**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, 2007

 

oTRANSITION REPORT            PURSUANT TO SECTION 13 OR 15(d)

OF            THE SECURITIES EXCHANGE ACT OF 1934

 

For            The Transition Period from ______ to _________

 

Commission File Number: 0-11411

 

**QMED, INC.**

(Exact Name of Registrant as Specified in its Charter)

 

|   | Delaware | 22-2468665 |
|--------|----------|------------|

|   | (State or other jurisdiction of | (I.R.S 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 if the registrant is a well-known seasoned            issuer, as defined in Rule 405 of the Securities Act. Yes            oNo [X ]

 

Indicated by check mark if the registrant is not required to file            reports pursuant to Section 13 or 15(d) of the Act. Yes            oNo [ X ]

 

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 o

 

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

 

Indicate by check mark whether the registrant is a large accelerated            filer, an accelerated filer, or a non-accelerated filer. See definition of            “accelerated filer and large accelerated filer” in Rule 12b-2 of the            Exchange Act.

 

Large            accelerated filer oAccelerated            filer oNon-accelerated            filerx

 

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

 

The            aggregate market value of the common stock held by non-affiliates of the registrant was            approximately $42,970,220 on May 31, 2007, 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 March 10, 2008**,**there were            17,081,688 shares of the registrant’s common stock, $.001 par value, issued and            outstanding.

 

Documents incorporated by reference:

 

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

             

|   | Portions of the Registrant’s Proxy Statement                            for | III |
|--------|-----------------------------------------------------------------------------------|-----|

its 2007 Annual Meeting (to be filed in definitive

form within 120 days of the Registrant’s Fiscal

Year End)

 

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**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**

             

During November 2007, QMed Inc. ceased operations of its Managed Care            Special Needs Plans and related services because the Company was unable to raise            sufficient capital to fund its current reserve requirements as well as future capital            requirements. The Company significantly reduced its staff and other operating expenses            while continuing to operate as a disease management service provider. The Company also            sold its medical equipment business to an unaffiliated third party during October 2007.            As a result of the sale and termination of Special Needs plan services, the operations            of QMedCare, Inc., QMedCare Dakota, LLC, Lakeshore Captive Insurance Co. and QMedCare            of New Jersey, Inc., together with the medical equipment business are presented as            discontinued operations.

             

**Going Concern**

             

The            accompanying consolidated financial statements have been prepared assuming that the            Company continues as a going concern that contemplates the realization of assets and            satisfaction of liabilities in the normal course of business. However, the ability of            the Company to continue as a going concern will be dependent upon its ability to raise            additional capital or obtain other sources of financing in the immediate future            necessary to meet its obligations and continue operations.

 

During the year ended November 30, 2007, the Company incurred net losses            totaling $11,252,361 and utilized cash in operating activities of $12,745,008.            These factors raise substantial doubt as to the Company’s ability to continue as            a going concern. The financial statements do not include any adjustments that might            result from this uncertainty. If the Company is unable to raise additional capital or            obtain other sources of financing to meet its working capital requirements, it will            have to cease business altogether.

 

Management’s plan is to raise additional capital through a variety            of fund raising methods including the potential sale of its assets, and to pursue all            available financing alternatives as necessary to fund operations. The Company needs to            raise additional funds in the immediate future in order to continue its operations.            Whereas the Company has been successful in the past in raising capital, no assurance            can be given that these sources of financing will continue to be available to the            Company and/or that demand for the Company’s equity/debt instruments will be            sufficient to meet its capital needs. The financial statements do not include any            adjustments relating to the recoverability and classification of liabilities that might            be necessary should the Company be unable to continue as a going concern.

 

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To            the extent that the Company raises additional capital through the sale of equity or            convertible debt securities, the issuance of such securities may result in dilution to            existing stockholders. If additional funds are raised through the issuance of debt            securities, these securities may have rights, preferences and privileges senior to            holders of common stock and the terms of such debt could impose restrictions on the            Company's operations.

 

**History of QMed Inc.**

             

QMed®, Inc. (QMed) was incorporated in New Jersey in 1983            and reincorporated in Delaware in 1987. QMed owns 100% of the stock of the following            companies: Interactive Heart Management Corp. (“IHMC®”),            QMedCare, Inc., QMedCare of New Jersey, Inc. and Positive Directions, Inc.

 

IHMC            was incorporated in 1995 and developed and often co-markets with QMed, Inc. health care            information and communication services to health plans and the government.

 

QMedCare, Inc. was incorporated in December 2004. QMedCare is the sole            member of QMedCare Dakota, LLC and owns 100% of Lakeshore Captive Insurance Company.            These organizations assisted with the operation of a series of specialty Managed Care            products serving a high-risk population of Medicare beneficiaries in South            Dakota.

 

QMedCare of New Jersey, Inc. was incorporated in January 2006. This            organization was established as for the purpose of operating a Medicare Special Needs            Plan designed specifically for Medicare beneficiaries suffering from certain chronic            conditions.

 

In            April 2005, QMed acquired 100% of the stock of Positive Directions, Inc., (formerly            known as Health e Monitoring, Inc.) a privately owned firm offering a comprehensive            program for healthy weight and lifestyle management. In October 2005, QMed, Inc.            acquired all of the assets of Disease Management Technologies, Inc.            (“DMT”). DMT has developed a website for a health and wellness            program.

 

The            Company operated its specialty managed care products in South Dakota until November            2007 and its Medicare Special Needs Plan in New Jersey until December 2007. The Company            continues to operate its disease management programs under QMed/IHMC as well as            Positive Directions, Inc.

 

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 atwww.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 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®”(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.

 

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QMed 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.

             

**ohms|cvd® Systems**

             

ohms|cvd® is our proprietary medical 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            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 modification of critical            risk factors and medical intervention. The ohms|cvd® system expands upon            our core technology, first incorporated in our ohms|cvd® 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:

 

|   | **•** | appropriateness of the risk stratification, |
|--------|------------|---------------------------------------------|

|   | **•** | proportion of patients assigned to various                            therapies, |
|--------|------------|----------------------------------------------------------------------------------|

|   | **•** | objective outcomes, |
|--------|------------|---------------------|

|   | **•** | interplay with pharmacy use, and |
|--------|------------|----------------------------------|

|   | **•** | physician and patient compliance with evidence-based                            medicine. |
|--------|------------|-------------------------------------------------------------------------------------------|

 

Our            proprietary 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 that            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.

 

At            November 30, 2007, we had contracts with the Center for Medicare and Medicaid Services            and 4 health plans to provide disease management services in multiple health plan            markets in 4 states. The number of members under contract was as follows:

 

| At November 30, | 2007 | 2006 | 2005 |
|-----------------|------|------|------|

| Approximate members under contract | 725,000 | 718,000 | 1,094,000 |
|------------------------------------|---------|---------|-----------|

 

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At            November 30, 2007, of the approximately 725,000 plan members under contract, we had            approximately 694,000 commercial members and 31,000 Medicare Advantage members.     

 

**Medicare Demonstration Projects**

             

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

             

|   | **•** | Medicare Coordinated Care Demonstration                            (“MCCD”); and |
|--------|------------|----------------------------------------------------------------------------------------------|

|   | **•** | 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:

 

|   | **•** | assures that the Medicaid, Medicare and SCHIP programs                            are properly run by its contractors and state agencies; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | establishes policies for paying health care                            providers; |
|--------|------------|-----------------------------------------------------------------------------------|

|   | **•** | conducts research on the effectiveness of various                            methods of health care management, treatment, and financing;                            and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | assesses the quality of health care facilities and                            services and takes 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.

 

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. In January, based upon positive results to date, CMS            notified the Company of an additional 2 year extension of this project through June 30,            2010.

 

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. 

 

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

 

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            resulted in a reduction in disease management revenue of approximately $800,000 in            fiscal year 2007 as compared to fiscal year 2006 and $2.7 million in fiscal year 2006            as compared to fiscal year 2005.

 

**Discontinued Operations**

             

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 entered this market through our wholly owned subsidiary QMedCare,            Inc.

 

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 health maintenance organization in South Dakota. The Special            Needs Plan was marketed as HeartLine Plus and provided exclusive health coverage for            heart and stroke patients. This plan operated as a strategic alliance between QMedCare            Dakota, LLC and DAKOTACARE. The goal of this alliance was 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. established a Captive Insurance Company in South            Carolina, LakeShore Captive Insurance Company, to provide reinsurance for the Special            Needs Plan in South Dakota. Through a retrocessional reinsurance agreement with Ace            American Insurance Company and its related agreements with DAKOTACARE, effective            January 1, 2006 through January 1, 2008, LakeShore Captive Insurance Company assumes            100% of the risk associated with the operations of the Special Needs Plan in South            Dakota. We reduced our exposure by insuring levels of coverage through reinsurance in            excess of the first $200,000 of loss to a limit of $2,000,000 arising from claims by            any one original insured. Upon termination of the agreement, the underlying policies in            force at the time of the reinsurance coverage termination continue during the run-off            period until they expire.

 

On            November 1, 2007, Lakeshore Captive Insurance Company ceased its underwriting            activities as it was unable to meet its current and future capital requirements. On            March 7, 2008, Lakeshore Capitve Insurance Company executed a settlement agreement with            DAKOTACARE limiting it and its parent and affiliates liabilities associated with all            activities of the South Dakota SNP to $750,000. This settlement amount will be funded            by Lakeshore Captive Insurance. Subsequent to the settlement payment, Lakeshore will            file for dissolution with the State of South Carolina.

 

QMedCare of New Jersey, Inc. was incorporated in January 2006. This            organization is a licensed Health Maintenance Organization in certain counties in New            Jersey established for the purpose of operating a Medicare Special Needs Plan designed            specifically for Medicare beneficiaries suffering from certain chronic conditions. The            Company commenced enrollment in January 2007. Due to capital restrictions imposed on            the Parent Company by its South Dakota operations, the Company, together with the New            Jersey Department of Banking and Insurance and CMS, determined to conclude the            operations of QMedCare of New Jersey, Inc. effective in November 2007. QMedCare of New            Jersey, Inc. is currently winding down its operations.

 

**Positive Directions, Inc.**

             

Positive Directions, Inc. is a wholly owned subsidiary of QMed, Inc. In            May of 2005, QMed, Inc. acquired Positive Directions, Inc., (formerly Health e            Monitoring, Inc.), a privately owned firm offering a comprehensive program for healthy            weight and lifestyle management. In October 2005, QMed, Inc. acquired all of the assets            of Disease Management Technologies, Inc. (“DMT”). DMT has developed a            website for a health and wellness program.

 

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Its            program focuses on the role of wellness and prevention to establish healthy lifestyle            habits, dietary and nutrition education, exercise regimens and behavioral            modifications. QMed, Inc. will incorporate this program as part of its disease            management product offerings.

 

**Business Strategy**

             

Our            strategy is to sell, merge or continue as a DM service Company. In the event we are            successful, we will (1) obtain adequate financing through various alternatives; (2)            pursue contract opportunities with new health plans to provide disease management            services; (3) add disease states to our platform; and (4) 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.

             

**Marketing**

             

We            market our disease management services to health plans, large physician practice            groups, and governmental agencies through our sales staff. A key to the marketing of            our services is the relationships we develop with providers, physicians and patients.            QMed builds the critical links among them that result in improved 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 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.

 

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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 health- care 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 2007, 2006 and 2005, we expended approximately $2,096,000, $1,558,000 and            $1,323,000 respectively, for research and development. During these years, research and            development was primarily focused on the development of patient care programs and            advanced algorithms which coordinate care more rigorously and cost-effectively, and            systems which improve our patient out-reach capabilities.

 

**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|cvd® system (Patent No. 5,724,580) on March 3, 1998. Certain            patents relating to our technology began expiring in 2004. In October 2006, QMed filed            an application for a patent for certain elements of our technology related to the            collection of medical information and its identification in relation to patient            diagnoses. The patent application is currently pending.

 

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.

 

We sold            the patent for the nDx technology in October 2007 as part of the sale of the medical            equipment business to Innovative Diagnostics for $230,000 in cash. See Note 1 –            Discontinued Operations.

 

**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:

 

| **•** | security that requires a password to access our                            systems; |
|------------|-------------------------------------------------------------------------------------|

| **•** | 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; |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | encryption of data relating to our applications and                            services; and |
|------------|----------------------------------------------------------------------------------------------|

| **•** | a mechanism for preventing outsiders from improperly                            accessing private data resources on |
|------------|---------------------------------------------------------------------------------------------------------------------|

|   | our internal network and our applications commonly                            referred to as a “firewall.” |
|--------|------------------------------------------------------------------------------------------------------------------------|

 

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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:

 

| **•** | using individual user names and passwords for each                            employee handling electronic data; and |
|------------|----------------------------------------------------------------------------------------------------------------------|

| **•** | requiring each employee to sign an agreement to comply                            with all company policies |
|------------|-------------------------------------------------------------------------------------------------------------|

|   | including our policy regarding handling confidential                            information. |
|--------|----------------------------------------------------------------------------------------------|

 

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

 

**Government Regulation**

             

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

 

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            were 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 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.

 

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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,            reinsurance, and general liability insurance for 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 28 employees as of November 30, 2007, none of which are subject            to a collective bargaining agreement. We believe our relations with employees are            good.

 

**Executive Officers of the Registrant**

             

The            following sets forth certain information concerning our executive officers as of            January 31, 2008:

 

|   | **Officer** | **Age** | **Position with the Company** |
|--------|-------------|---------|-------------------------------|

 

|   | Jane Murray | 45 | President, Chief Executive |
|--------|-------------|----|----------------------------|

Officer and Director

             

|   | William T. Schmitt, Jr., CPA | 47 | Senior Vice President, Chief Financial |
|--------|------------------------------|----|----------------------------------------|

Officer and Treasurer

 

|   | Glenn J. Alexander, CPA | 41 | Vice President of Finance, Controller and |
|--------|-------------------------|----|-------------------------------------------|

|   | Principal Accounting Officer |
|--------|------------------------------|

 

11

----

*Item            1A. Risk Factors.*

 

See            Management’s Discussion and Analysis and Risk Factors contained later in this            report.

 

*Item            1B. Unresolved Staff Comments.*

 

There            are no unresolved staff comments.

 

*Item            2. Properties.*

Our            executive offices occupy approximately 20,000 square feet of office space in Eatontown,            New Jersey, pursuant to a lease agreement, which expires in November 2012. These            facilities are used principally for administrative offices, sales training, and            marketing. We are currently negotiating with our landlord to reduce the office space to            meet our present needs.

 

| *Item 3. Legal Proceedings.* |
|------------------------------|

             

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, was            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            January 30, 2006, the Company filed an action against Healthcare First, a division of            Gallagher Insurance Services, Inc., and of Arthur J. Gallagher & Co.            (“HCF”), seeking recovery in the amount of approximately $3,700,000 against            the financial intermediary/broker involved in obtaining the insurance policies from            Centre Insurance, which was the subject of the prior proceeding against Centre.            Following a mediation process, the matter was resolved on terms including a payment to            the Company of $400,000, which was received in June 2007.

 

On            November 21, 2005, the Company brought an arbitration proceeding against Alere Medical            Incorporated (“Alere”), seeking damages and an award for unjust enrichment            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.

 

In            the arbitration, Alere counterclaimed, asserting that, under a seventh agreement            between the parties, there was no obligation to enter into a long term agreement, and            thus, claimed Alere, the Company’s claims were not well founded and Alere is            allegedly entitled to damages for breach of the duty of good faith and fair dealing, as            well as its attorneys’ fees. Alere also filed a lawsuit in state court, in the            Second Judicial District Court of Nevada, Washoe County, seeking essentially the same            relief. Alere sought damages in an unspecified amount stated to be in excess of            $40,000.

 

12

----

             

Following extensive discovery, these matters were mediated, and both the            arbitration and the litigation were resolved during December 2006. As part of the            resolution, in December 2006, the Company received a payment totaling $1,975,000            bringing these matters to a conclusion.

 

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

 

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

 

|   | None. |
|--------|-------|

 

13

----

**PART II**

 

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

 

***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, markdowns, or commissions, and does not            necessarily represent actual transactions.

 

| **Fiscal Year Ended November 30, 2007** | High   |   | Low    |
|-----------------------------------------|--------|--------|--------|
|                                    |   |   |   |   |   |
| First Quarter                           | $      | 5.37   |   | $ | 4.08 |
| Second Quarter                          |   | 4.67   |   |   | 3.38 |
| Third Quarter                           |   | 3.95   |   |   | 2.90 |
| Fourth Quarter                          |   | 3.13   |   |   | .09 |
|                                    |   |   |   |   |   |
| **Fiscal Year Ended November 30, 2006** |   |   |   |   |   |
|                                    |   |   |   |   |   |
| First Quarter                           | $      | 10.48  |   | $ | 8.19 |
| Second Quarter                          |   | 9.95   |   |   | 5.03 |
| Third Quarter                           |   | 5.33   |   |   | 2.90 |
| Fourth Quarter                          |   | 5.29   |   |   | 3.83 |

 

***Approximate Number of Holders of Common Stock***

 

As of            March 10, 2008, the Company’s common stock was held of record by 260 persons.            Based upon requests from record holders for additional materials for our 2007 annual            meeting, we believe that there are at least 3,500 beneficial holders of our common            stock. On March 10, 2008, the closing price reported was $.13.

 

***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.

 

***Recent Sales of Unregistered Securities***

 

We did            not issue any unregistered securities during the fiscal fourth quarter of            2007.

 

***Repurchase of Securities***

 

We have            not repurchased any of our securities in the fiscal fourth quarter of 2007.

 

***Securities Authorized for Issuance Under Equity Compensation            Plans***

 

See            Item 12 of this report.

 

14

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***Item 6. Selected Financial Data.***

 

|                                         |   | **For the Years ended November 30,** |
|----------------------------------------------|--------|--------------------------------------|
|                                         |   | **2007**                             |   | **2006(1)** |   | **2005(1)** |   | **2004(1)** |   | **2003(1)** |
| **Results of Operations**                    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                      |   | $                                    | 5,246,789  |   | $ | 8,136,305  |   | $ | 21,957,689  |   | $ | 15,343,884  |   | $ | 12,650,406  |
| Cost of revenue                              |   |                                 | 2,740,880  |   |   | 4,764,436  |   |   | 7,333,249  |   |   | 8,618,542  |   |   | 6,534,116  |
| Gross profit                                 |   |                                 | 2,505,909  |   |   | 3,371,869  |   |   | 14,624,440  |   |   | 6,725,342  |   |   | 6,116,290  |
|                                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses |   |                                 | 7,798,511  |   |   | 12,397,618  |   |   | 7,585,837  |   |   | 7,265,605  |   |   | 6,856,266  |
| Research and development expenses            |   |                                 | 2,096,477  |   |   | 1,558,325  |   |   | 1,323,397  |   |   | 903,921  |   |   | 905,360  |
| Litigation settlement                        |   |                                 | -  |   |   | -  |   |   | -  |   |   | -  |   |   | 230,000  |
| (Loss) income from operations                |   |                                 | (7,389,079) |   |   | (10,584,074) |   |   | 5,715,206  |   |   | (1,444,184) |   |   | (1,875,336) |
|                                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                             |   |                                 | (28,333) |   |   | (19,314) |   |   | (27,294) |   |   | (33,874) |   |   | (25,595) |
| Interest income                              |   |                                 | 223,488  |   |   | 696,512  |   |   | 441,353  |   |   | 68,238  |   |   | 90,418  |
| Loss from operations of joint venture        |   |                                 | (4,547) |   |   | (77,365) |   |   | (847,830) |   |   | (502,027) |   |   | (362,499) |
| Other income                                 |   |                                 | 2,375,550  |   |   | 450,000  |   |   | 3,486  |   |   | 8,703  |   |   | -  |
| (Loss) income before income tax benefit      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (provision) and discontinued operations      |   |                                 | (4,822,921) |   |   | (9,534,241) |   |   | 5,284,921  |   |   | (1,903,144) |   |   | (2,173,012) |
| Gain on sale of state tax benefits           |   |                                 | -  |   |   | -  |   |   | 115,912  |   |   | 229,724  |   |   | -  |
| (Provision) benefit for income taxes         |   |                                 | (23,895) |   |   | 38,878  |   |   | (392,000) |   |   | (16,000) |   |   | (15,000) |
|                                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss) income before discontinued operations |   |                                 | (4,846,816) |   |   | (9,495,363) |   |   | 5,008,833  |   |   | (1,689,420) |   |   | (2,188,012) |
|                                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Discontinued Operations:                     |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss) income from operations           |   |                                 | (6,622,497) |   |   | (4,740,861) |   |   | (1,123,288) |   |   | (50,025) |   |   | 36,636  |
| Gain from sale                               |   |                                 | 216,952  |   |   | -  |   |   | -  |   |   | -  |   |   | -  |
|                                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income                            |   | $                                    | (11,252,361) |   | $ | (14,236,224) |   | $ | 3,885,545  |   | $ | (1,739,445) |   | $ | (2,151,376) |
|                                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive (loss) income            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain (loss) gain on securities    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| available for sale                           |   |                                 | (20,786) |   |   | 16,277  |   |   | (20,985) |   |   | (8,553) |   |   | (14,725) |
| Reclassification adjustment for loss (gain)  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| included in net income                       |   |                                 | 25,548  |   |   | -  |   |   | 6,584  |   |   | 8,914  |   |   | 44,830  |
|                                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive (loss) income                  |   | $                                    | (11,247,599) |   | $ | (14,219,947) |   | $ | 3,871,144  |   | $ | (1,739,084) |   | $ | (2,121,271) |
|                                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Per Share Data**                           |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income per share                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic – continuing operations          |   | $                                    | (.28) |   | $ | (.57) |   | $ | .30  |   | $ | (.12) |   | $ | (.15) |
| Basic – discontinued operations        |   |                                 | (.38) |   |   | (.28) |   |   | (.06) |   |   | (.00) |   |   | (.00) |
| Basic (loss) income per share                |   | $                                    | (.66) |   | $ | (.85) |   | $ | .24  |   | $ | (.12) |   | $ | (.15) |
| Diluted – continuing operations        |   | $                                    | (.28) |   | $ | (.57) |   | $ | .27  |   | $ | (.12) |   | $ | (.15) |
| Diluted – discontinued operations      |   |                                 | (.38) |   |   | (.28) |   |   | (.06) |   |   | (.00) |   |   | (.00) |
| Diluted (loss) income per share              |   | $                                    | (.66) |   | $ | (.85) |   | $ | .21  |   | $ | (.12) |   | $ | (.15) |
|                                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

15

----

 

| **Balance Sheet Data (at end of periods)** |
|--------------------------------------------|
|                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Working capital                            |   | $ | 2,205,655 |   | $ | 11,897,107 |   | $ | 23,918,273 |   | $ | 5,822,350 |   | $ | 6,154,367 |
|                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                               |   | $ | 11,321,560 |   | $ | 20,811,769 |   | $ | 30,673,366 |   | $ | 10,837,477 |   | $ | 12,918,311 |
|                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities                          |   | $ | 6,428,723 |   | $ | 5,796,898 |   | $ | 3,652,080 |   | $ | 2,946,807 |   | $ | 5,870,129 |
|                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                 |   | $ | 4,892,837 |   | $ | 15,014,871 |   | $ | 27,021,286 |   | $ | 7,890,670 |   | $ | 7,048,182 |

 

**(1) Amounts have been restated as a result of discontinued            operations consisting of the Special Needs Plans in New Jersey and South Dakota and the            medical equipment business. Selected quarterly financial data shown below has also been            restated as a result of these discontinued operations.**

             

             

**Selected Quarterly Financial Data (Unaudited)**

 

 

|                             |   | **For the Quarters Ending 2007** |
|----------------------------------|--------|----------------------------------|
|                             |   | **February 28**                  |   | **May 31** |   | **August 31** |   | **November 30** |   | **Total** |
|                             |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net revenue                      |   | $                                | 1,728,676  |   | $ | 1,162,143  |   | $ | 828,876  |   | $ | 1,527,094  |   | $ | 5,246,789  |
| Gross profit                     |   |                             | 997,577  |   |   | 435,366  |   |   | 123,516  |   |   | 949,450  |   |   | 2,505,909  |
| Income (loss) from continuing    |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                       |   |                             | 390,019  |   |   | (1,726,541) |   |   | (2,470,745) |   |   | (1,039,549) |   |   | (4,846,816) |
| (Loss) income from discontinued  |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                       |   |                             | (1,447,795) |   |   | (1,082,656) |   |   | (6,730,654) |   |   | 2,855,560  |   |   | (6,405,545) |
| Net (loss) income                |   |                             | (1,057,776) |   |   | (2,809,197) |   |   | (9,201,399) |   |   | 1,816,011  |   |   | (11,252,361) |
| Basic and diluted income (loss)  |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| per share continuing operations  |   | $                                | 0.02  |   | $ | (0.10) |   | $ | (0.14) |   | $ | (0.06) |   | $ | (0.28) |
| Basic and diluted loss per share |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| discontinued operations          |   |                             | (0.08) |   |   | (0.07) |   |   | (0.40) |   |   | 0.17  |   |   | (0.38) |
| Basic and diluted loss per share |   | $                                | (0.06) |   | $ | (0.17) |   | $ | (0.54) |   | $ | 0.11  |   | $ | (0.66) |
|                             |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

 

|                              |   | **For the Quarters Ending 2006** |
|-----------------------------------|--------|----------------------------------|
|                              |   | **February 28**                  |   | **May 31** |   | **August 31** |   | **November 30** |   | **Total** |
|                              |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net revenue                       |   | $                                | 3,012,562  |   | $ | 1,569,904  |   | $ | 1,735,896  |   | $ | 1,817,943  |   | $ | 8,136,305  |
| Gross profit                      |   |                             | 1,260,104  |   |   | 203,731  |   |   | 781,674  |   |   | 1,126,360  |   |   | 3,371,869  |
| Loss from continuing operations   |   |                             | (1,451,030) |   |   | (2,279,110) |   |   | (2,159,267) |   |   | (3,605,956) |   |   | (9,495,363) |
| Loss from discontinued            |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                        |   |                             | (918,166) |   |   | (896,239) |   |   | (1,158,134) |   |   | (1,705,322) |   |   | (4,740,861) |
| Net loss                          |   |                             | (2,432,196) |   |   | (3,175,349) |   |   | (3,317,401) |   |   | (5,311,278) |   |   | (14,236,224) |
| Basic loss per share continuing   |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                        |   | $                                | (0.08) |   | $ | (0.14) |   | $ | (0.13) |   | $ | (0.22) |   | $ | (0.57) |
| Basic loss per share discontinued |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                        |   |                             | (0.06) |   |   | (0.05) |   |   | (0.07) |   |   | (0.10) |   |   | (0.28) |
| Basic loss per share              |   | $                                | (0.14) |   | $ | (0.19) |   | $ | (0.20) |   | $ | (0.32) |   | $ | (0.85) |
|                              |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |

16

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*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:

 

|   | **•** | our ability to raise additional capital or obtain other                            sources of financing necessary to sustain operations; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to meet the continued listing qualifications                            of Nasdaq; |
|--------|------------|------------------------------------------------------------------------------------------------|

|   | **•** | our ability to renew and/or maintain contracts with our                            customers under existing terms or restructure these contracts on terms                            that would not have a material negative impact on our results of                            operations; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to execute new contracts for health plan                            disease management services; |
|--------|------------|--------------------------------------------------------------------------------------------------------------|

|   | **•** | the risks associated with a significant concentration of                            our revenues with a limited number of health plan customers; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | 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; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to effect estimated cost savings and                            clinical outcome improvements under health plan disease management                            contracts and reach mutual agreement with customers with respect to                            cost savings, or to effect such savings and improvements within the                            timeframes contemplated by us; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the ability of our health plan customers to provide                            timely, complete and accurate data that is essential to the operation                            and measurement of our performance under the terms of our health plan                            contracts, and our accurate analysis of such data; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to resolve favorably contract billing and                            interpretation issues with our health plan customers; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to effectively integrate new technologies                            into our care management information technology platform; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to obtain adequate financing to provide the                            capital that may be needed to support the growth of our current and                            future operations and financing or insurance to support our performance                            in these operations; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | unusual and unforeseen patterns of healthcare                            utilization by individuals within the health plans with chronic                            conditions, including coronary artery disease (“CAD”),                            stroke, heart failure (“HF”), hypertension, hyperlipidemia                            and the cardiovascular complications of diabetes with which we have                            executed disease management contracts; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the impact of the introduction of new                            technologies; |
|--------|------------|--------------------------------------------------------------------------------|

|   | **•** | the ability of the health plans to maintain the number                            of covered lives enrolled in the plans during the terms of the                            agreements between the health plans and us; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to attract and/or retain and effectively                            manage the employees required to implement our agreements with health                            plan organizations; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the impact of future state and federal healthcare                            legislation and regulations on our business; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the financial health of our customers and their                            willingness to purchase our services; |
|--------|------------|------------------------------------------------------------------------------------------------------------------|

|   | **•** | the impact of litigation or arbitration; |
|--------|------------|------------------------------------------|

|   | **•** | our ability to accurately estimate our performance and                            revenue recognition under the terms of our contracts; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to develop new products and deliver outcomes                            on those products; |
|--------|------------|--------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to implement our strategy within expected                            cost estimates; |
|--------|------------|--------------------------------------------------------------------------------------------------|

|   | **•** | general economic conditions |
|--------|------------|-----------------------------|

 

17

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**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,            2007. 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.

 

**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 have typically provided that a portion of our fees may be            “performance-based”. As of November 30, 2007, the Company did not have any            fee risk based contracts. Performance-based contracts have varying degrees of risk            associated with our ability to deliver the guaranteed financial cost savings or certain            clinical measures. In some 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

 

18

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entitled “contract billings in excess of revenues.” Under            performance based arrangements, the ability to make estimates at interim periods can be            challenging due to the inherent nature of the medical claims process and the lag time            associated with it. In most cases, complete paid claims data is not available until up            to six months after claims are incurred. Although interim data measurements are            indicative of performance objectives, actual results could differ from our            estimates.

 

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

 

During            the fiscal year ended November 30, 2007, approximately 95% of disease management            services were derived from five health plans that each comprised more than 10% of the            Company’s revenues. During the fiscal year ended November 30, 2006, approximately            63% of disease management services were derived from two health plans that each            comprised more than 10% of the Company’s revenues. 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.            The Company continues to anticipate a concentration of revenues from a limited number            of customers in fiscal year 2008.

 

During fiscal 2008, the Company            anticipates one contract to comprise approximately 40% of total revenues. This contract            has an expiration date of June 3, 2008 and the Company is currently negotiating a            contract renewal however no assurance can be given that such negotiations will be            successful.

 

In a            letter dated October 4, 2006, the Company was notified by HealthSuite Partners, a joint            venture with Alere Medical, Airlogix and the Company, that the HealthSuite Partners            contract with HealthPartners, a Minnesota managed care organization, would not be            extended beyond April 5, 2007. This notice of nonrenewal resulted in a reduction in            revenue of approximately $2.3 million in 2007.

 

**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 undiscounted cash flows expected to            result from that asset, including eventual disposition. During the year ended November            30, 2006, the company recorded an impairment charge of approximately            $32,000.

 

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.

 

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**Share Based Compensation**

 

On December 1, 2005, we adopted SFAS            No. 123(R), “Share-Based Payment,” which requires the Company to            measure and recognize compensation expense for all share-based payment awards based on            estimated fair values at the date of grant. Determining the fair value of share-based            awards at the grant date requires judgment in developing assumptions, which involve a            number of variables. These variables include, but are not limited to, the expected            stock price volatility over the term of the awards, and expected stock option            exercise behavior. In addition, it requires judgment in estimating the number of            share-based awards that are expected to be forfeited. The Company contracts with a            third party to assist in developing the assumptions used in estimating the fair values            of stock options.

 

**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.

 

|                                                    |             |            | Period-to-Period |
|---------------------------------------------------------|------------------|-----------------|------------------|
|                                                    |             |            | % Changes        |
|                                                    | % For Year Ended |            | 2007             | 2006 |
|                                                    | November 30,     |            | vs.              | vs. |
|                                                    | 2007             | 2006            | 2005             |   | 2006 | 2005 |
| Revenue                                                 | 100.0%           | 100.0%          | 100.0%           |   | (35.5)% | (62.9)% |
| Cost of revenue                                         | 52.2             | 58.6            | 33.4             |   | (42.5) | (35.0) |
| Gross Profit                                            | 47.8             | 41.4            | 66.6             |   | (25.7) | (76.9) |
| Selling, general and administrative                     | 148.6            | 152.4           | 34.5             |   | (37.1) | 63.4 |
| Research and development                                | 40.0             | 19.2            | 6.0              |   | 34.5 | 17.8 |
| (Loss) income from operations                           | (140.8)          | (130.1)         | 26.0             |   | * | * |
| Interest expense                                        | (0.5)            | (0.2)           | (0.1)            |   | 46.7 | (29.2) |
| Interest income, net                                    | 4.3              | 8.6             | 2.0              |   | (67.9) | 57.8 |
| Loss on operations of joint venture                     | (0.1)            | (1.0)           | (3.9)            |   | * | * |
| Other income                                            | 45.3             | 5.5             | -                |   | 427.9 | * |
| (Loss) income before tax (provision)  benefit |  

(91.9)   |  

(117.2) |  

24.1     |   |  

* |  

* |
| Gain on sale of tax benefit                             | -                | -               | 0.5              |   | * | * |
| Income tax (provision) benefit                          | (0.5)            | 0.5             | (1.8)            |   | (161.5) | (109.9) |
| (Loss) income before discontinued  operations | (92.4)           | (116.7)         | 22.8             |   | * | * |
| Loss from discontinued operations                       | (126.2)          | (58.3)          | (5.1)            |   | 39.7 | 322.1 |
| Gain from sale of discontinued  operations    |  

4.1      |  

-       |  

-        |   |  

* |  

* |
| Net (loss) income                                       | (214.5)          | (175.0)         | 17.7             |   | (21.0) | (466.4) |

 

* Not            meaningful

 

**Fiscal 2007 Compared to Fiscal 2006**

             

Revenue for fiscal year 2007 decreased approximately $2.9 million or            35.5% as compared to fiscal year 2006. This decrease is attributable to (i) a decrease            of approximately $5.2 million in revenue related to the expiration of five contracts;            (ii) a decrease of approximately $49,000 of revenue related to a reduction in health            plan membership associated with an existing contract; and (iii) a decrease of            approximately $182,000 related to a reconciliation of performance measurements under            contracts in fiscal 2006. These decreases were offset by (i) an increase in revenue of            approximately $1,368,000 related to increasing enrollment in two existing contracts and            the commencement of a new contract during the first quarter of fiscal 2007; (ii) the            recognition of approximately $550,000 of revenue related to the reconciliation of            performance measurements under a contract in fiscal 2007; and (iii) the reduction of            approximately $635,000 in deferred revenue under two contracts in fiscal            2006.

 

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Gross profit margins for fiscal year 2007 increased to 47.8% from 41.4%            for fiscal year 2006. This increase is related to (i) a decrease of approximately            $1,994,000 of labor costs associated with the reduction in workforce and operating            costs related to the non renewal of contracts; (ii) a decrease of approximately            $411,000 related to the outsourcing of certain call center services for our disease            management programs; and (iii) the decrease of approximately $161,000 in compensation            costs associated with the adoption of SFAS No. 123(R) “Share Based            Payments”.

 

Selling, general and administrative expenses for fiscal year 2007            decreased by approximately $4.6 million over fiscal year 2006. The decrease was            attributable to (i) a decrease of approximately $1,015,000 in salaries related to a            reduction in headcount; (ii) a decrease of approximately $943,000 related to the            accrual for employment agreement obligations for our former CEO in fiscal 2006; (iii) a            decrease of approximately $240,000 in travel and entertainment expenses related to            development and/or launch activities associated with Positive Directions, Inc. that            occurred in fiscal 2006; (iv) a decrease of approximately $1,015,000 in compensation            costs associated with the adoption of SFAS No. 123(R) “Share Based            Payments” due to forfeitures related to headcount reductions; (v) a decrease of            approximately $263,000 in marketing and advertising expenses primarily related to the            strategic decision to reduce marketing efforts; (vi) a decrease of approximately            $1,216,000 of legal fees related to general corporate and litigation matters; and (vii)            a decrease of approximately $121,000 in consulting services. These decreases were            offset by an increase in depreciation and amortization of approximately $304,000            primarily related to the amortization of completed product software development            projects.

 

Research and development expenses for fiscal year 2007 increased            approximately $538,000 or 34.5% over fiscal year 2006. Our accounting policy is to            capitalize certain software development costs during development and amortize them upon            implementation. Subsequent to implementation any further costs (i.e. maintenance costs)            are expensed as incurred. The increase in expenses is primarily attributable to (i) an            increase of approximately $229,000 in salaries and related costs associated with new            hires; and (ii) an increase of approximately $392,000 in consulting costs            approximately. The increase in expenses was offset by (i) a decrease of approximately            $30,000 in compensation costs associated with the adoption of SFAS No. 123(R)            “Share Based Payments”; and (ii) a reduction of approximately $51,000 in            travel and entertainment expenses. During fiscal year 2007, there was a decrease of            approximately $852,000 in capitalization of costs, which include salaries and            consultant fees, incurred for development as compared to fiscal year 2006. Certain            costs associated with the development of new product software to be incorporated into            our disease management programs are capitalized and amortized over a two to five year            useful life.

 

Interest income for fiscal year 2007 was approximately $223,000 as            compared to $697,000 for fiscal year 2006. This decrease is attributable to the            reduction of funds available for investment.

 

Other income for fiscal year 2007 increased approximately $1.9 million            as compared to fiscal year 2006. The increase represents the proceeds from the            settlement agreement with Alere of $1,975,000 and Healthcare First of $400,000 during            2007 offset by the sale of a patent for $450,000 to a third party in May            2006.

 

Our            effective tax rate for fiscal year 2007 is (.21)%. 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.

 

Loss            from discontinued operations includes the results of operations associated with SNP in            South Dakota as a result of the termination of the Lakeshore Captive Insurance Company            reinsurance agreements in November 2007, the results of operations of QMedCare of New            Jersey, Inc. as the SNP was terminated and the medical

 

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equipment business as the assets of the business were sold in October            2007. The loss from discontinued operations for fiscal year 2007 increased $1.9 million            as compared to fiscal year 2006. The increase is primarily attributable to the increase            in the loss of approximately $2.6 million associated with the commencement of            operations of QMedCare of New Jersey, Inc. in January 2007 offset by a decrease of            approximately $0.9 million in the loss related to the SNP in South Dakota due to the            settlement agreement with DAKOTACARE in March 2008.

 

The            gain on sale of discontinued operations of approximately $217,000 represents the            proceeds from the sale of the medical device equipment business in October            2007.

 

**Fiscal 2006 Compared to Fiscal 2005**

             

Revenue for fiscal year 2006 decreased approximately $13.8 million or            62.9% as compared to fiscal year 2005. This decrease is attributable to (i) a decrease            of approximately $11.9 million in revenue related to the expiration of four contracts;            (ii) a decrease of approximately $768,000 of revenue related to a reduction in health            plan membership and/or fees associated with existing contracts; (iii) a decrease of            approximately $1.0 million related to the deferred revenue that was recognized under            two contracts in fiscal 2005; and (iv) a decrease of approximately $500,000 in revenue            recognized related to the settlement with Regence in the third quarter of fiscal 2005.            These decreases were offset by (i) an increase in revenue of approximately $196,000            related to increasing enrollment in three existing contracts and the commencement of a            new contract during the first quarter of fiscal 2006; (ii) the recognition of            approximately $201,000 of revenue related to the reconciliation of performance            measurements under contracts in fiscal 2006.

 

Gross profit margins for fiscal year 2006 decreased to 41.4% from 66.6%            for fiscal year 2005. This decrease is related to (i) a decrease in revenue of            approximately $11.9 million attributable to the expiration of four contracts; (ii)            approximately $190,000 related to the outsourcing of certain call center services for            our disease management programs; (iii) the increase of approximately $153,000 in            compensation costs associated with the adoption of SFAS No. 123(R) “Share Based            Payments”. The decrease in gross profit margins was offset by a decrease of            approximately $2,898,000 of labor costs associated with the reduction in workforce and            operating costs related to the non-renewal of contracts.

 

Selling, general and administrative expenses for fiscal year 2006            increased by approximately $4.8 million over fiscal year 2005. The increase was            attributable to (i) an increase of approximately $370,000 in salaries related to new            executives and additional new hires for the operations of Positive Directions, Inc.            (formerly Health e Monitoring, Inc.); (ii) an increase of approximately $943,000            related to the accrual for employment agreement obligations for our former CEO; (iii)            an increase of approximately $1,668,000 in compensation costs associated with the            adoption of SFAS No. 123(R) “Share Based Payments”; (iv) an increase of            approximately $203,000 in marketing and advertising expenses primarily related to            Positive Directions, Inc.; (v) an increase of approximately $1,361,000 of legal fees            related to general corporate and litigation matters; (vi) an increase in depreciation            and amortization of approximately $274,000 attributable to the intangibles associated            with the acquisition of Positive Directions, Inc. in the second quarter of fiscal year            2005 and Disease Management Technologies, Inc. in the fourth quarter of 2005; and (vii)            an increase of approximately $69,000 in recruitment costs related to new hires. These            increases were offset by a decrease of approximately $163,000 of consulting services            rendered. Included within selling, general and administrative expenses for fiscal year            2006 (which incorporates the expenses noted above) was approximately $1,800,000 related            to implementation costs of Positive Directions, Inc.

 

Research and development expenses for fiscal year 2006 increased            approximately $235,000 or 17.8% over fiscal year 2005. Our accounting policy is to            capitalize certain software development costs during development and amortize them upon            implementation. Subsequent to implementation any further costs (i.e. maintenance costs)            are expensed as incurred. The increase in expenses is primarily attributable to (i) an            increase of approximately $232,000 in salaries and related costs associated with new            hires; and (ii) approximately $78,000 in compensation costs associated with the            adoption of SFAS No. 123(R) “Share Based Payments.” The increase in            expenses was offset by (i) a decrease of approximately $85,000 in consulting costs.            During fiscal year 2006, there was an increase of approximately $753,000 in            capitalization of costs, which include salaries and consultant fees, incurred for            development as compared to fiscal year 2005. We continue to focus our efforts on the            development of new,

 

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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 and SNP programs are            capitalized and amortized over a two to five year useful life.

 

Interest income for fiscal year 2006 was approximately $697,000 as            compared to $441,000 for fiscal year 2005. This increase is attributable to the            investment of the funds that were generated by the private placements in the first six            months of fiscal year 2005 along with the cash generated from operations in fiscal            2005.

 

Loss on            operations of joint ventures for fiscal year 2006 decreased approximately $770,000 as            compared to fiscal year 2005. The decrease is primarily attributable to reduction in            costs incurred associated with the settlement with The Regence Group and Centre            Insurance in fiscal 2005 and the dissolution of the respective joint venture in            December 2005. The decrease in costs was offset by costs related to a joint venture            entered into with two partners to provide services under a disease management contract            in Minnesota.

 

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

 

Our            effective tax rate for fiscal year 2006 was .27%. 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 adoption of SFAS No. 123(R)            “Share Based Payments”.

 

Loss            from discontinued operations includes the results of operations associated with SNP in            South Dakota as a result of the termination of the Lakeshore Captive Insurance Company            reinsurance agreements in November 2007, the results of operations of QMedCare of New            Jersey, Inc. as the SNP was terminated and the medical equipment business as the            assets of the business were sold in October 2007. The loss from discontinued operations            for fiscal year 2006 increased $3.6 million as compared to fiscal year 2005. The            increase is primarily attributable to the increase in the loss of approximately $1.3            million associated with the start up costs of QMedCare of New Jersey, Inc. in 2006 and            an increase of approximately $2.3 million in the loss related to the commencement of            operations of the SNP in South Dakota in January 2006.

 

**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 $48,100,000 less applicable expenses.

 

We            had working capital of approximately $2.2 million at November 30, 2007 as compared to            approximately $11.9 million of working capital at November 30, 2006 and ratios of            current assets to current liabilities of 1.3:1 as of November 30, 2007 and 3.3:1 as of            November 30, 2006. The working capital decrease of approximately $9.7 million was            primarily due to the net loss of approximately $11.2 million resulting in cash used in            operations of approximately $12.7 million.

 

The            accompanying financial statements have been prepared assuming that the Company            continues as a going concern that contemplates the realization of assets and            satisfaction of liabilities in the normal course of business. However, the ability of            the Company to continue as a going concern will be dependent upon its ability to raise            additional capital or obtain other sources of financing in the immediate future            necessary to meet its obligations and continue operations.

 

During the year ended November 30, 2007, the Company incurred net losses            totaling $11,252,361 and utilized  cash in operating activities of            $12,745,008. These factors raise substantial doubt as to the Company’s ability to            continue as a going concern. The Company needs to raise additional funds in the            immediate future in order to continue its operations. Whereas the Company has been            successful in the past in raising capital, no assurance

 

----

can            be given that these sources of financing will continue to be available to the Company            and/or that demand for the Company’s equity/debt instruments will be sufficient            to meet its capital needs. If the Company is unable to raise additional capital or            obtain other sources of financing to meet its working capital requirements, it will            have to cease business altogether. The financial statements do not include any            adjustments relating to the recoverability and classification of liabilities that might            be necessary should the Company be unable to continue as a going concern.

 

To            the extent that the Company raises additional capital through the sale of equity or            convertible debt securities, the issuance of such securities may result in dilution to            existing stockholders. If additional funds are raised through the issuance of debt            securities, these securities may have rights, preferences and privileges senior to            holders of common stock and the terms of such debt could impose restrictions on the            Company's operations.

 

On March 20, 2008, the Company            entered into an agreement with investors to receive up to $750,000 in working capital.            The financing is structured to provide $375,000 to the Company at closing, with an            additional $375,000 deposited in an escrow account, which could be released upon            achieving certain milestones. See Note 18 - Subsequent Events.

 

**Material Commitments**

 

The            following schedule summarizes our contractual cost obligations as of November 30, 2007            in the periods indicated.

 

|                                                                                                   |   | Payments Due by Period |
|--------------------------------------------------------------------------------------------------------|--------|------------------------|
| Contractual Obligations                                                                                |   | Total                  |   | Less than 1 year |   | 1-3 years |   | 4-5 years |   | After 5 years |
| Long-Term Debt                                                                                         |   | $                      | - |   | $ | - |   | $ | - |   | $ | - |   | $ | - |
| Capital Lease Obligations                                                                              |   |                   | 95,000 |   |   | 44,000 |   |   | 51,000 |   |   | - |   |   | - |
| Operating Leases                                                                                       |   |                   | 2,629,000 |   |   | 588,000 |   |   | 1,583,000 |   |   | 458,000 |   |   | - |
| Unconditional Purchase  Obligations                                                          |   |                   | - |   |   | - |   |   | - |   |   | - |   |   | - |
| Other Long-Term                              Obligations –  Employment Agreements |   |                   | 1,160,000 |   |   | 850,000 |   |   | 310,000 |   |   | - |   |   | - |
| Total Contractual Cash  Obligations                                                          |   | $                      | 3,884,000 |   | $ | 1,482,000 |   | $ | 1,944,000 |   | $ | 458,000 |   | $ | - |

 

**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.

 

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**We            have experienced significant losses and expect to incur losses in the future. As a            result, the amount of cash, cash equivalents, and investments in marketable securities            has materially declined. If we are unable to access sufficient working capital, we will            be unable to fund future operations and operate as a going concern.**

 

The            Company has two consecutive years of operating losses, has utilized most of its            available cash to support its SNP activities and anticipates that the losses will            continue for the foreseeable future. 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 our ability to raise additional funds            in the immediate future in order to continue our operations. Whereas the Company has            been successful in the past in raising capital, no assurance can be given that these            sources of financing will continue to be available to the Company and/or that demand            for the Company’s equity/debt instruments will be sufficient to meet our capital            needs. If we are unable to raise additional capital or obtain other sources of            financing to meet our working capital requirements, we will cease business altogether.            The financial statements do not include any adjustments relating to the recoverability            and classification of liabilities that might be necessary should the Company be unable            to continue as a going concern.

 

**We currently do not meet the continued listing requirements of the            Nasdaq Capital Market. Our ability to publicly or privately sell equity securities and            the liquidity of our common stock could be adversely affected if we are delisted from            the Nasdaq Capital Market.**

 

On            December 18, 2007, we received a Nasdaq Staff Deficiency Letter from Nasdaq, on which            our common stock is listed (“Nasdaq”), indicating that for the last 30            business days, the bid price of our common stock has closed below the minimum $1.00 per            share requirement of Nasdaq for continued listing set forth in Marketplace Rule            4350(c)(4). In accordance with Nasdaq’s marketplace rules, we have until June 16,            2008 to regain compliance.

 

If            we have not regained compliance by the end of the cure period, Nasdaq rules require its            staff to determine whether we meet the Nasdaq Capital Market initial listing criteria            as set forth in Marketplace Rule 4350(c), except for the bid price requirement. If at            that time we meet the initial listing criteria, the Nasdaq staff will notify us that we            will be granted an additional 180 calendar day compliance period. However, if we are            not eligible for an additional compliance period, the Nasdaq staff will provide written            notification to us that our common stock will be delisted. At that time, we may appeal            the delisting determination to a Listing Qualifications Panel, but no assurance can be            given that any such appeal would be successful.

 

Additionally, we received a second letter from Nasdaq indicating that we            do not meet the majority independent director and audit committee composition            requirements as set forth in Marketplace Rules 435(c)(1) and 435(d)(4), respectively.            Consistent with Marketplace Rules 435(c)(1) and 435(d)(4), Nasdaq has provided us with            a cure period in order to regain compliance as follows: (1) until the earlier of the            Company’s next annual shareholders’ meeting or November 12, 2008; or (2) if            the next annual shareholders’ meeting is held before May 12, 2008, then we must            evidence compliance no later then May 12, 2008. In the event we do not regain            compliance by the required date, Nasdaq rules require Staff to provide written            notification to us that our common stock will be delisted.

 

Alternatively, if our common stock is delisted by Nasdaq, our common            stock may be eligible to trade on another quotation system, or on the pink sheets where            an investor may find it more difficult to dispose of or obtain accurate quotations as            to the market value of our common stock, although there can be no assurance that our            common stock will be eligible for trading on any alternative exchanges or            markets.

 

Delisting from Nasdaq could adversely affect our ability to raise            additional financing through the public or private sale of equity            securities.

 

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**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 depend upon a            number of factors including, but not limited to, the timing of contracts signed,            enrollment of plan members and progress of 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 operating            results.

 

**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 suffer            competitive injury.**

 

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

 

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

 

**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

 

26

----

 

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            operations.

 

**The            disease management industry experiences a lengthy sales cycle for new            contracts.**

 

The            disease management industry 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. As a result, health plan            purchasers of these services have had a challenging experience purchasing, evaluating,            or monitoring such services; this generally results in a lengthy sales cycle for new            health plan contracts. 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. We believe that our state-of-the-art technology provides us with a            competitive advantage in the industry, however these system requirements expose us            to technology obsolescence risks. Accordingly, we amortize our computer software and            hardware over three to five years.

 

**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 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.

 

27

----

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**

 

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.

 

**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.

 

**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.

 

**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;                                                                                                                                                                    

 

|   | **•** | Failure of our processes to prevent and detect unethical                            conduct of employees; |
|--------|------------|-----------------------------------------------------------------------------------------------------------|

|   | **•** | A significant failure of internal controls over                            financial reporting; |
|--------|------------|-------------------------------------------------------------------------------------------------|

|   | **•** | Failure of our prevention and control systems related to                            employee compliance with internal                            policies;                                                                                                                                                                                                                                                                                                    |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Provider fraud that is not prevented or detected and                            impacts our medical costs or those of self-insured customers;                            and                                                                                                                                                                                                                                          |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Failure of Corporate Governance policies and                            procedures. |
|--------|------------|-------------------------------------------------------------------------------------|

 

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

 

28

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*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, 2007, the Company had no outstanding long-term debt. Although the            Company's assets included approximately $1.2 million in cash and cash equivalents and            approximately $3.0 million in cash and cash equivalents in statutory reserves included            within the assets of discontinued operations, 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, 2007. This annual            report does not include an attestation report of the company's registered public            accounting firm regarding internal control over financial reporting. Management's            report was not subject to attestation by the company's registered public accounting            firm pursuant to rules of the Securities and Exchange Commission that permit the            company to provide only management's report in this annual report.

 

**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.

 

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.

 

30

----

 

|   | QMED, INC. AND SUBSIDIARIES |
|--------|-----------------------------|

 

|   | For the Years Ended |
|--------|---------------------|

|   | November 30, 2007 and 2006 |
|--------|----------------------------|

 

 

 

|   | 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                            (Loss) | 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 |
|--------------------------------------------|------------|

 

31

----

 

**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, 2007 and 2006, and the related consolidated statements            of operations, comprehensive income (loss), stockholders’ equity, and cash flows            for each of the three years ended November 30, 2007, 2006, and 2005. 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. The Company is not required to have, nor were we            engaged to perform, an audit of its internal control over financial reporting. Our            audit included consideration of internal control over financial reporting as a basis            for designing audit procedures that are appropriate in the circumstances, but not for            the purpose of expressing an opinion on the effectiveness of the Company's internal            control over financial reporting. Accordingly we express no such opinion. 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, 2007 and 2006, and the results of their operations and their cash flows            for each of the three years ended November 30, 2007, 2006, and 2005, in conformity with            accounting principles generally accepted in the United States of America.

 

As            discussed in Note 1 to the consolidated financial statements, the accompanying            consolidated balance sheet as of November 30, 2006 and the related statements of            operations and cash flows for the years ended November 30, 2006 and 2005 have been            restated to give effect to the Company’s equipment and Special Needs business as            discontinued operations.

 

The            accompanying financial statements have been prepared assuming that the Company will            continue as a going concern. As discussed in Note 1, the Company has incurred losses            from operations, discontinued its special needs business and has limited cash available            for operations that raise substantial doubt about its ability to continue as a going            concern.  Management’s plans in regard to these matters are also described            in Note 1.  The financial statements do not include any adjustments that might            result from the outcome of this uncertainty.

 

In            2006, the Company adopted the provision of Statement of Financial Accounting Standards            No. 123 (revised), "Share-Based Payment".

 

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.

 

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

 

Edison, New Jersey

March 25, 2008

 

F-1

----

 

| QMED, INC.                            AND SUBSIDIARIES                        |
|-------------------------------------------------------------------------------|
| Consolidated Balance Sheets                                                   |
| November 30,                                                                  |
|                                                                          |   |   |   |   |   |   |
|                                                                          |   |   |   |   |   |   |
| Assets                                                                        |
|                                                                          |   |   |   |   | Restated |
|                                                                          |   | 2007 |   | 2006 |
| Current assets                                                                |   |   |   |   |   |   |
| Cash and cash equivalents                                                     |   | $ | 1,196,030  |   | $ | 2,313,261  |
| Investments in securities                                                     |   |   | -  |   |   | 8,547,525  |
| Accounts receivable, net of allowance for                                     |   |   |   |   |   |   |
| doubtful accounts of $58,980 and $53,558,                                     |   |   |   |   |   |   |
| respectively                                                                  |   |   | 535,810  |   |   | 1,803,804  |
| Prepaid professional fees                                                     |   |   | 228,000  |   |   | 10,000  |
| Prepaid expenses and other current assets                                     |   |   | 189,654  |   |   | 231,322  |
| Assets related to discontinued operations                                     |   |   | 6,126,492  |   |   | 4,156,805  |
|                                                                          |   |   | 8,275,986  |   |   | 17,062,717  |
| Property and equipment, net                                                   |   |   | 717,229 |   |   | 939,988 |
| Product software development costs, net                                       |   |   | 1,769,931 |   |   | 2,052,132 |
| Acquired intangibles, net                                                     |   |   | 421,224 |   |   | 587,027 |
| Other assets                                                                  |   |   | 137,190  |   |   | 146,202  |
| Investment in joint ventures                                                  |   |   | -  |   |   | 23,703  |
|                                                                          |   | $ | 11,321,560  |   | $ | 20,811,769  |
|                                                                          |   |   |   |   |   |   |
|                                                                          |   |   |   |   |   |   |
| Liabilities and Stockholders' Equity                                          |
|                                                                          |   |   |   |   |   |   |
| Current liabilities                                                           |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                                      |   | $ | 1,607,840  |   | $ | 2,053,533  |
| Leases payable, current portion                                               |   |   | 41,116  |   |   | 65,881  |
| Accrued salaries and commissions                                              |   |   | 245,888  |   |   | 388,002  |
| Fees reimbursable to health plans                                             |   |   | 12,900  |   |   | 47,005  |
| Contract billings in excess of revenues                                       |   |   | 197,380  |   |   | 1,396,423  |
| Income taxes payable                                                          |   |   | 12,786  |   |   | -  |
| Liabilities related to discontinued                            operations     |   |   | 3,952,421  |   |   | 1,214,766  |
|                                                                          |   |   | 6,070,331  |   |   | 5,165,610  |
| Leases payable, long term                                                     |   |   | 49,134  |   |   | 11,645  |
| Accrued severance payable, long term                                          |   |   | 309,258  |   |   | 619,643  |
|                                                                          |   |   | 6,428,723  |   |   | 5,796,898  |
| Commitments and contingencies                                                 |   |   |   |   |   |   |
| Stockholders' equity                                                          |   |   |   |   |   |   |
| Common stock, $.001 par value, 40,000,000                                     |   |   |   |   |   |   |
| shares authorized, 17,042,959 and 16,858,539                                  |   |   |   |   |   |   |
| shares issued 17,020,959 and 16,836,539                                       |   |   |   |   |   |   |
| outstanding, respectively                                                     |   |   | 17,043  |   |   | 16,859  |
| Paid-in capital                                                               |   |   | 54,558,476  |   |   | 53,433,095  |
| Accumulated deficit                                                           |   |   | (49,607,057) |   |   | (38,354,696) |
| Accumulated other comprehensive income                                        |   |   |   |   |   |   |
| Unrealized losses on securities available for                            sale |   |   | -  |   |   | (4,762) |
|                                                                          |   |   | 4,968,462  |   |   | 15,090,496  |
| Less treasury stock at cost, 22,000 common                            shares  |   |   | (75,625) |   |   | (75,625) |
| Total stockholders' equity                                                    |   |   | 4,892,837  |   |   | 15,014,871  |
|                                                                          |   | $ | 11,321,560  |   | $ | 20,811,769  |
|                                                                               |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-2

----

QMED,            INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For            the Years Ended November 30,

 

|                                                                                                                                                      | **2007**  |                    | **Restated****2006** |      | **Restated****2005** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|-------------------------|----------------------|-----------|----------------------|
| Revenue                                                                                                                                                   |  

$ |  

5,246,789  |                 |  

$ | 8,136,305       |   |  

$ | 21,957,689  |
| Cost of revenue                                                                                                                                           |      | 2,740,880          |                 |      | 4,764,436       |   |   | 7,333,249  |
| Gross profit                                                                                                                                              |      | 2,505,909          |                 |      | 3,371,869       |   |   | 14,624,440  |
|                                                                                                                                                      |      |                    |                 |      |                 |   |   |   |
| Selling, general and administrative expenses                                                                                                              |      | 7,798,511          |                 |      | 12,397,618      |   |   | 7,585,837  |
| Research and development expenses                                                                                                                         |      | 2,096,477          |                 |      | 1,558,325       |   |   | 1,323,397  |
| (Loss) income from continuing operations                                                                                                                  |      | (7,389,079)             |                 |      | (10,584,074)         |   |   | 5,715,206  |
|                                                                                                                                                      |      |                    |                 |      |                 |   |   |   |
| Interest expense                                                                                                                                          |      | (28,333)                |                 |      | (19,314)             |   |   | (27,294) |
| Interest income                                                                                                                                           |      | 223,488            |                 |      | 696,512              |   |   | 441,353  |
| Loss from operations of joint venture                                                                                                                |      | (4,547)                 |                 |      | (77,365)             |   |   | (847,830) |
| Other income                                                                                                                                              |      | 2,375,550          |                 |      | 450,000         |   |   | 3,486  |
|  

(Loss) income before income tax (provision) benefit                            and                              discontinued operations |      | (4,822,921)             |                 |      | (9,534,241)          |   |   |  

5,284,921  |
|                                                                                                                                                      |      |                    |                 |      |                 |   |   |   |
| Gain on sale of state tax benefits                                                                                                                        |      | -                  |                 |      | -               |   |   | 115,912  |
| (Provision) benefit for income taxes                                                                                                                      |      | (23,895)                |                 |      | 38,878          |   |   | (392,000) |
|                                                                                                                                                      |      |                    |                 |      |                 |   |   |   |
| (Loss) income from operations before discontinued                              operations                                                       |      | (4,846,816)             |                 |      | (9,495,363)          |   |   | 5,008,833  |
|                                                                                                                                                      |      |                    |                 |      |                 |   |   |   |
| Discontinued Operations:                                                                                                                                  |      |                    |                 |      |                 |   |   |   |
| Loss from operations                                                                                                                                      |      | (6,622,497)             |                 |      | (4,740,861)          |   |   | (1,123,288) |
| Gain from sale                                                                                                                                            |      | 216,952            |                 |      | -               |   |   | -  |
|                                                                                                                                                      |      |                    |                 |      |                 |   |   |   |
| Net (loss) income                                                                                                                                         | $         | (11,252,361)            |                 | $         | (14,236,224)         |   | $ | 3,885,545  |
|                                                                                                                                                      |      |                    |                 |      |                 |   |   |   |
| Basic (loss) income per share                                                                                                                             |      |                    |                 |      |                 |   |   |   |
| Weighted average shares outstanding                                                                                                                       |      | 16,968,431         |                 |      | 16,810,667      |   |   | 16,465,178  |
| Basic (loss) income per share – continuing                            operations                                                                    | $         | (.28)                   |                 | $         | (.57)                |   | $ | .30  |
| Basic (loss) income per share – discontinued                            operations                                                                  |      | (.38)                   |                 |      | (.28)                |   |   | (.06) |
| Basic (loss) income per share                                                                                                                             | $         | (.66)                   |                 | $         | (.85)                |   | $ | .24  |
|                                                                                                                                                      |      |                    |                 |      |                 |   |   |   |
| Diluted (loss) income per share                                                                                                                           |      |                    |                 |      |                 |   |   |   |
| Weighted average shares outstanding                                                                                                                       |      | 16,968,431         |                 |      | 16,810,667      |   |   | 18,457,101  |
| Diluted (loss) income per share – continuing                            operations                                                                  | $         | (.28)                   |                 | $         | (.57)                |   | $ | 0.27  |
| Diluted (loss) income per share – discontinued                            operations                                                                |      | (.38)                   |                 |      | (.28)                |   |   | (.06) |
| Diluted (loss) income per share                                                                                                                           | $         | (.66)                   |                 | $         | (.85)                |   | $ | .21  |
|                                                                                                                                                      |      |                    |                 |      |                 |   |   |   |

 

F-3

----

QMED,            INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

For the Years Ended November 30,

 

 

|                                                                                    | **2007** |         | **Restated                            2006** |   | **Restated                            2005** |
|-----------------------------------------------------------------------------------------|----------|--------------|----------------------------------------------|--------|----------------------------------------------|
|                                                                                    |     |         |                                         |   |                                         |   |   |   |
|                                                                                    |     |         |                                         |   |                                         |   |   |   |
| Net (loss) income                                                                       | $        | (11,252,361) |                                         | $      | (14,236,224)                                 |   | $ | 3,885,545  |
|                                                                                    |     |         |                                         |   |                                         |   |   |   |
| Other comprehensive income (loss)                                                       |     |         |                                         |   |                                         |   |   |   |
| Unrealized gain (loss) gain on securities available for                            sale |     | (20,786)     |                                         |   | 16,277                                  |   |   | (20,985) |
| Reclassification adjustment for realized losses                            included     |     |         |                                         |   |                                         |   |   |   |
|  in net (loss) income                                                              |     | 25,548  |                                         |   | -                                       |   |   | 6,584  |
|                                                                                    |     |         |                                         |   |                                         |   |   |   |
| Comprehensive (loss) income                                                             | $        | (11,247,599) |                                         | $      | (14,219,947)                                 |   | $ | 3,871,144  |
|                                                                                    |     |         |                                         |   |                                         |   |   |   |

 

F-4

----

 

| **QMED, INC. AND SUBSIDIARIES**                                                |
|--------------------------------------------------------------------------------|
| **Consolidated Statements of Stockholders'                            Equity** |
| **For the Years Ended November 30,**                                           |
|                                                                           |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |
|                                                                           |   |   |   |   |   |   |   |   |   | Other |   | Common Stock |   |   |
|                                                                           |   | Common Stock |   | Paid-in |   | Accumulated |   | Comprehensive |   | Held in Treasury |   |   |
|                                                                           |   | Shares |   | Amount |   | Capital |   | Deficit |   | Income (Loss) |   | Shares |   | Amount |   | Total |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balances - November 30, 2004, restated                                         |   | 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 gains on securities                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| available for sale                                                             |   | - |   | - |   | - |   | -  |   | (14,401) |   | - |   | -  |   | (14,401) |
| Balances - November 30, 2005, restated                                         |   | 16,804,846 |   | $        16,805 |   | $      51,219,617 |   | $   (24,118,472) |   | $          (21,039) |   | 22,000 |   | $  (75,625) |   | $  27,021,286  |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options and warrants                                         |   | 46,245 |   | 47 |   | 131,612 |   | -  |   | -  |   | - |   | -  |   | 131,659  |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of common stock in connection                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   with Directors Equity Plan                                         |   | 7,448 |   | 7 |   | 41,548 |   | -  |   | -  |   | - |   | -  |   | 41,555  |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock compensation expense - employees                                         |   | - |   | - |   | 2,040,318 |   | -  |   | -  |   | - |   | -  |   | 2,040,318  |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss                                                                       |   | - |   | - |   | - |   | (14,236,224) |   | -  |   | - |   | -  |   | (14,236,224) |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains on securities                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   available for sale                                                 |   | - |   | - |   | - |   | -  |   | 16,277  |   | - |   | -  |   | 16,277  |
| Balances - November 30, 2006, restated                                         |   | 16,858,539 |   | $        16,859 |   | $     53,433,095 |   | $   (38,354,696) |   | $          (4,762) |   | 22,000 |   | $  (75,625) |   | $  15,014,871  |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options and warrants                                         |   | 161,243 |   | 161 |   | 420,758 |   | -  |   | -  |   | - |   | -  |   | 420,919  |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of common stock in connection                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   with Directors Equity Plan                                         |   | 23,177 |   | 23 |   | 86,100 |   | -  |   | -  |   | - |   | -  |   | 86,123  |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock compensation expense - employees                                         |   | - |   | - |   | 618,523 |   | -  |   | -  |   | - |   | -  |   | 618,523  |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss                                                                       |   | - |   | - |   | - |   | (11,252,361) |   | -  |   | - |   | -  |   | (11,252,361) |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains on securities                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   available for sale                                                 |   | - |   | - |   | - |   | -  |   | 4,762  |   | - |   | -  |   | 4,762  |
| Balances - November 30, 2007                                                   |   | 17,042,959 |   | $        17,043 |   | $     54,558,476 |   | $     (49,607,057) |   | $                  -  |   | 22,000 |   | $  (75,625) |   | $    4,892,837  |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

F-5

----

QMED,            INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For            the Years Ended November 30,

|                                                                             |  

**2007** |             | **Restated                            2006** |   | **Restated                            2005** |
|----------------------------------------------------------------------------------|------------------|------------------|----------------------------------------------|--------|----------------------------------------------|
|                                                                             |             |             |                                         |   |                                         |   |   |   |
| Cash flows from operating activities                                             |             |             |                                         |   |                                         |   |   |   |
| Net (loss) income                                                                | $                | (11,252,361)     |                                         | $      | (14,236,224)                                 |   | $ | 3,885,545  |
| Adjustments to reconcile net (loss) income to                                    |             |             |                                         |   |                                         |   |   |   |
| net cash (used in) provided by operating                            activities   |             |             |                                         |   |                                         |   |   |   |
| Loss from discontinued operations                                                |             | 6,622,497   |                                         |   | 4,740,861                               |   |   | 1,123,288  |
| Gain from sale of discontinued operations                                        |             | (216,952)        |                                         |   | -                                       |   |   | -  |
| Loss on sale of investments                                                      |             | 25,548      |                                         |   | -                                       |   |   | 6,584  |
| Loss in operations of joint venture                                              |             | 4,547       |                                         |   | 77,365                                  |   |   | 847,830  |
| Depreciation and amortization                                                    |             | 1,155,132   |                                         |   | 879,379                                 |   |   | 624,426  |
| Provision for loss on accounts receivable                                        |             | 49,231      |                                         |   | 18,830                                  |   |   | 57,159  |
| Tax benefit from stock option exercises                                          |             | -           |                                         |   | -                                       |   |   | 7,000  |
| Stock compensation expense                                             |             | 86,123      |                                         |   | 41,555                                  |   |   | 39,375  |
| Share-based compensation                                                         |             | 585,750     |                                         |   | 1,899,490                               |   |   | -  |
| Amortization of non-employee stock options                                       |             | -           |                                         |   | -                                       |   |   | 54,917  |
| Amortization of bond discounts and premiums                                      |             | 518         |                                         |   | (42,097)                                     |   |   | (80,455) |
| (Increase) decrease in                                                           |             |             |                                         |   |                                         |   |   |   |
| Accounts receivable                                                              |             | 1,218,764   |                                         |   | 1,817,243                               |   |   | (970,081) |
| Prepaid expenses and other current assets                                        |             | (176,332)        |                                         |   | 136,997                                 |   |   | 46,742  |
| Increase (decrease) in                                                           |             |             |                                         |   |                                         |   |   |   |
| Accounts payable and accrued liabilities                                         |             | (962,270)        |                                         |   | 1,314,699                               |   |   | 550,433  |
| Contract billings in excess of revenues                                          |             | (1,199,043)      |                                         |   | 379,871                                 |   |   | (229,310) |
| Other, net                                                                       |             | 12,786      |                                         |   | (91,779)                                     |   |   | 41,089  |
| Discontinued operations                                                          |             | (8,698,946)      |                                         |   | (4,852,981)                                  |   |   | (628,582) |
| Total adjustments                                                                |             | (1,492,647)      |                                         |   | 6,319,433                               |   |   | 1,490,415  |
|                                                                             |             | (12,745,008)     |                                         |   | (7,916,791)                                  |   |   | 5,375,960  |
| Cash flows (used in) investing activities                                        |             |             |                                         |   |                                         |   |   |   |
| Proceeds from sale of securities available for                            sale   |             | 9,415,647   |                                         |   | 12,059,995                              |   |   | 10,001,013  |
| Purchase of securities available for sale                                        |             | (889,425)        |                                         |   | (1,200,642)                                  |   |   | (27,192,684) |
| Capital expenditures                                                             |             | (71,443)         |                                         |   | (258,014)                                    |   |   | (148,311) |
| Product development software expenditures                                        |             | (325,311)        |                                         |   | (1,176,524)                                  |   |   | (477,200) |
| Cash paid for acquisition                                                        |             | -           |                                         |   | -                                       |   |   | (522,450) |
| Investment in joint venture                                                      |             | 19,156      |                                         |   | (91,951)                                     |   |   | (959,179) |
| Discontinued operations                                                          |             | 3,124,113   |                                         |   | (3,128,175)                                  |   |   | -  |
|                                                                             |             | 11,272,737  |                                         |   | 6,204,689                               |   |   | (19,298,811) |
| Cash flows provided by (used in) financing                            activities |             |             |                                         |   |                                         |   |   |   |
| Proceeds from issuance of common stock                                           |             | -           |                                         |   | -                                       |   |   | 13,818,850  |
| Proceeds from exercise of stock options                                          |             |             |                                         |   |                                         |   |   |   |
| and warrants                                                                     |             | 420,919     |                                         |   | 131,659                                 |   |   | 987,645  |
| Payments on capital leases                                                       |             | (65,879)         |                                         |   | (144,962)                                    |   |   | (137,082) |
|                                                                             |             | 355,040     |                                         |   | (13,303)                                     |   |   | 14,669,413  |
|                                                                             |             |             |                                         |   |                                         |   |   |   |
| Net                            change in cash and cash equivalents               |             | (1,117,231)      |                                         |   | (1,725,405)                                  |   |   | 746,562  |
|                                                                             |             |             |                                         |   |                                         |   |   |   |
| Cash and cash equivalents – beginning                                      |             | 2,313,261   |                                         |   | 4,038,666                               |   |   | 3,292,104  |
|                                                                             |             |             |                                         |   |                                         |   |   |   |
| Cash and cash equivalents – ending                                         | $                | 1,196,030   |                                         | $      | 2,313,261                               |   | $ | 4,038,666  |
|                                                                             |             |             |                                         |   |                                         |   |   |   |
| Cash paid during the period for:                                                 |             |             |                                         |   |                                         |   |   |   |
| Interest                                                                         | $                | 9,342       |                                         | $      | 19,314                                  |   | $ | 27,294  |
| Income taxes                                                                     |             | 12,749      |                                         |   | 111,939                                 |   |   | 338,390  |
|                                                                             |             |             |                                         |   |                                         |   |   |   |
| Non-cash investing activities:                                                   |             |             |                                         |   |                                         |   |   |   |
| Capital leases entered into during the period                                    | $                | 78,603      |                                         | $      | -                                       |   | $ | 93,071  |
| Issuance of 40,410 shares of common stock in                                     |             |             |                                         |   |                                         |   |   |   |
| connection with acquisition                                                      | $                | -           |                                         | $      | -                                       |   | $ | 351,685  |

 

F-6

----

QMED,            INC. AND SUBSIDIARIES

Notes            to Financial Statements

 

**Note            1 - Basis of Presentation and Description of Business**

***Nature of Business***

QMed,            Inc. (the "Company”) operates in the disease-management services industry. The            Company and Interactive Heart Management Corp. (“IHMC”), a wholly owned            subsidiary, provide disease management services to health plans nationwide. In April            2005, the Company acquired Positive Directions, Inc., (formerly Health e Monitoring,            Inc.), a wholly owned subsidiary, to provide wellness and weight management programs.            In 2005, the Company established QMedCare, Inc., a wholly owned subsidiary, to assist            in providing specialty managed care services to chronically ill Medicare recipients            under a Special Needs Plan (“SNP”) agreement with DAKOTACARE, an HMO in            South Dakota. In 2006, the Company established QMedCare of New Jersey, Inc., a wholly            owned subsidiary and a licensed HMO in New Jersey providing specialty managed care            services to chronically ill Medicare Beneficiaries under a second SNP.

 

**Discontinued Operations**

***Medical Equipment***

On            October 5, 2007 the Company entered into an Acquisition Agreement pursuant to which it            sold its medical equipment business to Innovative Diagnostics, Inc.,            (“IDX”) an unaffiliated third party (“Purchaser”). The sale            includes all inventory, property, furniture, fixtures and equipment from the equipment            business and includes the Patent, intellectual property and rights in the 510K filing            with the U.S. Food and Drug Administration (“FDA”) that pertains to the            Monitor-One tehnology. In consideration for the sale, IDX paid the purchase price of            $230,000 during October 2007 resulting in a gain of $216,952. The parties also            simultaneously entered into a Patent License Agreement whereby IDX will license back to            the Company, certain rights under the Patent for continuing the use of the Monitor-One            STRX in the Company’s disease management business.

 

***Special Needs Plans***

On            November 2, 2007 the Company announced it was unable to raise adequate capital to            support both its operational needs and statutory reserve requirements and, as a result,            was disengaging from Special Needs Plan related activity in South Dakota. Additionally,            the Company announced it will be working to transition or conclude involvement in its            New Jersey Special Needs Plan.

 

In            March 2008, the Company executed a settlement agreement with DAKOTACARE settling any            liability in connection with its activities, including but not limited to; Incurred But            Not Reported and Paid (IBNP) claims of approximately $7.5 million associated with the            HeartLine Plus SNP in South Dakota, outstanding invoices for TPA services rendered of            approximately $220,000. The Company has agreed to pay DAKOTACARE $750,000 for a full            release of any and all liabilities related to the SNP and additional liabilities of            approximately $380,000. Based on this settlement agreement, management believes the            Company has no further liability. In addition, the Company recorded an impairment            charge related to product software development of approximately $445,000 and expensed            approximately $400,000 of prepaid broker commissions related to 2007 enrollment. As a            result of the settlement, the Company had a decrease in its estimated liability of            approximately $6.5 million primarily attributable to a decrease in its IBNP in the            fourth quarter of fiscal 2007, which is reflected as part of discontinued            operations.

 

Accordingly, the sale of the equipment business and all Special Needs            Plans activity and their results of operations have been classified as discontinued            operations in this financial statement. As a result, our financial statements for the            years 2006 and 2005 have been restated to reflect the equipment and Special Needs Plans            as discontinued operations in our consolidated balance sheet, statements of operations            and cash flows. Statement of operations information presented in the notes to            consolidated financial statements has been restated to reflect continuing operations            for all periods presented.

 

F-7

----

****Note 1 - Basis of Presentation and Description of            Business (**continued)**

 

The            following is a summary of financial information of our discontinued and continuing            operations for the 2007, 2006 and 2005 fiscal years:

 

|                                         | Year EndedNovember 30,2007                                        |
|----------------------------------------------|-------------------------------------------------------------------|
|                                         | Discontinued                                                      |
| Revenue                                      | $        31,747,935  |
| Cost of revenue                              | 30,635,680                                                   |
| Gross profit                                 | 1,112,255                                                    |
|                                         |                                                              |
| Selling, general and administrative expenses | 8,044,389                                                    |
|                                         |                                                              |
| (Loss) from operations                       | (6,932,134)                                                       |
|                                         |                                                              |
| Interest expense                             | (49)                                                              |
| Interest income                              | 310,206                                                      |
| Loss in operations of joint ventures         | -                                                            |
| Other income                                 | -                                                            |
| Discontinued operations – gain on sale | 216,952                                                      |
|                                         |                                                              |
| Loss before income tax provision             | (6,405,025)                                                       |
|                                         |                                                              |
| Provision for income taxes                   | (520)                                                             |
|                                         |                                                              |
| Loss from discontinued operations            | $       (6,405,545)            |

 

|                                         | Year Ended November 30, 2006                                            |
|----------------------------------------------|-------------------------------------------------------------------------|
|                                         | Consolidated

(As Originally                             Reported) |   |  

                            Discontinued |   |  

                            Continuing |
| Revenue                                      | $      9,881,053                     |   | $       1,744,748  |   | $      8,136,305  |
| Cost of revenue                              | 6,383,691                                                          |   | 1,619,255  |   | 4,764,436  |
| Gross profit                                 | 3,497,362                                                          |   | 125,493  |   | 3,371,869  |
|                                         |                                                                    |   |   |   |   |
| Selling, general and administrative expenses | 18,895,902                                                         |   | 4,939,959  |   | 13,955,943  |
|                                         |                                                                    |   |   |   |   |
| (Loss) from operations                       | (15,398,540)                                                            |   | (4,814,466) |   | (10,584,074) |
|                                         |                                                                    |   |   |   |   |
| Interest expense                             | (19,314)                                                                |   | -  |   | (19,314) |
| Interest income                              | 771,137                                                            |   | 74,625  |   | 696,512  |
| Loss in operations of joint ventures         | (77,365)                                                                |   | -  |   | (77,365) |
| Other income                                 | 450,000                                                            |   | -  |   | 450,000  |
|                                         |                                                                    |   |   |   |   |
| (Loss) before income tax benefit             | (14,274,082)                                                            |   | (4,739,841) |   | (9,534,241) |
|                                         |                                                                    |   |   |   |   |
| Benefit (provision) for income taxes         | 37,858                                                             |   | (1,020) |   | 38,878  |
|                                         |                                                                    |   |   |   |   |
| Net (loss)                                   | $   (14,236,224)                                         |   | $  (4,740,861) |   | $    (9,495,363) |

 

F-8

----

****Note 1 - Basis of Presentation and Description of            Business (**continued)**

**Discontinued Operations (continued)**

 

|                                         | Year Ended November 30, 2005                                           |
|----------------------------------------------|------------------------------------------------------------------------|
|                                         | Consolidated

(As Originally Reported)                                 |   |  

                            Discontinued |   |  

                            Continuing |
| Revenue                                      | $        22,146,496       |   | $       188,807  |   | $    21,957,689  |
| Cost of revenue                              | 7,510,894                                                         |   | 177,645  |   | 7,333,249  |
| Gross profit                                 | 14,635,602                                                        |   | 11,162  |   | 14,624,440  |
|                                         |                                                                   |   |   |   |   |
| Selling, general and administrative expenses | 10,043,684                                                        |   | 1,134,450  |   | 8,909,234  |
|                                         |                                                                   |   |   |   |   |
| Income (loss) from operations                | 4,591,918                                                         |   | (1,123,288) |   | 5,715,206  |
|                                         |                                                                   |   |   |   |   |
| Interest expense                             | (27,294)                                                               |   | -  |   | (27,294) |
| Interest income                              | 441,353                                                           |   | -  |   | 441,353  |
| Loss in operations of joint ventures         | (847,830)                                                              |   | -  |   | (847,830) |
| Other income                                 | 3,486                                                             |   | -  |   | 3,486  |
|                                         |                                                                   |   |   |   |   |
| Income (loss) before income tax provision    | 4,161,633                                                         |   | (1,123,288) |   | 5,284,921  |
|                                         |                                                                   |   |   |   |   |
| Gain on sale of state tax benefits           | 115,912                                                           |   |   |   | 115,912  |
| Provision for income taxes                   | (392,000)                                                              |   | -  |   | (392,000) |
|                                         |                                                                   |   |   |   |   |
| Net income (loss)                            | $         3,885,545  |   | $   (1,123,288) |   | $   5,008,833  |

 

The            following is a summary of the balance sheet amounts related to discontinued            operations:

 

|                                                                             | **November 30,**                                         |
|----------------------------------------------------------------------------------|----------------------------------------------------------|
|                                                                             | **2007**                                                 |   | **2006** |
|                                                                             |                                                     |   |   |
| **Assets**                                                                       |                                                     |   |   |
| Cash and cash equivalents                                                        | $     2,773,895                 |   | $       726,434 |
| Investments                                                                      | -                                                        |   | 2,320,290 |
| Restricted cash                                                                  | 2,975,093                                                |   | 705,881 |
| Accounts receivable, net                                                         | 79,372                                                   |   | 201,681 |
| Inventory                                                                        | -                                                        |   | 36,631 |
| Prepaid expenses and other current assets                                        | 291,071                                                  |   | 60,891 |
| Property and equipment, net                                                      | 7,061                                                    |   | 49,341 |
| Product software development costs, net                                          | -                                                        |   | 52,656 |
| Other assets                                                                     | -                                                        |   | 3,000 |
| **Total assets – discontinued                            operations**      | **$**     **6,126,492**         |   | **$**    **4,156,805** |
|                                                                             |                                                     |   |   |
| **Liabilities**                                                                  |                                                     |   |   |
| Accounts payable and accrued liabilities                                         | $        629,486 |   | $       773,690 |
| Medical claims payable                                                           | 2,667,736                                                |   | 364,830 |
| Accrued salaries and commissions                                                 | 62,123                                                   |   | 58,738 |
| Deferred revenue                                                                 | 592,826                                                  |   | 16,583 |
| Income taxes payable                                                             | 250                                                      |   | 925 |
| **Total liabilities – discontinued                            operations** | **$**     **3,952,421**         |   | **$**    **1,214,766** |

 

**Going Concern**

The            accompanying financial statements have been prepared assuming that the Company            continues as a going concern that contemplates the realization of assets and            satisfaction of liabilities in the normal course of business. However, the ability of            the Company to continue as a going concern will be dependent upon its ability to raise            additional capital or obtain other sources of financing in the immediate future            necessary to meet its obligations and continue operations.

 

F-9

----

****Note 1 - Basis of Presentation and            Description of Business (**continued)**

**Going Concern (continued)**

During the year ended November 30,            2007, the Company incurred net losses totaling $11,252,361 and utilized cash in            operating activities of $12,745,008. These factors raise substantial doubt as to the            Company’s ability to continue as a going concern. The financial statements do not            include any adjustments that might result from this uncertainty. If the Company is            unable to raise additional capital or obtain other sources of financing to meet its            working capital requirements, it will have to cease business altogether.

 

Management’s plan is to raise additional capital through a variety            of fund raising methods including the potential sale of its assets, which may include            the sale of assets and to pursue all available financing alternatives as necessary to            fund operations. The Company needs to raise additional funds in the immediate future in            order to continue its operations. Whereas the Company has been successful in the past            in raising capital, no assurance can be given that these sources of financing will            continue to be available to the Company and/or that demand for the Company’s            equity/debt instruments will be sufficient to meet its capital needs. The financial            statements do not include any adjustments relating to the recoverability and            classification of liabilities that might be necessary should the Company be unable to            continue as a going concern.

 

To the extent that the Company raises            additional capital through the sale of equity or convertible debt securities, the            issuance of such securities may result in dilution to existing stockholders. If            additional funds are raised through the issuance of debt securities, these securities            may have rights, preferences and privileges senior to holders of common stock and the            terms of such debt could impose restrictions on the Company's            operations.

 

**Summary of Significant Accounting Policies**

Principles of Consolidation

The            consolidated financial statements include the accounts of the Company, IHMC, QMedCare,            Inc., QMedCare of New Jersey, Inc., Positive Directions, Inc. and the Company’s            majority-owned (83%) inactive subsidiary, Heart Map, Inc. (dissolved in December 2005).            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 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 $47,000 and            $104,000 at November 30, 2007 and 2006, respectively.

 

F-10

----

******Note 1 - Basis of Presentation            and Description of Business (**continued)****

**Summary of Significant Accounting Policies (continued)**

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.

 

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 (Loss)

Comprehensive income (loss) as defined includes all changes in            equity during a period from non-owner sources. Accumulated other comprehensive income            (loss), 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, 2007 and 2006, because of the relative short maturity of these            instruments. The carrying value of leases payable approximated fair value at            November 30, 2007 and 2006, 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.

 

Impairment of Intangible Assets (continued)

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 fortrade 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.

 

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.

 

F-11

----

******Note 1 - Basis of Presentation            and Description of Business (**continued)****

**Summary of Significant Accounting Policies (continued)**

 

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 have typically provided that a portion of the            Company’s fees may be “performance-based”. As of November 30, 2007,            the Company does not have any fee risk based contracts. Performance-based contracts            have varying degrees of risk associated with the Company’s ability to deliver the            guaranteed financial cost savings or certain clinical meausres. In some 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 “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, 2007 and 2006, based on information and data available, the Company has            deferredapproximately $197,000 and $1,396,000 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, 2007, approximately 95% of            disease management services were derived from five health plans that each comprised            more than 10% of the Company’s revenues. During the fiscal year ended November            30, 2006, approximately 63% of disease management services were derived from two health            plans that each comprised more than 10% of the Company’s revenues. 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.

 

F-12

----

******Note 1 - Basis of Presentation            and Description of Business (**continued)****

**Summary of Significant Accounting Policies (continued)**

 

(Loss) Earnings 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.

 

Share Based Compensation

On            December 1, 2005, we adopted SFAS No. 123(R), “Share-Based            Payment,” which requires the Company to measure and recognize compensation            expense for all share-based payment awards based on estimated fair values at the date            of grant. Determining the fair value of share-based awards at the grant date requires            judgment in developing assumptions, which involve a number of variables. These            variables include, but are not limited to, the expected stock price volatility over the            term of the awards, and expected stock option exercise behavior. In addition, it            requires judgment in estimating the number of share-based awards that are expected to            be forfeited. The Company contracts with a third party to assist in developing the            assumptions used in estimating the fair values of stock options.

 

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.

 

New Accounting Pronouncements

*Accounting for Uncertainty in Income Taxes*

In            June 2006 the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes            - an interpretation of FASB Statement No. 109.”  FIN No. 48 creates a single            model to address uncertainty in income tax positions by prescribing the minimum            recognition threshold a tax position is required to meet before being recognized in the            financial statements.  It also provides guidance on derecognition, measurement,            classification, interest and penalties, accounting in interim periods, disclosure and            transition.  It is effective for fiscal years beginning after December 15,            2006.  The adoption of FIN No. 48 will not have a material impact on our financial            position or results of operations.

 

F-13

----

******Note 1 - Basis of Presentation            and Description of Business (**continued)****

**Summary of Significant Accounting Policies (continued)**

*Fair Value Measurement*

In            September 2006 the FASB issued SFAS No. 157, “Fair Value Measurement,”            which provides guidance for using fair value to measure assets and liabilities,            including a fair value hierarchy that prioritizes the information used to develop fair            value assumptions.  It also requires expanded disclosure about the extent to which            companies measure assets and liabilities at fair value, the information used to measure            fair value, and the effect of fair value measurements on earnings.  The standard            applies whenever other standards require (or permit) assets or liabilities to be            measured at fair value and does not expand the use of fair value in any new            circumstances. 

 

SFAS            No. 157 is effective for financial statements issued for fiscal years beginning after            November 15, 2007, and interim periods within those fiscal years.  The adoption of            SFAS No. 157 will not have a material impact on our financial position or results            of operations.

 

**Note 2 - Investments in Securities**

There            were no investments in securities available for sale as of November 30, 2007.            Investments in securities available-for-sale as of November 30, 2006 were as            follows:

 

|                      |   |   |       |   | Market     |   | Unrealized |
|---------------------------|--------|--------|------------|--------|------------|--------|------------|
|                      |   |   | Cost       |   | Value      |   | (Loss)     |
| 2006                      |   |   |       |   |       |   |       |
| Corporate debt securities |   |   | $8,552,287 |   | $8,547,525 |   | $(4,762)   |

 

During the years ended November 30, 2007 and 2006, the Company sold            available for sale securities for approximately $9,416,000 and $12,060,000,            respectively, resulting in losses of approximately $25,548 and $0,            respectively.

 

**Note            3 - Property and Equipment**

 

|                                | November 30, |
|-------------------------------------|--------------|
|                                | 2007         |   | 2006 |
| Machinery and equipment             | $            | 18,514  |   | $ | 425,497  |
| Furniture and fixtures              |         | 1,140,060  |   |   | 1,139,109  |
| Office equipment                    |         | 2,339,680  |   |   | 2,004,411  |
| Leasehold improvements              |         | 154,496  |   |   | 154,496  |
| Equipment held under capital leases |         | 171,673  |   |   | 373,480  |
|                                |         | 3,824,423  |   |   | 4,096,993  |
| Less accumulated depreciation and   |         |   |   |   |   |
|   amortization            |         | (3,107,194) |   |   | (3,157,005) |
| Property and equipment - net        | $            | 717,229  |   | $ | 939,988  |

 

At November 30, 2007 and 2006, the equipment under the            capital leases had net book values of approximately $118,000 and $189,000,            respectively. Depreciation expenses were approximately $373,000, $376,000 and            $363,000 for 2007, 2006 and 2005, respectively.

 

F-14

----

 

**Note            4 - Product Software Development Costs**

During the years ended November 30, 2007 and 2006, the Company            capitalized approximately $325,000 and $1,177,000 in product software development            costs, respectively. These costs are amortized over their estimated useful lives,            between two to five years.

 

During the years ended November 30, 2007, 2006 and 2005, amortization            costs related to product software development costs were approximately $608,000 and            $285,000 and $174,000, respectively. Accumulated amortization was $1,508,266 and            $900,754 at November 30, 2007 and 2006, respectively. Estimated amortization expense is            $582,000, $542,000, $358,000, $252,000 and $35,000 for the next five fiscal years,            respectively.

 

**Note            5 – Acquired Intangibles**

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

 

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

 

F-15

----

**Note            5 – Acquired Intangibles (continued)**

The            following table summarizes the estimated fair value of the assets acquired and their            balances as of November 30,:

 

| **2007**                |   | Original

Fair Value |    | Accumulated

Amortization |   | Net Book

Value |   | Useful

Life

in Years |
|-------------------------|--------|----------------------|---------|---------------------------|--------|-----------------|--------|------------------------|
| Positive Directions:    |   |                 |    |                      |   |            |   |                   |   |   |   |
| Covenant not to compete |   | $                    | 483,363 |                      | $      | (253,766)       |   | $                      | 229,597 |   | 5 |
| Acquired technology     |   |                 | 46,307  |                      |   | (24,311)        |   |                   | 21,996 |   | 5 |
|                    |   |                 |    |                      |   |            |   |                   |   |   |   |
| DMT:                    |   |                 |    |                      |   |            |   |                   |   |   |   |
| Software and contents   |   |                 | 299,348 |                      |   | (129,717)       |   |                   | 169,631 |   | 5 |
| Assembled workforce     |   |                 | 45,117  |                      |   | (45,117)        |   |                   | - |   | - |
|                    |   | $                    | 874,135 |                      | $      | (452,911)       |   | $                      | 421,224 |   |   |

 

| **2006**                |   | Original

Fair Value |    | Accumulated

Amortization |   | Net Book

Value |   | Useful Life

in Years |
|-------------------------|--------|----------------------|---------|---------------------------|--------|-----------------|--------|-----------------------|
| Positive Directions:    |   |                 |    |                      |   |            |   |                  |   |   |   |
| Covenant not to compete |   | $                    | 483,363 |                      | $      | (157,093)       |   | $                     | 326,270 |   | 5 |
| Acquired technology     |   |                 | 46,307  |                      |   | (15,050)        |   |                  | 31,257 |   | 5 |
|                    |   |                 |    |                      |   |            |   |                  |   |   |   |
| DMT:                    |   |                 |    |                      |   |            |   |                  |   |   |   |
| Software and contents   |   |                 | 299,348 |                      |   | (69,848)        |   |                  | 229,500 |   | 5 |
| Assembled workforce     |   |                 | 45,117  |                      |   | (45,117)        |   |                  | - |   | - |
|                    |   | $                    | 874,135 |                      | $      | (287,108)       |   | $                     | 587,027 |   |   |

 

During the year ended November 30, 2007, amortization expense related to            the covenant not to compete, acquired technology and software and contents, was            $96,673, $9,261, and $59,869, respectively. During the year ended November 30, 2006,            amortization expense related to the covenant not to compete, acquired technology,            software and contents, and assembled workforce was $96,673, $9,261, $59,870 and            $43,016, respectively. During the year ended November 30, 2006, the company recorded an            impairment charge within selling, general and administrative expenses of approximately            $32,000 related to a write down of assembled workforce. Estimated amortization expense            is $166,000 for fiscal years 2008 and 2009 and $90,000 for the fiscal year            thereafter.

 

**Note            6 - Investment in Joint Ventures**

 

The            Company had a 50% interest in HeartMasters, L.L.C. (“HM”). The management            agreement provided for profits and losses to be allocated based on the Company’s            50% interest. As of November 30, 2006, the Company had recorded losses to date of            approximately $1,799,000 bringing the investment in the joint venture to zero. This            joint venture was not a variable interest entity and therefore was not required to be            consolidated under the provisions of FIN 46R. In December 2005, this joint venture was            dissolved.

 

F-16

----

**Note            6 - 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,                                                                                                             |
|--------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                 | 2006                                                                                                                     |
| Balance Sheet                                                                                                                        |                                                                                                                     |
|                                            Current assets | $                                           - |
| Liabilities                                                                                                                          | -                                                                                                                        |
| Capital                                                                                                                              | $                -                       |
|                                                                                                                                 |                                                                                                                     |
| Statements of operations                                                                                                             |                                                                                                                     |
| Revenues                                                                                                                             | $                                           - |
| Operating expenses                                                                                                                   | (2,098)                                                                                                                  |
| Net loss                                                                                                                             | $      (2,098)                                                                             |

 

The            Company had a 33.33% interest in HealthSuite Partners, LLC (“HSP”). The            management agreement provided for profits and losses to be allocated based on the            Company’s 33.33% interest. As of November 30, 2007, the Company has recorded            losses to date of approximately $234,000 bringing its investment in this joint venture            to $0. This joint venture was not a variable interest entity and therefore was not            required to be consolidated under the provisions of FIN 46. In November 2007, this            joint venture was dissolved. As of November 30, 2006, approximately $790,000 was due            from this joint venture which was included in accounts receivable.

 

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

 

|                     | 2007   |      | 2006   |
|--------------------------|--------|-----------|--------|
| Balance Sheet            |   |      |   |   |   |
| Assets                   | $      | -         |   | $ | 1,555,056  |
| Liabilities              |   | -         |   |   | 1,495,079  |
| Capital                  | $      | -         |   | $ | 59,977  |
|                     |   |      |   |   |   |
| Statements of operations |   |      |   |   |   |
| Revenues                 | $      | 1,984,676 |   | $ | 7,081,755  |
| Operating expenses       |   | 1,971,934 |   |   | 7,218,812  |
| Net profit (loss)        | $      | 12,742    |   | $ | (137,057) |

 

**Note            7- Accounts Payable and Accrued Liabilities**

 

|                                | November 30, |
|-------------------------------------|--------------|
|                                | 2007         |   | 2006 |
| Accounts payable - trade            | $            | 730,165 |   | $ | 990,291 |
| Insurance premiums payable          |         | 99,385 |   |   | 79,124 |
| Professional fees payable           |         | 330,615 |   |   | 526,316 |
| Accrued severance payable, current  |         | 332,002 |   |   | 323,776 |
| Other accrued expenses - none in    |         |   |   |   |   |
| excess of 5% of current liabilities |         | 115,673 |   |   | 134,026 |
|                                | $            | 1,607,840 |   | $ | 2,053,533 |

 

F-17

----

**Note            8 - 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, 2007 and 2006, there was $12,900 and            $47,005 outstanding under these provisions.

 

**Note            9 - 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. The line of credit was extended for 90 days however            management decided not to renew the line of credit and requested a release of the            collateral. Borrowings under this line of credit were $-0- at November 30, 2007 and            2006.

 

**Note            10 - Capital Lease Obligations**

The            Company has entered into various capital leases for equipment expiring through October            2010, with aggregate monthly payments of approximately $5,200.

 

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,            2007:

 

             

|                                        | For the YearsEndingNovember 30, |
|---------------------------------------------|---------------------------------|
| 2008                                        | $                               | 44,339  |
| 2009                                        |                            | 27,826  |
| 2010                                        |                            | 23,188  |
| Total minimum lease payments                |                            | 95,353  |
| Less amount representing interest (4%-10%)  |                            | (5,103) |
| Present value of net minimum lease payments |                            | 90,250  |
| Less current maturities                     |                            | 41,116  |
| Long-term maturities                        | $                               | 49,134  |

 

**Note            11 – Accrued Severance Payable**

On            November 28, 2006, the Company announced that its CEO was appointed as a special            advisor to the Board for Strategic Development and Expansion Issues. He will continue            to be a director of the Company, but will no longer serve in the capacity as either the            CEO or the President of the Company.

 

As a            result, the Company incurred certain obligations under the terms of the employment            agreement. These obligations consist of: (i) three times last base salary, to be paid            in three equal annual installments, with the first installment to be paid no later than            thirty (30) days after November 28, 2006 (the “Payment Date”), and            thereafter, the second and third installments on each of the next two annual            anniversaries of the payment date; (ii) immediate vesting of all options; and (iii)            continued coverage, at the Company’s expense for a period of 36 months from            November 28, 2006 under all executive health plans in which the Executive participates            as of November 28, 2006. As of November 30, 2007, the Company has recorded $641,260            representing the present value of these obligations using an interest rate of 4% of            which $332,002 is recorded as current and $309,258 is long term. At November 30, 2006,            the Company had recorded $943,419 of which $323,776 was recorded as current and            $619,643 was long term. The Company had a payment due on December 28, 2007 in the            amount of $310,000, which was not made due to the limited financial resources to            continue as a going concern. Should the Company obtain adequate financing, the payment            will be made upon closing of such transaction.

 

F-18

----

**Note            12 - Income Taxes**

The            federal and state income tax provision (benefit) allocable to the consolidated            statements of income and balance sheet line items was as follows:

 

|                    | 2007    |   | 2006        |   | 2005     |
|-------------------------|---------|--------|-------------|--------|----------|
|                    |    |   |        |   |     |
| Continuing operations   | $23,895 |   | $(38,878)   |   | $392,000 |
| Discontinued operations | 520     |   | 1,020  |   | -        |
|                    | $24,415 |   | $(37,858)   |   | $392,000 |

 

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

 

|                       | 2007                                                     |   | 2006                                                                       |   | 2005                |
|----------------------------|----------------------------------------------------------|--------|----------------------------------------------------------------------------|--------|---------------------|
|                       |                                                     |   |                                                                       |   |                |
| Federal income tax         | $         - |   | $           -  |   | $  87,000 |
| State income (benefit) tax | 24,415                                                   |   | (37,858)                                                                   |   | 305,000             |
| Total current              | $24,415                                                  |   | $(37,858)                                                                  |   | $392,000            |

 

For            November 30, 2006, the current state tax provision of $18,000 was offset by a refund of            state taxes of approximately $56,000 received in fiscal 2006.

 

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

 

|                                 | 2007     |   | 2006    |   | 2005    |
|--------------------------------------|----------|--------|---------|--------|---------|
|                                 |     |   |    |   |    |
| Statutory federal income tax rate    | 34.0%    |   | 34.0%   |   | 34.0%   |
| Share based compensation expense     | (.72%)   |   | (2.12%) |   | -       |
| State income tax, net of federal     |     |   |    |   |    |
| benefit                              | (.14%)   |   | .31%    |   | 2.3%    |
| Certain non-deductible expenses      | (.09%)   |   | (0.29%) |   | 0.5%    |
| Other                                | (.01%)   |   | (0.23%) |   | -       |
| Effect on net operating loss         |     |   |    |   |    |
| carryforward and valuation allowance | (33.25%) |   | (31.4%) |   | (27.4%) |
|                                 | (.21%)   |   | .27%    |   | 9.4%    |

 

Deferred tax attributes resulting from differences between financial            accounting amounts and tax basis of assets and liabilities at November 30, 2007 and            2006, follow:

 

|                                       |   | November 30,                                                                           |   |
|--------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|
| Current assets and libilities              |   | 2007                                                                                   |   | 2006 |
| Allowance for doubtful accounts            |   | $     24,000                                             |   | $    24,000  |
| Inventory reserve                          |   | -                                                                                 |   | 44,000  |
| Inventory overhead capitalization          |   | -                                                                                 |   | 24,000  |
| Deferred warranties                        |   | -                                                                                 |   | 5,000  |
| Accrued expenses                           |   | -                                                                                 |   | 269,000  |
|                                       |   | 24,000                                                                            |   | 366,000  |
| Valuation allowance                        |   | (24,000)                                                                               |   | (366,000) |
| Net current deferred tax asset (liability) |   | $             -  |   | $             -  |
|                                            |        |                                                                                        |        |  |  |

 

F-19

----

**Note            12 - Income Taxes (continued)**

 

|                                          |   | November 30,                                                                                                   |
|-----------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------|
| Noncurrent assets and libilities              |   | 2007                                                                                                           |   | 2006 |
| Depreciation and amortization                 |   | $     90,000                                                                     |   | $     (44,000) |
| Accrued expenses                              |   | -                                                                                                         |   | 124,000  |
| Investments                                   |   | (26,000)                                                                                                       |   | -  |
| Net operating loss carryforward               |   | 17,080,000                                                                                                |   | 12,423,000  |
| Research and development credit carryforward  |   | 82,000                                                                                                    |   | 82,000  |
| Alternative minimum tax credit carryforward   |   | -                                                                                                         |   | 76,000  |
| Stock compensation                            |   | 123,000                                                                                                   |   | 124,000  |
| Share based compensation expense              |   | 582,000                                                                                                   |   | 460,000  |
| Charitable contributions                      |   | 3,000                                                                                                     |   | -  |
|                                          |   | 17,934,000                                                                                                |   | 13,245,000  |
| Valuation allowance                           |   | (17,934,000)                                                                                                   |   | (13,245,000) |
| Net noncurrent deferred tax asset (liability) |   | $                 -  |   | $                -  |

 

The            Company has cumulative pre-tax losses through fiscal 2007 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 $17,958,000 and $13,611,000 as of November 30,            2007 and 2006, respectively.

 

As            of November 30, 2007, the Company has available the following federal net operating            loss carryforwards for tax purposes of $40,799,000 beginning to expire in 2010 through            2022.

 

The            Company has net operating loss carryforwards for state tax purposes of approximately            $37,274,000 expiring at various times from fiscal years ending 2008 through 2021. 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.

 

**Note            13 - Stockholders' Equity**

Private Placement Equity Transactions

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

 

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

 

F-20

----

**Note            13 - Stockholders' Equity (continued)**

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 15,000,            47,000 and 12,500 options were issued to Directors during the years ended November 30,            2007, 2006 and 2005, respectively. As of November 30, 2007, 205,000 shares remain            available for issuance under the plan.

 

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.            At the Company’s annual shareholder meeting on April 28, 2006, the amendment to            the 1999 Equity Incentive Plan to increase the number of shares reserved for issuance            under such plan from 2,000,000 to 3,000,000 and to ensure compliance with Section 409A            of the Internal Revenue Code was approved. At November 30, 2007, the Company has            reserved approximately 1,318,000 shares for future equity grants.

 

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. Currently, there are no shares of the Company's common stock reserved for            future equity grants from 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.

 

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

 

For            the year ended November 30, 2005, the Company recorded compensation expense under APB            No. 25 of approximately $55,000. This expense resulted from the grant of stock options            to directors of the Company in June 2004 and September 2005. The Company recognized            compensation expense related to these stock options on a straight-line basis over the            vesting period.

 

F-21

----

**Note 13 - Stockholders' Equity****–            (continued)**

Stock Options and Warrants (continued)

 

Effective December 1, 2005, we adopted SFAS No. 123(R),            “Share-Based Payment,” using the modified prospective transition method.            Under the modified prospective transition method, recognized compensation cost for the            year ended November 30, 2006 includes: 1) compensation cost for all share-based            payments granted prior to, but not yet vested as of, December 1, 2005, based on the            grant date fair value estimated in accordance with the original provisions of Statement            123; and 2) compensation cost for all share-based payments granted on or after December            1, 2005, based on the grant date fair value estimated in accordance with Statement            123(R). In accordance with the modified prospective method, we have not restated prior            period results.

 

Under the terms of an employment agreement, all unvested stock would            immediately vest upon separation. As of November 28, 2006, a separation in service            occurred resulting in the immediate vesting of the unvested options. As a result, the            Company recognized additional share-based compensation cost of approximately $313,000            related to the vesting of these options in fiscal 2006.

 

For            the year ended November 30, 2007, we recognized share based compensation cost of            $585,750, which consisted of $68,701 in cost of services and $469,015 in selling,            general and administrative expenses and $48,034 in research and development,            respectively.

 

For            the year ended November 30, 2006, we recognized share-based compensation cost of            $1,899,490, which consisted of $153,414 in cost of services and $1,667,585 in selling,            general and administrative expenses and $78,491 in research and development,            respectively. The Company did not capitalize any share-based compensation            cost.

 

As a            result of adopting Statement 123(R), loss before income taxes and net loss for the year            ended November 30, 2007 and 2006 totaling $585,750 and $1,899,490, respectively, were            lower than if the Company had continued to account for share-based compensation under            APB 25. The effect of adopting Statement 123(R) on basic and diluted earnings per share            for the year ended November 30, 2007 and 2006 was $.03 and $.11, respectively, per            share.

 

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

 

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

 

The            Company has elected to calculate the pool of excess tax benefits under the alternative            transition method described in FASB Staff Position (“FSP”) No. FAS            123(R)-3, “Transition Election Related to Accounting for Tax Effects of            Share-Based Payment Awards,” which also specifies the method we must use to            calculate excess tax benefits reported on the statement of cash flows. The Company is            in a net operating loss position; therefore, no excess tax benefits from share-based            payment arrangements have been recognized for the years ended November 30, 2007 and            2006.

 

The            following table illustrates the effect on net income and earnings per share if the            Company had applied the fair value recognition provisions of SFAS No. 123 to            stock-based employee compensation for the year ended November 30, 2005.

 

F-22

----

**Note            13 - Stockholders' Equity****–            (continued)**

Stock Options and Warrants (continued)

 

|                                                                            | 2005   |
|---------------------------------------------------------------------------------|--------|
| Net (loss) income, as reported                                                  | $      | 3,885,545  |
|                                                                            |   |   |
| Deduct: Total stock-based employee                            compensation      |   |   |
| expense determined under fair value based method                            for |   |   |
| all awards, net of related tax effects                                          |   | (1,251,561) |
|                                                                            |   |   |
| Pro forma net income (loss)                                                     | $      | 2,633,984  |
|                                                                            |   |   |
| Weighted average common shares outstanding                                      |   | 16,465,178  |
|                                                                            |   |   |
| Dilutive effect of stock options and warrants                                   |   | 1,991,923  |
|                                                                            |   |   |
| Diluted shares outstanding                                                      |   | 18,457,101  |
|                                                                            |   |   |
| Income (loss) per share:                                                        |   |   |
|                                                                            |   |   |
| Basic, as reported                                                              | $      | 0.24  |
|                                                                            |   |   |
| Basic, pro forma                                                                | $      | 0.16  |
|                                                                            |   |   |
| Diluted, as reported                                                            | $      | 0.21  |
|                                                                            |   |   |
| Diluted, pro forma                                                              | $      | 0.14  |

 

Potentially dilutive options and warrants to purchase 39,219, 1,418,726,            and -0- shares of the common stock were outstanding as of November 30, 2007, 2006 and            2005, 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 1,053,643, 892,556, and 6,562 shares of common stock were            outstanding as of November 30, 2007, 2006 and 2005, 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.

 

As            of November 30, 2007, there was $1,318,667 of total unrecognized compensation cost            related to nonvested share-based compensation arrangements granted under the stock            incentive plans. That cost is expected to be recognized over a weighted-average period            of1.6 years.

 

For            the years ended November 30, 2007 and 2006, the Company based expected volatility on            both historical volatility and implied volatility on the Company’s stock. The            expected term of options granted represents the period of time that options granted are            expected to be outstanding. The Company used historical data to estimate expected            option exercise and post-vesting employment termination behavior. The Company utilized            the risk-free interest rate for periods equal to the expected term of the option based            upon the U.S. Treasury yield curve in effect at the time of the grant. The Company has            no intention of declaring any dividends for the foreseeable future.

 

F-23

----

**Note            13 - Stockholders' Equity****–            (continued)**

Stock Options and Warrants (continued)

For            the year ended November 30, 2005, we estimated the fair value of each option award on            the date of grant using the Black-Scholes model. The Company based expected volatility            on historical volatility. The Company estimated the expected term of stock options            using historical exercise and employee termination experience.

 

The            following table shows the weighted average grant date fair values and the weighted            average assumptions the Company used to develop the fair value estimates under each of            the option valuation models for the years ended November 30, 2007, 2006 and            2005:

 

|                          | 2007    |   | 2006    |   | 2005      |
|-------------------------------|---------|--------|---------|--------|-----------|
| Weighted Average              |    |   |    |   |      |
| fair value of options granted |    |   |    |   |      |
| during the year               | $2.54   |   | $9.68   |   | $9.92     |
|                          |    |   |    |   |      |
| Risk-free interest rate       | 4.6%    |   | 4.5%    |   | 5.0%      |
| Expected volatility           | 66.9%   |   | 64.6%   |   | 65.8%     |
| Dividend yield                | -       |   | -       |   | -         |
| Expected life                 | 4 years |   | 4 years |   | 5.5 years |

 

A            summary of option activity as of November 30, 2007 and changes during the year then            endedis presented below:

 

|  

                             

Options |   |  

                             

Shares |   |  

Weighted Average

Exercise Price |   | Weighted Average Remaining Contractual Term |   |  

Aggregate Intrinsic Value ($000s) |
|-----------------------------------------------------|--------|----------------------------------------------------|--------|------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------|
|                                                |   |                                               |   |                                     |   |                                        |   |                                      |
| Outstanding at December 1, 2006                     |   | 2,022,983                                     |   | $7.43                                    |   |                                        |   |                                      |
| Granted                                             |   | 649,000                                       |   | 5.20                                     |   |                                        |   |                                      |
| Exercised                                           |   | (137,941)                                          |   | 2.77                                     |   |                                        |   |                                      |
| Forfeited or expired                                |   | (889,714)                                          |   | 7.21                                     |   |                                        |   |                                      |
|                                                |   |                                               |   |                                     |   |                                        |   |                                      |
| Outstanding at November 30, 2007                    |   | 1,644,328                                     |   | $7.07                                    |   | 6.2                                         |   | $     -               |
|                                                |   |                                               |   |                                     |   |                                        |   |                                      |
| Exercisable at November 30, 2007                    |   | 1,108,344                                     |   | $7.27                                    |   | 4.8                                         |   | $     -               |

 

The            total intrinsic value, which represents the difference between the underlying            stock’s market price and the option’s exercise price, of options exercised            during the years ended November 30, 2007, 2006 and 2005 was $265,049, $71,287 and            $1,351,057, respectively. The total fair value of options vested during the year ended            November 30, 2007 and 2006 was $1,271,656 and $2,092,968, respectively.

 

Cash            received from option and warrant exercises under all share-based payment arrangements            for the years ended November 30, 2007, 2006 and 2005 was $420,919, $131,659 and            987,645, respectively. No tax benefit was realized from option exercises of the            share-based payment arrangements for the years ended November 30, 2007 and 2006. A            $7,000 benefit was recorded for the year ended November 30, 2005.

 

As            of November 30, 2006, the Company also has 1,672,522 stock warrants outstanding at a            weighted average exercise price of $1.85. As of December 1, 2005, the adoption date of            Statement 123(R), these warrants were exercisable; therefore, no expense has been            recognized in the current period. During the fourth quarter of fiscal            2007, 23,302 warrants were exercised at an exercise price of $1.67 per share. As of            November 30, 2007, the warrants are no longer outstanding as the warrants expired in            November 2007.

 

F-24

----

**Note            14 - Retirement Plan**

The            Company has a 401(k) plan which allows its employees to set aside a part of their            earnings, tax deferred, to be matched by the Company as determined each year by            resolution of the Board of Directors. During the years ended 2007, 2006 and 2005, the            Company matched $.25 for each dollar up to 6% of an employee's contribution on a            monthly basis, which amounted to approximately $63,000, $83,000 and $74,000,            respectively.

 

**Note            15 - Commitments and Contingencies**

Leases 

The            Company leases office space and equipment under noncancellable operating leases            expiring through September 2009. Management is currently negotiating with the landlord            to reduce the office space to meet our present needs. Monthly payments under the            current leases are approximately $49,000.

 

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, 2007.

             

| For the Years Ending            |   |   |            |
|---------------------------------|--------|--------|-----------------|
| November 30                     |   |   |            |
|                            |   |   |            |
| 2008                            |   | $      | 588,000    |
| 2009                            |   |   | 1,583,000  |
| 2010                            |   |   | 458,000    |
| 2011                            |   |   | -          |
| 2012                            |   |   | -          |
| Thereafter                      |   |   | -          |
| Total minimum payments required |   | $      | 2,629,000       |

             

Rent            expense for the years ended November 30, 2007, 2006 and 2005 was approximately            $491,000, $495,000 and $467,000, 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 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

----

 

**Note            15 - Commitments and Contingencies (continued)**

Litigation (continued)

 

On January 30, 2006, the            Company filed an action against Healthcare First, a division of Gallagher Insurance            Services, Inc., and of Arthur J. Gallagher & Co. (“HCF”), seeking            recovery in the amount of approximately $3,700,000 against the financial            intermediary/broker involved in obtaining the insurance policies from Centre Insurance,            which were the subject of the prior proceeding against Centre. Following a mediation            process, the matter was resolved on terms including a payment to the Company of            $400,000, which was received in June 2007 and has been reflected as other income for            the year ended November 30, 2007.

 

On            November 21, 2005, the Company brought an arbitration proceeding against Alere Medical            Incorporated (“Alere”), seeking damages and an award for unjust enrichment            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.

 

In            the arbitration, Alere counterclaimed, asserting that, under a seventh agreement            between the parties, there was no obligation to enter into a long term agreement, and            thus, claimed Alere, the Company’s claims were not well founded and Alere is            allegedly entitled to damages for breach of the duty of good faith and fair dealing, as            well as its attorneys’ fees. Alere also filed a lawsuit in state court, in the            Second Judicial District Court of Nevada, Washoe County, seeking esssentially the same            relief. Damages were sought by Alere in an unspecified amount stated to be in excess of            $40,000.

 

Following extensive discovery, these matters were mediated, and both the            arbitration and the litigation were resolved during December 2006. As part of the            resolution, in December 2006, the Company received a payment totaling $1,975,000            bringing these matters to a conclusion. This amount has been reflected as other income            for the year ended November 30, 2007.

 

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 five major customers during 2007, two major customers during 2006 and three            major customers during 2005 and 2004. Major customers were considered to be those who            account for more than 10% of total revenue. The major customers accounted for            approximately 95%, 63% and 69% for 2007, 2006 and 2005, respectively.

 

During fiscal 2008, the Company            anticipates one contract to comprise approximately 40% of total revenues. This contract            has an expiration date of June 3, 2008 and the Company is currently negotiating a            contract renewal however no assurance can be given that such negotiations will be            successful.

 

In a            letter dated October 4, 2006, the Company was notified by HealthSuite Partners, a joint            venture with Alere Medical, Airlogix and the Company, that the HealthSuite Partners            contract with HealthPartners, a Minnesota managed care organization, would not be            extended beyond April 5, 2007.

 

F-26

----

**Note 16 – Sale of Intellectual Property**

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

 

**Note            17 – Fourth Quarter Adjustments**

In            March 2008, the Company executed a settlement agreement with DAKOTACARE settling            any liabilty in connection with ts activities including but not limited            to; Incurred But Not Reported and Paid (IBNP) claims of approximately $7.5 million            associated with the HeartLine Plus SNP in South Dakota and outstanding invoices for TPA            services rendered of approximately $220,000. The Company as agreed to pay DAKOTACARE            $750,000 for a full release of any and all liabilities related to the SNP and            additional liabilities of approximately $380,000. Based on this settlement            agreement, management believes the Company has no further liability. In addition, the            Company recorded an impairment charge related to product software development of            approximately $445,000 and expensed approximately $400,000 of prepaid broker            commissions related to 2007 enrollment. As a result of the settlement, the Company had            a decrease in its estimated liability of approximately $6.5 million primarily            attributable to a decrease in its IBNP in the fourth quarter of fiscal 2007, which is            reflected as part of discontinued operations.

 

During the fourth quarter, the Company completed a reconciliation under            its joint venture’s contract with HealthPartners, which reflected the achievement            of targeted performance measures. As a result, during the fourth quarter of fiscal            2007, the Company recognized approximately $169,000 of previously deferred revenue            under this contract with HealthPartners.

 

**Note 18 - Subsequent Events**

In            February 2008, the Company negotiated a contingent settlement agreement with a vendor            for consulting services rendered in 2007. The Company agreed to pay the vendor 45% of            the outstanding amount of approximately $545,000 should the Company obtain adequate            financing. If the Company cannot obtain adequate financing, the liability will revert            back to the full amount due. The financial statements do not include any adjustment            related to this agreement.

 

On            December 18, 2007, the Company received a Nasdaq Staff Deficiency Letter from Nasdaq,            on which the Company’s common stock is listed (“Nasdaq”). The letter            indicated that for the last 30 business days, the bid price of the Company’s            common stock has closed below the minimum $1.00 per share requirement of Nasdaq for            continued listing set forth in Marketplace Rule 4350(c)(4). The Letter also stated that            the Company had been provided a cure period by Nasdaq until June 16, 2008 in order for            the Company to become compliant again with Nasdaq’s Marketplace Rules.

 

If            the Company has not regained compliance by the end of the cure period, Nasdaq rules            require its staff to determine whether the Company meets the Nasdaq Capital Market            initial listing criteria as set forth in Marketplace Rule 4350(c), except for the bid            price requirement. According to the Letter, if at that time the Company meets the            initial listing criteria, the Nasdaq staff will notify the Company that it will be            granted an additional 180 calendar day compliance period. However, if the Company is            not eligible for an additional compliance period, the Nasdaq staff will provide written            notification to the Company that its securities will be delisted. At that time, the            Company may appeal the delisting determination to a Listing Qualifications            Panel.

 

F-27

----

**Note 18 - Subsequent Events (continued)**Additionally, the Company had received a second letter            from Nasdaq indicating the Company does not meet the majority independent director and            audit committee composition requirements as set forth in Marketplace Rules 435(c)(1)            and 435(d)(4), respectively. Consistent with Marketplace Rules 435(c)(1) and 435(d)(4),            NASDAQ has provided the Company a cure period in order to regain compliance as follows:            (1) until the earlier of the Company’s next annual shareholders’ meeting or            November 12, 2008; or (2) if the next annual shareholders’ meeting is held before            May 12, 2008, then the Company must evidence compliance no later then May 12, 2008. In            the event the Company does not regain compliance by the required date, Nasdaq rules            require Staff to provide written notification to the Company that its securities will            be delisted.

On March 20, 2008, the Company entered into an agreement with the            former CEO of the Company, a former director of the company and a third individual (the            “Investors”), to receive up to $750,000 in working capital. The financing            is structured to provide $375,000 to the Company at closing, with an additional            $375,000 to be deposited into an escrow account, which could be released at the            Company’s request, in two stages, upon achieving certain milestones in connection            with the possible sale of the Company or its assets, within certain specified time            frames. Either the Company, on reaching the milestones, or such investors, may require            the release of such funds to the Company. The loan proceeds plus interest, together            with up to $620,000 in severance obligations owed to the former CEO, will be secured by            substantially all assets of the Company, other than securities and other investment            property. As noted above, the former CEO has agreed to forbear on his severance            obligations of up to $620,000, until the earlier of January 15, 2009 and the            closing of either an asset or stock sale.

At            the closing of this financing, the Company will issue to the Investors warrants to            acquire up to 19.9% of the Company’s common stock at an exercise price of $.001            per share; of which, warrants to purchase up to 9.95% of the Company’s common            stock will immediately be exercisable, with the balance becoming exercisable in            proportion to the remaining proceeds in the escrow being released to the Company. The            investors will be entitled, in the case of a sale or exchange of all or, under certain            circumstances, a majority of the outstanding shares, or an issuance of new shares            constituting a majority of the outstanding shares, or a sale of all or substantially            all of the Company’s assets, to receive, either from the Company or by virtue of            the transaction itself, the consideration payable in connection with the transaction on            the shares underlying their warrants, or if no consideration is payable with respect to            the shares in the transaction (such as in a new issuance of shares or in certain asset            sale transactions), the market value of the shares after giving effect to the            transaction, in each case net of the exercise price of the warrants. Pursuant to the            transaction, the Investors have the right to have two observers present at Board            Meetings.

The            staff at Nasdaq has informed the Company verbally that they are of the opinion that,            even though the director of the Company involved in the transaction resigned on March            18, 2008, this transaction would violate a NASDAQ rule unless shareholder approval was            obtained, as the issuance of warrants in the transaction may be deemed compensation.            Due to the Company’s need for working capital, and that the Company is already in            receipt of delisting letters from NASDAQ, the Company has decided to proceed with the            transaction without seeking shareholder approval. As a result, the Company’s            shares may be delisted by Nasdaq. The Company has not yet determined whether it will            appeal Nasdaq’s or its staff’s determination.

 

F-28

----

**Note 19 - Selected Quarterly Financial Data            (Unaudited)**

Amounts have been restated as a result of discontinued operations            consisting of the Special Needs Plans in New Jersey and South Dakata and the medical            equipment business. Selected quarterly financial data shown below has been restated as            a result of these discontinued operations.

****

|                                      |   | **For the Quarters Ending 2007** |
|-------------------------------------------|--------|----------------------------------|
|                                      |   | **February 28**                  |   | **May 31** |   | **August 31** |   | **November 30** |   | **Total** |
|                                      |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net revenue                               |   | $                                | 1,728,676  |   | $ | 1,162,143  |   | $ | 828,876  |   | $ | 1,527,094  |   | $ | 5,246,789  |
| Gross profit                              |   |                             | 997,577  |   |   | 435,366  |   |   | 123,516  |   |   | 949,450  |   |   | 2,505,909  |
| Income (loss) from continuing operations  |   |                             | 390,019  |   |   | (1,726,541) |   |   | (2,470,745) |   |   | (1,039,549) |   |   | (4,846,816) |
| (Loss) income from discontinued           |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                                |   |                             | (1,447,795) |   |   | (1,082,656) |   |   | (6,730,654) |   |   | 2,855,560  |   |   | (6,405,545) |
| Net (loss) income                         |   |                             | (1,057,776) |   |   | (2,809,197) |   |   | (9,201,399) |   |   | 1,816,011  |   |   | (11,252,361) |
| Basic and diluted income (loss) per share |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| continuing operations                     |   | $                                | 0.02  |   | $ | (0.10) |   | $ | (0.14) |   | $ | (0.06) |   | $ | (0.28) |
| Basic and diluted loss per share          |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| discontinued operations                   |   |                             | (0.08) |   |   | (0.07) |   |   | (0.40) |   |   | 0.17  |   |   | (0.38) |
| Basic and diluted loss per share          |   | $                                | (0.06) |   | $ | (0.17) |   | $ | (0.54) |   | $ | 0.11  |   | $ | (0.66) |
|                                      |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

 

|                              |   | **For the Quarters Ending 2006** |
|-----------------------------------|--------|----------------------------------|
|                              |   | **February 28**                  |   | **May 31** |   | **August 31** |   | **November 30** |   | **Total** |
|                              |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net revenue                       |   | $                                | 3,012,562  |   | $ | 1,569,904  |   | $ | 1,735,896  |   | $ | 1,817,943  |   | $ | 8,136,305  |
| Gross profit                      |   |                             | 1,260,104  |   |   | 203,731  |   |   | 781,674  |   |   | 1,126,360  |   |   | 3,371,869  |
| Loss from continuing operations   |   |                             | (1,451,030) |   |   | (2,279,110) |   |   | (2,159,267) |   |   | (3,605,956) |   |   | (9,495,363) |
| Loss from discontinued operations |   |                             | (981,166) |   |   | (896,239) |   |   | (1,158,134) |   |   | (1,705,322) |   |   | (4,740,861) |
| Net loss                          |   |                             | (2,432,196) |   |   | (3,175,349) |   |   | (3,317,401) |   |   | (5,311,278) |   |   | (14,236,224) |
| Basic loss per share continuing   |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                        |   | $                                | (0.08) |   | $ | (0.14) |   | $ | (0.13) |   | $ | (0.22) |   | $ | (0.57) |
| Basic loss per share discontinued |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                        |   |                             | (0.06) |   |   | (0.05) |   |   | (0.07) |   |   | (0.10) |   |   | (0.28) |
| Basic loss per share              |   | $                                | (0.14) |   | $ | (0.19) |   | $ | (0.20) |   | $ | (0.32) |   | $ | (0.85) |
|                              |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

 

|                                         |   | **For the Quarters Ending 2005** |
|----------------------------------------------|--------|----------------------------------|
|                                         |   | **February 28**                  |   | **May 31** |   | **August 31** |   | **November 30** |   | **Total** |
|                                         |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net revenue                                  |   | $                                | 4,707,067 |   | $ | 5,417,825 |   | $ | 5,457,173  |   | $ | 6,375,624  |   | $ | 21,957,689  |
| Gross profit                                 |   |                             | 2,923,493 |   |   | 3,607,547 |   |   | 3,684,684  |   |   | 4,408,716  |   |   | 14,624,440  |
| Income from continuing operations            |   |                             | 870,130 |   |   | 870,796 |   |   | 1,417,320  |   |   | 1,850,587  |   |   | 5,008,833  |
| Income (loss) from discontinued              |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                                   |   |                             | 4,673 |   |   | 195 |   |   | (424,383) |   |   | (703,773) |   |   | (1,123,288) |
| Net income                                   |   |                             | 874,803 |   |   | 870,991 |   |   | 992,937  |   |   | 1,146,814  |   |   | 3,885,545  |
| Basic income per share continuing            |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                                   |   | $                                | 0.05 |   | $ | 0.05 |   | $ | 0.09  |   | $ | 0.11  |   | $ | 0.30  |
| Basic income (loss) per share                |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| discontinued operations                      |   |                             | 0.01 |   |   | 0.00 |   |   | (0.03) |   |   | (0.04) |   |   | (0.06) |
| Basic income per share                       |   | $                                | 0.06 |   | $ | 0.05 |   | $ | 0.06  |   | $ | 0.07  |   | $ | 0.24  |
| Diluted income per share continuing          |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                                   |   | $                                | 0.05 |   | $ | 0.05 |   | $ | 0.07  |   | $ | 0.10  |   | $ | 0.27  |
| Diluted income (loss) per share discontinued |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| operations                                   |   |                             | 0.00 |   |   | 0.00 |   |   | (0.02) |   |   | (0.04) |   |   | (0.06) |
| Diluted income per share                     |   | $                                | 0.05 |   | $ | 0.05 |   | $ | 0.05  |   | $ | 0.06  |   | $ | 0.21  |
|                                         |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

 

F-29

----

**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, 2007 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, 2007 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, 2007 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, 2007 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, 2007 and is incorporated herein by            reference.

 

32

----

**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, 2007 and 2006

 

Consolidated Statement of Operations for each of the three            years

ended November 30, 2007, 2006 and 2005

             

Consolidated Statement of Comprehensive Income (Loss) for each of            the

three years ended November 30, 2007, 2006 and 2005

             

Consolidated Statement of Stockholder’s Equity for each            of

the three years ended November 30, 2007, 2006 and 2005

 

Consolidated Statement of Cash Flows for each of the three

years ended November 30, 2007, 2006 and 2005

 

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:

|   | Sequential |
|--------|------------|

| Exhibit | No. | Description | Page No. |
|---------|-----|-------------|----------|

 

|   | 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 |
|--------|----------------------------------------------------------------------------------------------|-------|

 

|   | 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 |
|--------|---------------------------------------------------------------------------------------------------|-------|

 

33

----

 

|   | 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                            to 4.2 |  |
|--------|-------------------------------------------------------------------------------------------|--|

|   |  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 |
|--------|----------------------------------------------------------------------------------------------|-------|

 

|   | 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 |
|--------|------------------------------------------------------------------------------------------------------|-------|

 

34

----

 

|   | 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 |
|--------|-------------------------|-------|

 

|   | 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 |
|--------|-----------------------------|-------|

 

35

----

 

|   | 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 |
|--------|----------------------------|-------|

 

|   | 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 |
|--------|-------------------------------------------|-------|

 

|   | 10.25 |  Amendment to Employment Agreement between the                            Company |
|--------|-------|----------------------------------------------------------------------------------------|

  and Michael W. Cox (Exhibit 10.1 to the Company’s            Report

|   |   on Form 8-K dated August 24, 2006) | I/B/R |
|--------|-------------------------------------------|-------|

             

|   | 11 |  None. |
|--------|----|-------------|

 

|   | 13 |  None. |
|--------|----|-------------|

 

|   | 16 |  None. |
|--------|----|-------------|

 

|   | 18 |  None. |
|--------|----|-------------|

 

|   | 21 |  Subsidiaries of Registrant | * |
|--------|----|----------------------------------|---|

 

|   | 22 |  None. |
|--------|----|-------------|

 

36

----

 

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

 

|   | 24 |  None. |
|--------|----|-------------|

|   | 31.1 |  Certification of Principal Executive Officer of                            Periodic Report |
|--------|------|--------------------------------------------------------------------------------------------------|

|   |   pursuant to Rule 13a-14a and Rule                            15d-14(a). | * |
|--------|--------------------------------------------------------------------------------|---|

 

|   | 31.2 |  Certification of Chief Financial Officer of                            Periodic Report |
|--------|------|----------------------------------------------------------------------------------------------|

|   |   pursuant to Rule 13a-14a and Rule                            15d-14(a). | * |
|--------|--------------------------------------------------------------------------------|---|

 

|   | 32.1 |  Certification of Principal Executive Officer and                            Chief Financial |
|--------|------|---------------------------------------------------------------------------------------------------|

|   |   Officer pursuant to U.S.C. - Section                            1350. | * |
|--------|------------------------------------------------------------------------------|---|

 

________

 

| * | Filed herewith |
|---|----------------|

**            Management contract or compensatory plan or arrangement

 

37

----

**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: March 25, 2008 | QMED, INC. |
|-----------------------|------------|

 

 

|   | By:/s/ Jane A.                            Murray__________ |
|--------|------------------------------------------------------------|

|   | Jane A. Murray |
|--------|----------------|

|   | President and Chief Executive Officer |
|--------|---------------------------------------|

 

----

**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/ Jane Murray | President, | March 25, 2008 |
|-----------------|------------|----------------|

| Jane Murray | Chief Operating Officer and Director |
|-------------|--------------------------------------|

|   | (Principal Executive Officer) |
|--------|-------------------------------|

 

| /s/ William T. Schmitt, Jr. | Senior Vice President and Chief | March 25, 2008 |
|-----------------------------|---------------------------------|----------------|

| William T. Schmitt, Jr. | Financial Officer |
|-------------------------|-------------------|

|   | (Principal Financial Officer) |
|--------|-------------------------------|

 

| /s/ Glenn J. Alexander | Controller | March 25, 2008 |
|------------------------|------------|----------------|

| Glenn J. Alexander | (Principal Accounting Officer) |
|--------------------|--------------------------------|

 

 

| /s/ A. Bruce Campbell, M.D. | Director | March 25, 2008 |
|-----------------------------|----------|----------------|

A.            Bruce Campbell, M.D.

 

|   | Director | March 25, 2008 |
|--------|----------|----------------|

Richard            I. Levin, M.D.

 

----

**SEC            FILED COPY ONLY - NOT BOUND WITH FINANCIAL**

Schedule II

 

| QMED, INC. AND SUBSIDIARIES       |
|-----------------------------------|
| Valuation and Qualifying Accounts |
|                              |   |   |   |   |   |   |   |   |   |
|                              |   |   |   |   |   |   |   |   |   |
|                              |   |   | Balance at |   |   |   |   |   | Balance at |
|                              |   |   | Beginning of |   |   |   |   |   | End of |
|                              |   |   | Year |   | Additions |   | Write-offs |   | Year |
|                              |   |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts   |   |   |   |   |   |   |   |   |   |
|                              | 2005 |   | $     51,850 |   | $      57,159 |   | $                                  33,325  |   | $        75,684  |
|                              | 2006 |   | 75,684 |   | 18,830 |   | 40,956  |   | 53,558  |
|                              | 2007 |   | 53,558 |   | 49,231 |   | 43,809  |   | 58,980  |
|                              |   |   |   |   |   |   |   |   |   |
| Deferred tax valuation allowance  |   |   |   |   |   |   |   |   |   |
|                              | 2005 |   | 10,037,000 |   | - |   | (1,790,000) |   | 8,247,000  |
|                              | 2006 |   | 8,247,000 |   | 5,364,000 |   | -  |   | 13,611,000  |
|                              | 2007 |   | 13,611,000 |   | 4,347,000 |   | -  |   | 17,958,000  |