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

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

                                    FORM 10-K

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

                  For the fiscal year ended: November 30, 2005

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

                For The Transition Period from _______ to _______


                         Commission File Number: 0-11411

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

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

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

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

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 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 [ ]

<PAGE>

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. [ ]

The aggregate market value of the common stock held by non-affiliates of the
registrant was approximately $122,910,747 on January 31, 2006, based on the last
reported sales price of the registrant's common stock on the NASDAQ Small Cap
Market on such date. All executive officers, directors and 10% or more
beneficial owners of the registrant's common stock have been deemed, solely for
the purpose of the foregoing calculation, "affiliates" of the registrant.

As of January 31, 2006, there were 16,844,777 shares of the registrant's common
stock, $.001 par value, issued and outstanding.

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

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


         Documents incorporated by reference:

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

         Portions of the Registrant's Proxy Statement             III
         for its 2006 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" and other factors described in this Item 1
under "Industry and Other Risk Considerations." We undertake no obligation to
update or revise such forward-looking statements.

General
--------------------------------------------------------------------------------

QMed(R), Inc. was incorporated in New Jersey in 1983 and reincorporated in
Delaware in 1987. Interactive Heart Management Corp. ("IHMC(R)") is a wholly
owned subsidiary of QMed, which was incorporated in 1995. IHMC developed and
often co-markets with QMed health care information and communication services to
health plans and the government.

QMedCare, Inc. is a wholly owned subsidiary of QMed, Inc., which was
incorporated in December 2004. This organization acts as a management company
that will operate a series of specialty Managed Care products serving a
high-risk population of Medicare beneficiaries.

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

Our executive offices are located at 25 Christopher Way, Eatontown, New Jersey
07724 and our telephone number is (732) 544-5544.

We maintain an Internet website at www.qmedinc.com. We make available free of
charge on our website our annual report on Form 10-K, our quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or

                                       3
<PAGE>

furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as
soon as practicable after we electronically file such material, or furnish it to
the Securities and Exchange Commission.

QMed, Inc./IHMC

The services of QMed include "ohms|cvd(R)"(Online Health Management System for
Cardiovascular Disease) which is an integrated cardiovascular disease management
system. ohms|cvd includes related systems to assist health plans and government
organizations in managing the care, and cost of diabetes, cardiovascular
conditions, including coronary artery disease ("CAD"), stroke, heart failure
("CHF"), hypertension, hyperlipidemia and the cardiovascular complications of
diabetes. These systems are designed to provide health care physicians with
patient specific recommendations focused on the optimal use of "evidence based"
medical management for patients with these conditions including co-morbidities,
as well as those at high risk of developing these conditions. The net impact of
this approach is the improvement in health and the associated reduction in
mortality, morbidity and cost.

QMed, Inc is a technology formulated and fully interactive disease management
company that synchronizes the latest scientific evidence to insure that the
right care is received by patients all of the time. QMed is dedicated to
improving clinical outcomes for individuals, providing decision support for
physicians, and reducing costs for payors.

QMed also empowers individuals using tools such as health education, training in
self-monitoring, and personalized coaching by trained professionals. In
addition, timely, clinically validated, actionable "evidence based" information
is provided to physicians to proactively prevent medical episodes that can
result in unnecessary emergency room visits and hospitalizations. QMed has
demonstrated results that our programs reduce hospitalizations and overall
medical costs.

QMed's dedicated professionals follow nationally accepted clinical standards of
care to complete their mission. Medical expertise combined with the most current
computer-based technology offers programs that are highly scalable and offer
reliable results.

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(R) ("nDx").

ohms|cvd Systems
--------------------------------------------------------------------------------

ohms|cvd is our medical "expert system" designed as a total disease management
process for Heart Failure (HF), Coronary Artery Disease (CAD), Stroke, Diabetes
and Diabetic cardiovascular complications, Hypertension, Hyperlipidemia and
other co-morbidities utilizing "best practice" solutions in the management of
these diseases and conditions. The entire system non-invasively and reliably
quantifies the probable risk of a clinical event most significantly a
cardiovascular, cerebrovascular or heart failure event, and rationally directs
the patient to appropriate therapy with the accent on early detection, the

                                       4
<PAGE>

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 heart failure,
diabetes, diabetic cardiovascular complications and the risk of stroke.

The systems produce clinical recommendations for physicians tailored to an
individual patient. Significantly, each individual patient's medical history
inclusive of co-morbidities, risk factor profile, current medication, and other
relevant patient specific information are electronically entered into the
systems' "best practices" database for primary and secondary prevention analysis
and treatment.

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

         o        appropriateness of the risk stratification,
         o        proportion of patients assigned to various therapies,
         o        objective outcomes,
         o        interplay with pharmacy use, and pharmacy benefit managers,
         o        physician and patient compliance with evidence-based medicine.

Our expert medical system, ohms|cvd, is an active disease and care management
process emphasizing a continuum of care, including modification of patient risk
factors. Use of this system can result in important cost-effective improvements
in diabetic care, coronary, cerebrovascular and heart failure events,
improvements which have been verified by empirical health and cost outcomes. 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.

At November 30, 2005, we had contracts with the Center for Medicare and Medicaid
Services and 11 health plans to provide disease management services in multiple
health plan markets in 10 states. The number of members under contract was as
follows:

At November 30,                          2005          2004           2003
---------------                          ----          ----           ----
Approximate members under contract    1,094,000      1,065,000      1,200,000

At November 30, 2005, of the approximately 1.1 million plan members under
contract, we had approximately 800,000 commercial members and 300,000 Medicare
Advantage members. During fiscal year 2006, we anticipate that we will have
approximately 820,000 plan members under contract, which is comprised of
approximately 800,000 commercial members and 20,000 Medicare Advantage members.
The reduction in members under contract is related to the contract terminations
with Alere Medical and the BIPA Medicare Disease Management Project (see

                                       5
<PAGE>

Medicare Demonstration Projects Section) that will occur at the end of December
and February 2006, respectively. These contract terminations will result in a
reduction of disease management revenue in fiscal 2006 of approximately $11.5
million.

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 Demonstration Projects
--------------------------------------------------------------------------------

The Centers for Medicare and Medicaid Services ("CMS") selected us to
participate in two demonstration projects:

         o        Medicare Coordinated Care Demonstration ("MCCD"); and
         o        BIPA Medicare Disease Management Demonstration

CMS is a federal agency within the U.S. Department of Health and Human Services.
CMS runs the Medicare and Medicaid programs - two national health care programs
that benefit millions of Americans. CMS, with the Departments of Labor and
Treasury, helps millions of Americans and small companies get and keep health
insurance coverage, and eliminate discrimination based on health status for
people buying health insurance. CMS spends billions of dollars a year buying
health care services for beneficiaries of Medicare, Medicaid and SCHIP. CMS
among other things:

         o        assures that the Medicaid, Medicare and SCHIP programs are
                  properly run by its contractors and state agencies;
         o        establishes policies for paying health care providers;
         o        conducts research on the effectiveness of various methods of
                  health care management, treatment, and financing; and
         o        assesses the quality of health care facilities and services
                  and taking enforcement actions as appropriate.

Medicare Coordinated Care Demonstration
---------------------------------------
In fiscal 2002, we received a contract award to participate in the Medicare MCCD
project. Our ohms|cad program is the only one under this demonstration that will
be evaluated specifically for management of CAD.

                                       6
<PAGE>

CMS 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 commenced in
early 2002. As a result of our success in the initial enrollment stage of the
project, CMS authorized doubling the patient base of the project with
commensurate remuneration. This project was originally scheduled to end in
January 2006 but has been extended by CMS through June 30, 2008.

BIPA Medicare Disease Management Demonstration
----------------------------------------------
On October 23, 2002, CMS selected QMed, Inc., PacifiCare Health Systems, Inc.,
with its subsidiary, Prescription Solutions, and Alere Medical, Inc. - operating
jointly as "HeartPartners" - to participate in its BIPA Disease Management
Demonstration Project.

The HeartPartners Program provides disease management services and a
comprehensive tiered prescription drug plan for up to 15,000 chronically ill
Medicare fee-for-service beneficiaries suffering from congestive heart failure.
The program also addresses the significant co-morbidities of coronary artery
disease and diabetes.

PacifiCare Health Systems, Inc., with its subsidiary, Prescription Solutions,
QMed, Inc., and Alere Medical, Inc. were selected following a national
competitive evaluation process. The HeartPartners program commenced in January
2004. PacifiCare Health Systems, Inc., with its subsidiary, Prescription
Solutions, QMed, Inc., and Alere Medical, Inc, will operate HeartPartners under
a single, coordinated management and operational construct.

PacifiCare Health Systems, Inc. notified CMS that PacifiCare intended to
terminate this project not later than February 28, 2006 and CMS agreed to allow
PacifiCare to terminate this contract effective February 28, 2006. This
termination will result in a reduction in disease management revenue of
approximately $3.5 million in fiscal year 2006.

QMedCare, Inc.
--------------------------------------------------------------------------------

As a result of the Medicare Modernization Act of 2003 (MMA), new business
opportunities were created by the creation of Special Needs Plans for
chronically ill Medicare beneficiaries. We have entered this market through our
wholly owned subsidiary QMedCare, Inc. QmedCare, Inc. acts as a management
company that will operate a series of specialty Managed Care products serving a
high-risk population of Medicare beneficiaries. QMedCare, Inc. leverages the

                                       7
<PAGE>

considerable disease management capabilities of the parent company, QMed, Inc.,
in managing medical risk within a Medicare population.

QMedCare, Inc. is the sole investor in QMedCare Dakota, LLC, a company
specifically formed to administer a Medicare Advantage Coordinated Care Special
Needs Plan for DAKOTACARE, a large health maintenance organization in South
Dakota. The Special Needs Plan will be marketed as HeartLine Plus and will
provide exclusive health coverage for heart and stroke patients. This plan will
be operated as a strategic alliance between QMedCare Dakota, LLC and DAKOTACARE.
The goal of this alliance is to reduce disease complications, hospitalizations,
and emergency room visits for members, and to improve their quality of life.

As part of its initiatives, QMedCare, Inc. is in the process of establishing a
Captive Insurance Company in South Carolina.

Health e Monitoring, Inc.
--------------------------------------------------------------------------------

Health e Monitoring , Inc. (HeM) is a wholly owned subsidiary of QMed, Inc. In
May of 2005, QMed, Inc. acquired HeM, a privately owned firm offering a
comprehensive program for healthy weight and lifestyle management. This highly
interactive program is designed for those individuals interested in weight and
health management - ranging from the desire to maintain a healthy weight and
lifestyle to those concerned about more serious weight and health issues such as
bariatric surgery, diabetes and hypertension.

Its Health e Living program focuses on the role of wellness and prevention to
establish healthy lifestyle habits, dietary and nutrition education, exercise
regimens and behavioral modifications. Whether one's goal is to gain better
control over his or her weight or to enhance an established wellness routine,
our program is personalized to the needs of each participant enrolled. This
program provides a high level of personal touch and focuses on the role of
wellness and prevention to establish healthy lifestyle habits, dietary and
nutrition education, exercise regimens and behavioral modifications. Personal
Health Coaches - Registered Dieticians, Interns and Para professionals - are
assigned to individuals to motivate them, help them change the way they think
about their health and ingrain new behaviors for healthy living.

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

Our goal is to assist individuals in developing lifestyle habits that lead to a
more balanced way of life. We are committed to providing our participants with
the tools, motivation and support needed to enhance their life's balance for
living a long and healthy life.

                                       8
<PAGE>

Business Strategy
--------------------------------------------------------------------------------

Our strategy is to (1) develop additional contracts with CMS within the Special
Needs Plans (SNP) provisions of the Medicare Modernization Act; (2) pursue a
Company owned Health Maintenance Organization license; (3) pursue opportunities
within the employer and consumer marketplace for our health and wellness, and
weight management programs; (4) pursue strategic alliances with other health
plans within the Special Needs Arena for patients suffering from chronic
cardiovascular diseases; (5) pursue contract opportunities with new health plans
to provide disease management services; (6) further develop and expand our
disease management business within the existing customer base; (7) add disease
states to our platform; and (8) pursue other opportunities within the healthcare
industry. We anticipate that we will utilize our medical
information-communication technologies to gain and maintain competitive
advantage in delivering care coordination and its narrower subset, disease
management services. We anticipate that significant investments will continue to
be made during fiscal 2006 in the development of our own HMO, our operation of
an SNP in South Dakota, continued development of the Health e Monitoring
programs and the associated information technology support for these
initiatives. Many of these investments will be made prior to the realization of
revenues from these initiatives. It is also anticipated that some of these new
capabilities and technologies may be added through strategic alliances with
other entities.

Marketing
--------------------------------------------------------------------------------

We market our disease management services to health plans, large physician
practice groups, and governmental agencies through our sales staff. In addition
to marketing through our sales staff, we promote our services at key conferences
throughout the United States where potential clients are present.

A key to our success in marketing our services is the relationships we develop
with providers, physicians and patients. QMed builds the critical links among
them that result in superior patient outcomes and reduced costs.

We have developed a comprehensive Medicare strategy, and we project that a large
portion of our future business will be in contracts with the federal and state
governments. In our current Medicare projects, our relationships with physicians
have given us a key advantage in identifying patients for the projects. We will
continue to promote these relationships, as they are critical to patient
enrollment.

Contracting efforts are conducted and coordinated by senior management
personnel, with the aid, where appropriate, of certain independent consultants.
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

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<PAGE>

efforts, management meets with appropriate personnel from the organization
making the request to best determine the organization's needs. 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.

Competition
--------------------------------------------------------------------------------

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

We believe we have competitive advantages because our clinical platform links
the physician, patient and nurse to a coordinated plan of care therefore
improving adherence to evidence-based medicine and reducing "gaps in care". We
have a specialty field management team dedicated to working directly with
physicians and their office staff to promote the benefits of our disease
management program. The entire management system and its components are
proprietary and patented. We have documented improvements, for a health plan
customer, in its HEDIS (Health Plan Employer Data and Information Set) audit, a
competitive advantage for each customer, and the financial and clinical outcomes
for our programs. However, we cannot assure you that we can compete effectively
with these other entities in the marketplace.

With the creation of the Special Needs Plans program, we expect there will be
significant competition from existing HMO's and there may be new entries into
this field.

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

Consolidation has been, and may continue to be, an important factor in all
aspects of the healthcare industry. We cannot assure you that we can
effectively compete with companies formed as a result of industry consolidation
or that we can retain existing customers if they are acquired by other health
plans which already have or are not interested in health and care support
programs.


Research and Development
--------------------------------------------------------------------------------

In fiscal 2005, 2004 and 2003, we expended approximately $1,323,000, $904,000,
and $905,000 respectively, for research and development. During these years,
research and development was primarily focused on the development of advanced
algorithms which coordinate care more rigorously and cost-effectively, and
systems which improve our patient out-reach capabilities.

We plan to continue to enhance our existing systems and products to support the
new initiatives within our QMedCare and Health e Monitoring segments in
anticipation of revenues from these segments in fiscal 2006.

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<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 our 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). We received a U.S.
patent for the nDx technology on March 29, 1994 (Patent No. 5299119) and a
patent for the ohms|cad system (Patent No. 5,724,580) on March 3, 1998. Certain
patents relating to our technology began expiring in 2004.

The patent laws of foreign countries may differ from those of the United States
as to the patentability 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 to
us.

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."

Our customers also implement their own procedures to protect the confidentiality
of information being transferred into and out of their computer network. Despite
these efforts, it is not possible to assure 100% data security.

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

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<PAGE>

         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 effected.

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.

The cost of complying with our contractual privacy obligations has not, to date,
had a material negative impact on our results of operations and financial
condition. In 2005, health plans, most health-care providers and certain other
entities were required to comply with federal security regulations issued
pursuant to HIPAA, which require the use of administrative, physician, and
technical safeguards to protect the confidentiality, integrity and availability
of electronic individually-identifiable health information.

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.

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
related regulations.

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 our contract manufacturers and we 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

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determine that our monitors were not manufactured in accordance with GMP's, it
has the authority to order us to cease production and could 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 and/or increase our cost of doing business.

To our knowledge and other than what we have described in this report 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 managed care errors and omissions, product liability, directors and
officers, and general liability insurance for all of our locations and
operations. 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
sufficient to cover all future claims. In recent years, the cost of liability
and other forms of insurance have increased significantly. There is no assurance
that such insurance will continue to be available in adequate amounts or at
reasonable costs. Our liability insurance coverage provides for certain
deductible levels to be paid by us. 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 144 employees as of November 30, 2005, none of which are subject to a
collective bargaining agreement. We believe our relations with employees are
good.

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Executive Officers of the Registrant
--------------------------------------------------------------------------------

The following sets forth certain information concerning our executive officers
as of January 31, 2006:

Officer                         Age    Position with the Company
-------                         ---    -------------------------

Michael W. Cox                   63    President, Chief Executive
                                       Officer and Director

Jane Murray                      43    Executive Vice President, Chief Operating
                                        Officer and Director

William T. Schmitt, Jr., CPA     45    Senior Vice President, Chief Financial
                                        Officer

Teri J. Kraf                     56    Senior Vice President, Health Management
                                        Services

John Siegel                      49    Senior Vice President, Sales

Robert Mosby                     59    Vice President, Strategy and Development

John W. Rohfritch                60    President - QMedCare, Inc.

K. Randall Burt                  50    President - Health e Monitoring, Inc.

Glenn J. Alexander, CPA          39    Controller and Principal Accounting
                                        Officer


Item 2. Properties.

Our executive offices occupy approximately 21,000 square feet of office space in
Eatontown, New Jersey, pursuant to a lease agreement, which expires in November,
2007. These facilities are used principally for administrative offices, sales
training, and marketing. We lease approximately 800 square feet of space in Sag
Harbor, New York, used principally for repairs, assembly and product quality
control.

We believe our facilities are suitable and adequate to meet our present needs,
but we may require expansion with increased business.

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<PAGE>

Item 3. Legal Proceedings.

On March 28, 2003, HeartMasters LLC, a limited liability company 50% owned by
our IHMC subsidiary, received a Demand for Arbitration before the American
Arbitration Association for claims under certain terminated disease management
agreements. The claims alleged breach of disease management agreements between
Regence of Washington and Oregon and HeartMasters LLC. HeartMasters LLC also
received a notice from a reinsurer, Centre, denying coverage for the Regence of
Oregon HMO first year coverage period, asserting that an outside actuarial
report concerning Regence's claims history and other information, which were
considered by the reinsurer prior to issuance of coverage, contained "grossly
incorrect data." HeartMasters LLC denied the claims of Regence and asserted
counter claims. In addition, HeartMasters demanded payment of the insurance
coverage. Regence had also asserted, informally, that the Company was or could
have been liable for certain of these obligations, a claim the Company denied.

On June 15, 2004, the Company entered into an agreement to settle its dispute
with The Regence Group, including all issues surrounding the HeartMasters LLC
arbitration. The settlement agreement provided QMed, Inc. and IHMC with releases
from any and all claims related to Regence and the Regence contract in exchange
for a financial guarantee of certain payments from HeartMasters LLC to Regence.
The amount of the financial guarantee could have ranged between $0 and
$2,300,000 and was contingent upon the outcome of a separate arbitration being
pursued by Regence and HeartMasters LLC against the insurer, Centre Insurance.
The Company made an advance payment on this guarantee of $1,150,001 on June 15,
2004. The advance payment, and any subsequent payment, were subject to refund
based upon certain recovery targets under the Centre Insurance arbitration, if
successful.

The dispute with Centre over the insurance coverage on all of the relevant
Regence disease management plans, for which coverage was purchased, was the
subject of an arbitration proceeding. Initially, the Company sued Centre over
the nonpayment of the policies; the court determined that this must be resolved
in the arbitration with Centre.

On August 18, 2005, HeartMasters LLC and The Regence Group entered into a
settlement agreement with Centre, resolving the dispute. The settlement resulted
in the elimination of any further contingent liability for the Company, under
the guarantee to Regence. The Company received $500,000 on September 15, 2005,
which has been reflected as revenue for the period ended November 30, 2005.

On November 21, 2005, the Company brought an arbitration proceeding against
Alere Medical Incorporated ("Alere"), seeking damages of approximately
$17,000,000, on allegations that Alere materially misled and misrepresented to
the Company its intentions to enter into long-term agreements with the Company
for the provision of disease management services. The Company alleges that, in
reliance on Alere's misrepresentations, the Company agreed to continue to
provide services to the six PacifiCare Health Systems, Inc. ("PacifiCare")
plans, on a short term basis, and as a subcontractor to Alere, after the
termination of its direct contracts with PacifiCare, and further agreed to give

                                       15
<PAGE>

Alere a discounted price during the interim periods. The Company asserts that
Alere acted improperly and misleadingly by misrepresenting its intentions with
regard to agreeing to a long-term contract between the parties, and that the
Company, inter alia, was damaged thereby.

In the arbitration, Alere has counterclaimed, asserting that, under a seventh
agreement between the parties, there was no obligation to enter into a long term
agreement, and thus, claims Alere, the Company's claims are not well founded and
Alere is allegedly entitled to damages for breach of the duty of good faith and
fair dealing, as well as its attorneys' fees. Alere also filed a lawsuit in
state court, in the Second Judicial District Court of Nevada, Washoe County,
seeking essentially the same relief. Damages are sought by Alere in an
unspecified amount stated to be in excess of $10,000. The Company removed
Alere's State Court action to the United States District Court for the District
of Nevada, where it is now pending. At this stage, management is unable to
predict the outcome of this matter.

On January 30, 2006, the Company has filed an action against Healthcare First, a
division of Gallagher Insurance Services, Inc., and of Arthur J. Gallagher & Co.
("HCF"), seeking recovery in the amount of approximately $3,700,000 against the
financial intermediary/broker involved in obtaining the insurance policies from
Centre Insurance, which were the subject of the prior proceeding against Centre.
This case is pending in the Superior Court of New Jersey, Law Division, Monmouth
County. HCF has not yet responded to the complaint, and its time to counterclaim
has not yet expired. The Company is unaware of any counterclaims that HCF might
have under consideration. At this stage, management is unable to predict the
outcome of this matter.

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

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

         None.

                                       16
<PAGE>

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.

(a)      Market Price and Dividend Information

Our common stock is traded in the Nasdaq Small Cap Market, under symbol "QMED".
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 transactions.

Fiscal Year Ended November 30, 2005                  High              Low
-----------------------------------                  ----              ---

First Quarter                                    $     14.08      $     8.76
Second Quarter                                         11.84            6.77
Third Quarter                                          11.02            7.23
Fourth Quarter                                         12.97            8.75

Fiscal Year Ended November 30, 2004                  High              Low
-----------------------------------                  ----              ---

First Quarter                                    $     12.59      $     9.65
Second Quarter                                         11.94            9.03
Third Quarter                                          10.21            7.57
Fourth Quarter                                         11.55            6.27

(b)      Approximate Number of Holders of Common Stock

As of January 31, 2006, the Company's common stock was held of record by 309
persons. Based upon requests from record holders for additional materials for
our 2005 annual meeting, we believe that there are at least 3,500 beneficial
holders of our common stock. On January 31, 2006, the closing price reported was
$9.90.

(c)      Dividends

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.

(d)      Recent Sales of Unregistered Securities

See the Company's Form 8-K dated December 6, 2004 and Form 8-K dated February
15, 2005.

                                       17
<PAGE>

Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
                                                            For the Years Ended November 30,
                                                            --------------------------------
                                         2005              2004             2003           2002           2001
                                         ----              ----             ----           ----           ----
<S>                                   <C>             <C>             <C>             <C>             <C>
Results of Operations
Net revenue                           $ 22,146,496    $ 15,576,599    $ 12,899,361    $ 12,744,754    $  8,021,634

Cost of revenue                          7,510,894       8,878,104       6,726,867       5,607,563       3,300,526
                                      ------------    ------------    ------------    ------------    ------------
Gross profit                            14,635,602       6,698,495       6,172,494       7,137,191       4,721,108


Selling, general and
  administrative expenses                8,720,287       7,288,783       6,875,834       5,789,730       5,424,183
Research and development expenses        1,323,397         903,921         905,360         999,985         757,355
Litigation settlement                            -               -         230,000               -               -
                                      ------------    ------------    ------------    ------------    ------------
Income (Loss) from operations            4,591,918      (1,494,209)     (1,838,700)        347,476      (1,460,430)


Interest expense                           (27,294)        (33,874)        (25,595)         (9,173)        (16,517)
Interest income                            441,353          68,238          90,418         220,014         232,607
Loss in operations of joint
  venture                                 (847,830)       (502,027)       (362,499)        (47,500)        (42,500)
Other income                                 3,486           8,703               -         104,444          24,180
                                      ------------    ------------    ------------    ------------    ------------
Income (loss) before income tax
  benefit (provision)                    4,161,633      (1,953,169)     (2,136,376)        615,261      (1,262,660)

Gain on sale of state tax
  benefits                                 115,912         229,724               -         129,885         219,603
Provision for income taxes                (392,000)        (16,000)        (15,000)        (40,000)              -
                                      ------------    ------------    ------------    ------------    ------------
Net income (loss)                        3,885,545      (1,739,445)     (2,151,376)        705,146      (1,043,057)

Other comprehensive income (loss)

Unrealized (loss) gain on
  securities available for sale            (20,985)         (8,553)        (14,725)        (69,617)         32,513
Reclassification adjustment for
  loss (gain) included in net
  income                                     6,584           8,914          44,830         (59,598)              -
                                      ------------    ------------    ------------    ------------    ------------
Comprehensive income (loss)           $  3,871,144    $ (1,739,084)   $ (2,121,271)   $    575,931    $ (1,010,544)
                                      ============    ============    ============    ============    ============

Per Share Data

Net income (loss) per share
     Basic                            $       0.24    $       (.12)   $       (.15)   $        .05    $       (.08)
                                      ============    ============    ============    ============    ============
     Diluted                          $       0.21    $       (.12)   $       (.15)   $        .04    $       (.08)
                                      ============    ============    ============    ============    ============

Balance Sheet Data (at end of periods)

Working capital                       $ 23,915,273    $  5,819,350    $  6,151,367    $  6,718,300    $  5,749,732

Total assets                          $ 30,673,366    $ 10,837,477    $ 12,918,311    $ 12,163,181    $  8,167,511

Total liabilities                     $  3,652,080    $  2,946,807    $  5,870,129    $  3,295,191    $  1,472,990

Stockholders' equity                  $ 27,021,286    $  7,890,670    $  7,048,182    $  8,867,990    $  6,694,521

                                       18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Selected Quarterly Financial Data (Unaudited)


                                                              For the Quarters Ending 2005
                                                              ----------------------------
                                        February 28,      May 31,     August 31,       November 30,       Total
                                        ------------      -------     ----------       ------------       -----
<S>                                    <C>             <C>           <C>                <C>          <C>
Net revenue                            $ 4,755,486     $ 5,462,897   $ 5,504,634        $6,423,479   $  22,146,496
Gross profit                             2,934,000       3,612,376     3,677,321         4,411,905      14,635,602
Net income                                 874,803         870,991       992,937         1,146,814       3,885,545
Basic income per share                         .06             .05           .06               .07             .24
Diluted income per share                       .05             .05           .05               .06             .21
<CAPTION>
                                                             For the Quarters Ending 2004
                                                             ----------------------------
                                       February 29,       May 31,     August 31,       November 30,       Total
                                       ------------       -------     ----------       ------------       -----
<S>                                    <C>             <C>           <C>                <C>          <C>
Net revenue                            $ 3,792,820     $ 3,724,881   $ 3,273,083        $4,785,815   $  15,576,599
Gross profit                             1,791,622       1,033,936       892,907         2,980,030       6,698,495
Net (loss) income                         (262,414)     (1,432,269)   (1,180,896)        1,136,134      (1,739,445)
Basic (loss) income per share                 (.02)           (.10)         (.08)              .08            (.12)
Diluted (loss) income per share               (.02)           (.10)         (.08)              .07            (.12)
</TABLE>

                                       19
<PAGE>

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

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

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

                                       20
<PAGE>

         o        our ability to attract and/or retain and effectively manage
                  the employees required to implement our agreements with health
                  plan organizations;
         o        the impact of future state and federal healthcare legislation
                  and regulations on our business;
         o        the financial health of our customers and their willingness to
                  purchase our services;
         o        the impact of litigation or arbitration;
         o        our ability to accurately estimate our performance and revenue
                  recognition under the terms of our contracts;
         o        our ability to develop new products and deliver outcomes on
                  those products;
         o        our ability to implement our strategy within expected cost
                  estimates;
         o        general economic conditions

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

         o        the risks inherent in starting a new venture including the
                  incurring of significant start-up expenses, the time and
                  number of enrollees in the Special Needs Plans, and the
                  ability to achieve profitable operations;
         o        the ability to maintain certain levels of equity (referred to
                  as surplus) that may be required by state regulations;
         o        the ability to maintain the Risk-Based Capital ratio (RBC
                  ratio) as defined and utilized by the National Association of
                  Insurance Commissioners (NAIC) to identify weakly capitalized
                  companies by comparing each company's adjusted surplus to its
                  required surplus (RBC ratio);
         o        the ability to reasonably estimate appropriate medical claims
                  reserves and related benefit expenses;
         o        the ability to maintain regulatory compliance associated with
                  governmental supervisory agencies including state health
                  insurance, managed care and securities departments, which have
                  the authority to grant, suspend and revoke licenses to
                  transact business, regulate many aspects of the products and
                  services offered, assess fines, penalties and/or sanctions,
                  monitor our solvency and reserve adequacy and regulate our
                  investment activities on the basis of quality, diversification
                  and other quantitative criteria;
         o        the ability to be competitive, set prices and renew business
                  as pricing and underwriting regulations by states limit the
                  Company's and other health insurers flexibility to their
                  underwriting and rating practices, particularly for small
                  employer groups;

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

We are a provider of disease management services to health plans and to the
federal government through its Medicare program. Our disease management services
are provided by QMed, Inc. and IHMC. Our services assist health plans and
government organizations in managing the care, and cost of diabetes,
cardiovascular conditions, including coronary artery disease ("CAD"), stroke,

                                       21
<PAGE>

heart failure ("CHF"), hypertension, hyperlipidemia and the cardiovascular
complications of diabetes. We also, to a limited extent, manufacture and sell
diagnostic medical equipment to primary care physicians.

Acquisitions and Recent Developments

QMedCare, Inc.

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

Health e Monitoring, Inc.

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

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

Critical Accounting Policies and Estimates

Our accounting policies are described in Note 1 of the consolidated financial
statements included in this Annual Report on Form 10-K for the fiscal year ended
November 30, 2005. The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America, which requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

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

                                       22
<PAGE>

Revenue Recognition

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

We determine our level of performance at interim periods based on medical claims
data, achievement of physician and patient participation levels, or other data
supplied by the health plan. In the event these interim performance measures
indicate that performance targets are not being met or sufficient data is
unavailable, fees, which could be subject to refund, are not recorded as revenue
but rather are recorded as a current liability entitled "contract billings in
excess of revenues." Under performance based arrangements, the ability to make
estimates at interim periods can be challenging due to the inherent nature of
the medical claims process and the lag time associated with it. In most cases,

                                       23
<PAGE>

complete paid claims data is not available until up to six months after claims
are incurred. Although interim data measurements are indicative of performance
objectives, actual results could differ from our estimates.

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

During the fiscal year ended November 30, 2005, approximately 69% of disease
management services were derived from three health plans that each comprised
more than 10% of the Company's revenues. During the fiscal year ended November
30, 2004, approximately 45% of disease management services were derived from
four health plans that each comprised more than 10% of the Company's revenues.
During the fiscal year ended November 30, 2003, approximately 57% of disease
management services were derived from two health plans that each comprised more
than 10% of the Company's revenues. The Company continues to anticipate a
concentration of revenues from a limited number of customers in fiscal year
2006.

Subsequent to November 30, 2005, the PacifiCare contract and BIPA Medicare
Demonstration Project were terminated and will result in a reduction in revenue
of approximately $11.5 million.

Impairment of Intangible Assets

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

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

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

                                       24
<PAGE>

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

Recent Accounting Pronouncements

Refer to note 1 in the accompanying consolidated financial statements.

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>
                                                                                                 Period-to-Period
                                                                                                    % Changes
                                                          % For Year Ended                     ---------------------
                                                            November 30,                        2005           2004
                                                            ------------                         vs.            vs.
                                                   2005          2004         2003              2004           2003
                                                   ----          ----         ----              ----           ----
<S>                                               <C>          <C>            <C>               <C>            <C>
Revenue                                           100.0%       100.0%         100.0%            42.2%          20.8%
Cost of revenue                                    33.9         57.0           52.1            (15.4)          32.0
Gross Profit                                       66.1         43.0           47.9            118.5            8.5
Selling, general and administrative                39.4         46.8           53.3             19.6            6.0
Research and development                            6.0          5.8            7.0             46.4           (0.2)
Litigation settlement                                -            -             1.8               *              *
Income (loss) from operations                      20.7         (9.6)         (14.3)              *              *
Interest expense                                   (0.1)        (0.2)          (0.2)           (19.4)          32.3
Interest income, net                                2.0          0.4            0.7            546.8          (24.5)
Loss on operations of joint venture                (3.8)        (3.2)          (2.8)              *              *
Other income                                         -           0.1            -                 *              *
Income (loss) before tax (provision) benefit       18.8        (12.5)         (16.6)              *            (8.6)
Gain on sale of tax benefit                         0.5          1.5            -                 *              *
Income tax (provision) benefit                     (1.8)        (0.1)          (0.1)         2,350.0            6.7
Net income (loss)                                  17.5        (11.2)         (16.7)              *           (19.1)
</TABLE>
* Not meaningful

                                       25
<PAGE>

Fiscal 2005 Compared to Fiscal 2004
--------------------------------------------------------------------------------

Revenue for fiscal year 2005 increased approximately $6.6 million or 42.2% over
fiscal year 2004. This increase is attributable to (i) an increase of
approximately $5.7 million of revenue related to the increase in enrollment
related to contracts entered into during fiscal year 2004; (ii) the recognition
of approximately $1.4 million of previously deferred revenue and bonuses earned
under contracts with HealthPartners, SummaCare and PacifiCare where performance
measurements were achieved or surpassed; (iii) an increase in revenue of
$500,000 representing a return of funds previously paid under the guarantee in
connection with the settlement of its arbitration with The Regence Group and
Centre Insurance; (iv) a reduction of revenue in fiscal year 2004 of
approximately $353,000 representing an increase in management's deferred revenue
estimate in connection with its settlement with The Regence Group; and (v) a
reduction of $348,000 in revenue during fiscal year 2004 as a result of the
reconciliation process for one of our smaller health plans. These increases were
offset by a reduction in revenue of approximately $1.7 million from the
termination of one disease management program, market exits and reductions in
membership under existing disease management programs.

Subsequent to November 30, 2005, the PacifiCare contract and BIPA Medicare
Demonstration Project were terminated and will result in a reduction in revenue
in fiscal 2006 of approximately $11.5 million.

Gross profit margins for fiscal year 2005 increased to 66% from 43% for fiscal
year 2004. This increase is related to (i) an increase in revenue attributable
to an increase in enrollment in contracts entered into in fiscal year 2004
(while direct costs associated with the initial implementation costs on these
contracts were incurred in fiscal year 2004, the incremental costs associated
with the increased enrollment in fiscal year 2005 were not as significant as the
initial implementation costs incurred in fiscal year 2004); (ii) an increase in
revenue in fiscal year 2005 of $500,000, without a corresponding increase in
costs, representing a return of funds previously paid under the guarantee in
connection with the settlement of its arbitration with The Regence Group and
Centre Insurance; (iii) a decrease in revenue in fiscal year 2004 of
approximately $353,000, without a corresponding decrease in costs, which
represented an increase in management's deferred revenue estimate in connection
with its settlement with The Regence Group; (iv) the recognition of
approximately $1.4 million of revenue, without a corresponding increase in
costs, related to the recognition of previously deferred revenue and bonuses
earned under contracts with HealthPartners, SummaCare and PacifiCare where
performance measurements were achieved or surpassed; and (v) approximately $1.6
million in labor and related cost reductions associated with efficiencies
related to enhancements in our programs. The increase in gross profit margins
was offset by an increase of approximately $292,000 related to the outsourcing
of certain call center services and $60,000 in equipment costs for our disease
management programs. We expect a significant reduction in gross profits in
fiscal year 2006 as a result of the reduction in revenue related to the
termination of contracts and the increase in costs of sales as a result of the
share-based payments required to be expensed under SFAS No. 123(R),
"Shared-Based Payment."

                                       26
<PAGE>

Selling, general and administrative expenses for fiscal year 2005 increased by
approximately $1.4 million or 19.6% over fiscal year 2004. The increase was
attributable to (i) an increase of approximately $635,000 in salaries and
related expenses primarily related to two new executives for QMedCare, Inc. and
Health e Monitoring, Inc. and additional new hires throughout the Company; (ii)
an increase of approximately $86,000 in travel expenses primarily related to
business development for QMedCare, Inc. and Health e Monitoring, Inc. (ii) a
$270,000 increase in consulting services; (iii) a $271,000 increase in
advertising in connection with our SNP project in South Dakota; (iv) a $44,000
increase in costs associated with trade shows during fiscal year 2005; (v) a
$157,000 increase in depreciation and amortization primarily attributable to the
intangibles associated with the acquisition of Health e Monitoring, Inc. in the
second quarter of fiscal year 2005 and Disease Management Technologies, Inc. in
the fourth quarter of fiscal year 2005 and an increase in amortization of
product software development; and (vi) a $199,000 increase in accounting and
legal fees for compliance services. These increases were offset by a decrease of
approximately $207,000 in commissions related to new contracts with health plans
entered into in fiscal year 2004 and a decrease in insurance costs of $71,000.
Included within selling, general and administrative expenses outlined above was
approximately $1.1 million of costs incurred as implementation costs of QMedCare
Inc. relating to the SNP project in South Dakota and approximately $430,000 of
costs were incurred as implementation costs of Health e Monitoring Inc. We
expect to continue to incur implementation costs for both QMed Care Inc. and
Health e Monitoring Inc. in fiscal year 2006 and anticipate these costs to
increase during this time period.

Research and development expenses for fiscal year 2005 increased approximately
$419,000 or 46.4% over fiscal year 2004. Our accounting policies are to
capitalize certain software development costs during development and amortize
them upon implementation. Subsequent to implementation any further costs (i.e.
maintenance costs) are expensed as incurred. During the first quarter of fiscal
year 2005, we completed the primary development of one of our new systems and
therefore all subsequent costs are being expensed, which accounts for a portion
of the increase in research and development expense. In addition, we incurred
expenses in connection with the development of the Health e Monitoring, Inc.
web-based wellness program. We continue to focus our efforts on the development
of new advanced software programs, web-based applications, and tools to assist
in the identification and evaluation of patients who are at risk for developing
various disease conditions. These programs incorporate state of the art
telecommunications, data management, and security and information technology.
Certain costs associated with the development of new product software to be
incorporated into our disease management programs are capitalized and amortized
over a 2-5 year useful life. We intend to continue to improve and expand the
capabilities of all of our technologies.

Interest income for fiscal year 2005 was approximately $441,000 as compared to
approximately $68,000 for fiscal year 2004. This increase is attributable to the
investment of the funds that were primarily generated by the private placements
in the first six months of fiscal year 2005 along with the cash generated from
operations throughout fiscal year 2005.

                                       27
<PAGE>

Loss on operations of joint ventures for fiscal year 2005 increased
approximately $346,000 over fiscal year 2004. The expense for fiscal year 2005
primarily represents legal fees for the arbitration and settlement with The
Regence Group and Centre Insurance, and costs related to a joint venture entered
into with two partners to provide services under a disease management contract
in Minnesota.

Our effective tax rate for fiscal year 2006 is 9.4%. The difference in the
Company's effective tax rate from the federal statutory rate is primarily due to
a 100% valuation allowance provided for all deferred tax assets and the sale of
certain state tax benefits. Current period income tax expense represents federal
and state tax liabilities attributable to the reported net income.

Fiscal 2004 Compared to Fiscal 2003
--------------------------------------------------------------------------------

Revenue for fiscal 2004 increased approximately $2.7 million or 20.8% over the
fiscal 2003. This increase consists of approximately $4.9 million of additional
revenue related to the execution of new contracts entered into during fiscal
2004. This increase was offset by a reduction in revenue of approximately $2.2
million representing (i) approximately $1.2 million related to market exits and
reductions in membership under existing disease management programs, the
termination of disease management programs under agreements with the Regence
Group and with a customer in Oregon and (ii) a reduction of approximately
$353,000 related to an increase in management's deferred revenue estimate
related to its settlement with the Regence Group and $580,000 related to an
increase in management's deferred revenue estimate from a contract with a
customer in Oregon.

Gross profit margins for fiscal 2004 decreased to 43.0% from 47.9% for fiscal
2003. This decrease was primarily due to (i) a reduction of approximately
$353,000 related to an increase in management's deferred revenue estimate
related to its settlement with the Regence Group, (ii) $580,000 related to an
increase in management's deferred revenue estimate with a customer in Oregon and
(iii) implementation costs associated with our expansion into new market places
related to new contracts, including costs associated with one contract totaling
approximately $800,000. Salaries, travel and other direct costs are all factors
in the initial implementation related to any new markets and contracts. These
direct costs as a percentage of revenue will decrease once a marketplace and
contract matures and a significant number of members are enrolled.

Selling, general and administrative expenses for fiscal 2004 increased
approximately $413,000 or 6.0% compared to fiscal 2003. The increase was
primarily due to costs associated with compliance with the provisions under the
Sarbanes-Oxley Act, of approximately $250,000, costs associated with negotiating
and signing new disease management services contracts of approximately $247,000,
and an increase in both executive and administrative staff of approximately
$223,000. These increases were partially offset by the reduction of costs
associated with the end of a lease on old corporate office space of
approximately $226,000, and a reduction in insurance costs of approximately
$94,000.

                                       28
<PAGE>

Research and development expenses for fiscal 2004 were flat compared to fiscal
2003. We continued to focus our efforts on the development of new, advanced
software programs to assist in the identification and evaluation of patients who
are at risk for developing various disease conditions. These programs
incorporate state of the art telecommunications, data management, and security
and information technology. Certain costs associated with the development of new
product software to be incorporated into our disease management programs are
capitalized and amortized over a 5-year useful life. We intend to continue to
improve and expand the capabilities of the ohms|cvd system.

Loss on operations of joint ventures for fiscal 2004 increased to approximately
$502,000 from $362,000 in 2003. The expense in 2004 primarily represents legal
fees associated with the arbitration with the Regence Group and startup costs
related to a joint venture entered into with two partners to provide services
under a disease management contract in Minnesota. Loss on operations of joint
venture for fiscal 2003 primarily represented legal fees associated with the
arbitration with the Regence Group.

There was no cost of litigation settlements in 2004. In 2003, the litigation
settlement expense of $230,000 represents costs associated with settlement of
certain outstanding legal proceedings, which have either reached settlement
during the period or have reached a point at which the outcome can be reasonably
estimated.

Our effective tax rate for fiscal 2003 was a negative 1.0%. The difference in
the Company's effective tax rate from the federal statutory rate was primarily
due to a 100% valuation allowance provided for all deferred tax assets and the
sale of certain state tax benefits. Current period income tax expense of $16,000
represented minimum state tax liabilities.

Liquidity and Capital Resources
--------------------------------------------------------------------------------

To date, our principal sources of working capital have been the proceeds from
public and private placements of securities. Since our inception, sales of
securities, including the proceeds from the exercise of outstanding options and
warrants, have generated approximately $47,600,000 less applicable expenses.

We had working capital of approximately $23.9 million at November 30, 2005
compared to approximately $5.8 million at November 30, 2004 and ratios of
current assets to current liabilities of 8.2:1 as of November 30, 2005 and 3.1:1
as of November 30, 2004. The working capital increase of approximately $18.1
million was due to two private placement equity transactions during the first
half of fiscal year 2005 whereby the company sold common stock for approximately
$13.8 million net of expenses, proceeds from the sale of common stock through
the exercise of outstanding options and warrants of approximately $1.0 million,
and cash flow from operations of approximately $5.4 million. These increases
were offset by a cash payment for the purchase of Health e Monitoring, Inc. of
$0.2 million, a cash payment for the purchase of the assets of Disease

                                       29
<PAGE>

Management Technologies, Inc. of $0.3 million, funding of joint ventures of
approximately $0.9 million, payments under capital leases of $0.1 million, and
other capital expenditures of $0.6 million.

In September 2001, we entered into a $1,000,000 line of credit agreement with
Wachovia Bank, National Association. The agreement is collateralized by
securities owned by the Company and expires on September 1, 2006. Outstanding
balances under the loan bear interest at an annual rate equal to the lower of
the bank's reference rate minus 1% or LIBOR plus 1.5%. As of November 30, 2005,
no debt was outstanding and the entire $1,000,000 was available under this
credit line. In December 2005, the Company established a $250,000 letter of
credit with Wachovia Bank, N.A. to establish the appropriate capital required
for the Company's captive insurance company in South Carolina.

In fiscal year 2006, we anticipate that we will expend cash to fund our current
operations, fund our continuing implementation costs associated with our managed
care and wellness segments, and for establishing and maintaining certain levels
of capital reserves as required by regulatory agencies in connection with the
operations of our insurance subsidiary.

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

Material Commitments
--------------------------------------------------------------------------------

The following schedule summarizes our contractual cost obligations as of
November 30, 2005 in the periods indicated.
<TABLE>
<CAPTION>

                                                                     Payments Due by Period
                                       ----------------------------------------------------------------------------------
          Contractual                                                                                          After 5
          Obligations                       Total        Less than 1 year      1-3 years       4-5 years       years
-------------------------------------- ---------------- ------------------- ---------------- --------------- ------------
<S>                                        <C>               <C>                 <C>            <C>            <C>
Long-Term Debt                             $         -       $         -         $        -     $        -     $        -
-------------------------------------- ---------------- ------------------- ---------------- --------------- ------------
Capital Lease Obligations                      240,000           160,000             80,000              -              -
-------------------------------------- ---------------- ------------------- ---------------- --------------- ------------
Operating Leases                               984,000           490,000            488,000          6,000              -
-------------------------------------- ---------------- ------------------- ---------------- --------------- ------------
Unconditional Purchase Obligations             290,000           290,000                  -              -              -
-------------------------------------- ---------------- ------------------- ---------------- --------------- ------------
Other Long-Term Obligations -
Employment Agreements                        1,582,000         1,354,000            228,000              -              -
-------------------------------------- ---------------- ------------------- ---------------- --------------- ------------
Total Contractual Cash Obligations         $ 3,096,000       $ 2,294,000         $  796,000     $    6,000     $        -
-------------------------------------- ---------------- ------------------- ---------------- --------------- ------------
</TABLE>
                                       30
<PAGE>

Risk Factors
--------------------------------------------------------------------------------

You should carefully consider each of the following risks and all of the other
information set forth in this MD&A or elsewhere in the Form 10-K. These risks
and other factors may affect forward-looking statements including those in this
MD&A or made by the Company elsewhere, such as in investor calls or conference
presentations. The risks and uncertainties described below are not the only ones
facing our Company. Additional risks and uncertainties not presently known to us
or that we currently believe to be immaterial may also adversely affect our
business.

If any of the following risks and uncertainties develops into an actual event,
this could have a material adverse effect on our business, financial condition
or results of operations. In that case, the trading price of our common stock
could decline materially.

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 activities, industry specific factors, and
regulatory change.

New Business Segment - Special Needs Plans

We have entered a new business segment as the administrator for a Medicare
Advantage Coordinated Care Special Needs Plan for DAKOTACARE, a large health
maintenance organization in South Dakota. The Special Needs Plan will be
marketed as HeartLine Plus and will provide exclusive health coverage for heart
and stroke patients. Our Company will be faced with all of the risks of
establishing a new business, including significant start up costs, uncertainty
as to the timing and number of enrollees in the Plan, effectively managing
health care costs, and ability to achieve and maintain profitable operations.

Fluctuations in our quarterly operating results may cause volatility in the
price of our common stock.

Given the nature of the markets in which we participate, we cannot reliably
predict future revenue and profitability. Our quarterly revenue and operating
results are 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 fixed in nature due to our revenue,
research and development costs; to the extent that projected revenue does not
meet forecast, these fixed cost would impact profitability.

We are in the process of implementing new information systems; 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 infrastructure in order to improve operating efficiency and expand the
range of disease management services we offer. We may not be successful in

                                       31
<PAGE>

implementing these new systems and transitioning data. As part of this effort,
we are implementing software applications to manage our business operations.
Failure to smoothly and successfully convert to this and/or other systems could
temporarily interrupt our operations and adversely impact our ability to run the
business. In addition, any failure or significant downtime in our new
information systems could prevent us from efficiently implementing disease
management programs, reconciling cost savings timely and accurately, 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 and 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 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

                                       32
<PAGE>

synergies. Depending on the size and complexity of an acquisition, our
successful integration of the entity would depend 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 in order
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 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.

                                       33
<PAGE>

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 meaningful
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. 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.

We depend on payments from CMS and health plans, and cost reductions within
those entities may adversely affect our business and results of operations.

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 the 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 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. In addition, this focus on
cost reduction may result in increased focus from health plans on contract
restructurings that reduce the fees paid to us for our services. There can be no
assurance that these financial pressures will not have a negative impact on our
operations.

Compliance with new federal and state legislation and regulation could adversely
affect our results of operations or may require us to invest substantial amounts
acquiring and implementing new information systems and/or modifying existing
systems.

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 services.
The 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 from health plans and CMS
patient identifiable medical information for disease management purposes is
protected in federal regulations governing medical record confidentiality. State
legislation or regulation of this information may be more restrictive. 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.

                                       34
<PAGE>

The disease management industry is a relatively new segment of the health-care
industry and, as a result, experiences a lengthy sales cycle for new contracts.

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
disease management. Because the industry is relatively new, health plan
purchasers of these services have not had significant experience purchasing,
evaluating or monitoring such services; this generally results in a lengthy
sales cycle for new health plan contracts. In addition, with the reduction in
revenue of $11.5 million resulting from the termination of the PacifiCare
contract and BIPA Medicare Demonstration Project, we continue to anticipate a
concentration of revenues in fiscal 2006 resulting from a limited number of
customers. Until we sign and implement additional health plan contracts, the
loss or a downward restructuring of a contract would negatively and materially
impact our results of operations and financial condition.

The disease management industry depends on effectively using information systems
and the failure of these systems could adversely affect our business.

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 this 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 three to five years.

We depend on the timely receipt of accurate data from our health plan customers
and our accurate analysis of this data.

The measurement of our performance under our health plan contracts is highly
dependent upon the timely receipt of accurate data from our 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 have a material adverse impact on our revenues from
that contract.

Our revenue is subject to seasonal pressure resulting from the disenrollment
process of our health plan clients.

The membership enrollment and disenrollment processes of our health plan
customers can result in a cyclical reduction of lives under management,
especially during our first quarter. Employers typically make decisions about
health insurance carriers at the end of each calendar year. Health plans also

                                       35
<PAGE>

periodically assess the types of markets they service as well as the contractual
arrangements of medical groups within those markets. In any event, all of these
factors will have an effect on membership as of January 1 of each year. A health
plan's decision to exit markets or non-renewal of contracts with its medical
groups will result in a loss of covered lives under management as of January 1.
Although these decisions may also result in a gain of members, the process of
identification and enrollment will typically lag by six months or longer. The
result of these cyclical changes has not, to date, had a material impact on the
company's revenues or results of operations but could have such an effect in the
future.

A potential seasonal impact on covered membership could be caused by a decision
by a health plan to withdraw or expand coverage thereby automatically
disenrolling previously covered members or enrolling new members, and/or would
significant shifts in employer's participation in the plans.

Contract renewals

The disease management industry is relatively new; as such the renewal
experience for these contracts is limited. No assurances can be given that
results from contract restructurings and possible terminations at or prior to
renewal would not have a material negative impact on our operations and
financial condition.

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 of 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.

Health Care Regulation

General

The federal and state governments have adopted laws and regulations that govern
our business activities in various ways. These laws and regulations restrict how
we conduct our business and result in additional burdens and costs to us. Areas
of governmental regulation include:

         o        Licensure
         o        Policy forms, including plan design and disclosures
         o        Premium rates and rating methodologies
         o        Underwriting rules and procedures
         o        Benefit mandates
         o        Eligibility requirements
         o        Service areas
         o        Market conduct
         o        Utilization review activities
         o        Payment of claims, including timeliness and accuracy of
                  payment
         o        Member rights and responsibilities
         o        Sales and marketing activities

                                       36
<PAGE>

         o        Quality assurance procedures
         o        Disclosure of medical and other information
         o        Provider rates of payment
         o        Surcharges on provider payments
         o        Provider contract forms
         o        Delegation of risk and other financial arrangements
         o        Producer licensing and compensation
         o        Financial condition (including reserves) and
         o        Corporate governance

These laws and regulations are different in each jurisdiction.

States generally require health insurers and HMOs to obtain a certificate of
authority prior to commencing operations. To establish a new insurance company
or an HMO in a state, we generally would have to obtain such a certificate. The
time necessary to obtain such a certificate varies from state to state. Each
health insurer and HMO must file periodic financial and operating reports with
the states in which it does business. In addition, health insurers and HMOs are
subject to state examination and periodic license renewal.

Legislative and Regulatory Initiatives

There has been a continuing trend of increased health care regulation at both
the federal and state levels. The federal government and many states have
enacted or are considering additional legislation or regulation related to
health care plans. Legislation, regulation, and initiatives relating to this
trend include among other things, the following:

         o        Amending or supplementing ERISA to impose greater requirements
                  on the administration of employer-funded benefit plans or
                  limit to the scope of current ERISA pre-emption, which would
                  among other things expose health plans to expanded liability
                  for punitive and other extra-contractual damages.

         o        Imposing assessments on (or to be collected by) health plans
                  or health carriers, such as assessments for insolvency,
                  assessments for uninsured or high-risk pools, assessments for
                  uncompensated care, or assessments to defray provider medical
                  malpractice insurance costs.

         o        Extending malpractice and other liability exposure for
                  decisions made by health plans.

         o        Mandating coverage for certain conditions and/or specified
                  procedures, drugs, or devices (e.g. infertility treatment,
                  experimental pharmaceuticals).

         o        Mandating direct access to specialists for patients with
                  chronic conditions, and direct access to OB/GYNs,
                  chiropractors, or other practitioners.

                                       37
<PAGE>

         o        Mandating expanded employer and consumer disclosures and
                  notices.

         o        Mandating expanded coverage for emergency services.

         o        Prohibiting or limiting certain types of financial
                  arrangements with providers including, among other things,
                  incentives based on utilization of services or various other
                  performance metrics.

         o        Imposing substantial penalties for failure to pay claims
                  within specified time periods.

         o        Regulating the composition of provider networks, as occurs
                  with willing provider and pharmacy laws (which generally
                  provide that providers and pharmacies cannot be denied
                  participation in a managed care plan where the providers and
                  pharmacies are willing to abide by the terms and conditions of
                  that plan).

         o        Imposing a fee schedule for out-of-network care.

         o        Exempting physicians from the antitrust laws that prohibit
                  price fixing, group boycotts, and other horizontal restraints
                  on competition.

         o        Restricting health plan claim and related procedures.

         o        Requiring the application of treatment and financial parity
                  between mental health benefits and medical benefits within the
                  same health plan.

         o        Extending benefits available to workers who lose their jobs
                  and others who are uninsured.

         o        Mandating liberalized definitions of medical necessity.

         o        Mandating internal and external grievance and appeal
                  procedures (including expedited decision making and access to
                  external claim review).

         o        Enabling the creation of new types of health plans or health
                  carriers, which in some instances would not be subject to the
                  regulations or restrictions that govern our operations.

         o        Allowing individuals and small groups to collectively purchase
                  health care coverage without any other affiliations.

         o        Imposing requirements and restrictions on operations of
                  pharmacy benefit managers, including restricting or
                  eliminating the use of formularies for prescription drugs.

         o        Making health plans responsible for provider payments in the
                  event of financial failure by a capitated physician group or
                  other intermediary.

                                       38
<PAGE>

         o        Creating or expanding state-sponsored health benefit
                  purchasing pools, in which we might be required to
                  participate.

         o        Creating a single payer system where the government oversees
                  or manages the provision of health care coverage.

         o        Imposing employer or individual health coverage mandates.

It is uncertain whether we can counter the potential adverse effects of such
potential legislation or regulation, including whether we can recoup, through
higher premiums or other measures, the increased costs of mandated benefits or
other increased costs due to regulatory change.

We also may be adversely impacted by court and regulatory decisions that expand
the interpretations of existing statutes and regulations or impose medical
malpractice or bad faith liability. Among other issues, the courts, including
the U.S. Supreme Court and federal and state courts, continue to consider cases
addressing the pre-emptive effect of ERISA on state laws. In general,
limitations to this pre-emption have the effect of increasing our costs,
liability exposures, or both. Legislative initiatives discussed above include
proposals in the U.S. Congress to restrict the pre-emptive effect of ERISA and
legislative activity in several states that, should it result in enacted
legislation that is not preempted by ERISA, could increase our liability
exposure and could result in greater state regulation of our operations.

Patients' Rights Legislation

Various state legislatures and the U.S. Congress continue to debate legislation
containing various patient protection initiatives, including provisions that
could expose the Company to unlimited economic damages and certain punitive
damages, for making a determination denying benefits or for delaying members'
receipt of benefits as a result of "medical necessity" or other coverage
determinations. The Company cannot predict whether these measures will be
enacted into law in 2006 or what form any such legislation might take.

ERISA

The provision of services to certain employee benefit plans including certain
Health Care, Group Insurance and Large Case Pensions benefit plans, is subject
to ERISA, a complex set of laws and regulations subject to interpretation and
enforcement by the Internal Revenue Service and the Department of Labor (the
"DOL"). ERISA regulates certain aspects of the relationships between us and
employers who maintain employee benefit plans subject to ERISA. Some of our
administrative services and other activities may also be subject to regulation
under ERISA. In addition, some states require licensure or registration of
companies providing third-party claims administration services for benefit
plans.

DOL regulations under ERISA set standards for claim payment and member appeals
along with associated notice and disclosure requirements. We have invested
significant time and attention to compliance with these new standards, which
represent an additional regulatory burden for us.

                                       39
<PAGE>

We face a wide range of risks, and our success depends on our ability to
identify, prioritize and appropriately manage our enterprise risk exposures.

Operating in a complex industry, we expect to encounter a variety of risks. The
risks we face include, among other matters, the range of industry, competitive,
regulatory, operational or external risks identified in this Risk Factor
discussion. Failure to appropriately identify, manage and/or mitigate these
risks can affect our profitability, our ability to retain or grow business, or,
in the event of extreme circumstances, our financial condition or viability.

Our ability to forecast and manage health care costs affects profitability.

In the Special Needs Plan business segment, profitability depends in large part
on accurately forecasting health care costs and on our ability to appropriately
manage future health care costs through underwriting criteria, product design,
negotiation of favorable provider contracts and medical management programs. The
aging of the population and other demographic characteristics, and advances in
medical technology and other factors continue to contribute to rising health
care costs. Government-imposed limitations on Medicare and Medicaid
reimbursement have also caused the private sector to bear a greater share of
increasing health care costs. Changes in health care practices, inflation, new
technologies, the cost of prescription drugs and direct-to-consumer marketing by
pharmaceutical companies, adverse selection, changes in the regulatory
environment, health care provider or member fraud and numerous other factors
affecting the cost of health care are beyond any health plan's control and may
adversely affect our ability to predict and manage health care costs, as well as
our business, financial condition and results of operations. The profitability
of our business will depend on our ability to effectively manage health care
costs for our chronically ill members. Total health care costs are affected by
the number of individual services rendered and the cost of each service.
Although we believe our disease management expertise will allow us to control
costs effectively, inflation, regulations and other factors may cause actual
costs to exceed estimates. These factors include, but are not limited to,
increased use of services, increased cost of individual services, catastrophes,
epidemics, the introduction of new or costly treatments, technology, new mandate
benefits or other regulatory changes, insured population characteristics and
seasonal changes in the level of health care use. In addition, since we are just
entering this managed care segment and are likely to have a low enrollment base
in the early stages, we are potentially at financial risk from individuals who
may incur abnormally high medical costs. Since a large portion of the premiums
go to medical costs, relatively small differences between predicted and actual
medical costs can result in significant changes in our financial results. There
can be no assurance regarding the accuracy of medical cost projections assumed
for pricing purposes and if the rate of increase in medical costs in 2006 were
to exceed the levels of Medicare reimbursement, our results would be materially
adversely affected.

We expect that management will need to focus simultaneously on multiple
strategic and operational initiatives as we seek to further improve our
financial performance, profitably grow our business, and differentiate our
products and services; if we do not successfully implement these initiatives, or
if these initiatives do not achieve their objectives, our results could be
materially adversely affected.

                                       40
<PAGE>

Our operating earnings have significantly improved over the last year, however,
in our next phase of development management will need to continue to focus on
executing multiple strategic and operational projects and initiatives at the
same time, including, among other things, new customer market approach, further
improving the efficiency of operations, certain significant technology projects,
further improving relations with health care providers, customer or provider
contracting changes, or other business process improvements. The future
performance of our business will depend in large part on our ability to design
and implement these initiatives. If these initiatives do not achieve their
objectives or result in increased medical costs, our results could be adversely
affected. Refer to "Overview" for more information.

We would be adversely affected if there were a significant loss or significant
shift in the type of our QMedCare insurance initiatives.

Failure to achieve profitable membership growth in our QMedCare insurance
initiatives could materially adversely affect our results of operations.

Terrorism or the continued threat of terrorism, epidemics or other extreme
events could materially increase Health Care utilization and pharmacy costs and
Group Insurance life and disability claims, although we cannot predict whether
any such increases will occur.

Terrorism can affect the U.S. economy in general, but also the healthcare
industry and QMed specifically. Beyond obtaining coverage for our facilities,
there are few, if any, commercial options through which to transfer the exposure
from terrorism away from the Company. In particular, in the event of
bioterrorism epidemics or other extreme events, we could face significant health
care costs depending on the government's actions and the responsiveness of
public health agencies and insurers.

Success of our business depends in part on effective information technology
systems and on continuing to develop and implement improvements in technology;
certain significant multiyear strategic information technology projects are
currently in process.

We need to continue to improve our systems to meet current standards and keep
pace with continuing changes in information processing technology, evolving
industry and regulatory standards, and customer demands. Our success is
dependent in large part on maintaining the effectiveness of existing systems, on
implementing improvements, and on continuing to develop and enhance information
systems that support our business processes in a cost efficient manner.

In the future, we expect to hold reserves for expected claims, which are
estimated. These estimates are highly judgmental; if actual claims exceed
reserve estimates our results could be materially adversely affected.

Reserves will be established to reflect estimates of the ultimate cost of claims
that have been incurred but not yet reported or reported but not yet paid. These
reserves will be estimated periodically, and any resulting adjustments will be
reflected in current-period operating results. These reserves will be based on a

                                       41
<PAGE>

number of factors, including those derived from actuarial assumptions and
analysis. We expect that a large portion of health care claims will typically
not be submitted until after the end of the quarter in which services are
rendered by providers to members. As a result, subject matter knowledge is used
in this estimation process; considerable variability is inherent in such
estimates, and the adequacy of the estimate is highly sensitive to changes in
medical claims payment patterns and changes in medical cost trends (the rate of
increase in medical costs). A worsening (or improvement) of medical cost trend
or changes in claim payment patterns from assumptions used to estimate the
reserves would cause such estimates to change in the near term, and such a
change could be material.

Our profitability may be adversely affected if we are unable to contract with
providers on favorable terms and otherwise maintain favorable provider
relationships.

Our profitability is dependent in part upon our ability to contract on favorable
terms with hospitals, physicians and other health benefits providers. This
ability to contract is affected both by the rates for provider services, and by
our provider payment and other provider relations practices. The sufficiency and
quality of our networks of available providers is also an important factor when
customers consider our products and services. The failure to maintain or to
secure new cost-effective health care provider contracts may result in a loss in
membership and/or higher medical costs.

We must demonstrate that our products and processes facilitates access by
members to quality care delivered by their providers.

Failure to demonstrate that our products and processes (such as disease
management programs, provider credentialing and other quality of care and
information management initiatives) facilitate access by members to quality care
by providers would adversely affect our ability to differ entiate our product
and/or service offerings from those of competitors.

We outsource and obtain certain information technology systems or other services
from independent third parties.

Although we will take steps to monitor and regulate the performance of
independent third parties who provide services to us or to whom we delegate
selected functions, these arrangements may make our operations vulnerable if
those third parties fail to satisfy their obligations to us, whether because of
our failure to adequately monitor and regulate their performance, changes in
their own financial condition, or other matters outside our control. Certain
legislative authorities have, in recent periods also discussed or proposed
legislation that would restrict outsourcing and, if enacted, could materially
increase our costs.

Government payors can determine premiums.

In our government-funded health programs such as our SNP Project with DAKOTACARE
in South Dakota, Medicare, the government payor determines the premium levels.
If the government payor reduces the premium levels or increases premiums by less

                                       42
<PAGE>

than our costs of service increase, and if we cannot offset these with
supplemental premiums and changes in benefit plans, then we could be materially
adversely affected.

Our future business activities will be highly regulated; further regulation
could also materially adversely affect our business.

Our future business will be subject to extensive regulation and oversight by
state and federal governmental authorities. The federal and many state
governments have enacted and continue to consider legislative and regulatory
changes related to health products. At this time, we are unable to predict the
impact of future changes, although we anticipate that some of these measures, if
enacted, could adversely affect health operations through:

         o        Affecting premium rates,
         o        Reducing our ability to manage medical costs,
         o        Increasing medical costs and operating expenses,
         o        Increasing our exposure to lawsuits,
         o        Regulating levels and permitted lines of business,
         o        Imposing financial assessments, and
         o        Regulating business practices.

Recently, there has been heightened review by regulators of the health care
insurance industry's business practices; these include utilization management
and claim payment practices as well as review of the general insurance
industry's brokerage practices. These regulatory reviews could result in changes
to or clarifications of our business practices, and also could result in
material fines, penalties, or other sanctions. Our business also may be
adversely impacted by judicial and regulatory decisions that expand the
interpretations of existing statutes and regulations, impose medical or bad
faith liability, increase our responsibilities under ERISA, or reduce the scope
of ERISA pre-emption of state law claims.

We also face other risks that could adversely affect our business, results of
operations or financial condition, which include:

Any requirement to restate financial results in the event of inappropriate
application of accounting principles;

Financial loss from inadequate insurance coverage due to self insurance levels
or unavailability of coverage for credit or other reasons;

         o        Failure of our processes to prevent and detect unethical
                  conduct of employees;
         o        A significant failure of internal controls over financial
                  reporting;
         o        Failure of our prevention and control systems related to
                  employee compliance with internal policies;
         o        Provider fraud that is not prevented or detected and impacts
                  our medical costs or those of self-insured customers; and

                                       43
<PAGE>

         o        Failure of Corporate Governance policies and procedures.

We undertake no obligation to update or revise any such forward-looking
statements.

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

The Company does not issue or invest in financial instruments or derivatives for
trading or speculative purposes. All of the operations of the Company are
conducted in the United States, and, as such, are not subject to material
foreign currency exchange rate risk. At November 30, 2005, the Company had no
outstanding long-term debt. Although the Company's assets included approximately
$4.1 million in cash and cash equivalents and approximately $19.3 million of
securities with a maturity of generally less than one year at November 30, 2005,
market rate risk associated with changing interest rates in the United States is
not material. See also Note 2 of the Notes to Consolidated Financial Statements.

Item 8. Financial Statements and Supplementary Data.

Attached.

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.

None.

Item 9A.  Controls and Procedures

Evaluation of the Company's Disclosure Controls and Internal Controls. We
evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures" as of the end of the period covered by the Annual
Report. This evaluation (the Controls Evaluation) was done under the supervision
and with the participation of management, including our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO). Attached as exhibits to this Annual
Report are certifications of the CEO and the CFO, which are required in
accordance with Rule 13a-14 of the Exchange Act. This "Controls and Procedures"
section includes the information concerning the controls evaluation referred to
in the certifications, and it should be read in conjunction with the
certifications for a more complete understanding of the topics presented.

Management's Report on Internal Control Over Financial Reporting. Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in Exchange Act Rules 13a-15(f).
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control - Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of November 30, 2005. Our management's assessment of the
effectiveness of our internal control over financial reporting as of November

                                       44
<PAGE>

30, 2005 has been audited by Amper, Politziner & Mattia P.C., an independent
registered public accounting firm, as stated in their report which is included
herein.

Disclosure Controls and Internal Controls. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934
(Exchange Act), such as this Report, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's (SEC) rules and forms. Disclosure Controls are also designed with
the objective of ensuring that such information is accumulated and communicated
to our management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Our Disclosure Controls include
components of our internal control over financial reporting, which consists of
control processes designed to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements in accordance with generally accepted accounting principles in the
U.S. To the extent that components of our internal control over financial
reporting are included within our Disclosure Controls, they are included in the
scope of our quarterly controls evaluation.

Scope of the Controls Evaluation. The CEO/CFO evaluation of our Disclosure
Controls included a review of the controls' objectives and design, the controls'
implementation by the company and the effect of the controls on the information
generated for use in this Report. In the course of the controls evaluation, we
sought to identify data errors, controls problems or acts of fraud and to
confirm that appropriate corrective action, including process improvements, were
being undertaken. This type of evaluation is performed on a quarterly basis so
that the conclusions concerning controls effectiveness can be reported in our
Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. Our Internal
Controls are also evaluated on an ongoing basis by other personnel in our
finance organization and by our independent auditors in connection with their
audit and review activities.

The overall goals of these various evaluation activities are to monitor our
Disclosure Controls, and to modify them as necessary. Our intent is to maintain
the Disclosure Controls as dynamic systems that change as conditions warrant.

In accordance with SEC requirements, the CEO and CFO note that, since the date
of the Controls Evaluation to the date of this Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above at the end of the period covered by
this Annual Report, our Disclosure Controls are effective to provide reasonable
assurance that material information relating to QMed and its consolidated
subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being prepared.

                                       45
<PAGE>

             Report of Independent Registered Public Accounting Firm

We have audited management's assessment, included in the accompanying
Management's 2005 Annual Report on Internal Controls, that QMed, Inc. and
Subsidiaries (the Company) maintained effective internal control over financial
reporting as of November 30, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment, and an opinion on the effectiveness of the company's internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of November 30, 2005, is fairly
stated, in all material respects, based on control criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of November 30, 2005, based on the criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

                                       46
<PAGE>

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
QMed, Inc. and Subsidiaries as of November 30, 2005 and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the year ended November 30, 2005 in our report dated January 27, 2006,
in which we expressed an unqualified opinion.

/s/ Amper, Politziner & Mattia, P.C.

Amper, Politziner & Mattia, P.C.
January 27, 2006
Edison, New Jersey

                                       47
<PAGE>

                           QMED, INC. AND SUBSIDIARIES

                               For the Years Ended
                           November 30, 2005 and 2004




                                                                        Page

Report of Independent Registered Public Accounting Firm                  F-1

Consolidated Balance Sheets                                              F-2

Consolidated Statements of Operations                                    F-3

Consolidated Statements of Comprehensive Income                          F-4

Consolidated Statements of Stockholders' Equity                          F-5

Consolidated Statements of Cash Flows                                    F-6

Notes to Consolidated Financial Statements                           F-7 - F-29

<PAGE>

             Report of Independent Registered Public Accounting Firm



Board of Directors
QMed, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of QMed, Inc. and
Subsidiaries as of November 30, 2005 and 2004, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years ended November 30, 2005, 2004, and 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board of United States of America. Those standards require
that we plan and perform the audit 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of QMed, Inc. and
Subsidiaries as of November 30, 2005 and 2004, and the results of its operations
and its cash flows for each of the three years ended November 30, 2005, 2004,
and 2003, 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 Schedule II - Valuation and Qualifying Accounts. 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.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board of the United States of America, the effectiveness of
QMed, Inc. and Subsidiaries internal control over financial reporting as of
November 30, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated January 27, 2006 expressed an unqualified
opinion.

/s/ Amper, Politziner & Mattia, P.C.

Amper, Politziner & Mattia, P.C.
Edison, New Jersey
January 27, 2006

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

                                                             Assets

                                                                                               2005                  2004
                                                                                               ----                  ----
<S>                                                                                     <C>                   <C>
Current assets
    Cash and cash equivalents                                                           $        4,051,046    $       3,292,571
    Investments in securities                                                                   19,348,503            2,097,362
    Accounts receivable, net of allowance for
     doubtful accounts of $76,518 and $52,690, respectively                                      3,377,495            2,750,507
    Inventory, net of reserve                                                                       30,887               38,355
    Prepaid expenses and other current assets                                                      411,608              440,620
                                                                                        ------------------    -----------------
                                                                                                27,219,539            8,619,415

Property and equipment, net                                                                      1,058,295            1,180,050
Product software development costs, net                                                          1,161,083              858,022
Accounts receivable, non-current                                                                   271,809                    -
Acquired intangibles, net                                                                          795,848                    -
Other assets                                                                                       128,794              132,136
Investment in joint ventures                                                                        37,998               47,854
                                                                                        ------------------    -----------------
                                                                                        $       30,673,366    $      10,837,477
                                                                                        ==================    =================

                                              Liabilities and Stockholders' Equity

Current liabilities
    Accounts payable and accrued liabilities                                            $        1,577,385    $         817,234
    Leases payable, current portion                                                                146,483              119,757
    Accrued salaries and commissions                                                               721,792              416,382
    Fees reimbursable to health plans                                                               39,000              161,178
    Contract billings in excess of revenues                                                        744,743            1,245,862
    Deferred warranty revenue                                                                       12,253               23,652
    Income taxes payable                                                                            62,610               16,000
                                                                                        ------------------    -----------------
                                                                                                 3,304,266            2,800,065
Leases payable, long term                                                                           76,005              146,742
Contract billings in excess of revenue, long term                                                  271,809                    -
                                                                                        ------------------    -----------------
                                                                                                 3,652,080            2,946,807
                                                                                        ------------------    -----------------
Commitments and contingencies

Stockholders' equity
    Common stock, $.001 par value, 40,000,000 shares
     authorized, 16,804,846 and 15,150,054 shares issued
     16,782,846 and 15,128,054 outstanding, respectively                                            16,805               15,150
    Paid-in capital                                                                             51,219,617           35,961,800
    Accumulated deficit                                                                        (24,118,472)         (28,004,017)
    Accumulated other comprehensive income
      Unrealized losses on securities available for sale                                           (21,039)              (6,638)
                                                                                        -------------------   ------------------
                                                                                                27,096,911            7,966,295
    Less treasury stock at cost, 22,000 common shares                                              (75,625)             (75,625)
                                                                                        -------------------   -----------------
      Total stockholders' equity                                                                27,021,286            7,890,670
                                                                                        ------------------    -----------------
                                                                                        $       30,673,366    $      10,837,477
                                                                                        ==================    =================

                                  See accompanying notes to consolidated financial statements.

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


                                                                       2005                   2004                 2003
                                                                       ----                   ----                 ----
<S>                                                              <C>                   <C>                  <C>
Revenue                                                          $      22,146,496     $      15,576,599    $      12,899,361

Cost of revenue                                                          7,510,894             8,878,104            6,726,867
                                                                 -----------------     -----------------    -----------------

Gross profit                                                            14,635,602             6,698,495            6,172,494

Selling, general and administrative expenses                             8,720,287             7,288,783            6,875,834
Research and development expenses                                        1,323,397               903,921              905,360
Litigation settlement                                                            -                     -              230,000
                                                                 -----------------     -----------------    -----------------

Income (loss) from operations                                            4,591,918            (1,494,209)          (1,838,700)

Interest expense                                                           (27,294)              (33,874)             (25,595)
Interest income                                                            441,353                68,238               90,418
Loss in operations of joint ventures                                      (847,830)             (502,027)            (362,499)
Other income                                                                 3,486                 8,703                    -
                                                                 -----------------     -----------------    -----------------

Income (loss) before income tax benefit (provision)                      4,161,633            (1,953,169)          (2,136,376)

    Gain on sale of state tax benefits                                     115,912               229,724                    -
    Provision for income taxes                                            (392,000)              (16,000)             (15,000)
                                                                 -----------------     -----------------    -----------------

Net income (loss)                                                $       3,885,545     $      (1,739,445)   $      (2,151,376)
                                                                 =================     =================    =================

Basic income (loss) per share
    Weighted average shares outstanding                                 16,465,178            14,766,895           14,568,781
                                                                 =================     =================    =================

    Basic income (loss) per share                                $            0.24     $           (0.12)   $            (.15)
                                                                 =================     =================    =================

Diluted income (loss) per share
    Weighted average shares outstanding                                 18,457,101            14,766,895           14,568,781
                                                                 =================     =================    =================

    Diluted income (loss) per share                              $            0.21     $           (0.12)   $            (.15)
                                                                 =================     =================    =================

                          See accompanying notes to consolidated financial statements.

                                                      F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                           QMED, INC. AND SUBSIDIARIES
                                 Consolidated Statements of Comprehensive Income
                                         For the Years Ended November 30,


                                                                      2005             2004             2003
                                                                      ----             ----             ----
<S>                                                            <C>              <C>               <C>
Net income (loss)                                              $    3,885,545   $   (1,739,445)   $   (2,151,376)

Other comprehensive (loss) income:
    Unrealized loss on securities
     available for sale                                               (20,985)          (8,553)          (14,725)

    Reclassification adjustment for losses
      included in net income (loss)                                     6,584            8,914            44,830
                                                               --------------   --------------    --------------

Comprehensive income (loss)                                    $    3,871,144   $   (1,739,084)   $   (2,121,271)
                                                               ==============   ==============    ==============


                           See accompanying notes to consolidated financial statements.

                                                      F-4
</TABLE>
<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>     <C>          <C>
Balances - November 30, 2002        14,506,153   $14,506   $33,079,409   $(24,113,196)  $(37,104)    22,000  $(75,625)    8,867,990

 Exercise of stock options             119,401       119       247,581              -          -          -         -       247,700

 Issuance of common stock in
  connection with directors equity
  plan                                   1,830         2        12,811              -          -          -         -        12,813

 Amortization of non-employee stock
  options                                    -         -        40,950              -          -          -         -        40,950

 Net loss                                    -         -             -     (2,151,376)         -          -         -    (2,151,376)

 Unrealized holding gains on
  securities available for sale              -         -             -              -     30,105          -         -        30,105
                                    ----------   -------   -----------   ------------   --------     ------  --------   -----------

Balances - November 30, 2003        14,627,384    14,627    33,380,751    (26,264,572)    (6,999)    22,000   (75,625)    7,048,182

 Exercise of stock options and
  warrants                             220,639       220       508,833              -          -          -         -       509,053

 Issuance of common stock in
  connection with directors equity
  plan                                   3,524         4        28,433              -          -          -         -        28,437

 Amortization of non-employee stock
  options                                    -         -        55,775              -          -          -         -        55,775

 Issuance of common stock through
  private placement for cash, net
  of expenses                          298,507       299     1,988,008              -          -          -         -     1,988,307

 Net loss                                    -         -             -     (1,739,445)         -          -         -    (1,739,445)

 Unrealized holding gains on
  securities available for sale                                                              361          -         -           361
                                    ----------   -------   -----------   ------------   --------     ------  --------   -----------

Balances - November 30, 2004        15,150,054    15,150    35,961,800    (28,004,017)    (6,638)    22,000   (75,625)    7,890,670

 Exercise of stock options and
  warrants                             261,108       261       987,384              -          -          -         -       987,645

 Issuance of common stock in
  connection with directors equity
  plan                                   3,435         4        39,371              -          -          -         -        39,375

 Amortization of non-employee stock
  options                                    -         -        54,917              -          -          -         -        54,917

 Issuance of common stock through
  private placement for cash, net
  of expenses                        1,349,839     1,350    13,817,500              -          -          -         -    13,818,850

 Issuance of common stock in
  connection with asset purchase        40,410        40       351,645              -          -          -         -       351,685

 Tax benefit from stock option
  exercises                                  -         -         7,000              -          -          -         -         7,000

 Net income                                  -         -             -      3,885,545          -          -         -     3,885,545

 Unrealized holding losses on
  securities available for sale              -         -             -              -    (14,401)         -         -       (14,401)
                                    ----------   -------   -----------   ------------   --------     ------  --------   -----------

Balances - November 30, 2005        16,804,846   $16,805   $51,219,617   $(24,118,472)  $(21,039)    22,000  $(75,625)  $27,021,286
                                    ==========   =======   ===========   ============   ========     ======  ========   ===========

                                     See accompanying notes to consolidated financial statements.

                                                              F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                   QMED, INC. AND SUBSIDIARIES
                                              Consolidated Statements of Cash Flows
                                                For the Years Ended November 30,


                                                                               2005              2004               2003
                                                                               ----              ----               ----
<S>                                                                      <C>               <C>               <C>
Cash flows from operating activities
   Net income (loss)                                                     $    3,885,545    $   (1,739,445)   $   (2,151,376)
                                                                         --------------    --------------    --------------
   Adjustments to reconcile net income (loss) to
    net cash provided by (used in) operating activities
     Loss on sale of investments                                                  6,584             8,914            44,830
     Loss in operations of joint venture                                        847,830           502,027           362,499
     Depreciation and amortization                                              624,426           476,753           404,180
     Provision for loss on accounts receivable                                   57,153            51,850                 -
     Provision for slow moving inventory                                          9,632           101,428                 -
     Tax benefit from stock option exercises                                      7,000                 -                 -
     Stock compensation expense                                                  39,375            28,437            12,813
     Amortization of non-employee stock options                                  54,917            55,775            40,950
     Amortization of bond discounts and premiums                                (80,455)          116,260           100,921
     (Increase) decrease in
       Accounts receivable                                                     (955,950)       (1,487,336)       (2,586,479)
       Inventory                                                                 (2,164)            6,456            26,807
       Prepaid expenses and other current assets                                 29,012           (47,837)          326,576
     Increase (decrease) in
       Accounts payable and accrued liabilities                               1,064,588          (313,944)          205,905
       Contract billings in excess of revenues                                 (240,709)       (1,277,632)        2,202,333
       Other                                                                     41,089            21,194           (25,297)
                                                                         --------------    --------------    --------------
Total adjustments                                                             1,502,328        (1,757,655)        1,116,038
                                                                         --------------    --------------    --------------
                                                                              5,387,873        (3,497,100)       (1,035,338)
                                                                         --------------    --------------    --------------
Cash flows from investing activities
   Proceeds from sale of securities available for sale                       10,001,013         9,760,860        15,701,735
   Purchase of securities available for sale                                (27,192,684)       (5,769,210)      (15,157,716)
   Capital expenditures                                                        (148,311)         (106,331)         (158,865)
   Product development software expenditures                                   (477,200)         (534,726)          (79,118)
   Cash paid for acquisition                                                   (522,450)                -                 -
   Investment in joint venture                                                 (959,179)         (564,750)         (197,572)
                                                                         --------------    --------------    --------------
                                                                            (19,298,811)        2,785,843           108,464
                                                                         --------------    --------------    --------------
Cash flows from financing activities
   Proceeds from issuance of common stock
     and investment rights                                                   13,818,850         1,988,307                 -
   Proceeds from exercise of stock options
     and warrants                                                               987,645           509,053           247,700
   Payments on capital leases                                                  (137,082)         (131,803)          (65,678)
                                                                         --------------    --------------    --------------
                                                                             14,669,413         2,365,557           182,022
                                                                         --------------    --------------    --------------

Net change in cash and cash equivalents                                         758,475         1,654,300          (744,852)

Cash and cash equivalents - beginning                                         3,292,571         1,638,271         2,383,123
                                                                         --------------    --------------    --------------

Cash and cash equivalents - ending                                       $    4,051,046    $    3,292,571    $    1,638,271
                                                                         ==============    ==============    ==============

Cash paid during the period for:
   Interest                                                              $       27,294    $       33,874    $       25,469
   Income taxes                                                                 338,390             6,810            48,190

Non-cash investing activities:
   Capital leases entered into during the period                         $       93,071    $      280,410    $      100,642
   Issuance of 40,410 shares of common stock in
      connection with acquisition                                        $      351,685    $            -    $            -

                                  See accompanying notes to consolidated financial statements.

                                                             F-6
</TABLE>
<PAGE>

                           QMED, INC. AND SUBSIDIARIES
                          Notes to Financial Statements

Note 1 - Significant Accounting Policies

Nature of Business
------------------
QMed, Inc. (the "Company") operates in three industry segments:
disease-management services, specialty managed care services and health and
wellness programs. The Company and Interactive Heart Management Corp. ("IHMC"),
a wholly owned subsidiary, provide disease management services to health plans
nationwide. In 2005, the Company established QMedCare, Inc., a wholly owned
subsidiary, to provide specialty managed care services to chronically ill
Medicare recipients under a Special Needs Plan ("SNP") agreement with
DAKOTACARE, an HMO in South Dakota, and also acquired Health e Monitoring, Inc.,
a wholly owned subsidiary, to provide wellness and weight management programs to
employer groups, health plans and the consumer marketplace.

Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company, IHMC,
QMedCare, Inc., Health e Monitoring, Inc. and the Company's majority-owned (83%)
inactive subsidiary, Heart Map, Inc. 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 equivalents. The Company restricts cash and
cash equivalents to financial institutions with high credit standings.

Accounts Receivable
-------------------
Accounts receivable primarily represent fees that are contractually due in the
ordinary course of providing a service, net of contractual adjustments. Included
in accounts receivable are unbilled balances totaling approximately $109,000 and
$119,000 at November 30, 2005 and 2004, respectively.

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 and which meet the definitions
set forth in SFAS No. 115 have been classified as "available for sale" and are
carried at fair value.. Net unrealized gains and losses on marketable securities
are credited or charged to accumulated other comprehensive income, net of income
taxes.

                                      F-7
<PAGE>

Note 1 - Significant Accounting Policies - (continued)

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 over a three to 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.

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, 2005 and 2004, because of the relative short maturity of these
instruments. The carrying value of leases payable approximated fair value at
November 30, 2005 and 2004, 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
between two to five years.

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

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

If the Company determines that the carrying value of other identifiable
intangible assets may not be recoverable, the Company calculates any impairment
using an estimate of the asset's fair

                                      F-8
<PAGE>

Note 1 - Significant Accounting Policies - (continued)

Impairment of Intangible Assets (continued)
-------------------------------------------
value based on the projected net cash flows expected to result from that asset,
including eventual disposition.

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

Contract Billings in Excess of Revenues
---------------------------------------
Contract billings in excess of revenues represent performance based fees subject
to refund that the Company does not recognize in revenue because either 1) data
from the customer is insufficient or incomplete to measure performance; or 2)
interim performance measures indicate that we are not meeting performance
targets.

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

The Company determines its level of performance at interim periods based on
medical claims data, achievement of enrollment targets or other data required to
be supplied by the health plan. In the event these interim performance measures
indicate that performance targets are not being met or sufficient data is
unavailable, fees subject to refund and not covered by reinsurance are not
recorded as revenues but rather are recorded as a current liability entitled

                                      F-9
<PAGE>

Note 1 - Significant Accounting Policies - (continued)

Revenue Recognition - Disease Management (continued)
----------------------------------------------------
"contract billings in excess of revenues." Under performance based arrangements,
the ability to make estimates at interim periods can be challenging due to the
inherent nature of the medical claims process and the claims lag time associated
with it. In most cases, paid claims data is not available until up to six months
after claims are incurred. Although interim data measurement is indicative of
performance objectives, actual results could differ from those estimates. As of
November 30, 2005 and 2004, based on information and data available, the Company
has deferred approximately $1,017,000 and $1,246,000 of revenue, respectively,
which may be subject to refund. This deferral has been reflected as contract
billings in excess of revenues on the balance sheet.

The majority of contract billings in excess of revenues on the balance sheet are
subject to reconciliation at future periods. If future reconciliations provide
positive results, revenue will be recorded at that time.

The Company believes these estimates adequately provide for any potential
adjustments that may be applied to revenues from these contracts.

During the fiscal year ended November 30, 2005, approximately 69% of disease
management services were derived from three health plans that each comprised
more than 10% of the Company's revenues. During the fiscal year ended November
30, 2004, approximately 45% of disease management services were derived from
four health plans that each comprised more than 10% of the Company's revenues.
During the fiscal year ended November 30, 2003, approximately 57% of disease
management services were derived from two health plans that each comprised more
than 10% of the Company's revenues.

Revenue Recognition - Medical Equipment
---------------------------------------
Revenue is recognized on equipment revenue when the equipment is shipped and
title passes. Management establishes estimated accruals for returns from
customers, and for allowances granted to customers at the time of shipment. For
the years ended November 30, 2005, 2004 and 2003, there have been deminimus
sales returns or allowances.

During 2005, 2004 and 2003, the Company sold extended one-year service warranty
contracts to customers. Revenue on one-year warranty contracts is recognized on
a straight-line basis over the life of the contract.

Earnings (Loss) Per Share
-------------------------
Earnings (loss) per share is reported under SFAS No. 128 "Earnings per Share".
The presentation of basic earnings per share is based upon weighted average
common shares outstanding during the period. Diluted earnings (loss) per share
is based on average common shares outstanding during the period plus the
dilutive effect of stock options and warrants outstanding.

Stock Based Compensation
------------------------
The Company accounts for its stock options issued to employees and outside
directors pursuant to Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and has adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", and
SFAS No. 148, "Accounting for Stock-Based Compensation -

                                      F-10
<PAGE>

Note 1 - Significant Accounting Policies - (continued)

Stock Based Compensation (continued)
------------------------------------
Transition and Disclosure - an Amendment of FASB Statement No. 123".
Accordingly, no compensation expense has been recognized through November 30,
2005 in connection with the issuance of stock options.

The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation.
<TABLE>
<CAPTION>
                                                          2005             2004              2003
                                                          ----             ----              ----
<S>                                                <C>                <C>             <C>
         Net income (loss), as reported            $  3,885,545       $ (1,739,445)   $ (2,151,376)

         Deduct: Total stock-based
         employee compensation
         expense determined under
         fair value based method for all
         awards, net of related tax
         effects                                     (1,251,561)        (1,231,601)       (887,469)
                                                   ------------       ------------    ------------

         Pro forma net income (loss)               $  2,633,984       $ (2,971,046)   $ (3,038,845)
                                                   ============       ============    ============

         Weighted average common
           shares outstanding                        16,465,178         14,766,895      14,568,781

         Dilutive effect of stock options and
         warrants                                     1,991,923                  -               -
                                                   ------------       ------------    ------------

         Diluted shares outstanding                   18,457,101        14,766,895       14,568,781
                                                   ============       ============    ============

         Income (loss) per share:

              Basic, as reported                   $       0.24       $       (.12)   $       (.15)
                                                   ============       ============    ============

              Basic, pro forma                     $       0.16       $       (.20)   $       (.21)
                                                   ============       ============    ============

              Diluted, as reported                 $       0.21       $       (.12)   $       (.15)
                                                   ============       ============    ============

              Diluted, pro forma                   $       0.14       $       (.20)   $       (.21)
                                                   ============       ============    ============
</TABLE>

Potentially dilutive options and warrants to purchase 0, 2,021,696 and 1,792,896
shares of the common stock were outstanding as of November 30, 2005, 2004 and
2003, respectively, but were not included in the computation of diluted loss per
share because the effect of their inclusion would have been anti-dilutive.
Additionally, options to purchase 6,562, 50,000, and 287,440 shares of common
stock were outstanding as of November 30, 2005, 2004 and 2003, respectively 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, and would have been anti-dilutive.

                                      F-11
<PAGE>

Note 1 - Significant Accounting Policies - (continued)

Stock Based Compensation (continued)

The estimated weighted average fair values of the options at the date of grant
using the Black-Scholes option pricing model as promulgated by SFAS No. 123 and
the related assumptions used to develop the estimates are as follows:

                                                     2005        2004       2003
                                                     ----        ----       ----
         Weighted Average
          fair value of options granted during
          the year                                  $9.92       $9.30     $ 4.47

         Risk-free interest rate                       5%          5%         5%
         Expected volatility                        65.8%       65.8%      68.4%
         Dividend yield                                 -           -          -
         Expected life                          5.5 years   5.5 years  5.5 years

See Note 14 for further discussion of the Company's stock options.

The Company accounts for stock options issued to non-employees in accordance
with the provisions of SFAS No. 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. There were no such instruments issued during fiscal years
ended November 30, 2005, 2004 or 2003.

Research and Development Expenses
---------------------------------
Costs associated with the development of new products and changes to existing
products are charged to operations as incurred.

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.

Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of deferral, contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

                                      F-12
<PAGE>

Note 1 - Significant Accounting Policies - (continued)

New Accounting Pronouncements
-----------------------------
Consolidation of Variable Interest Entities
-------------------------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). FIN No.46 is
applicable immediately for VIEs created after January 31, 2003 and are effective
for reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the guidance of
FIN 46R, public companies that have interests in VIE's that are commonly
referred to as special purpose entities are required to apply the provisions of
FIN 46R for periods ending after December 15, 2003. A public company that does
not have any interests in special purpose entities but does have a variable
interest in a VIE created before February 1, 2003, must apply the provisions of
FIN 46R by the end of the first interim or annual reporting period ending after
March 14, 2004. The Company adopted FIN 46 and FIN 46R during the quarter ended
February 29, 2004. The adoption of FIN 46 had no impact on the financial
condition or results of operations since the Company does not have investments
in VIE's.

Share-Based Payment
-------------------
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation."
Statement 123(R) supersedes Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement
of Cash Flows." Generally, the approach in Statement 123(R) is similar to the
approach described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The Statement is effective for fiscal
years beginning after June 15, 2005.

Statement 123(R) permits public companies to adopt its requirements using one of
two methods:

A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of Statement
123(R) for all share-based payments granted after the effective date and (b)
based on the requirements of Statement 123 for all awards granted to employees
prior to the effective date of Statement 123(R) that remain unvested on the
effective date.

A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate, based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures, either (a) all prior periods presented or (b)
prior interim periods of the year of adoption.

The Company adopted Statement 123(R) on December 1, 2005 using the modified
prospective method.

As permitted by Statement 123, the Company currently accounts for share-based
payments to employees using Opinion 25's intrinsic value method and, as such,
generally recognize no compensation cost for employee stock options.

                                      F-13
<PAGE>

Note 1 - Significant Accounting Policies - (continued)

New Accounting Pronouncements (continued)
-----------------------------------------
Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on our results of operations, although it will have no impact
on our overall financial position. However, uncertainties such as stock price
volatility, estimated forfeitures and employee stock option exercise behavior,
make it difficult to determine whether future stock-based compensation expenses
will be similar to the proforma expenses disclosed in Note 1 of the consolidated
financial statements.

Statement 123(R) also requires the benefits of tax deductions in excess of
amounts recognized as compensation cost to be reported as a financing cash flow,
rather than an operating cash flow as required under previous accounting
guidance. This requirement will reduce net operating cash flows and increase in
net financing cash flows in periods after adoption. While we cannot estimate
what the benefits of these tax deductions will be in the future (because they
depend on, among other things, when employees exercise stock options), we
recognized $7,000 of such amounts in cash flow from operating activities for
fiscal 2005.

Exchange of Nonmonetary Assets
------------------------------
In December 2004, the FASB issued Statement No. 153 "Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29" ("Statement No. 153"). Statement No.
153 is effective for nonmonetary asset exchanges occurring in our fiscal quarter
beginning September 1, 2005. Statement No. 153 requires that exchanges of
productive assets be accounted for at fair value unless fair value cannot be
reasonably determined or the transaction lacks commercial substance. Statement
No. 153 is not expected to have a material impact on our financial statements.

Inventory costs
---------------
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS 151
amends ARB No. 43, "Inventory Pricing", to clarify the accounting for certain
costs as period expense. The Statement is effective for fiscal years beginning
after June 15, 2005, however, early adoption of this Statement is permitted.
There will be no impact from the adoption of this statement.

Reclassifications
-----------------
Certain reclassifications have been made to prior period's financial statements
in order to conform to the current year presentation.

Note 2 - Investments in Securities

Investments in securities available-for-sale as of November 30, 2005 and 2004
were as follows:
                                                       Market      Unrealized
                  2005                     Cost         Value      Gain (Loss)
                  ----                     ----         -----      -----------
         Corporate debt securities     $13,321,361   $13,318,203   $   (3,158)
         Certificate of deposits           100,000        99,678         (322)
         Government debt securities      5,948,181     5,930,622      (17,559)
                                       -----------   -----------   ----------
                                       $19,369,542   $19,348,503   $  (21,039)
                                       ===========   ===========   ==========

                                      F-14
<PAGE>

Note 2 - Investments in Securities - (continued)

                                                       Market      Unrealized
                  2004                     Cost         Value      Gain (Loss)
                  ----                     ----         -----      -----------
         Corporate debt securities     $ 1,381,106   $ 1,378,014   $   (3,092)
         Certificate of deposits            84,726        84,153         (573)
         Government debt securities        638,168       635,195       (2,973)
                                       -----------   -----------   ----------
                                       $ 2,104,000   $ 2,097,362   $   (6,638)
                                       ===========   ===========   ==========

During the years ended November 30, 2005 and 2004, the Company sold available
for sale securities for approximately $10,001,000 and $9,800,000, respectively,
resulting in losses of approximately $6,600 and $9,000, respectively.

Note 3 - Inventory
<TABLE>
<CAPTION>
                                                                    November 30,
                                                                    ------------
                                                                2005            2004
                                                                ----            ----
<S>                                                        <C>             <C>
         Raw materials (component parts and supplies)      $   116,873     $   120,533
         Finished units                                         25,074          19,250
                                                           -----------     -----------
                  Total inventory                          $   141,947     $   139,783
         Reserve for slow moving inventory                    (111,060)       (101,428)
                                                           -----------     -----------
         Net inventory                                     $    30,887     $    38,355
                                                           ===========     ===========

Note 4 - Property and Equipment
<CAPTION>
                                                                     November 30,
                                                                     ------------
                                                                2005            2004
                                                                ----            ----
<S>                                                        <C>             <C>
         Machinery and equipment                           $ 1,422,585     $ 1,422,585
         Loaner equipment                                      244,542         244,542
         Furniture and fixtures                              1,116,670       1,076,498
         Office equipment                                    1,742,867       1,524,747
         Leasehold improvements                                125,353         123,477
         Equipment held under capital leases                   428,592         447,378
                                                           -----------     -----------
                                                             5,080,609       4,839,227
         Less accumulated depreciation and amortization     (4,022,314)     (3,659,177)
                                                           -----------     -----------
         Property and equipment - net                      $ 1,058,295     $ 1,180,050
                                                           ===========     ===========
</TABLE>

At November 30, 2005 and 2004, the equipment under the capital leases had net
book values of approximately $295,000 and $340,000, respectively.

Depreciation expenses were approximately $363,000, $339,000 and $284,000 for
2005, 2004 and 2003, respectively.

Note 5 - Product Software Development Costs

During the years ended November 30, 2005 and 2004, the Company capitalized
approximately $477,000 and $534,000 in product software development costs,
respectively. These costs are amortized over their estimated useful life,
between two to five years.

                                      F-15
<PAGE>

Note 5 - Product Software Development Costs - (continued)

During the years ended November 30, 2005, 2004 and 2003, amortization costs
related to product software development costs were approximately $174,000 and
$119,000 and $100,000, respectively. Accumulated amortization was $615,279 and
$441,778 at November 30, 2005 and 2004, respectively. Estimated amortization
expense is $229,000, $269,000, $215,000, $197,000 and $140,000 for the next five
fiscal years, respectively.

Note  6 - Patent and Deferred Legal Costs

During fiscal 2003, the Company reached an out of court settlement of its patent
infringement claim against LifeMasters Supported SelfCare, Inc. The Settlement
resolves the outstanding dispute between the parties and includes a license of
one of the Company's patents. The Company had deferred all legal costs
associated with this claim. The settlement also includes a reimbursement for
legal costs associated with this matter. As of November 30, 2003, the Company
had incurred approximately $391,000 of legal costs related to this matter of
which approximately $59,000 was recorded in other current assets as of November
30, 2003. The full amount of the receivable was collected in 2004.

Note 7 - Acquired Intangibles

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

                                                           2005
                                                   -----------------
         Covenant not to compete                   $         483,363
         Acquired technology                                  46,307
                                                   -----------------
         Total purchase price                      $         529,670
                                                   =================

The costs of both the covenant not to compete and the acquired technology are
being amortized over their useful life of 5 years. During the year ended
November 30, 2005 amortization expense related to the covenant not to compete
and developed technology was $60,420 and $5,788, respectively. Estimated
amortization expense is $105,934 for each of the next four fiscal years and
$39,725 for the year thereafter.

                                      F-16
<PAGE>

Note 7 - Acquired Intangibles - (continued)

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

                                                           2005
                                                   -----------------
         Software and contents                     $         299,348
         Assembled workforce                                  45,117
                                                   -----------------
         Total purchase price                      $         344,465
                                                   =================

The costs of the software and contents are being amortized over their useful
life of 5 years and the assembled workforce is being amortized over its useful
life of 4 years. During the year ended November 30, 2005 amortization expense
related to the software and contents and assembled workforce was $9,978 and
$2,101, respectively. Estimated amortization expense is $71,149 for each of the
next three fiscal years and $69,050 and $49,889 for the next two years
thereafter.

Note 8 - Investment in Joint Ventures

The Company has a 50% interest in HeartMasters, L.L.C. ("HM"). The management
agreement provides for profits and losses to be allocated based on the Company's
50% interest. As of November 30, 2005, the Company has recorded losses to date
of approximately $1,796,000 bringing the investment in joint venture to zero.
This joint venture is not a variable interest entity and therefore is not
required to be consolidated under the provisions of FIN 46.

                                      F-17
<PAGE>

Note 8 - Investment in Joint Ventures - (continued)

The unaudited summary financial information for HM as of and for the period
ended November 30, is as follows:

                                                      November 30,
                                                      ------------
                                                2005                  2004
                                                ----                  ----
         Balance Sheet
                  Current assets           $     27,454          $  2,423,505
                  Liabilities                    51,811             2,654,573
                                           ------------          ------------
                  Capital                  $    (24,357)         $   (231,068)
                                           ============          ============

         Statements of operations
                  Revenues                 $          -          $          -
                  Operating expenses            777,741               837,544
                                           ------------          ------------
                  Net loss                 $   (777,741)         $   (837,544)
                                           ============          ============

The Company has a 33.33% interest in Healthsuite Partners, LLC ("HSP"). The
management agreement provides for profits and losses to be allocated based on
the Company's 33.33% interest. As of November 30, 2005, the Company has recorded
losses to date of approximately $70,000 bringing its investment in this joint
venture to approximately $38,000. This joint venture is not a variable interest
entity and therefore is not required to be consolidated under the provisions of
FIN 46. As of November 30, 2005, approximately $666,000 is due from this joint
venture of which approximately $394,000 is included in accounts receivable and
approximately $272,000 is included in non-current accounts receivable. As of
November 30, 2004, approximately $512,000 was due from this joint venture and
was included in accounts receivable.

The unaudited summary financial information for HSP as of and for the period
ended November 30, is as follows:

                                                    2005               2004
                                                    ----               ----
         Balance Sheet
                  Assets                       $ 2,062,955         $   598,817
                  Liabilities                       14,461               4,050
                                               -----------         -----------
                  Capital                      $ 2,048,494         $   594,767
                                               ===========         ===========

         Statements of operations
                  Revenues                     $ 6,874,572         $ 4,815,770
                  Operating expenses             7,014,858           5,029,621
                                               -----------         -----------
                  Net loss                     $  (140,286)        $  (213,851)
                                               ===========         ===========

Note  9 - Accounts Payable and Accrued Liabilities

                                                          November 30,
                                                    2005               2004
                                                    ----               ----
         Accounts payable - trade              $ 1,010,163         $   278,319
         Insurance premiums payable                 58,867              71,720
         Professional fees payable                 305,080             209,503
         Other accrued expenses - none in
          excess of 5% of current liabilities      203,275             257,692
                                               -----------         -----------
                                               $ 1,577,385         $   817,234
                                               ===========         ===========

                                      F-18
<PAGE>

Note 10 - Fees Reimbursable to Health Plans

Health plans utilizing the disease management program of the Company pay
participating physicians fees for their services related to use of the program.
Such fees are additional costs to the health plan, which in some cases are
deducted from fees paid to the Company. As of November 30, 2005 and 2004, there
was $39,000 and $161,178 outstanding under these provisions.

Note 11 - Line of Credit

On September 11, 2001, the Company entered into a loan agreement with Wachovia
Bank, N.A., formerly First Union National Bank, for a $1 million line of credit.
The annual interest rate is the lower of the bank's prime rate minus 1% or the
LIBOR Market Index Rate plus 1.5%. The line is collateralized by securities
owned by the Company and expires on September 1, 2006. Borrowings under this
line of credit were $-0- at November 30, 2005 and 2004.

Note 12 - Capital Lease Obligations

The Company has entered into various capital leases for equipment expiring
through April 2008, with aggregate monthly payments of approximately $11,500.

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, 2005:

         For the Years Ending
              November 30,
                  2006                                            $   160,155
                  2007                                                 67,727
                  2008                                                 11,879
                                                                  -----------
                  Total minimum lease payments                        239,761
                  Less amount representing interest (8% - 10%)        (17,273)
                                                                  -----------
                  Present value of net minimum lease payments         222,488
                  Less current maturities                             146,483
                                                                  -----------
                  Long-term maturities                            $    76,005
                                                                  ===========

Note 13 - Income Taxes

Income tax expense (benefit) is made up of the following:

                                       2005             2004             2003
                                       ----             ----             ----

         Federal income tax         $    87,000      $         -      $        -
         State income tax               305,000           16,000          15,000
                                    -----------      -----------      ----------
         Total current              $   392,000      $    16,000      $   15,000
                                    ===========      ===========      ==========

                                      F-19
<PAGE>

Note 13 - Income Taxes - (continued)

The effective tax rate varied from the statutory rate as follows:

                                                  2005        2004        2003
                                                  ----        ----        ----

         Statutory federal income tax rate        34.0%       34.0%       34.0%
         State income tax, net of federal
          Benefit                                  2.3%       (0.6%)      (0.5%)

         Certain non-deductible expenses           0.5%       (1.6%)      (0.8%)
         Effect on net operating loss
           carryforward and valuation
           allowance                             (27.4%)     (32.8%)     (33.4%)
                                                 ------      ------      ------
                                                   9.4%       (1.0%)      (0.7%)
                                                 ======      ======      ======

Deferred tax attributes resulting from differences between financial accounting
amounts and tax basis of assets and liabilities at November 30, 2005 and 2004,
follow:
<TABLE>
<CAPTION>
                                                                      November 30,
                                                                      ------------
                                                                 2005              2004
                                                                 ----              ----
<S>                                                          <C>               <C>
         Current assets and liabilities
             Allowance for doubtful accounts                 $    31,000       $    21,000
             Inventory reserve                                    44,000            41,000
             Inventory overhead capitalization                     1,000            15,000
             Deferred warranties                                   5,000            10,000
                                                             -----------       -----------
                                                                  81,000            87,000
             Valuation allowance                                 (81,000)          (87,000)
                                                             -----------       -----------
         Net current deferred tax asset (liability)          $         -       $         -
                                                             ===========       ===========
<CAPTION>
                                                                      November 30,
                                                                      ------------
                                                                 2005              2004
                                                                 ----              ----
<S>                                                          <C>               <C>
         Noncurrent assets and liabilities
             Depreciation and amortization                   $  (106,000)      $   (54,000)
             Investments                                         (26,000)          (48,000)
             Net operating loss carryforward                   7,999,000         9,829,000
             Research and development credit carryforward         82,000            82,000
             Alternative minimum tax credit carryforward          76,000                 -
             Stock compensation                                  123,000           123,000
             Capital loss carryforward                            18,000            18,000
                                                             -----------       -----------
                                                               8,166,000         9,950,000
             Valuation allowance                              (8,166,000)       (9,950,000)
                                                             -----------       -----------
         Net noncurrent deferred tax asset (liability)       $         -       $         -
                                                             ===========       ===========
</TABLE>

The Company has cumulative pre-tax losses through fiscal 2004 for financial
reporting purposes. Recognition of deferred tax assets will require generation
of future taxable income. Given the recent terminated contracts and the start up
costs associated with the new business segments, there can be no assurance that
the Company will generate earnings in future years. Therefore, the Company
established a valuation allowance on deferred tax assets of approximately
$8,200,000 and $10,000,000 as of November 30, 2005 and 2004, respectively.

                                      F-20
<PAGE>

Note 13 - Income Taxes - (continued)

As of November 30, 2005, the Company has available the following federal net
operating loss carryforwards for tax purposes of $20,802,000 beginning to expire
in 2010.

The Company has net operating loss carryforwards for state tax purposes of
approximately $15,855,000 expiring at various times from fiscal years ending
2006 through 2019. 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, 2005 the Company completed the sale of
approximately $2,057,000 of its New Jersey net operating loss carryforwards and
received approximately $116,000. Proceeds from these transactions are recorded
as a gain on sale of net state tax benefits.

During the year ended November 30, 2004 the Company completed the sale of
approximately $2,900,000 of its New Jersey net operating loss carryforwards and
received approximately $230,000. Proceeds from these transactions are recorded
as a gain on sale of net state tax benefits.

Note 14 - Stockholders' Equity

Private Placement Equity Transactions
-------------------------------------
On October 21, 2004, the Company issued to Quest Diagnostics Venture LLC 298,507
shares of the Company's common stock for approximately $1,988,000, net of
expenses.

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

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

2003 Outside Directors Equity Plan
----------------------------------
The Company has adopted an Outside Directors Equity Plan to better enable the
retention and attraction of qualified outside directors to serve on the
Company's Board of Directors. The plan requires up to 250,000 shares to be
authorized for issuance under the plan and is designed to allow outside
directors the option to receive a portion of their fees in the form of the
Company's common stock in lieu of cash, and 12,500, 12,500 and 10,000 options
were issued to Directors during the years ended November 30, 2005, 2004 and
2003, respectively. 215,000 shares remain available for issuance under the plan
at November 30, 2005.

                                      F-21
<PAGE>

Note 14 - Stockholders' 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 Plan was
amended by a vote of stockholders on May 22, 2002 to increase the number of
shares available for awards from 1,000,000 to 2,000,000.

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. 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.

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 was approximately $90,000 and
was amortized over their respective vesting period. Amortization expense
relating to these options for the years ended November 30, 2005, 2004 and 2003
was approximately $0, $0 and $15,000, respectively.

During the years ended November 30, 2005, 2004 and 2003, the Company granted
stock options to certain board members. 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 periods for these
options are one year. The value of these options for the years ended November
30, 2005, 2004 and 2003 was approximately $111,000, $63,000 and $56,000,
respectively, and is being amortized over their respective vesting period.
Amortization expense relating to these options for the years ended November 30,
2005, 2004 and 2003 was approximately $55,000, $56,000 and $41,000,
respectively.

                                      F-22
<PAGE>

Note 14 - Stockholders' 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, 2002         1,481,143         $   4.51           1,149,076        $      3.75

           Granted                     235,175             7.30
           Exercised                  (119,401)            2.07
           Expirations                 (14,900)            8.55
           Terminated                  (27,696)            9.32
                                    ----------

         Outstanding
           November 30, 2003         1,554,321             4.97           1,147,962               4.28

           Granted                     298,506             9.30
           Exercised                  (158,806)            1.92
           Expirations                 (12,973)            8.95
           Terminated                  (43,379)            9.33
                                    ----------

         Outstanding
           November 30, 2004         1,637,669             5.91           1,163,761               5.10

           Granted                     424,911             9.92
           Exercised                  (226,948)            4.05
           Expirations                    (420)            8.90
           Terminated                  (52,884)            8.65
                                    ----------

         Outstanding
           November 30, 2005         1,782,328         $   7.02           1,108,021        $      5.80
                                    ==========         ========           =========        ===========
</TABLE>

         Weighted-average fair value of options granted during the years

                                       2005           2004           2003
                                       ----           ----           ----

         Where exercise price
           equals stock price         $9.92         $ 9.30         $ 4.47

         Where exercise price
           exceeds stock price            -              -              -

         Where stock price
          exceeds exercise price          -              -              -

Following is a summary of the status of stock options outstanding at November
30, 2005:
<TABLE>
<CAPTION>
                                    Outstanding Options                                Exercisable Options
                                                 Weighted-
                                   Number         Average           Weighted-        Number        Weighted-
          Exercise Price        Outstanding      Remaining           Average       Outstanding      Average
               Range            at 11/30/05   Contractual Life   Exercise Price    at 11/30/05   Exercise Price
               -----            -----------   ----------------   --------------    -----------   --------------
<S>                               <C>                 <C>          <C>             <C>             <C>
         $  2.75 -  4.04            448,594           3.2          $   3.13          426,159       $   3.10
            4.44 -  6.56            171,726           4.4              4.79          122,382           4.70
            6.88 - 10.28          1,039,822           7.7              8.48          552,918           8.05
           10.95 - 12.97            122,186           9.5             12.04            6,562          11.17
         ---------------          ---------         -----          --------        ---------       --------
         $  2.75 - 12.97          1,782,328           6.4          $   7.02        1,108,021       $   5.80
         ===============          =========         =====          ========        =========       ========
</TABLE>
                                      F-23
<PAGE>

Note 14 - Stockholders' 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, 2002         1,795,515         $   1.90           1,795,515        $      1.90

           Granted                           -                                    -
           Exercised                         -                                    -
           Terminated                        -                                    -
                                    ----------                            ---------

         Outstanding
           November 30, 2003         1,795,515             1.90           1,795,515               1.90

           Granted                           -                                    -
           Exercised                   (62,500)            3.33             (62,500)
           Terminated                        -                                    -
                                    ----------                            ---------

         Outstanding
           November 30, 2004         1,733,015             1.85           1,733,015               1.85

           Granted                           -                                    -
           Exercised                   (33,493)            1.88             (33,493)
           Terminated                        -                                    -
                                    ----------                            ---------

         Outstanding
           November 30, 2005         1,699,522         $   1.85           1,699,522        $      1.85
                                    ==========         ========           =========        ===========

Following is a summary of the status of stock warrants outstanding at November
30, 2005:
<CAPTION>

                                 Outstanding Warrants                               Exercisable Warrants
                                 --------------------                               --------------------
                                            Weighted-
                             Number          Average           Weighted-        Number          Weighted-
         Exercise Price    Outstanding      Remaining           Average       Outstanding        Average
              Range        at 11/30/05   Contractual Life   Exercise Price    at 11/30/05     Exercise Price
              -----        -----------   ----------------   --------------    -----------     --------------
<S>                          <C>                <C>           <C>             <C>                <C>
         $  1.67 - 1.67      1,432,631          1.9           $   1.67        1,432,631          $   1.67
            2.62 - 2.87        266,001          1.9               2.80          266,001              2.80
            3.64 - 3.64            890          1.9               3.64              890              3.34
         --------------      ---------         ----           --------        ---------          --------
         $  1.67 - 3.64      1,699,522          1.9           $   1.85        1,699,522          $   1.85
         ==============      =========         ====           ========        =========          ========
</TABLE>

On December 21, 2005, the Company granted 246,391 and 32,350 options under the
1999 Equity Incentive Plan at exercise prices of $10.63, 110% of fair market
value at date of grant , and $9.66, respectively.

Note 15 - 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 2005, 2004
and 2003, the Company matched $.25 for each dollar up to 6% of an employee's
contribution on a monthly basis, which amounted to approximately $76,000,
$80,000 and $55,000, respectively.

                                      F-24
<PAGE>

Note 16 - Commitments and Contingencies

Leases

The Company leases office space and equipment under noncancellable operating
leases expiring through November 2007. Monthly payments under the current leases
are approximately $43,000.

The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of November 30, 2005.

         For the Years Ending
             November 30,
             ------------
                  2006                                    $      490,000
                  2007                                           477,000
                  2008                                            11,000
                  2009                                             6,000
                  2010                                                 -
                  Thereafter                                           -
                                                          --------------
                  Total minimum payments required         $      984,000
                                                          ==============

Rent expense for the years ended November 30, 2005, 2004 and 2003 was
approximately $489,000, $450,000 and $840,000, respectively.

Litigation

On June 15, 2004, the Company entered into an agreement to settle its dispute
with The Regence Group, including all issues surrounding the HeartMasters LLC's
arbitration. The settlement agreement provided QMed, Inc. and IHMC with releases
from any and all claims related to Regence and the Regence contract in exchange
for a financial guarantee of certain payments from HeartMasters LLC to Regence.
The amount of the financial guarantee could have ranged between $0 and
$2,300,000 and was contingent upon the outcome of a separate arbitration being
pursued by Regence and HeartMasters LLC against the insurer, Centre Insurance.
The Company made an advance payment on this guarantee of $1,150,001 on June 15,
2004. The advance payment, and any subsequent payment, were subject to refund
based upon certain recovery targets under the Centre Insurance arbitration, if
successful.

The dispute with Centre over the insurance coverage on all of the relevant
Regence disease management plans, for which coverage was purchased, was the
subject of an arbitration proceeding. Initially, the Company sued Centre over
the nonpayment of the policies; the court determined that this must be resolved
in the arbitration with Centre.

On August 18, 2005, HeartMasters LLC and The Regence Group entered into a
settlement agreement with Centre, resolving the dispute. The settlement resulted
in the elimination of any further contingent liability for the Company, under
the guarantee to Regence. The Company received $500,000 on September 15, 2005,
which has been reflected as revenue for the period ended November 30, 2005.

                                      F-25
<PAGE>

Note 16 - Commitments and Contingencies

Litigation (continued)

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

In the arbitration, Alere has counterclaimed, asserting that, under a seventh
agreement between the parties, there was no obligation to enter into a long term
agreement, and thus, claims Alere, the Company's claims are not well founded and
Alere is allegedly entitled to damages for breach of the duty of good faith and
fair dealing, as well as its attorneys' fees. Alere also filed a lawsuit in
state court, in the Second Judicial District Court of Nevada, Washoe County,
seeking essentially the same relief. Damages are sought by Alere in an
unspecified amount stated to be in excess of $10,000. The Company removed
Alere's State Court action to the United States District Court for the District
of Nevada, where it is now pending. At this stage, management is unable to
predict the outcome of this matter.

On January 30, 2006, the Company has filed an action against Healthcare First, a
division of Gallagher Insurance Services, Inc., and of Arthur J. Gallagher & Co.
("HCF"), seeking recovery in the amount of approximately $3,700,000 against the
financial intermediary/broker involved in obtaining the insurance policies from
Centre Insurance, which were the subject of the prior proceeding against Centre.
This case is pending in the Superior Court of New Jersey, Law Division, Monmouth
County. HCF has not yet responded to the complaint, and its time to counterclaim
has not yet expired. The Company is unaware of any counterclaims that HCF might
have under consideration. At this stage, management is unable to predict the
outcome of this matter.

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

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

Major Customers
---------------
The Company had three major customers during 2005 and 2004 and four major
customers during 2003. Major customers were considered to be those who account

                                      F-26
<PAGE>

Note 16 - Commitments and Contingencies

Major Customers (continued)
---------------------------
for more than 10% of total revenue. The major customers accounted for
approximately 69%, 45% and 57% for 2005, 2004 and 2003, respectively.

Purchase Commitments
--------------------
The Company is obligated to purchase heart-monitoring equipment under various
orders from one supplier, all of which are expected to be fulfilled with no
adverse consequences material to the companies operations or financial
condition. As of November 30, 2005 total open commitments under these purchase
orders are approximately $290,000.

Note 17 - Business Segment Information

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

The Company is organized into three business units, disease-management services,
specialty managed care services and health and wellness programs, which are
considered reportable segments. The segments are managed separately and the
Company evaluates performance on operating profits of the respective segments.
The Company supports 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-27
<PAGE>

Note 17 - Business Segment Information - (continued)

Summarized financial information by operating segment for 2005, 2004 and 2003,
is as follows:
<TABLE>
<CAPTION>
                                                                                2005

                                            Disease            Managed         Health &
                                           Management           Care           Wellness        General          Total
                                            Services          Services         Programs       Corporate     Consolidated
                                            --------          --------         --------       ---------     ------------
<S>                                       <C>               <C>             <C>             <C>             <C>
Revenues                                  $ 22,146,496      $          -    $          -    $          -    $ 22,146,496
Income (loss) before income taxes            7,325,815        (1,112,147)       (500,967)     (1,551,068)      4,161,633
Depreciation and amortization                  282,305                 -          79,259         262,862         624,426
Expenditures for long-lived assets             408,953                 -         913,793         176,900       1,499,646
Identifiable assets                          7,782,960            28,772         866,501      21,995,133      30,673,366

<CAPTION>
                                                                               2004

                                            Disease            Managed         Health &
                                           Management           Care           Wellness        General          Total
                                            Services          Services         Programs       Corporate     Consolidated
                                            --------          --------         --------       ---------     ------------
<S>                                       <C>               <C>             <C>             <C>             <C>
Revenues                                 $  15,576,599           $     -          $    -         $     -    $ 15,576,599
Income (loss) before income taxes           (1,953,169)                -               -               -      (1,953,169)
Depreciation and amortization                  476,753                 -               -               -         476,753
Expenditures for long-lived assets             641,057                 -               -               -         641,057
Identifiable assets                         10,837,477                 -               -               -      10,837,477

<CAPTION>
                                                                               2003

                                            Disease            Managed         Health &
                                           Management           Care           Wellness        General          Total
                                            Services          Services         Programs       Corporate     Consolidated
                                            --------          --------         --------       ---------     ------------
<S>                                       <C>               <C>             <C>             <C>             <C>
Revenues                                 $  12,899,361           $     -          $    -         $     -    $ 12,899,361
Income (loss) before income taxes           (2,136,376)                -               -               -      (2,136,376)
Depreciation and amortization                  404,180                 -               -               -         404,180
</TABLE>

Note 18 - Subsequent Events

In December 2005, the Company executed a term sheet for approximately 2,952
square feet of office space in Eatontown, New Jersey, pursuant to a lease
agreement, which will commence in January 2006 and expire in October 2007. These
facilities will be used principally for administrative offices, sales training,
and marketing of QMedCare, Inc. Monthly payments under the lease will be
approximately $5,600.

Effective December 31, 2005, the Company's contract with its largest customer
has ended and will not be renewed. This contract represented approximately 37%
of total revenue or $8.0 million. In addition, the same customer will not be
renewing their contract with CMS under

                                      F-28
<PAGE>

Note 18 - Subsequent Events - (continued)

HeartPartners of California effective February 2006 resulting in an additional
loss of approximately 16% of total revenue or $3.5 million.

In December 2005, the Company established a $250,000 letter of credit with
Wachovia Bank, N.A. to establish the appropriate capital required for the
Company's captive insurance company in South Carolina.

Note 19 - Fourth Quarter Adjustments

Subsequent to the balance sheet date, the Company completed reconciliations
under contracts with PacifiCare and HealthPartners, which reflected the
achievement of targeted performance measures. As a result, during the fourth
quarter of fiscal 2005, the Company recognized approximately $1,400,000 of
previously deferred revenue and bonuses earned under these contracts with
PacifiCare and HealthPartners in the amounts of approximately $1,000,000 and
$400,000, respectively.

Note 20 - Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
                                                          For the Quarters Ending 2005
                                                          ----------------------------
                                     February 28,       May 31,       August 31,    November 30,       Total
                                     ------------       -------       ----------    ------------       -----
<S>                                    <C>            <C>             <C>            <C>           <C>
  Net revenue                          $4,755,486     $5,462,897      $5,504,634     $6,423,479    $22,146,496
  Gross profit                          2,934,000      3,612,376       3,677,321      4,411,905     14,635,602
  Net income                              874,803        870,991         992,937      1,146,814      3,885,545
  Basic income per share                      .06            .05             .06            .07            .24
  Diluted income per share                    .05            .05             .05            .06            .21

<CAPTION>
                                                          For the Quarters Ending 2004
                                                          ----------------------------
                                     February 29,       May 31,       August 31,    November 30,       Total
                                     ------------       -------       ----------    ------------       -----
<S>                                    <C>            <C>             <C>            <C>           <C>
  Net revenue                          $3,792,820     $3,724,881      $3,273,083     $4,785,815    $15,576,599
  Gross profit                          1,791,622      1,033,936         892,907      2,980,030      6,698,495
  Net (loss) income                      (262,414)    (1,432,269)     (1,180,896)     1,136,134     (1,739,445)
  Basic (loss) income per share              (.02)          (.10)           (.08)           .08           (.12)
  Diluted (loss) income per share            (.02)          (.10)           (.08)           .07           (.12)

<CAPTION>
                                                          For the Quarters Ending 2003
                                                          ----------------------------
                                     February 29,       May 31,       August 31,    November 30,       Total
                                     ------------       -------       ----------    ------------       -----
<S>                                    <C>            <C>             <C>            <C>           <C>
  Net revenue                          $3,666,044     $3,316,701      $3,164,912     $2,751,704    $12,899,361
  Gross profit                          2,071,551      1,685,985       1,423,309        991,649      6,172,494
  Net income (loss)                       290,989       (587,451)       (676,054)    (1,178,860)    (2,151,376)
  Basic Income (loss) per share               .02           (.04)           (.05)          (.08)          (.15)
  Diluted Income (loss) per share             .02           (.04)           (.05)          (.08)          (.15)
</TABLE>
                                      F-29
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers 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, 2005 and is incorporated herein by
reference.

Pursuant to General Instruction G(3), information concerning executive officers
is included in Part I of this form under the caption "Executive Officers of the
Registrant."

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, 2005 and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.

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, 2005 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, 2005 and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

Information regarding our relationship with our principal public accountant will
be set forth in the Company's definitive proxy statement which is expected to be
filed within 120 days of November 30, 2005 and is incorporated herein by
reference.

                                       48
<PAGE>

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

         (a) (1) Financial Statements.

         Description

         Report of Independent Registered Public Accounting Firm

         Consolidated Balance Sheets as of November 30, 2005 and 2004

         Consolidated Statement of Operations for each of the three years ended
         November 30, 2005, 2004 and 2003

         Consolidated Statement of Comprehensive Income for each of the three
         years ended November 30, 2005, 2004 and 2003

         Consolidated Statement of Stockholder's Equity for each of the three
         years ended November 30, 2005, 2004 and 2003

         Consolidated Statement of Cash Flows for each of the three years ended
         November 30, 2005, 2004 and 2003

         Notes to Consolidated Financial Statements

         (a)(2) Financial Statement Schedules:

         II - Valuation and Qualifying Accounts

         Other schedules have been omitted because they are not applicable.

         (a)(3) 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>
                                                                                      Sequential
Exhibit   No.                             Description                                   Page No.
-------------                             -----------                                   --------
<S>               <C>                                                                   <C>
    2             None

    3.1           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

                                       49
<PAGE>

    3.2           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

    3.3           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

    3.4           Certificate of Amendment to Restated Certificate of
                  Incorporation of Q-Med, Inc., dated May 22, 2002 (Exhibit 3.1
                  to the Company's Form 10-Q dated May 31, 2002)                        I/B/R

    4.1           Specimen Common Stock Certificate (Exhibit 4.1 to
                  the Company's Form 10-K Report dated November 30,
                  2002)                                                                 I/B/R

    4.2           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

    4.3           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

    4.4           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

    4.5           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

    4.6           Stock Purchase Agreement between QMed, Inc. and Quest
                  Diagnostics Ventures LLC, dated as of October 21, 2004
                  (Exhibit 10.1 to the Company's report on Form 8-K dated
                  October 21, 2004)                                                     I/B/R

    4.7           Registration Rights Agreement between QMed, Inc. and
                  Quest Diagnostics Ventures LLC, dated as of October
                  21, 2004 (Exhibit 10.2 to the Company's report on
                  Form 8-K dated October 21, 2004).                                     I/B/R

    4.8           Securities Purchase Agreement, dated December 6, 2004
                  (Exhibit 10.1 to the Company's report on Form 8-K dated
                  December 6, 2004)                                                     I/B/R

    4.9           Form of Additional Investment Right (Exhibit 10.2 to the
                  Company's report on Form 8-K dated October 21, 2004).                 I/B/R

                                       50
<PAGE>

    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           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

   10.4           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

   10.5           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

   10.6           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

   10.7           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

   10.8           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

   10.9           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

                                       51
<PAGE>

   10.10          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

   10.11          First Amendment to the 1999 Equity Incentive Plan
                  of QMed, Inc. dated May 22, 2002 (Exhibit 10.1 to
                  the Company's Form 10-Q dated May 31, 2002)**                         I/B/R

   10.12          QMed, Inc. 1999 Equity Incentive Plan, as amended
                  November 1, 2002 (Exhibit 10.13 to the Company's
                  Form 10-K Report dated November 30, 2002)**                           I/B/R

   10.13          Employment Agreement dated September 23, 2002
                  between QMed, Inc. and Bill Schmitt (Exhibit 10.1
                  to the Company's Report on Form 10-Q dated August
                  31, 2002)**                                                           I/B/R

   10.14          Employment Agreement dated as of December 1, 2002
                  between QMed, Inc. and Michael W. Cox (Exhibit 10.15
                  to the Company's Report for the year ended November
                  30, 2002)**                                                           I/B/R

   10.15          QMed, Inc. 2002 Key Employee Bonus Plan (Exhibit
                  10.16 to the Company's Report for the year ended
                  November 30, 2002)**                                                  I/B/R

   10.16          Real Property Lease between Donato Hi-Tech Holdings
                  IV, Inc. and the Company dated June 19, 2002 (Exhibit
                  10.2 to the Company's Report on Form 10-Q dated
                  May 31, 2002)                                                         I/B/R

   10.17          Retainer Agreement between Sommer & Schneider LLP and the
                  Company dated January 8, 2003 (Exhibit 10.18 to the Company's
                  Report for the year ended November 30, 2002)                          I/B/R

   10.18          Waiver of Benefits under the QMed, Inc. 2002 Key
                  Employee Bonus Plan dated February 28, 2003 (Exhibit
                  10.19 to the Company's Report for the year ended
                  November 30, 2002)**                                                  I/B/R

                                       52
<PAGE>

   10.19          QMed, Inc. 2003 Outside Directors Equity Plan (Exhibit
                  10.1 to the Company's Report on Form 10-Q dated
                  May 31, 2003)**                                                       I/B/R

   10.20          Employment Agreement between the Company and Jane Murray dated
                  April 21, 2003 (Exhibit 10.2 to the Company's Report on Form
                  10-Q dated May 31, 2003)**                                            I/B/R

   10.21          Michael W. Cox Waiver of Salary Increase dated
                  June 30, 2003 (Exhibit 10.3 to the Company's Report
                  on Form 10-Q dated May 31, 2003)**                                    I/B/R

   10.22          Jane Murray Waiver of Salary Increase dated
                  June 30, 2003 (Exhibit 10.1 to the Company's Report
                  on Form 10-Q dated May 31, 2003)**                                    I/B/R

   10.23          Indenture of Trust Dated August 8, 2003 Between QMed,
                  Inc. and American Stock Transfer and Trust Company.
                  (Exhibit 10.1 to the Company's Report on Form 10-Q dated
                  August 31, 2003)**                                                    I/B/R

   10.24          Employment Agreement between Health E. Monitoring Inc.
                  and K. Randall Burt (Exhibit 10.1 to the Company's Report
                  on Form 8-K dated April 9, 2005)**                                    I/B/R

   11             None.

   13             None.

   16             None.

   18             None.

   21             Subsidiaries of Registrant                                            *

   22             None.

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

   24             None.

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

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

                                       53
<PAGE>

   32.1           Certification of Chief Executive Officer and the Chief
                  Financial Officer pursuant to 18 U.S.C. - Section 1350.               *
--------
</TABLE>
*     Filed herewith
**   Management contract or compensatory plan or arrangement

                                       54
<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 on its
behalf by the undersigned, thereunto duly authorized.

Dated: February 10, 2006                  QMED, INC.


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

                                       55
<PAGE>
                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacity and on the dates indicated:

Signature                              Capacity                       Date
---------                              --------                       ----

/s/ Michael W. Cox            President, Chief Executive       February 10, 2006
---------------------------   Officer and Director
Michael W. Cox                (Principal Executive Officer)

/s/ Jane Murray               Executive Vice President, Chief  February 10, 2006
---------------------------   Operating Officer and Director
Jane Murray


/s/ William T. Schmitt, Jr.   Senior Vice President and Chief  February 10, 2006
---------------------------   Financial Officer
William T. Schmitt, Jr.       (Principal Financial Officer)


/s/  Glenn J. Alexander       Controller                       February 10, 2006
---------------------------   (Principal Accounting Officer)
Glenn J. Alexander


/s/ Bruce F. Wesson           Chairman of the Board            February 10, 2006
---------------------------
Bruce F. Wesson


/s/ A. Bruce Campbell, M.D.   Director                         February 10, 2006
---------------------------
A. Bruce Campbell, M.D.


/s/ David Feldman             Director                         February 10, 2006
---------------------------
David Feldman


/s/ Richard I. Levin          Director                         February 10, 2006
---------------------------
Richard I. Levin, M.D.


/s/ Lucia L. Quinn            Director                         February 10, 2006
---------------------------
Lucia L. Quinn


/s/ John J. Gargana, Jr.      Director                         February 10, 2006
---------------------------
John J. Gargana, Jr.


/s/ John P. Zanotti           Director                         February 10, 2006
---------------------------
John P. Zanotti

                                       56
<PAGE>

SEC FILED COPY ONLY - NOT BOUND WITH FINANCIAL
<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
                                         2003              2,000               -                  -              2,000
                                         2004              2,000          51,850              1,160             52,690
                                         2005             52,690          57,153             33,325             76,518

Reserve for slow moving inventory
                                         2003                  -               -                  -                  -
                                         2004                  -         101,428                  -            101,428
                                         2005            101,428           9,632                  -            111,060

Deferred tax valuation allowance
                                         2003         10,859,000               -         (1,059,000)         9,800,000
                                         2004          9,800,000         237,000                  -         10,037,000
                                         2005         10,037,000               -         (1,790,000)         8,247,000
</TABLE>