolescence risks. Accordingly, we amortize our computer software and hardware
over five years.

         The measurement of our performance under our health plan contracts is
highly dependent upon the timely receipt of accurate data from its health plan
customers and the accuracy of the analysis of such data. Data acquisition, data
quality control and data analysis are intense and complex processes subject to
error. Untimely, incomplete or inaccurate data from a customer or flawed
analysis of such data could materially impact our revenues from that contract.

         A potential seasonal impact on covered membership could include a
decision by a health plan to withdraw or expand coverage thereby automatically
disenrolling previously covered members or enrolling new members.

                                       8
<PAGE>

         Share prices of healthcare companies and our share price in particular
may be volatile. The volatility may be influenced by the market's perceptions of
the healthcare sector in general, or other companies believed to be similar to
us or by the market's perception of our operations and future prospects. Many of
these perceptions are beyond our control.

Marketing

         We directly market our services to health plans, large physician
practice groups, employers and governmental agencies through our sales staff.
Contracting efforts are conducted and coordinated by senior management
personnel, with the aid, where appropriate, of certain independent consultants.
In addition, we generally pursue business opportunities through the traditional
competitive process where a Request for Proposals ("RFP") or a Request for
Qualifications ("RFQ") is issued by a managed care, employer or government
organization, to which a number of companies respond. We utilize demographic and
cost of service data from the organization as well as statistical information to
conduct an initial cost analysis to determine program feasibility. As part of
our sales efforts, management meets with appropriate personnel from the
organization making the request to best determine the organization's needs. A
typical RFP requires bidders to provide detailed information, including the
service to be provided by the bidder, its experience and qualifications and the
price at which the bidder is willing to provide the services. We sometimes
engage independent consultants to assist in responding to RFPs. Based on the
proposals received in response to an RFP, the organization will award a contract
to the successful bidder. In addition to issuing formal RFPs, some organizations
may issue an RFQ. In the RFQ process, the requesting agency selects a firm it
believes is the most qualified to provide the requested services and then
negotiates the terms of the contract with that firm, including the price at
which its services are to be provided. We also attend and promote our services
at key conferences throughout the United States where potential clients are
present.

Warranty

         In our medical equipment segment, we extend a standard warranty to
end-users of purchased or leased devices. Extended one-year to three-year
warranties are available to end-users at additional cost. Beginning in May, 1999
we changed our policy to extend only one year warranties. Extended warranty
sales represented 1.7%, 7.6%, and 16.1% of total sales for fiscal 2001, 2000 and
1999, respectively, and are not expected to represent a significant portion of
revenue in future periods.

Manufacturing

         We contract with electronics companies for the manufacture and
sub-assembly of devices and accessories and provide these contractors with
technical expertise. These devices undergo final testing and packaging at our
facility located in Sag Harbor, New York. Although we have not experienced
significant delays or disruptions in the assembly and delivery of its products,
there can be no assurance that delays or disruptions will not occur in the
future. A deterioration of our relationship with our independent contract
manufacturers could subject us to substantial delays in the delivery of our

                                       9
<PAGE>

products to customers. Such delays would subject us to possible cancellation of
orders and the loss of certain customers.

         Whenever possible, we use multiple sources of supply for components.
However, we believe that there are only singular sources of supply for certain
components. There is no assurance that these sources will continue to supply
those parts and, if they become unavailable, we would be adversely affected.
Also, there can be no assurance that our contract manufacturers will maintain an
acceptable level of quality and capability for assembling the products to our
specifications. We have not experienced delays in obtaining supplies which
affected our ability to deliver finished goods.

Competition

         We believe ohms|cad and ohms|cvd offer unique solutions for
cardiovascular disease management. However, there are several entities,
including pharmaceutical companies, pharmacy benefit managers and independent
companies that are pursuing CAD management which we consider to be competition.

         To our knowledge, none of these companies deal with CAD and related
diseases comprehensively. Most have designed their programs to respond to a
cardiac event, essentially waiting for a patient to have a heart attack or
procedure and to follow it with post-hospitalization case management. In
addition, manufacturers of drugs that reduce cholesterol have designed programs
based on high blood lipids and have developed protocols emphasizing the use of
their drug(s). To our knowledge, ohms|cad and ohms|cvd are the only operating
disease management systems that include primary and secondary prevention; risk
stratify the patients into those who are and who are not in danger of adverse
events in the near term; and reduce practice variation and referrals. No other
CAD management program to our knowledge has shown comparable results with
beneficial patient outcomes that lowered overall CAD healthcare costs.

         We believe we have competitive advantages based on the following:

         o        The entire management system and its components are
                  proprietary and patented.

         o        Our ischemia technology has been clinically validated with
                  results appearing in several "peer reviewed" journals.

         o        Health outcomes have been documented and presented at
                  prestigious meetings, such as the American Heart Association
                  Scientific Sessions.

         o        We have an extensive and growing knowledgebase of how specific
                  therapeutic modalities positively affect patients' health.

         o        We have proven successes in actual implementation of our CAD
                  disease management system in the field that demonstrates our
                  ability to produce faster rollouts and faster health and
                  economic outcomes to the plan.

                                       10
<PAGE>

         o        We have created proprietary analytics that define the target
                  population at risk.

         o        We have established an operating infrastructure with
                  integrated resources and processes amplified by corporate
                  expertise.

         o        We have documented improvements for a health plan customer of
                  its HEDIS audit, a competitive advantage for each customer.

         o        We are perhaps the only disease management program in which
                  the patient is seen face to face on a regularly scheduled
                  basis by disease management specialists who work for us.

         Competition may increase and such competition could come from companies
that are considerably larger and have greater financial and marketing resources
than we have.

         Monitor One(TM) ischemia products compete primarily with ambulatory
arrhythmia ECG scanning services, of which there are more than 75 in the United
States, and other ambulatory ECG monitoring equipment manufacturers. In many
cases, some of these companies have substantially greater marketing, financial
and other resources than we have, but management believes that our products'
price and performance are competitive in this field.

         We are not aware of any commercial product competing with our nDx
system, a system which automates the process of testing for autonomic
dysfunction. Nor are we aware of any comprehensive CAD management system which
competes with ohms|cad or ohms|cvd.

         We believe that direct competition in ambulatory ischemic monitoring,
products for testing autonomic function and disease management may, in the
future, come from companies that are considerably larger and have greater
financial and human resources and marketing capabilities. Primary competitive
factors in the medical device industry include scientific and technological
superiority, price, service, product support, availability of patent protection,
access to adequate capital, the ability to successfully develop and market
products and processes.

Research and Development

         In fiscal 2001, 2000 and 1999, we expended $757,355, $524,275 and
$571,449 respectively, for research and development. During these years,
research and development was primarily focused on the development of an advanced
version of the ohms|cad system and the ohms|cvd system.

         Management expects to continue to develop new offerings, as well as
enhance its existing systems and products and has budgeted approximately 10% of
anticipated revenue for such development in fiscal 2002.

                                       11
<PAGE>

Patent Protection and Proprietary Information

         We maintain a policy of seeking patent protection in the United States
and other countries in connection with certain elements of its technology. Our
Monitor One technology has been granted patents in the United States (Patent No.
4679144), Canada (Patent No. 1281081) and Spain (Patent No. 547040) and has
additional patent applications pending in other countries. We received a U.S.
patent for the nDx(TM)technology on March 29, 1994 (Patent No. 5299119) and a
patent for the ohms|cad(R)system (Patent No. 5,724,580) on March 3, 1998.
Certain patents relating to our technology begin expiring in 2004.

         The patent laws of foreign countries may differ from those of the
United States as to the patentibility of our products and, accordingly the
degree of protection afforded by the pendency or issuance of foreign patents may
be different than the protection afforded under corresponding United States
patents. There can be no assurance that patents will be obtained in foreign
jurisdictions with respect to our products or that the United States patents and
any foreign patents will significantly protect or be commercially beneficial.

         We do not intend to rely solely on patent protection for our
proprietary technology. We also rely upon trade secrets, copyright protection,
confidentiality agreements with employees, know-how, expertise and lead-time to
attain and maintain our competitive position. To the extent that we rely upon
these measures, there can be no assurance that others might not independently
develop similar technology or that secrecy will not be breached.

Privacy Issues

         Because our applications and services are utilized to transmit and
manage highly sensitive and confidential health information, the security and
confidentiality concerns of our customers and their patients are a primary
concern. In order to enable our applications and services to transmit sensitive
and confidential medical information, we utilize advanced technologies designed
to ensure a high degree of security. These technologies generally include:

         o        security that requires a password to access our systems;

         o        user access restrictions that allow our customers to determine
                  the individuals who will have access to data and what level of
                  access each individual will have;

         o        encryption of data relating to our applications and services;
                  and

         o        a mechanism for preventing outsiders from improperly accessing
                  private data resources on our internal network and our
                  applications, commonly referred to as a "firewall."

         The level of data encryption utilized by our products is in compliance
with the encryption guidelines set forth in the proposed rule regarding security

                                       12
<PAGE>

and electronic signature standards in connection with HIPPA. Our customers also
implement their own procedures to protect the confidentiality of information
being transferred into and out of their computer network.

         Internally, we work to ensure the safe handling of confidential data by
employees by:

         o        using individual user names and passwords for each employee
                  handling electronic data; and

         o        requiring each employee to sign an agreement to comply with
                  all company policies, including our policy regarding handling
                  confidential information.

         We monitor proposed regulations that might affect our applications and
services, in order to ensure that we are in compliance with such regulations
when and if they are affected.

Government Regulation

         HEALTHCARE REGULATION. As a participant in the healthcare industry, our
operations and relationships are subject to regulation by federal and state laws
and regulations and enforcement by federal and state governmental agencies.
Sanctions may be imposed for violation of these laws. We believe our operations
are in substantial compliance with existing laws that are material to our
operations.

         HIPAA. HIPAA required the Secretary of the Department of Health and
Human Services, referred to as the Secretary, to promulgate national standards
to facilitate the electronic exchange of health information and to ensure the
confidentiality and security of such information.

         A substantial part of our activities involves the receipt or delivery
of confidential health information concerning members of health plans with whom
we have direct relationships. For example, we electronically transfer
confidential health information obtained from providers and health plans in
connection with our patient selection enrollment and ohms|cvd programs. The
results of this process are then transmitted to the proper recipient. On
December 28, 2000, the Secretary published a final rule setting standards to
limit the permissible use and disclosure of individually identifiable health
information by health care providers, health plans and health care
clearinghouses, known collectively as "covered entities." Certain requirements
of the rule extend to "business associates" of the covered entities. The covered
entities are required to enter into agreements with their business associates,
extending applicable provisions of the rule to those business associates. The
covered entities are responsible for enforcing those contractual provisions. The
Secretary's actions are mandated by HIPAA because Congress did not pass
legislation protecting health information privacy by the August 1999 deadline
set by HIPAA. The rule took effect on April 14, 2001, and all covered entities
(except small health plans with annual receipts of $5 million or less) are
required to be in compliance with this rule as of April 14, 2003.

                                       13
<PAGE>

         Because of the broad definition of "business associates" under the
final privacy rule, we would be, at a minimum, considered to be business
associates of covered entities. The rule establishes a complex regulatory
framework on a variety of subjects, including (1) disclosure and use of health
information, (2) individuals' rights to access and amend their health
information, (3) individuals' rights to an accounting of disclosures and (4)
administrative, technical and physical safeguards required of covered entities
that maintain or transmit protected health information. The rule generally
prohibits any disclosure or use of protected health information except as
authorized either by the rule or by the patient under standards set by the final
rule.

         In addition to the federal privacy rule described above, most states
have enacted patient confidentiality laws, which prohibit the disclosure of
confidential medical information. The federal privacy rule establishes minimum
standards and preempts conflicting state laws, less restrictive than HIPAA
regarding health information privacy. But it does not preempt conflicting state
laws more restrictive than HIPAA. The rule promulgated by the Secretary may
require substantial changes to our applications and services, policies and
procedures.

         In addition to the federal privacy rule, on August 12, 1998 the
Secretary issued proposed regulations addressing security standards regarding
the transmission of health information data under HIPAA. The security standards
address various areas, including, administrative procedures, physical
safeguards, technical security services and technical security mechanisms.
Security standards may require us to enter into agreements with certain of our
customers restricting the dissemination of health information and requiring
implementation of specified security measures. Final regulations are expected at
an undetermined date and will require compliance two years after the effective
date of the final rule. Although we are working to design our applications and
services to comply with the proposed security standards, there can be no
assurance that final security regulations will not require additional
modifications to our applications, policies and procedures.

         Lastly, the Secretary published the final transactions and code sets
rule in August 2000, which took effect on October 16, 2000. Its purpose is to
create uniformity in electronic data interchange (EDI) standards, which allow
computers to exchange information without human involvement. Compliance with
this rule is mandatory for most covered entities that engage in the eight
transactions covered in the rule, by October 16, 2002. However, the recently
enacted Administrative Simplification Compliance Act allows covered entities to
apply for a one-year extension of such date if the entity submits a plan to the
Secretary by October 15, 2002. We intend to comply with any rule which is
determined to be applicable to us.

         FDA REGULATION. The Food and Drug Administration, or FDA, generally has
the authority to regulate medical devices, including computer applications, when
devices are indicated, labeled or intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. We
do not believe that any of our current services are subject to FDA regulation as
medical devices, however, expansion of our application and service offerings
could subject us to FDA regulation.

                                       14
<PAGE>

         Our products, to the extent they may be deemed "medical devices," are
regulated by the FDA under the Federal Food, Drug and Cosmetics Act (the "FDCA")
and regulations promulgated thereunder.

         All medical devices sold in interstate commerce are subject to FDA
clearance. Our monitors are subject to pre-market notification (510(k)),
pursuant to which the FDA determines whether a new medical product is
"substantially equivalent" to a product that was on the market prior to May 28,
1976. Products found to be "substantially equivalent" to those products may
thereafter be sold. The FDA has the authority, which it has not yet exercised,
to issue performance standards for the type of monitors manufactured by us.

         Regulations by the FDA, known as Good Manufacturing Practices ("GMP"),
provide standards for manufacturing processes, facilities, and record-keeping
requirements with which we and our contract manufacturers must also comply. We
believe that the manufacturing and quality control procedures employed by us and
our contract manufacturers meet the GMP requirements. If the FDA should
determine that our monitors were not manufactured in accordance with GMP's, it
has the authority to order us to cease production and may require us to recall
products already sold by us. In addition, any facilities used to manufacture or
assemble our products will be subject to inspection by the FDA at least
biannually.

         The FDCA is not the exclusive source of regulation of medical devices
and, by its terms, allows state and local authorities to adopt more stringent
regulations for medical devices.

         REGULATION OF THE INTERNET. Laws and regulations applicable to
communications or commerce over the Internet may be adopted covering user
privacy, pricing, content, copyright, distribution and characteristics and
quality of products and services. In addition, some states or foreign countries
could apply existing laws concerning issues such as property ownership, sales
tax, libel and personal privacy to transactions conducted over the Internet.
Additional laws or regulations or application of laws to transactions over the
Internet could require us to change our operations or increase our cost of doing
business.

         To our knowledge and other than what we have described in this
statement and other than occupational health and safety laws and labor laws
which are generally applicable to most companies, our products are not subject
to governmental regulation by any federal, state or local agencies that would
affect the manufacture, sale or use of our products. We cannot, of course,
predict what sort of regulations of this type may be imposed in the future, but
we do not anticipate any unusual difficulties in complying with governmental
regulations that may be adopted in the future.

Insurance

         We maintain professional malpractice, errors and omissions and general
liability insurance for all of our locations and operations. We also carry
insurance policies to support our performance under contract with three health
plans. While we believe our insurance policies to be adequate in amount and
coverage for our current operations, there can be no assurance that coverage is

                                       15
<PAGE>

sufficient to cover all future claims or will continue to be available in
adequate amounts or at a reasonable cost. Our liability insurance coverage
provides for certain deductible levels to be paid by us. Estimated reserves to
cover potential payments under these policies have been provided in our
financial statements. We also maintain property and workers compensation
insurance for each of our locations with commercial carriers on relatively
standard commercial terms and conditions.

Employees

         We had 122 employees as of December 31, 2001. We believe our relations
with employees are good.

Item 2.  Properties.

         Our executive offices occupy approximately 9,000 square feet of office
space in Laurence Harbor, New Jersey. These facilities are used principally for
administrative offices, sales training, and marketing. In addition, we lease
approximately 2,000 square feet of space in Sag Harbor, New York used
principally for monitor repairs, assembly and quality control. We also lease
approximately 800 square feet in California for sales support. Management is
actively seeking additional space to support our growing operations.

Item 3.  Legal Proceedings.

         We brought a patent infringement and unfair competition action against
LifeMasters Supported Selfcare ("LifeMasters"). In the action, which is pending
in the U.S. District Court for the District of New Jersey under the caption
Q-Med, Inc v. LifeMasters Supported Selfcare, Inc. (CV-01-3469), we are seeking
damages and other relief for patent infringement, violation of the Lanham Act
and common law unfair competition. In November 2001, LifeMasters then brought
arbitration proceedings against both the company and IHMC, seeking, in
arbitration, compensatory and punitive damages in an unspecified amount,
together with costs and fees. In the arbitration proceedings, LifeMasters
asserts claim of fraud, constructive fraud, declaratory relief, breach of
contract, and claims for determination as to the validity, enforceability and
infringement of our patent, as well as for other relief. LifeMasters moved in
the U.S. District Court action, for an order, transferring, staying or
dismissing parts of our case, in favor of the arbitrations brought by
LifeMasters. We have opposed LifeMasters' motion and arbitrations, and will
vigorously defend against LifeMasters' claims, and in pursuit of our own.

         We are subject to claims and legal proceedings covering a wide range of
matters that arise in the ordinary course of business. It is management's
opinion that the ultimate resolution of these matters will not have a material
effect on our consolidated financial position and results of operations.

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

         None.

                                       16
<PAGE>

Executive Officers of the Registrant

         The following sets forth certain information concerning our executive
officers as of January 28, 2002:


         Officer                   Age      Position

         Michael W. Cox            59       President, Treasurer, Chief
                                            Executive Officer and Director since
                                            February 1983.

         Jane Murray               39       Executive Vice President, Chief
                                            Operating Officer and Director since
                                            January 1, 2002, Executive Vice
                                            President - Operations of IHMC since
                                            December 2000, various other
                                            positions with the company since
                                            1985.

         Teri J. Kraf              53       Senior Vice President - Program
                                            Implementation since January 1,
                                            2002. Vice President - Strategic
                                            Development since June 1988.

         John Siegel               45       Senior Vice President - Sales since
                                            April 17, 2001. Vice President -
                                            Field Services since 1998.

         Debra A. Fenton, CPA      37       Controller since 1990.

         Herbert H. Sommer, Esq.   43       Secretary and a Director since
                                            June 1996.

                                       17
<PAGE>
                                     PART II

Item 5.  Market for the Registrant's Common Stock and Related Security Holder
         Matters.

         Our common stock is traded in the Nasdaq Small Cap Market, under symbol
"QEKG". The following table sets forth the range of high and low bid quotations
for our shares reported by the Nasdaq Small Cap Market. This information
represents inter-dealer quotations, without retail mark-ups, mark-downs, or
commissions, and does not necessarily represent actual quotations.

Fiscal Year Ended November 30, 1999                  High              Low

First Quarter                                    $   4.000        $    2.375
Second Quarter                                       3.125             2.250
Third Quarter                                        5.625             2.750
Fourth Quarter                                       4.500             2.750

Fiscal Year Ended November 30, 2000                  High              Low

First Quarter                                    $  10.625        $    8.500
Second Quarter                                      10.125             6.125
Third Quarter                                        8.000             6.250
Fourth Quarter                                      11.375             7.000

Fiscal Year Ended November 30, 2001                  High              Low

First Quarter                                    $   7.906        $    3.188
Second Quarter                                       8.950             5.625
Third Quarter                                       14.450             8.410
Fourth Quarter                                      13.890             7.000

         As of January 28, 2002, the Company's common stock was held of record
by 348 persons. On January 28, 2002, the closing price reported was $15.40.

         We have never paid a cash dividend on our common stock. It is the
current policy of our Board of Directors to retain any earnings to finance the
operations and expansion of our business. The payment of dividends in the future
will depend upon our earnings, financial condition and capital needs and on
other factors deemed pertinent by the Board of Directors.

                                       18
<PAGE>

Item 6.  Selected Financial Data.
<TABLE>
<CAPTION>
                        For the Years Ended November 30:

                                      2001           2000            1999           1998           1997
                                      ----           ----            ----           ----           ----
<S>                              <C>             <C>            <C>            <C>            <C>
Results of Operations
Net sales                        $ 8,021,634     $ 2,872,205    $ 2,040,520    $ 2,046,627    $ 2,412,149
Cost of sales                      3,300,526       1,424,779      1,167,020      1,099,515      1,406,480
                                 -----------     -----------    -----------    -----------    -----------
Gross profit                       4,721,108       1,447,426        873,500        947,112      1,005,669

Selling, general and
 administrative expenses           5,424,183       3,045,052      2,319,277      2,623,984      3,038,949
Provision for uncollectible
 accounts                                  -               -         74,148        289,716        214,601
Research and development
 expenses                            757,355         524,275        571,449        486,843        551,681
Debt conversion expense                    -          38,623        737,135              -              -
                                 -----------     -----------    -----------    -----------    -----------
Loss from operations              (1,460,430)     (2,160,524)    (2,828,509)    (2,453,431)    (2,799,562)


Gain on sale of investments           24,180          15,406              -              -        (30,574)
Interest income                      232,607         133,668         68,126         57,081         98,214
Interest expense                     (16,517)        (33,168)      (143,891)      (179,704)       (25,430)
Loss in operations of joint
 venture                             (42,500)       (146,148)
                                 -----------     -----------    -----------    -----------    -----------
Loss before income tax benefit    (1,262,660)     (2,190,766)    (2,904,274)    (2,576,054)    (2,757,352)


Income tax benefit
 Gain on sale of state net
  operating loss carryovers          219,603         309,256              -              -              -
                                 -----------     -----------    -----------    -----------    -----------
Net loss                         $(1,043,057)    $(1,881,510)   $(2,904,274)   $(2,576,054)   $(2,757,352)

Other comprehensive
 income (loss)
  Unrealized gains (losses)
   on securities available
   for sale                           32,513               -              -              -              -

Comprehensive loss               $(1,010,544)    $(1,881,510)   $(2,904,274)   $(2,576,054)   $(2,757,352)
                                 ===========     ===========    ===========    ===========    ===========

Per Share Data

Net Loss per share -
 basic and diluted               $      (.08)    $      (.15)   $      (.25)   $      (.26)   $      (.29)
                                 ===========     ===========    ===========    ===========    ===========


Balance Sheet Data (at end of periods)

Working capital                  $ 5,749,732     $ 2,009,012    $   691,668    $ 2,392,161    $   803,415

Total assets                       8,167,511       3,390,428      1,966,050      3,757,424      2,450,533

Total liabilities                  1,472,990         739,145        824,261      1,638,425        888,015

Stockholders' equity               6,694,521       2,651,283      1,141,789     (1,902,992)     1,562,518

Temporary equity, put                      -               -      4,021,991              -              -

Stockholders equity (including
 temporary equity)                 6,694,521       2,651,283      1,141,789      2,118,999      1,562,518
</TABLE>
                                       19
<PAGE>
<TABLE>
<CAPTION>
Selected Quarterly Financial Data (Unaudited)

                                                          For the Quarters Ending 2001
                                        February 28,        May 31,       August 31,    November 30,      Total

<S>                                   <C>               <C>              <C>           <C>             <C>
Net sales                             $   1,207,927     $   1,654,698    $ 2,129,421   $  3,029,588    $   8,021,634
Gross profit                          $     690,722     $     937,690    $ 1,155,768   $  1,936,928    $   4,721,108
Net income (loss)                     $    (283,975)    $    (516,275)   $  (382,232)  $    139,425    $  (1,043,057)
Net Income (loss) per share           $        (.02)    $        (.04)   $      (.03)  $        .01    $        (.08)

<CAPTION>
                                                          For the Quarters Ending 2000
                                            February 28,      May 31,      August 31,   November 30,     Total
<S>                              <C>             <C>            <C>            <C>            <C>
Net sales                             $     530,389     $     542,562    $   835,745   $    963,509    $   2,872,205
Gross profit                          $     233,402     $     223,872    $   467,469   $    522,683    $   1,447,426
Net income (loss)                     $    (233,159)    $    (532,689)   $  (505,573)  $   (610,089)   $  (1,881,510)
Net Income (loss) per share           $        (.02)    $        (.04)   $      (.04)  $       (.05)   $        (.15)
</TABLE>

                                       20
<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.

         The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements, and Notes thereto, contained
elsewhere in this report.

Results of Operations

         The following table presents the percentage of total revenue for the
periods indicated and changes from period to period of certain items included in
the Company's Consolidated Statements of Operations.
<TABLE>
<CAPTION>
                                                             % For                        Period-to-Period
                                                          Year Ended                         % Changes
                                                        November 30,                         ---------
                                                        ------------                  2001       2000      1999
                                                                                       vs.        vs.       vs.
                                                    2001      2000      1999          2000       1999      1998
                                                    ----      ----      ----          ----       ----      ----
<S>                                                 <C>       <C>       <C>          <C>        <C>        <C>
Net sales                                           100.0     100.0     100.0        179.3       40.8        (.3)
Cost of sales                                        41.1      49.6      57.2        131.7       22.1        6.1
                                                    ------    ------   -------
Gross profit                                         58.9      50.4      42.8        226.2       65.7       (7.8)

Selling, general and administrative
 expenses                                            67.6     106.0     113.7         78.1       31.3      (11.6)
Provisions for uncollectible accounts                  -         -        3.6           *          *       (74.4)
Research and development expenses                     9.5      18.3      28.0         44.5       (8.3)      17.4
Debt conversion expense                                -        1.3      36.1           *       (94.8)        *
                                                    ------    ------   -------
(Loss) from operations                              (18.2)    (75.2)   (138.6)       (32.4)     (23.6)      15.3
Gain on sale of investments                            .3        .5        -          57.0         *          *
Interest Income                                       2.9       4.7       3.3         74.0       96.2       19.3
Interest expense                                      (.2)     (1.2)     (7.0)       (50.2)     (76.9)     (19.9)
Loss in operations of joint venture                   (.5)     (5.1)       -         (70.9)        *          *
                                                    ------    ------   -------
(Loss) before income tax benefit                    (15.7)    (76.3)   (142.3)       (42.4)     (24.6)      12.7
Income tax benefit
 Gain on sale of state net operating
  loss carryforwards                                  2.7      10.8        -         (29.0)        *          *
                                                    ------    ------   -------
Net (loss)                                          (13.0)    (65.5)   (142.3)       (44.6)     (35.2)      12.7
Other comprehensive income(loss)
  Unrealized gains(losses) on
   securities available for sale                       .4        -         -            *          *          *
Comprehensive (loss)                                (12.6)    (65.5)   (142.3)       (46.3)     (35.2)      12.7
                                                    ======    ======   =======
</TABLE>
*Not meaningful

                                       21
<PAGE>

Fiscal 2001 Compared to Fiscal 2000

         Total revenues for fiscal 2001 increased by approximately $5,149,000 or
179.3% when compared to fiscal 2000. The total revenue increase consists of an
increase in the disease management segment of approximately $5,474,000 or 266%
compared to fiscal 2000 offset by a decrease in medical equipment sales of
approximately $325,000 or 40% compared to fiscal 2000. The increase in revenues
from 2000 to 2001 primarily resulted from an increase in total membership from
health plan contracts for our disease management business segment to
approximately 1.1 million members for fiscal 2001 compared to approximately
400,000 members for fiscal 2000. This increase was primarily the result of new
health plan contracts signed and implemented during fiscal 2000 and 2001. At
November 30, 2001, of the 1,073,046 plan members under contract, we had 913,627
commercial members and 159,419 Medicare+Choice members. Revenue for
Medicare+Choice members are significantly higher than commercial members. We did
not have a significant number of Medicare+Choice members in fiscal 2000. We
expect to have a slightly higher percentage of Medicare+Choice membership in
fiscal 2002, and, if this occurs, increases in revenue may result primarily from
this change in membership mix. We expect revenue growth for 2002 to continue to
increase over 2001 as a result of additional members enrolled under our existing
contracts as well as anticipated new health plan contracts during fiscal 2002.

         During fiscal 2001, we sold unused state net operating loss
carryforwards for cash by way of the New Jersey Technology Tax Certificate
Transfer Program through our IHMC subsidiary. We received approximately $220,000
from this transaction. We also had remaining tax benefits, which were sold as
part of the program during fiscal 2002 in which we received approximately
$130,000.

         Gross profit margins increased to 58.9% in fiscal 2001 from 50.4% in
fiscal 2000. The increase was primarily the result of revenue growth in the
disease management segment. During fiscal 2001 we were able to contract with
different plans within the same geographic area which also assisted in improving
gross margins.

         Selling, general and administrative expenses for the year ended
November 30, 2001 increased by approximately $2,379,000 or 78.1% when compared
to fiscal 2000. The increase includes a non-recurring charge of $354,000
associated with an executive employee's compensation expense and severance
payment. Without this charge, selling general and administrative expenses would
have increased by approximately $2,025,000 or 66.5% when compared to 2000. The
increase primarily resulted from an increase in salaries and benefits associated
with increased staff to support the higher levels of members enrolled in our
disease management programs, incentive payments for new contracts and
achievement of targeted performance goals. We expect selling, general and
administrative expenses to continue to increase as we add more health plan
contracts, increase staffing levels and increase employee compensation
associated with improvement of operating performance.

                                       22
<PAGE>

         Research and development expenses increased in fiscal 2001 by
approximately $233,000 or 44.5% when compared to fiscal 2000. The increase is
primarily the increase in staffing levels in our Information Technology
department. We have dedicated these resources primarily on new product software
development and upgrades to existing technology in order to support our current
operations, new disease states managed and the increased volume of patients
associated.

Fiscal 2000 Compared with Fiscal 1999

         Net sales for fiscal 2000 increased by approximately $832,000 or 40.8%
compared to fiscal 1999. During fiscal 2000, we added a substantial volume to
our disease management segment, increasing this segments revenues to
approximately $2,040,000 from approximately $869,000 or by 137% when compared to
the prior year. The system has demonstrated "cost effective" outcomes while
improving the health status of the patient. Subsequent to year-end we added
275,000 members to our disease management segment and have executed an agreement
to cover an additional 400,000 members beginning in the second quarter of 2001.
The capital equipment segment of our business showed a decline in revenues of
approximately $360,000 or 30.7%.

         During fiscal 2000, we sold unused state net operating loss
carryforwards for cash through the New Jersey Technology Tax Certificate
Transfer Program. We received $309,256 from this transaction.

         Debt conversion expense for the fiscal year ended November 30, 2000 was
reported in the amount of $38,623. This non-cash charge resulted from the
conversion of the remaining $50,000 of debt held by the Galen Funds to equity at
a price of $2.87 per share rather than the conversion price of $3.6875
originally set at the time the Note was issued. Without the debt conversion
expense, net losses for the year ended November 30, 2000 would have been
$(1,842,887) compared to $(2,167,139) for the prior fiscal year.

         Gross profit margins increased to 50.4% in fiscal 2000 from 42.8% in
fiscal 1999. The increase was primarily due to the revenue increase in the
disease management segment.

         Selling, general and administrative expenses for the year ended
November 30, 2000 increased by approximately $726,000 or 31% when compared to
fiscal 1999, primarily due to the increased selling activity related to the
disease management segment as well as increases in administrative functions
supporting enrollment of disease management patients.

         Research and development expenses decreased by approximately $47,000 or
8.3% when compared to the prior year. We have focused these efforts on product
software development as well as upgrading existing technology to support new
diseases and a larger volume of patients.

                                       23
<PAGE>

Liquidity and Capital Resources

         To date, our principal sources of working capital have been provided by
proceeds from public and private placements of securities and the sale of
certain assets. Since our inception, issuance of securities and sale of assets
have generated approximately $31,000,000 less applicable expenses.

         In March and April 2000 we sold an aggregate of 449,014 shares of
common stock to two private investors for approximately $2,985,000, net of
expenses.

         On April 13, 2000, the remaining $50,000 principal amount of notes
relating to a private placement in 1997, plus accrued interest of $134,582 was
converted into 64,315 shares of common stock. On April 4, 2001 we sold 796,813
shares of common stock for approximately $4,000,000 to three investors led by
Galen Partners III, L.P. As part of this transaction, we also extended the terms
on outstanding warrants to November 12, 2007.

         Working capital was $5,749,732 at November 30, 2001 compared to
$2,009,012 at November 30, 2000 and ratios of current assets to current
liabilities are 5.0:1 and 4.1:1 as of November 30, 2001 and 2000, respectively.
The working capital increase of approximately $3,700,000 was primarily due to
the equity investment of Galen Partners III, L.P. totaling approximately
$4,000,000.

         On September 11, 2001 we entered into a loan agreement with First Union
National Bank for a line of credit of $1 million. The annual interest rate is
the lower of the bank's reference rate minus 1% or the LIBOR Market Index Rate
plus 1.5%. The entire $1 million is currently available.

         We anticipate that funds generated from operations, together with cash
and investments, and available credit under our credit line should be sufficient
to fund our current level of growth. However, to the extent the expansion of our
operations requires significant additional resources or certain forms of
financial guarantees to assure our performance under the terms of new health
plan contracts, 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.

Additional Factors That May Affect Future Results

         Future Operating Results. Future operating results, which reflect
management's current expectations may be impacted by a number of factors that
could cause actual results to differ materially from those stated herein. These
factors include worldwide economic and political conditions, terrorist's
activities, industry specific factors, our ability to maintain access to
external financing sources and its financial liquidity, the acceptance of our
disease management system by health plan organizations, and our ability to
manage expense levels.

         Need for Additional Capital. As of November 30, 2001, we had
approximately $5,968,000 cash and short term investments. While we have
experienced negative cash flows since fiscal 1995 we expect to have positive
cash flow beginning in fiscal 2002. Nevertheless, our future success is highly

                                       24
<PAGE>

dependent upon our continued access to capital markets, which we believe are
necessary for the continued support of our growth. In the event we are unable to
maintain access to our existing financing sources, or obtain other sources of
financing, there would be a material adverse effect on our business, financial
position and results of operations.

         Fluctuations in our quarterly operating results may cause volatility in
the price of our common stock and the debentures. Given the nature of the
markets in which we participate, we cannot reliably predict future revenue and
profitability. As demand for our services has increased in recent periods, our
quarterly sales and operating results have become highly dependent on the timing
of contracts signed and programs implemented during the quarter, which are
difficult to forecast. In addition, a portion of our operating expenses is
relatively fixed in nature due to our sales, research and development costs.

         We are in the process of implementing new information systems, and
problems with the redesign and implementation of these new systems could
interfere with our operations. We are in the process of implementing new
information systems to enhance our current systems in order to improve our
operating effectively and expand the range of disease management services we
offer. We may not be successful in implementing these new systems and
transitioning data. As part of this effort, we are implementing new enterprise
resource planning software applications to manage our business operations.
Failure to smoothly and successfully implement this and other systems could
temporarily interrupt our operations and adversely impact our ability to run our
business. In addition, any failure or significant downtime in our legacy or new
information systems could prevent us from efficiently implementing disease
management programs, reconciling cost savings and could harm our business.

         If we do not introduce successful new disease management services in a
timely manner, our services will become obsolete, and our operating results will
suffer. Our services are for industries that are characterized by rapid
technological changes, frequent new product and service introductions and
changing industry standards. Without the timely introduction of new products,
services and enhancements, our products and services will become technologically
obsolete over time, in which case our revenue and operating results would
suffer. The success of our new product and service offerings will depend on
several factors, including our ability to:

         o        properly identify customer needs;
         o        innovate and develop new technologies, services and
                  applications;
         o        successfully commercialize new technologies in a timely
                  manner;
         o        differentiate our offerings from our competitors' offerings;
         o        price our services competitively; and
         o        anticipate our competitors' announcements of new products,
                  services or technological innovations

         Our business will suffer if we are not able to retain and hire key
personnel. Our future success depends partly on the continued service of our key
research, engineering, sales, marketing, manufacturing, executive and
administrative personnel. If we fail to retain and hire a sufficient number of

                                       25
<PAGE>

these personnel, we will not be able to maintain or expand our business.
Although the labor market has changed dramatically within the past year, and our
attrition rate has dropped, there is still intense competition for certain
highly technical specialties in geographic areas where we continue to recruit.

         Acquisitions, strategic alliances, and joint ventures may result in
financial results that are different than expected. We engage in discussions
with third parties relating to possible acquisitions, strategic alliances, and
joint ventures. As a result of such transactions, our financial results may
differ from the investment community's expectations in a given quarter. In
addition, acquisitions and strategic alliances may require us to integrate a
different company culture, management team and business infrastructure. We may
have difficulty developing, manufacturing and marketing the products of a
newly-acquired company in a way that enhances the performance of our combined
businesses or product lines to realize the value from expected synergies.
Depending on the size and complexity of an acquisition, our successful
integration of the entity depends on a variety of factors, including:

         o        the retention of key employees;
         o        the management of facilities and employees in separate
                  geographic areas;
         o        the retention of key customers; and
         o        the integration or coordination of different research and
                  development, product manufacturing and sales programs and
                  facilities

         All of these efforts require varying levels of management resources,
which may divert our attention from other business operations. If we do not
realize the expected benefits from such transactions, our financial position
results and stock price could be negatively impacted.

         We and our customers are subject to various governmental regulations,
compliance with which may cause us to incur significant expenses, and if we fail
to maintain satisfactory compliance with certain regulations, we may be forced
to curtail operations, and we could be subject to civil or criminal penalties.
Our businesses are subject to various significant federal, state and local,
health and safety, health information disclosure, and labor regulations. These
regulations are complex, change frequently and have tended to become more
stringent over time. We may be required to incur significant expenses to comply
with these regulations or to remedy violations of these regulations. Any failure
by us to comply with applicable government regulations could also result in
cessation of our operations or portions of our operations, or impositions of
fines and restrictions on our ability to carry on or expand our operations.

         Litigation regarding patents or intellectual property could be costly
and time consuming. Any litigation regarding patents or other intellectual
property could be costly and time consuming and could divert our management and
key personnel from our business operations. The complexity of the technology
involved and the uncertainty of intellectual property litigation increase these
risks. Claims of intellectual property infringement might also require us to
enter into costly royalty or license agreements. However, we may not be able to

                                       26
<PAGE>

obtain royalty or license agreements on terms acceptable to us, or at all. We
also may be subject to significant damages or injunctions against development
and sale of certain of our products.

         Third parties may infringe our intellectual property, and we may expend
significant resources enforcing our rights or suffer competitive injury. Our
success depends in large part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our proprietary
rights. If we fail to successfully enforce our intellectual property rights, our
competitive position could suffer, which could harm our operating results.

         Our pending patent and trademark registration applications may not be
allowed, or competitors may challenge the validity or scope of these patents or
trademark registrations. In addition, our patents may not provide us a
significant competitive advantage.

         We may be required to spend significant resources to monitor and police
our intellectual property rights. We may not be able to detect infringement and
our competitive position may be harmed before we do so. In addition, competitors
may design around our technology or develop competing technologies. Intellectual
property rights may also be unavailable or limited in some foreign countries,
which could make it easier for competitors to capture market share.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

         Quantitative and qualitative disclosures about market risk as set forth
in Note 2 of the Notes to Consolidated Financial Statement.

Item 8.  Financial Statements and Supplementary Data.

         Attached.

Item 9.  Disagreements on Accounting and Financial Disclosure.

         None.

                                       27
<PAGE>

                           QMED, INC. AND SUBSIDIARIES

                               For the Years Ended
                           November 30, 2001 and 2000





                                                                        Page

Independent Auditors' Report                                             F-1

Consolidated Balance Sheets                                              F-2

Consolidated Statements of Operations and Comprehensive Loss             F-3

Consolidated Statements of Stockholders' Equity                          F-4

Consolidated Statements of Cash Flows                                    F-5

Notes to Consolidated Financial Statements                           F-6 - F-21


                                       28
<PAGE>

                          Independent Auditors' Report


Board of Directors
qmed, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of qmed, Inc. and
Subsidiaries as of November 30, 2001 and 2000, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity and cash
flows for the years ended November 30, 2001, 2000 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly in all
material respects the financial position of qmed, Inc. and Subsidiaries as of
November 30, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years ended November 30, 2001, 2000 and 1999, in
conformity with accounting principles generally accepted in the United States of
America.

In connection with our audits of the financial statements referred to above, we
audited the financial schedule listed under Item 14. In our opinion, the
financial schedule, when considered in relation to the financial statements
taken as a whole, presents fairly, in all material respects, the information
stated therein.


                                                 AMPER, POLITZINER & MATTIA P.A.

                                             /s/ AMPER, POLITZINER & MATTIA P.A.

January 14, 2002
Edison, New Jersey

                                      F-1
<PAGE>
<TABLE>
<CAPTION>
                                               QMED, INC. AND SUBSIDIARIES
                                               Consolidated Balance Sheets
                                                       November 30,

                                                           Assets

                                                                                               2001                  2000
                                                                                               ----                  ----
<S>                                                                                     <C>                   <C>
Current assets
    Cash and cash equivalents                                                           $         531,450     $        576,537
    Investments in securities                                                                   5,436,290            1,651,250
    Accounts receivable, net of allowance for
     doubtful accounts of $75,000 and $42,000                                                     886,028               85,416
    Inventory                                                                                     178,386              188,663
    Prepaid expenses and other current assets                                                     159,787              154,785
                                                                                        ------------------    -----------------
                                                                                                7,191,941            2,656,651

Property and equipment, net of accumulated depreciation                                           466,456              447,693
Product software development costs, net                                                           277,812              155,031
Other assets                                                                                      231,302              131,053
Investment in joint venture                                                                             -                    -
                                                                                        -----------------     -----------------
                                                                                        $       8,167,511     $      3,390,428
                                                                                        ==================    =================

                                              Liabilities and Stockholders' Equity

Current liabilities
    Accounts payable and accrued liabilities                                            $         435,479     $        287,832
    Lease payable, current portion                                                                 53,034               68,683
    Accrued salaries and commissions                                                              498,815              156,115
    Fees reimbursable to health plans                                                              15,524               20,800
    Deferred revenue                                                                              360,524                    -
    Deferred warranty revenue                                                                      78,833              114,209
                                                                                        ------------------    -----------------
                                                                                                1,442,209              647,639

Leases payable, long term                                                                          30,781               81,833
Deferred warranty revenue, long term                                                                    -                9,673
                                                                                        ------------------    -----------------
                                                                                                1,472,990              739,145

Commitments and Contingencies

Stockholders' equity
    Common stock, $.001 par value, 40,000,000 shares
     authorized, 14,175,713 and 12,846,631 shares issued
     and 14,153,713 and 12,824,631 outstanding, respectively                                       14,175               12,846
    Paid-in capital                                                                            31,541,800           26,489,347
    Accumulated deficit                                                                       (24,818,342)         (23,775,285)
    Accumulated other comprehensive income
      Unrealized gains on securities available for sale                                            32,513                    -
                                                                                        ------------------    -----------------
                                                                                                6,770,146            2,726,908

    Less treasury stock at cost, 22,000 common shares                                             (75,625)             (75,625)
                                                                                        ------------------    -----------------
      Total stockholders' equity                                                                6,694,521            2,651,283
                                                                                        ------------------    -----------------
                                                                                        $       8,167,511     $      3,390,428
                                                                                        ==================    =================
</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                                           QMED, INC. AND SUBSIDIARIES
                          Consolidated Statements of Operations and Comprehensive Loss
                                        For the Years Ended November 30,


                                                                       2001                   2000                   1999
                                                                       ----                   ----                   ----
<S>                                                            <C>                   <C>                    <C>
Sales
    Disease management services                                $        7,534,931    $         2,060,461    $          869,294
    Medical equipment                                                     486,703                811,744             1,171,226
                                                               -------------------   --------------------   -------------------
                                                                        8,021,634              2,872,205             2,040,520
                                                               -------------------   --------------------   -------------------

Cost of sales
    Disease management services                                         3,017,380                937,560               610,814
    Medical equipment                                                     283,146                487,219               556,206
                                                               -------------------   --------------------   -------------------

Cost of sales                                                           3,300,526              1,424,779             1,167,020
                                                               -------------------   --------------------   -------------------

Gross profit                                                            4,721,108              1,447,426               873,500

Selling, general and administrative expenses                            5,424,183             3,045,052              2,319,277
Provision for uncollectible accounts                                            -                      -                74,148
Research and development expenses                                         757,355                524,275               571,449
Debt conversion expense                                                         -                 38,623               737,135
                                                               -------------------   --------------------   -------------------

Loss from operations                                                   (1,460,430)            (2,160,524)           (2,828,509)

Gain on sale of investments                                                24,180                 15,406                     -
Interest income                                                           232,607                133,668                68,126
Interest expense                                                          (16,517)               (33,168)             (143,891)
Loss in operations of joint venture                                       (42,500)              (146,148)                    -
                                                               -------------------   --------------------   ------------------

Loss before income tax benefit                                         (1,262,660)            (2,190,766)           (2,904,274)

Income tax benefit
    Gain on sale of state net operating
     loss carryovers                                                      219,603                309,256                     -
                                                               -------------------   --------------------   -------------------

Net loss                                                               (1,043,057)            (1,881,510)           (2,904,274)

Other comprehensive income (loss)
    Unrealized gains (losses) on
     securities available for sale                                         32,513                      -                     -
                                                               -------------------   --------------------   -------------------

Comprehensive loss                                             $       (1,010,544)   $        (1,881,510)   $       (2,904,274)
                                                               ===================   ====================   ===================

Net loss per share - basic and diluted                         $             (.08)   $              (.15)   $             (.25)
                                                               ===================   ====================   ===================

Weighted average common shares
 outstanding - basic and diluted                                       13,866,216             12,650,831            11,761,054
                                                               ===================   ====================   ===================
</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
<TABLE>
<CAPTION>
                                           QMED, INC. AND SUBSIDIARIES
                                 Consolidated Statements of Stockholders' Equity
                                        For the Years Ended November 30,



                                                                                    Accumulated      Common Stock
                                     Common Stock                                       Other      Held in Treasury
                                 -------------------      Paid-in       Accumulated Comprehensive ------------------
                                 Shares       Amount      Capital         Deficit      Income      Shares     Amount        Total
                                 ------       ------      -------         -------      ------      ------     ------        -----
<S>                             <C>          <C>       <C>            <C>            <C>            <C>     <C>        <C>
Balances - November 30, 1998    11,586,321   $11,587   $ 17,150,547   $(18,989,501)  $       -      22,000  $(75,625)  $ (1,902,992)

  Elimination of put option
   related to convertible debt           -         -      4,021,991              -           -           -         -      4,021,991

  Issuance of common stock
   in exchange for services          1,000         1          2,999              -           -           -         -          3,000

  Stock issued in conversion
   of debt                         538,922       539        872,944              -           -           -         -        873,483

  Securities issued to induce
   debt conversion                       -         -        737,135              -           -           -         -        737,135

  Exercise of stock options         37,335        37        104,798              -           -           -         -        104,835

  Issuance of common stock
   for cash                         95,203        95        208,516              -           -           -         -        208,611

  Net loss                               -         -              -     (2,904,274)          -           -         -     (2,904,274)
                                ----------   -------   ------------   ------------   ---------      ------  --------    -----------
Balance - November 30, 1999     12,258,781    12,259     23,098,930    (21,893,775)          -      22,000   (75,625)     1,141,789

  Exercise of stock options
   and warrants for cash            74,521        73        167,580              -           -           -         -        167,653

  Sale of stock to Quest
   Diagnostics for cash            285,714       286      1,984,714              -           -           -         -      1,985,000

  Sale of stock to private
   investor for cash               163,300       163      1,000,049              -           -           -         -      1,000,212

  Stock issued in conversion
   of debt                          64,315        65        184,517              -           -           -         -        184,582

  Securities issued to induce
   debt conversion                       -         -         38,623              -           -           -         -         38,623

  Amortization of non-employee
   stock options                         -         -         14,934              -           -           -         -         14,934

  Net loss                               -         -              -     (1,881,510)          -           -         -     (1,881,510)
                                ----------   -------   ------------   ------------   ---------      ------  --------    -----------
Balance - November 30, 2000     12,846,631    12,846     26,489,347    (23,775,285)          -      22,000   (75,625)     2,651,283

  Exercise of stock options
   and warrants                    532,269       532        868,890              -           -           -         -        869,422

  Sale of stock to Galen
   Associates for cash             796,813       797      3,954,361              -           -           -         -      3,955,158

  Stock compensation expense             -         -        199,334              -           -           -         -        199,334

  Amortization of non-employee
   options                               -         -         29,868              -           -           -         -         29,868

  Net loss                               -         -              -     (1,043,057)          -           -         -     (1,043,057)

Unrealized holding gains on
 securities available for sale           -         -              -              -      32,513           -         -         32,513
                                ----------   -------   ------------   ------------   ---------      ------  --------    -----------
Balance - November 30, 2001     14,175,713   $14,175   $ 31,541,800   $(24,818,342)  $  32,513      22,000  $(75,625)   $ 6,694,521
                                ==========   =======   ============   ============   =========      ======  ========    ===========

</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                           QMED, INC. AND SUBSIDIARIES
                                      Consolidated Statements of Cash Flows
                                        For the Years Ended November 30,


                                                                              2001               2000                1999
                                                                              ----               ----                ----
<S>                                                                    <C>                 <C>                 <C>
Cash flows from operating activities
   Net loss                                                            $    (1,043,057)    $    (1,881,510)    $    (2,904,274)
                                                                       ---------------     ---------------     ---------------
   Adjustments to reconcile net loss to
    net cash (used) by operating activities
     Gain on sale of investments                                               (24,180)            (15,406)                  -
     Loss in operations of joint venture                                        42,500             146,148                   -
     Depreciation and amortization                                             272,601             248,732             258,975
     Debt conversion expense                                                         -              38,623             737,135
     Stock compensation expense                                                199,334                   -                   -
     Amortization non-employee stock options                                    29,868              14,934                   -
     (Increase) decrease in
       Accounts receivable                                                    (800,612)             85,241             133,808
       Inventory                                                                10,277             184,079             131,252
       Prepaid expenses and other current assets                                (5,002)           (120,129)             23,120
     Increase (decrease) in
       Accounts payable and accrued liabilities                                485,071             101,404             131,564
       Deferred revenue                                                        315,475                   -                   -
       Other                                                                     2,573             (14,869)            (42,529)
                                                                       ---------------     ---------------     ---------------
         Total adjustments                                                     527,905             668,757           1,373,325
                                                                       ---------------     ---------------     ---------------
                                                                              (515,152)         (1,212,753)         (1,530,949)
                                                                       ---------------     ---------------     ---------------

Cash flows from investing activities
   Proceeds from sale of securities available for sale                       8,399,747           1,700,000                   -
   Purchase of securities available for sale                               (12,213,094)         (3,335,844)                  -
   Capital expenditures                                                       (516,967)           (297,292)            (66,246)
   Proceeds from sale of investments                                            85,000                   -                   -
   Investment in joint venture                                                 (42,500)           (146,148)                  -
                                                                       ---------------     ---------------     ---------------
                                                                            (4,287,814)         (2,079,284)            (66,246)
                                                                       ---------------     ---------------     ---------------
Cash flows from financing activities
   Net proceeds from issuance of common
    stock and put options                                                    4,824,580           3,152,865             316,446
   Payments on capital leases                                                  (66,701)            (78,721)                  -
                                                                       ---------------     ---------------     ---------------
                                                                             4,757,879           3,074,144             316,446
                                                                       ---------------     ---------------     ---------------

Net change in cash and cash equivalents                                        (45,087)           (217,893)         (1,280,749)

Cash and cash equivalents - beginning                                          576,537             794,430           2,075,179
                                                                       ---------------     ---------------     ---------------

Cash and cash equivalents - ending                                     $       531,450     $       576,537     $       794,430
                                                                       ===============     ===============     ===============

Supplemental disclosure of cash paid
   Interest                                                            $        16,517     $       152,963     $        27,891
   Income taxes                                                                 10,112               6,834               8,691

Non-cash investing and financing activities:
On January 8, 2001, the Company received a note receivable in the amount of
$91,059 from an employee for the exercise of stock options. The note was paid on
August 29, 2001.
</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 1 -          Significant Accounting Policies
                  -------------------------------
                  Nature of Business
                  ------------------
                  The Company operates in two industry segments:
                  disease-management services and medical equipment sales. The
                  majority of QMed, Inc.'s operations consist primarily of
                  Interactive Heart Management Corp. ("IHMC"), a wholly owned
                  subsidiary that provides disease management services to health
                  plans nationwide.

                  Principles of Consolidation
                  ---------------------------
                  The consolidated financial statements include the accounts of
                  QMed, Inc., its wholly owned subsidiary, Interactive Heart
                  Management Corp. and its majority-owned (83%) inactive
                  subsidiary, Heart Map, Inc. (the "Company"). All intercompany
                  accounts and transactions have been eliminated in
                  consolidation. Investments in joint ventures are accounted for
                  under the equity method.

                  Cash and Cash Equivalents
                  -------------------------
                  The Company considers all highly liquid debt instruments
                  purchased with a maturity of three months or less to be cash
                  equivalents for financial statement purposes.

                  Concentration of Credit Risk
                  ----------------------------
                  Financial instruments that potentially subject the Company to
                  concentrations of credit risk consist of cash and cash
                  investments. The Company restricts cash and cash investments
                  to financial institutions with high credit standings. The
                  Company has not experienced any losses on its deposits of cash
                  and cash equivalents.

                  Investments in Securities
                  -------------------------
                  The Company accounts for investments in securities pursuant to
                  the Statement of Financial Accounting Standards (SFAS) No.
                  115, "Accounting for Certain Investments in Debt and Equity
                  Securities." Under this Statement, the Company's securities
                  with a readily determinable fair value have been classified as
                  available for sale and are carried at fair value with an
                  offsetting adjustment to Stockholders' Equity. Net unrealized
                  gains and losses on marketable securities are credited or
                  charged to accumulated other comprehensive income.

                  Inventory
                  ---------
                  Inventory consists of finished units, components and supplies,
                  and is stated at the lower of cost (moving weighted-average
                  method) or market.

                  Depreciation and Amortization
                  -----------------------------
                  Property and equipment are carried at cost. Depreciation is
                  computed using the straight-line method for financial
                  statement purposes over a five-year period. Leasehold
                  improvements are amortized on a straight-line basis over the
                  term of the lease. Repair and maintenance costs are expensed,
                  while additions and betterments are capitalized. The cost and
                  related accumulated depreciation of assets sold or retired are
                  eliminated from the accounts and any gains or losses are
                  reflected in earnings.

                                      F-6
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 1 -          Significant Accounting Policies - (continued)
                  --------------------------------------------
                  Comprehensive Income
                  --------------------
                  Comprehensive income as defined includes all changes in equity
                  during a period from non-owner sources. Accumulated other
                  comprehensive income, as presented on the accompanying
                  consolidated balance sheets consists of unrealized gains on
                  securities, net of income tax.

                  Financial Instruments
                  ---------------------
                  The carrying amounts of financial instruments, including cash
                  and cash equivalents, accounts receivable and accounts payable
                  approximated fair value as of November 30, 2001, because of
                  the relative short maturity of these instruments. The carrying
                  value of leases payable approximated fair value at November
                  30, 2001, based upon current rates for the same or similar
                  instruments.

                  Product Software Development Costs
                  ----------------------------------
                  The Company recognizes Product Software development costs in
                  accordance with Statement of Position ("SOP") 98-1,
                  "Accounting for the Costs of Computer Software Developed or
                  Obtained for Internal Use." As such, the Company expenses all
                  costs incurred that relate to the planning and post
                  implementation phases of development. Costs incurred in the
                  development phase are capitalized and amortized over the
                  estimated useful life of the software developed, which is
                  generally 60 months.

                  Stock-Based Compensation
                  ------------------------
                  Statement of Financial Accounting Standards No. 123
                  "Accounting for Stock Based Compensation" ("SFAS 123") allows
                  a company to adopt a fair value based method of accounting of
                  its stock-based compensation plans or continue to follow the
                  intrinsic value method of accounting prescribed by Accounting
                  Principles Board Opinion ("APB") No. 25, "Accounting for Stock
                  Issued to Employees." The Company accounts for stock-based
                  compensation in accordance with the provisions of APB No. 25,
                  and complies with the disclosure provision of SFAS No. 123.
                  Under APB No. 25, compensation cost for stock options is
                  measured as the excess, if any, of the quoted market price of
                  the Company's stock at the date of the grant over the amount
                  an employee must pay to acquire the stock.

                  The Company accounts for stock issued to non-employees in
                  accordance with the provisions of SFAS 123 and the Emerging
                  Issues Task Force ("EITF") Issue No. 96-18, "Accounting for
                  Equity Instruments that are Issued to other than Employees for
                  Acquiring, or in Conjunction with Selling Goods or Services."
                  Under SFAS 123, the cost is measured at the fair value of the
                  consideration received or the fair value of the equity
                  instruments issued, whichever is more reliably measured.

                                      F-7
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 1 -          Significant Accounting Policies - (continued)
                  --------------------------------------------
                  Revenue Recognition
                  -------------------
                  Disease Management Services
                  ---------------------------
                  The Company enters into contractual arrangements with health
                  plans to provide disease management services. Revenue from
                  such contracts are calculated on various performance-based and
                  fixed fee methodologies and are recorded as services are
                  provided. Performance-based contracts have varying degrees of
                  risk associated with the Company's ability to deliver the
                  guaranteed financial cost savings. In most cases the Company
                  guarantees a percentage reduction of disease costs compared to
                  a prior baseline year. Nevertheless, based on previous
                  outcomes and statistical results prepared by outside "third
                  party" actuarial firms and independent statisticians, and the
                  Company's historical experience, management believes the
                  guarantees are reasonably set and achievable. The measurement
                  of the Company's performance against the base year information
                  is a data intensive and time consuming process that is
                  typically not completed until well after the end of the
                  contract year. The Company will adjust or defer a portion of
                  the contract revenue for contracts where the Company may
                  believe that there could be an issue of non-performance,
                  possibly resulting in a refund of fees. Adjustments for
                  non-performance 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. These estimates are continually reviewed and
                  adjusted as interim information is available. Management
                  believes these estimates adequately provide for any potential
                  adjustments that may be applied to revenues from its
                  contracts. As of November 30, 2001, the Company has provided
                  an allowance of approximately $361,000 related to these
                  contracts which has been reflected as deferred revenue in the
                  balance sheet.

                  During the fiscal year ended November 30, 2001, approximately
                  63% of disease management revenues were derived from two
                  health plans that each comprised more than 10% of the
                  Company's revenues. During fiscal 2000 and 1999, revenues
                  derived from five and four health plans, respectively, each
                  comprised more than 10% of the Company's revenue for those
                  years.

                  Medical Equipment
                  -----------------
                  Revenue is recognized on equipment sales when the equipment is
                  shipped and title passes. Management establishes estimated
                  accruals for returns from customers, and for allowances
                  granted to them at the time of shipment. For the years ended
                  November 30, 2001, 2000 and 1999, there have been no sales
                  returns.

                  During 2001, the Company sold extended one-year service
                  warranty contracts to customers. Prior to fiscal 2001, the
                  Company also sold two and three year contracts and recognized
                  the revenue over the period of the contracts based on the
                  historical pattern of costs incurred. Such related costs,
                  incurred over contract years one, two, and three, are 76%, 17%
                  and 7%, respectively. Revenue on one-year warranty contracts
                  is recognized on a straight-line basis.

                                      F-8
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 1 -          Significant Accounting Policies - (continued)
                  --------------------------------------------
                  Research and Development Expenses
                  ---------------------------------
                  Costs associated with the development of new products and
                  changes to existing products are charged to operations as
                  incurred.

                  Use of Estimates
                  ----------------
                  The preparation of financial statements in conformity with
                  generally accepted accounting principles 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.

                  Income Taxes
                  ------------
                  The Company recognizes deferred tax assets and liabilities
                  based on differences between the financial reporting and tax
                  basis of assets and liabilities using the enacted tax rates
                  and laws that are expected to be in effect when the
                  differences are expected to be recovered. The Company provides
                  a valuation allowance for deferred tax assets for which it
                  does not consider realization of such assets to be more likely
                  than not.

                  Earnings (Loss) Per Share
                  -------------------------
                  Basic earnings (loss) per share are computed by dividing
                  income (loss) available to common shareholders by the
                  weighted-average number of common shares outstanding during
                  the period. Diluted earnings (loss) per share are computed by
                  dividing income (loss) available to common shareholders by the
                  weighted-average number of common shares outstanding during
                  the period increased to include the number of additional
                  common shares that would have been outstanding if the dilutive
                  potential common shares had been issued. The dilutive effect
                  of the outstanding options would be reflected in diluted
                  earnings (loss) per share by application of the treasury stock
                  method.

                  New Accounting Pronouncements
                  -----------------------------
                  In December 1999, the Securities and Exchange Commission staff
                  released Staff Accounting Bulletin No. 101, Revenue
                  Recognition in Financial Statements (SAB 101), which provides
                  guidance on the recognition, presentation and disclosure of
                  revenue in financial statements. The Company believes their
                  revenue recognition policies comply with SAB 101.

                  In June 1998, the Financial Accounting Standards Board
                  ("FASB") issued Statement of Financial Accounting Standards
                  ("SFAS") No. 133, Accounting for Derivative Instruments and
                  Hedging Activities. As amended by SFAS No. 138, SFAS No. 133
                  is effective for all fiscal quarters of all fiscal years
                  beginning after June 15, 2000. SFAS No. 133 establishes
                  accounting and reporting standards for derivative instruments,
                  including certain derivative instruments embedded in other
                  contracts, and for hedging activities. The adoption of this
                  statement did not have any effect on the Company's financial
                  position and results of operations.

                                      F-9
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 1 -          Significant Accounting Policies - (continued)
                  --------------------------------------------
                  New Accounting Pronouncements - (continued)
                  ------------------------------------------
                  In July 2001, the Financial Accounting Standards Board issued
                  Statement of Financial Accounting Standards ("SFAS") No. 141,
                  "Business Combinations", and SFAS No. 142, "Goodwill and Other
                  Intangible Assets". The provisions of SFAS No. 141 apply to
                  all business combinations initiated after June 30, 2001 and
                  prohibit the use of the pooling-of-interest method for those
                  business combinations. Furthermore, SFAS No. 141 applies to
                  all business combinations accounted for by the purchase method
                  for which the date of acquisition is July 1, 2001, or later.
                  SFAS No. 142, requires that upon adoption, amortization of
                  goodwill and indefinite life intangible assets will cease and
                  instead, the carrying value of goodwill and indefinite life
                  intangible assets will be evaluated for impairment at least on
                  an annual basis; impairment of carrying value will be
                  evaluated more frequently if certain indicators are
                  encountered. Identifiable intangible assets with a
                  determinable useful life will continue to be amortized over
                  that period and reviewed for impairment in accordance with
                  SFAS No. 121, "Accounting for the Impairment of Long-Lived
                  Assets and for Long-Lived Assets to be Disposed Of". SFAS No.
                  142 is effective for fiscal years beginning after December 15,
                  2001. The Company will adopt SFAS No. 142 in the first quarter
                  of fiscal 2002 and does not anticipate any impact resulting on
                  its financial position and results of operations.

                  In August 2001, the Financial Accounting Standards Board
                  issued SFAS No. 144, "Accounting for the Impairment or
                  Disposal of Long-Lived Assets," which supersedes SFAS No. 121
                  and the accounting and reporting provisions of Accounting
                  Principles Board Opinion No. 30, "Reporting the Results of
                  Operations-Reporting the Effects of Disposal of a Segment of a
                  Business, and Extraordinary, Unusual and Infrequently
                  Occurring Events and Transactions." This statement retains
                  certain requirements of SFAS No. 121 relating to the
                  recognition and measurement of impairment of long-lived assets
                  to be held and used. Additionally, this statement results in
                  one accounting model, based on the framework established in
                  SFAS No. 121, for long-lived assets to be disposed of by sales
                  and also addresses certain implementation issues related to
                  SFAS No. 121, including the removal of goodwill from its scope
                  due to the issuance of SFAS No. 142. SFAS No. 144 is effective
                  for fiscal years beginning after December 15, 2001, and
                  interim periods within those fiscal years. The Company does
                  not anticipate any impact resulting from the adoption of SFAS
                  No. 144 on its financial position and results of operations.

                                      F-10
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 2 -          Investments in Securities
                  -------------------------

                  Investments in securities available-for-sale as of
                  November 30, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>
                                                                                Market           Unrealized
                               2001                          Cost                Value           Gain (Loss)
                               ----                          ----                -----           -----------
                  <S>                                   <C>                 <C>                <C>
                  Corporate debt securities             $    3,522,409      $    3,532,631     $        10,222
                  Government debt securities                 1,881,368           1,903,659              22,291
                                                        --------------      --------------     ---------------
                                                        $    5,403,777      $    5,436,290     $        32,513
                                                        ==============      ==============     ===============
<CAPTION>
                                                                                Market           Unrealized
                               2000                          Cost                Value           Gain (Loss)
                               ----                          ----                -----           -----------
                  <S>                                   <C>                 <C>                <C>
                  Corporate debt securities             $    1,566,250      $    1,566,250     $             -
                  Certificate of deposits                       85,000              85,000                   -
                                                        --------------      --------------     ---------------
                                                        $    1,651,250      $    1,651,250     $             -
                                                        ==============      ==============     ===============
</TABLE>

                  Primarily all of the above securities mature within one year.

                  During the year ended November 30, 2001, the Company sold
                  available for sale securities for approximately $8,400,000
                  resulting in a gain of approximately $24,000. During the year
                  ended November 30, 2000, the Company sold available for sale
                  securities for approximately $1,700,000 resulting in a gain of
                  approximately $15,000.

Note 3 -          Inventory
                  ---------
<TABLE>
<CAPTION>
                                                                                       November 30,
                                                                                 2001               2000
                                                                                 ----               ----
                  <S>                                                       <C>               <C>
                  Raw materials (component parts and supplies)              $      127,062    $         89,030
                  Finished units                                                    51,324              99,633
                                                                            --------------    ----------------
                                                                            $      178,386    $        188,663
                                                                            ==============    ================

Note 4 -          Property and Equipment
                  ----------------------
<CAPTION>
                                                                                      November 30,
                                                                                 2001               2000
                                                                                 ----               ----
                  <S>                                                       <C>                <C>
                  Machinery and equipment                                   $     1,353,914    $     1,218,271
                  Loaner equipment                                                  244,542            244,542
                  Furniture and fixtures                                            411,074            398,187
                  Office equipment                                                  825,413            735,279
                  Leasehold improvements                                             51,746             51,746
                  Equipment held under capital leases                               433,347            433,347
                                                                            ---------------    ---------------
                                                                                  3,320,036          3,081,372
                  Less accumulated depreciation and
                   amortization                                                  (2,853,580)        (2,633,679)
                                                                            ---------------    ---------------
                  Property and equipment - net                              $       466,456    $       447,693
                                                                            ===============    ===============
</TABLE>

                  At November 30, 2001 and 2000, the equipment under the capital
                  leases had net book values of approximately $91,600 and
                  $146,500, respectively.

                  Depreciation expenses were approximately $220,000, $170,000
                  and $204,000, for 2001, 2000 and 1999, respectively.

                                      F-11
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 5 -          Product Software Development Costs
                  ----------------------------------
                  During the years ended November 30, 2001 and 2000, the Company
                  capitalized approximately $158,000 and $290,000 in product
                  software development costs, respectively. These costs are
                  amortized over a five-year useful life.

                  During the years ended November 30, 2001, 2000 and 1999,
                  amortization costs related to product software development
                  costs were approximately $35,100, $12,700, and $26,100,
                  respectively.

Note 6 -          Patent and Deferred Legal Costs
                  -------------------------------
                  During the third quarter of fiscal 2001, the Company has
                  instituted patent litigation. The Company defers legal costs
                  associated with lawsuits relating to defending existing
                  patents. If the patent claim is successful, the costs remain
                  capitalized and will be amortized over the estimated remaining
                  useful life of the patent. If the claim is unsuccessful, the
                  amounts deferred will be charged to operating expense. As of
                  November 30, 2001, $110,856 has been capitalized as deferred
                  legal costs and is included in other assets.

Note 7 -          Investment in Joint Venture
                  ---------------------------
                  During April 2000, the Company acquired a 50% equity interest
                  in Heartmasters, L.L.C. ("HM") for an initial contribution of
                  $60,000. The management agreement provides for profits and
                  losses to be allocated based on the Company's percentage of
                  revenue as defined in the agreement. As of November 30, 2001,
                  the total contribution by the Company was approximately
                  $188,000 to HM, however, losses through November 31, 2001
                  exceeded this amount bringing the investment in the joint
                  venture to zero. The unaudited summary financial information
                  for HM as of and for the period ended November 30, is as
                  follows:
<TABLE>
<CAPTION>
                                                                                  November 30,
                                                                           2001                  2000
                                                                           ----                  ----
                  <S>                                                <C>                   <C>
                  Balance sheet
                    Current assets                                   $       112,490       $        8,186
                    Liabilities                                              106,749                    -
                    Capital                                                    5,741                8,186

                  Statements of operations
                    Revenues                                               6,463,347              814,685
                    Operating expenses                                     6,550,763            1,098,795
                                                                     ---------------       --------------
                        Net loss                                     $       (87,416)      $     (284,110)
                                                                     ===============       ==============

                                      F-12
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 8 -          Accounts Payable and Accrued Liabilities
                  ----------------------------------------
<CAPTION>
                                                                                November 30,
                                                                        2001                   2000
                                                                        ----                   ----
                  <S>                                             <C>                    <C>
                  Accounts payable - trade                        $        252,284       $       219,193
                  Other accrued expenses - none in
                   excess of 5% of current liabilities                     183,195                68,639
                                                                  ----------------       ---------------
                                                                  $        435,479       $       287,832
                                                                  ================       ===============
</TABLE>

Note 9 -          Fees Reimbursable to Health Plans
                  ---------------------------------
                  Health plans which utilize 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 November 30,
                  2001 and 2000, there was $15,524 and $20,800 outstanding under
                  these provisions.

Note 10 -         Line of Credit
                  --------------
                  On September 11, 2001 the Company entered into a loan
                  agreement with First Union National Bank for a $1 million line
                  of credit. The annual interest rate is the lower of the bank's
                  reference rate minus 1% or the LIBOR Market Index Rate plus
                  1.5%. The line is collateralized by securities owned by the
                  Company. Borrowings under this line of credit were $-0- at
                  November 30, 2001.

Note 11 -         Capital Lease Obligations
                  -------------------------
                  The Company has entered into various capital leases for
                  equipment expiring through November 2001, with aggregate
                  monthly payments of $7,300.

                  The following is a schedule by years of future minimum lease
                  payments under capital leases together with the present value
                  of the net minimum lease payments as of November 30, 2001:
<TABLE>
<CAPTION>
                     For the Years Ending
                         November 30,
                     <S>                                                     <C>
                            2002                                             $        60,839
                            2003                                                      23,035
                            2004                                                      10,973
                                                                             ---------------
                            Total minimum lease payments                              94,847
                            Less amount representing interest                         11,032
                                                                             ---------------
                            Present value of net minimum lease payments               83,815
                            Less current maturities                                   53,034
                                                                             ---------------
                            Long-term maturities                             $        30,781
                                                                             ===============
</TABLE>
                                      F-13
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 12 -         Income Taxes
                  ------------
                  Deferred tax attributes resulting from differences between
                  financial accounting amounts and tax basis of assets and
                  liabilities at November 30, 2001 and 2000, follow:
<TABLE>
<CAPTION>
                                                                                          November 30,
                                                                                    2001                2000
                                                                                    ----                ----
                  <S>                                                           <C>               <C>
                  Current assets and liabilities
                      Allowance for doubtful accounts                           $       30,000    $         17,000
                      Inventory reserve                                                      -              20,000
                      Inventory overhead capitalization                                 61,000              62,000
                      Deferred revenue                                                 144,000                   -
                      Deferred warranties                                               32,000              50,000
                                                                                --------------    ----------------
                                                                                       267,000             149,000
                      Valuation allowance                                             (267,000)           (149,000)
                                                                                --------------    ----------------
                  Net current deferred tax asset (liability)                    $            -    $              -
                                                                                ==============    ================

                  Noncurrent assets and liabilities
                      Depreciation                                              $       39,000    $         40,000
                      Net operating loss carryforward                               10,416,000          10,001,000
                      Research and development credit carryforward                      82,000             140,000
                      Stock compensation                                                80,000                   -
                      Capital loss carryforward                                         12,000              12,000
                                                                                --------------    ----------------
                                                                                    10,629,000          10,193,000
                      Valuation allowance                                          (10,629,000)        (10,193,000)
                                                                                --------------    ----------------
                  Net noncurrent deferred tax asset (liability)                 $            -    $              -
                                                                                ==============    ================
</TABLE>

                  The Company has a cumulative pretax loss for financial
                  reporting purposes. Recognition of deferred tax assets will
                  require generation of future taxable income. There can be no
                  assurance that the Company will generate earnings in future
                  years. Therefore, the Company established a valuation
                  allowance on deferred tax assets of approximately $10,896,000
                  and $10,342,000 as of November 30, 2001 and 2000,
                  respectively.

                  The effective tax rate varied from the statutory rate as
                  follows:
<TABLE>
<CAPTION>
                                                                    2001             2000            1999
                                                                    ----             ----            ----
                  <S>                                               <C>              <C>             <C>
                  Statutory federal income tax rate                 (34%)            (34%)           (34%)
                  State income tax, net of federal
                   benefit                                           (6%)             (6%)            (6%)
                  Certain non-deductible expenses                     4%               3%              -
                  Effect on net operating loss
                  carryforward and valuation
                   allowance                                         37%              36%             40%
                                                                    ----             ----            ----
                                                                     -%               -%              -%
                                                                    ====             ====            ====
</TABLE>
                                      F-14
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 12 -         Income Taxes - (continued)
                  -------------------------
                  As of November 30, 2001, the Company has available the
                  following federal net operating loss carryforwards for tax
                  purposes:

                            Expiration Date:
                        Years Ending November 30,

                                 2002                         $        915,000
                                 2003                                4,340,000
                                 2004                                1,499,000
                                 2005                                  496,000
                                 2006 through 2021                  18,791,000
                                                              -----------------
                                                              $     26,041,000
                                                              ================

                  The Company has net operating loss carryforwards for state tax
                  purposes of approximately $18,900,000 expiring at various
                  times from fiscal years ending 2002 through 2016, of which
                  approximately $7.3 million expire through 2005.

                  The utilization of these net operating loss carryforwards may
                  be significantly limited under the Internal Revenue Code as a
                  result of ownership changes due to the Company's stock and
                  ownership changes.

                  During the year ended November 30, 2001 and 2000, the Company
                  completed the sale of approximately $2,922,000 and $4,115,000
                  of its New Jersey net operating loss carryforwards and
                  received $219,603 and $309,256, respectively, which was
                  recorded as a gain on sale of net operating loss carryovers.

Note 13 -         Shareholder's Equity
                  --------------------
                  Shares Authorized
                  -----------------
                  On June 26, 2000, the Company's shareholders approved an
                  amendment to the Company's restated Certificate of
                  Incorporation to increase the number of authorized shares of
                  the Company's common stock from 20,000,000 to 40,000,000.

                  Private Placement Equity Transactions
                  -------------------------------------
                  On March 17, 2000, the Company issued to Quest Diagnostics
                  Ventures, LLC 285,714 shares of the Company's common stock for
                  approximately $1,985,000, net of expenses.

                  On April 13, 2000, the remaining $50,000 principal amount of
                  the notes relating to a private placement in 1997, plus
                  accrued interest of $134,582, was converted into 64,315 shares
                  of common stock.

                  On April 28, 2000, the Company completed the sale of 163,300
                  shares of the Company's common stock to an individual investor
                  for approximately $1,000,000.

                  On April 4, 2001, the Company sold 796,813 shares to three
                  investors led by Galen Partners III, LP for approximately
                  $4,000,000. As part of this transaction, the Company extended
                  the terms on all outstanding warrants to November 12, 2007.
                  All charges related to the change were treated as a cost of
                  raising capital and were netted in stockholders' equity.

                                      F-15
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 13 -         Shareholder's Equity - (continued)
                  ---------------------------------
                  Stock Options and Warrants
                  --------------------------
                  The qmed, Inc. 1999 Equity Incentive Plan provides for stock
                  options, stock appreciation rights, restricted stock or
                  deferred stock awards up to 1,000,000 shares of the Company's
                  common stock to be granted to employees and consultants of the
                  Company until September 2009. The Plan also provides for
                  Director Non-Qualified stock options to be granted to
                  directors of the Company (other than directors who are also
                  officers or employees of the Company).

                  The qmed, Inc. 1997 Equity Incentive Plan provides for stock
                  options, stock appreciation rights, restricted stock or
                  deferred stock awards for up to 600,000 shares of the
                  Company's common stock to be granted to employees of the
                  Company until May 2007. The Plan also provides for director
                  stock options to be granted to directors of the Company (other
                  than directors who are also officers or employees of the
                  Company).

                  The qmed, Inc. 1990 Employee Stock Incentive Plan provides for
                  stock options, stock appreciation rights, restricted stock or
                  deferred stock awards for up to 1,000,000 shares of the
                  Company's common stock to be granted to employees of the
                  Company until October 2000. 1,000,000 shares of the Company's
                  common stock are reserved for this plan.

                  Under the 1990, 1997 and 1999 plans, most options are
                  exercisable in cumulative 33% increments after the first and
                  each subsequent anniversary of the date of the grant, except
                  for officers' options which generally are exercisable
                  immediately. The incentive and nonqualifying stock options
                  expire ten years after the date of the grant.

                  Options granted under all 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.

                  Pro forma information regarding net income and earnings per
                  share has been determined as if the Company had accounted for
                  its employee stock options under the fair-value method. The
                  fair value for these options was estimated at the date of
                  grant using a Black-Scholes option pricing model with the
                  following weighted-average assumptions for November 30:

                                                     2001          2000
                                                     ----          ----

                        Risk-free interest rate         5.0%         5.0%
                        Expected volatility            75.0%        80.0%
                        Dividend yield                    -             -
                        Expected life              5.5 years    5.5 years

                  The Black-Scholes option valuation model was developed for use
                  in estimating the fair value of traded options, which have no
                  vesting restrictions and are fully transferable. In addition,
                  option valuation models require the input of highly subjective
                  assumptions including the expected stock price volatility.
                  Because the Company's employee stock options have
                  characteristics significantly different from those of traded
                  options, and because changes in the subjective input
                  assumptions can materially affect the fair-value estimate, in
                  management's opinion, the existing models do not necessarily
                  provide a reliable single measure of the fair value of its
                  employee stock options.

                                      F-16
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 13 -         Shareholder's Equity - (continued)
                  ---------------------------------
                  Stock Options and Warrants - (continued)
                  ---------------------------------------
                  For purposes of pro forma disclosures, the estimated fair
                  value of the options is amortized to expense over the options'
                  vesting period. The Company's pro forma information follows:

                                                   2001              2000
                                                   ----              ----

                  Pro forma net loss           $  (1,649,555)  $  (2,476,595)

                  Pro forma loss per share
                       Basic                            (.12)           (.20)
                       Diluted                          (.12)           (.20)

                  There was compensation expense of $200,000, $0, and $0
                  recorded from stock options under APB 25 for the years ended
                  November 30, 2001, 2000 and 1999. Effective November 30, 2001,
                  the Company terminated an employment agreement with an
                  employee which resulted in the immediate vesting of their
                  unvested stock options. This termination resulted in a charge
                  to operations of approximately $200,000 for the acceleration
                  of options and an additional $154,000 charge to operations for
                  severance payments, during the fourth quarter of 2001. The
                  immediate vesting results in variable accounting treatment for
                  the related options, and accordingly the Company will adjust
                  the charge each period through the exercise or expiration of
                  the related options. These options will expire 90 days from
                  the date of termination.

                  During the year ended November 30, 2000, the Company granted
                  stock options to consultants in exchange for services. The
                  fair value of these options was estimated at the date of the
                  grant, which was determined to be the measurement date, using
                  a Black-Scholes option pricing model. The vesting period for
                  these options is three years.

                  The value of these options is approximately $90,000 and is
                  being amortized over their respective vesting period.
                  Amortization expense relating to these options for the years
                  ended November 30, 2001 and 2000 was approximately $30,000 and
                  $15,000, respectively.

                  On January 8, 2001, the Company accepted a promissory note in
                  the amount of $91,059 from the Company's president in
                  connection with the exercise of stock options which were due
                  to expire on February 1, 2001. The note accrued interest at
                  the rate of 7.5% per annum and was due in January 2002. The
                  principal amount of this note plus accrued interest was paid
                  in full on August 29, 2001.

                                      F-17
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 13 -         Shareholder's Equity - (continued)
                  ---------------------------------
                  Stock Options and Warrants - (continued)
                  ---------------------------------------
                  A summary of the Company's stock option activity, and related
                  information for the years ended November 30, follows:
<TABLE>
<CAPTION>
                                                             Weighted-Average     Number of      Weighted-Average
                                                 Options      Exercise Price     Exercisable      Exercise Price
                                                 -------      --------------     -----------      --------------
                  <S>                           <C>             <C>                   <C>            <C>
                  Outstanding
                    November 30, 1998           1,039,681       $    2.16             921,224        $    1.94

                      Granted                     484,128            3.23
                      Exercised                   (32,335)           2.72
                      Terminated                  (22,000)           3.00
                                            --------------

                  Outstanding
                    November 30, 1999           1,469,474       $    2.48           1,196,237        $    2.17

                      Granted                     365,162            6.35
                      Exercised                   (69,584)           2.29
                      Terminated                  (27,859)           3.73
                                            --------------

                  Outstanding
                    November 30, 2000           1,737,193       $    3.28           1,314,284        $    2.56

                      Granted                     271,796             8.02
                      Exercised                  (323,219)            1.49
                      Terminated                  (13,831)            7.76
                                            --------------

                  Outstanding
                    November 30, 2001           1,671,939       $     4.37          1,170,049        $    3.25
<CAPTION>
                  Weighted-average fair
                   value of options granted
                   during the years                                2001             2000
                                                                   ----             ----
                         <S>                                    <C>               <C>
                         Where exercise price
                          equals stock price                    $     5.30        $     5.12

                         Where exercise price
                          exceeds stock price                         5.64              2.77

                         Where stock price
                          exceeds exercise price                         -              4.61
<CAPTION>
                  Following is a summary of the status of stock options
                  outstanding at November 30, 2001:

                                            Outstanding Options                           Exercisable Options
                                 -------------------------------------------------   -------------------------------
                                    Weighted-
                                    Number          Average            Weighted-       Number        Weighted-
                  Exercise        Outstanding      Remaining            Average      Outstanding      Average
                  Price Range     at 11/30/01  Contractual Life      Exercise Price   at 11/30/01  Exercise Price
                  -----------     -----------  ----------------      --------------   -----------  --------------
                  <S>               <C>                <C>             <C>           <C>               <C>
                  $  1.38 - 1.75    316,967            1.6             $   1.55         316,967        $  1.55
                  $  2.44 - 3.50    583,249            6.2             $   2.94         567,862        $  2.94
                  $  3.69 - 5.38    314,250            8.1             $   4.31         143,748        $  4.19
                  $  6.05 - 8.90    426,473            9.0             $   7.76         141,472        $  7.34
                  $11.76 - 11.76     31,000            9.7             $  11.76               -        $     -
                  ---------------   --------      --------             ---------      ----------       --------
                  $ 1.38 - 11.76    1,671,939          6.5             $   4.33       1,170,049        $  3.25
</TABLE>
                                      F-18
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 13 -         Shareholder's Equity - (continued)
                  ---------------------------------
                  Stock Options and Warrants - (continued)
                  ---------------------------------------
                  A summary of the Company's stock warrant activity, and related
                  information for the years ended November 30, follows:
<TABLE>
<CAPTION>
                                                                 Weighted-Average    Number of     Weighted-Average
                                                       Warrants   Exercise Price    Exercisable     Exercise Price
                                                       --------   --------------    -----------     --------------
                  <S>                                 <C>                <C>         <C>                   <C>
                  Outstanding
                   November 30, 1999                  2,055,889          1.92        2,055,889             1.92

                  Granted                                     -             -                -                -
                  Exercised                              (3,937)         2.16                -                -
                  Terminated                                  -             -                -                -
                                                    ------------   ----------       ----------       ----------

                  Outstanding
                   November 30, 2000                  2,051,952          1.92        2,051,952             1.92

                  Granted                                     -             -                -                -
                  Exercised                            (210,000)         1.86                -                -
                  Terminated                                  -             -                -                -
                                                    ------------   ----------       ----------       ----------

                  Outstanding
                   November 30, 2001                  1,841,952          1.93        1,841,952             1.93

                  Following is a summary of the status of stock warrants
                  outstanding at November 30, 2001:
<CAPTION>
                                            Outstanding Warrants                           Exercisable Warrants
                                       ----------------------------                    ----------------------------
                                         Number     Weighted-Average    Weighted-         Number         Weighted-
                    Exercise Price     Outstanding      Remaining        Average        Outstanding       Average
                         Range         at 11/30/01  Contractual Life Exercise Price     at 11/30/01   Exercise Price
                    <S>                   <C>                 <C>       <C>              <C>                  <C>
                    $ 1.38 - 1.75         1,472,669           5.9       $    1.67        1,472,669            1.67
                    $ 2.44 - 5.50           303,393           5.9            2.82          303,393            2.82
                    $ 3.64 - 3.64            65,890           5.9            3.64           65,890            3.64
                    -------------       -----------    ----------       ---------      -----------      ----------
                    $ 1.38 - 3.64         1,841,952           5.9       $    1.93        1,841,952            1.93
<CAPTION>
                  Earnings (Loss) Per Share
                  -------------------------
                  The following table sets forth the computations of basic
                  earnings (loss) per share and diluted earnings (loss) per
                  share:

                  Year ended November 30,            2001                    2000                       1999
                                                     ----                    ----                       ----
                  <S>                           <C>                    <C>                        <C>
                  Numerator:
                    Net loss                    $  (1,043,057)         $    (1,881,510)           $    (2,904,274)
                                                -------------          ---------------            ---------------
                  Denominator:
                    Weighted average common
                    shares outstanding             13,866,216               12,650,831                 11,761,054
                                                -------------          ---------------            ---------------

                  Basic and diluted earnings
                   (loss) per share             $        (.08)         $          (.15)           $          (.25)
                                                =============          ===============            ===============
</TABLE>

                  Potentially dilutive options and warrants to purchase
                  3,340,345 shares of the common stock were outstanding as of
                  November 30, 2001, 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 173,546 shares of common stock were outstanding as of
                  November 30, 2001, but were also not included in the
                  computation of diluted loss per share because the options
                  exercise price was greater than the average market price of
                  the common shares.

                                      F-19
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 14 -         Retirement Plan
                  ---------------
                  The Company has a 401(k) plan which allows its employees to
                  set aside a part of their earnings, tax deferred, to be
                  matched by the Company as determined each year by resolution
                  of the Board of Directors. During the years ended 2001, 2000
                  and 1999, the Company matched $.25 for each dollar up to 6% of
                  an employee's contribution on a monthly basis, which amounted
                  to approximately $37,000, $24,000 and $21,000, respectively.

Note 15 -         Commitments and Contingencies
                  -----------------------------
                  Leases
                  ------
                  The Company leases its premises under noncancellable operation
                  leases expiring through November 2003. The approximate future
                  minimum lease payments for the years ending November 2001,
                  2002 and 2003 are $248,000, $205,000, and $205,000,
                  respectively.

                  Rent expense for the years ended November 30, 2001, 2000 and
                  1999 was $240,810, $231,924 and $213,640, respectively.

                  Litigation
                  ----------
                  The Company is subject to claims and legal proceedings
                  covering a wide range of matters that arise in the ordinary
                  course of business. It is management's opinion that the
                  ultimate resolution of these matters will not have a material
                  effect on the Company's consolidated financial position and
                  results of operations.

                  Major Customer
                  --------------
                  The Company had two major customers during 2001. Major
                  customers were considered to be those who account for more
                  than 10% of total revenue. Two customers accounted for
                  approximately 36% and 27% of total revenue for the year ended
                  November 30, 2001.

Note 16 -         Business Segment Information
                  ----------------------------
                  Segment Reporting
                  -----------------
                  The Company presents segment information in accordance with
                  SFAS No. 131, "Disclosures about Segments of an Enterprise and
                  Related Information", which established reporting and
                  disclosure standards for an enterprise's operating segments.
                  Operating segments are defined as components of an enterprise
                  for which separate financial information is available and
                  regularly reviewed by the Company's senior management.

                  The Company is organized into two business units,
                  disease-management services and medical equipment sales, 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 both
                  segments with shared human resources, clinical, marketing and
                  information technology resources. The accounting policies of
                  the operating segments are the same as those described in the
                  summary of significant accounting policies in Note 1.

                                      F-20
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


Note 16 -         Business Segment Information - (continued)
                  -----------------------------------------
                  Segment Reporting - (continued)
                  ------------------------------
                  Summarized financial information by operating segment for
                  2001, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
                                                              Medical             Disease
                                                             Equipment          Management
                                                               Sales             Services           Consolidated
                                                               -----             --------           ------------
                  <S>                                   <C>                 <C>                  <C>
                  2001
                  ----
                  Sales                                 $        486,703    $       7,534,931    $      8,021,634
                  Operating income (loss)                     (1,076,230)            (384,200)         (1,460,430)
                  Total assets                                 6,353,624            1,813,887           8,167,511
                  Depreciation and amortization                  143,740              128,861             272,601
                  Capital expenditures                           483,501               33,466             516,967

                  2000
                  ----
                  Sales                                 $        811,744    $       2,060,461    $      2,872,205
                  Operating (loss)                              (862,174)          (1,298,350)         (2,160,524)
                  Total assets                                 2,780,798              609,630           3,390,428
                  Depreciation and amortization                  143,344              105,388             248,732
                  Capital expenditures                            21,496              275,796             297,292

                  1999
                  ----
                  Sales                                 $      1,171,226    $         869,294    $      2,040,520
                  Operating (loss)                            (1,276,548)          (1,551,961)         (2,828,509)
                  Total assets                                 1,620,690              345,360           1,966,050
                  Depreciation and amortization                  146,434              112,541             258,975
                  Capital expenditures                            55,462               10,784              66,246
<CAPTION>
Note 17 -         Selected Quarterly Financial Data (unaudited)

                                                                   For the Quarters Ending 2001
                                            February 28,     May 31,        August 31,   November 30,      Total
                                            ------------     -------        ----------   ------------      -----
                  <S>                       <C>            <C>            <C>            <C>            <C>
                    Net sales               $ 1,207,927    $ 1,654,698    $ 2,129,421    $ 3,029,588    $ 8,021,634
                    Gross profit                690,722        937,690      1,155,768      1,936,928      4,721,108
                    Net income (loss)          (283,975)      (516,275)      (382,232)       139,425     (1,043,057)
                    Income (loss) per share        (.02)          (.04)          (.03)           .01           (.08)
<CAPTION>
                                                                   For the Quarters Ending 2000
                                            February 28,     May 31,        August 31,   November 30,      Total
                                            ------------     -------        ----------   ------------      -----
                  <S>                       <C>            <C>            <C>            <C>            <C>
                  Net sales                 $   530,389    $   542,562    $   835,745    $   963,509    $ 2,872,205
                  Gross profit                  233,402        223,872        467,469        522,683      1,447,426
                  Net income (loss)            (233,159)      (532,689)      (505,573)      (610,089)    (1,881,510)
                  Income (loss) per share          (.02)          (.04)          (.04)          (.05)          (.15)
</TABLE>
                                      F-21
<PAGE>

                                    PART III

Item 10. Directors, Executive Officers, Promoters, Control Persons and
         Compliance with Section 16(a) of the Exchange Act of the Registrant.

         Information with respect to executive officers and directors of the
Company will be set forth in the Company's definitive proxy statement which is
expected to be filed within 120 days of November 30, 2001 and is incorporated
herein by reference.

Item 11. Executive Compensation.

         Information with respect to executive compensation will be set forth in
the Company's definitive proxy statement which is expected to be filed within
120 days of November 30, 2001 and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

         Information with respect to the ownership of the Company's securities
by certain persons will be set forth in the Company's definitive proxy statement
which is expected to be filed within 120 days of November 30, 2001 and is
incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

          Information with respect to transactions with management and others
will be set forth in the Company's definitive proxy statement which is expected
to be filed within 120 days of November 30, 2001 and is incorporated herein by
reference.

                                       29
<PAGE>

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

         (a) (1) Financial Statements.

         Description

         Independent Auditors Report

         Consolidated Balance Sheets as of November 30, 2001 and 2000

         Consolidated Statement of Operations and Comprehensive Income for each
         of the three years ended November 30, 2001, 2000 and 1999

         Consolidated Statement of Stockholder's Equity for each of the three
         years ended November 30, 2001, 2000 and 1999

         Consolidated Statement of Cash Flows for each of the three years ended
         November 30, 2001, 2000 and 1999

         Notes to Consolidated Financial Statements

         (2) Financial Statement Schedules:

         II - Valuation and Qualifying Accounts

         Other schedules have been omitted because they are not applicable.

         (b)  Reports on Form 8-K.

         None.

                                       30
<PAGE>

         (c) The following Exhibits are filed as part of this report. Where such
filing is made by incorporation by reference (I/B/R) to a previously filed
statement or report, such statement or report is identified in parentheses:
<TABLE>
<CAPTION>
Official                                                                          Sequential
Exhibit   No.                       Description                                     Page No.
-------------                       -----------                                     --------
   <S>            <C>                                                               <C>
    2             None

    3.1           Amended and restated New Jersey Certificate of
                  Incorporation dated July 6, 1983 (Exhibit 3C to
                  the S-18 Registration Statement 2-86653-NY of the
                  Company effective December 1, 1983)                                I/B/R

    3.2           New Jersey By-Laws as amended on January 16, 1984
                  (Exhibit 3F to the Company's Annual Report on Form
                  10-K for the year ending November 30, 1984)                        I/B/R

    3.3           Amended and Restated Delaware Certificate of Incorporation
                  of Q-Med, Inc. as in effect on July 11, 1987 (Exhibit 3.3 to
                  the Company's Report on Form 10-Q dated May 31, 1987)              I/B/R

    3.4           By-Laws as in effect on July 1, 1987 (Exhibit 3.3 to the
                  Company's Report on Form 10-Q dated May 31, 1987)                  I/B/R

    3.5           Amendment to By-Laws dated December 18, 1997 (Exhibit 3.5 to
                  the Company's Form 10-K Report dated November 30, 1997)            I/B/R

    4.1           Specimen of Stock Certificate (Exhibit 4.1 to the Company's
                  Report on Form 10-K dated November 30, 1989)                       I/B/R

    4.2           Registration Rights Agreement between Q-Med, Inc.
                  and Galen Partners III, L.P., Galen Partners International
                  III, L.P., and Galen Employee Fund III, L.P. dated as of
                  December 18, 1997 (Exhibit 4.3 to the Company's report
                  on Form 8-K dated December 18, 1997)                               I/B/R

    4.3           Form of Warrant Agreement dated November 16, 1998
                  (Exhibit 99.6 to the Company's report on Form 8-K
                  dated November 16, 1998)                                           I/B/R

    4.4           Form of common stock purchase warrants exercisable at
                  $1.67 per share until November 15, 2005 (Exhibit 4.1 to
                  the Company's report on Form 8-K dated May 17, 1999)               I/B/R

                                       31
<PAGE>

    4.5           Form of common stock purchase warrants exercisable at
                  $2.87 per share until November 15, 2005 (Exhibit 4.2 to
                  the Company's report on Form 8-K dated May 17, 1999)               I/B/R

    4.6           Form of common stock purchase warrants exercisable at
                  $2.625 per share until November 15, 2005 (Exhibit    4.2 to
                  the Company's report on Form 8-K dated August 25, 1999)            I/B/R

    9.1           Form of Shareholder and Voting Rights Agreement
                  between the Company and several stockholders dated
                  as of November 16, 1998 (Exhibit 99.4 to the Company's
                  report on Form 8-K dated November 16, 1998)                        I/B/R

   10.1           Q-Med, Inc. 1986 Incentive Stock Option Plan
                  (Exhibit 10N to the Company's Registration
                  Statement No. 33-4499 on Form S-1)                                 I/B/R

   10.2           Lease dated August 31, 1993 between the Company and
                  Alexandria Atrium Associates (Exhibit 28.1 to the
                  Company's Form 10-QSB Report dated August 31, 1993)                I/B/R

   10.3           Registration Rights Agreement dated May 6, 1996
                  between Q-Med, Inc. and S.R. One Limited (Exhibit
                  10.10 to the Company's Form 10-K Report dated
                  November 30, 1996, as amended)                                     I/B/R

   10.4           Q-Med, Inc. 1997 Equity Incentive Plan (Exhibit 10.11
                  to the Company's Form 10-K Report dated November 30, 1998)         I/B/R

   10.5           Form of Registration Rights Agreement between Q-Med,
                  Inc. and several stockholders dated as of November 15,
                  1998 (Exhibit 99.3 to the Company's report on Form 8-K
                  dated November 16, 1998)                                           I/B/R

   10.6           Amendment dated December 16, 1998 to Employment
                  Agreement between the Company and Michael W. Cox
                  (Exhibit 10.11 to the Company's Form 10-K for year
                  ended November 30, 1998)                                           I/B/R

   10.7           Q-Med, Inc. 1999 Equity Incentive Plan (Exhibit 4.1
                  to the Company's Registration Statement on Form
                  S-8 (333-93697) filed December 28, 1999)                           I/B/R

                                       32
<PAGE>

   10.8           Limited Liability Agreement of HeartMasters LLC dated
                  April 14, 2000 (Exhibit 99.1 to the Company's Form
                  10-Q Report dated May 31, 2000)                                    I/B/R

   10.9           Trademark and Data License and Services Agreement
                  between Interactive Heart Management Corp. and
                  HeartMasters, LLC dated April 14, 2000 (Exhibit 99.2
                  to the Company's Form 10-Q Report dated May 31, 2000)              I/B/R

   10.10          Loan Agreement dated September 11, 2001 between
                  First Union National Bank and Q-Med, Inc. (Exhibit
                  10.1 to the Company's Form 10-Q Report dated
                  August 31, 2001)                                                   I/B/R

   10.11          Security Agreement dated September 11, 2001 between
                  First Union National Bank and Q-Med, Inc. (Exhibit
                  10.2 to the Company's Form 10-Q Report dated
                  August 31, 2001)                                                   I/B/R

   10.12          Promissory Note dated September 11, 2001 given to
                  First Union National Bank by Q-Med, Inc. (Exhibit
                  10.3 to the Company's Form 10-Q Report dated
                  August 31, 2001)                                                   I/B/R

   11             None.

   13             None.

   16             None.

   18             None.

   21*            Subsidiaries of Registrant

   22             None.

   23*            Consent of Amper, Politziner & Mattia P.A.

   24             None.
--------
*     Filed herewith
</TABLE>

                                       33
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed by
the undersigned, thereunto duly authorized.

Dated: January 31, 2002                       Q-MED, INC.


                                              By: /s/ Michael W. Cox
                                                  ----------------------------
                                                  Michael W. Cox, President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on behalf of the Registrant and in capacities and at
the dates indicated:

Signature                             Capacity                         Date


/s/ Michael W. Cox        President and Treasurer (Principal    January 31, 2002
---------------------     Executive and Financial Officer)
Michael W. Cox


/s/ Jane Murray           Executive Vice President - Chief      January 31, 2002
---------------------     Operating Officer and Director
Jane Murray


/s/ Debra A. Fenton       Controller (Principal Accounting      January 31, 2002
---------------------     Officer)
Debra A. Fenton


/s/ Bruce F. Wesson       Chairman of the Board                 January 31, 2002
---------------------
Bruce F. Wesson


/s/ Richard I. Levin      Director                              January 31, 2002
---------------------
Richard I. Levin


/s/ Robert A. Burns       Director                              January 31, 2002
---------------------
Robert A. Burns


/s/ David Feldman         Director                              January 31, 2002
---------------------
David Feldman


/s/ Herbert H. Sommer     Director                              January 31, 2002
---------------------
Herbert H. Sommer


/s/ A. Bruce Campbell     Director                              January 31, 2002
---------------------
A. Bruce Campbell

                                       34
<PAGE>
<TABLE>
<CAPTION>

                                                                                   Schedule II

                                      QMED, INC. AND SUBSIDIARIES
                                  Valuation and Qualifying Accounts




                                           Balance at                                Balance at
                                          Beginning of                                 End of
                                              Year        Additions    Write-offs       Year
                                              ----        ---------    ----------       ----
<S>                               <C>     <C>           <C>           <C>          <C>
Allowance for doubtful accounts   1999    $  500,000    $       -     $  384,000   $  116,000
                                  2000       116,000            -         74,000       42,000
                                  2001        42,000       33,000              -       75,000
</TABLE>


                                       35
<PAGE>

                                  EXHIBIT INDEX

Exhibit                                                             Sequential
  No.                                                                 Page No.
-------                                                             -----------

21                Subsidiaries of Registrant

23                Consent of Amper, Politziner & Mattia P.A.





                                       36