The ohms/cad(R) Process


                                     [ART]

              GRAPHICAL REPRESENTATION OF THE ohms/cad(R) PROCESS



                           24 hr. Ischemia Evaluation


                                     [ART]

o    Stratifies  patients  into  low/high  risk  prognostic  groups for coronary
     events


o    Best  predictor  of adverse  outcome in stable CAD,  post MI, PTCA and CABG
     patients


                          Annual Report 1998 - Page 1


<PAGE>


President's Message
================================================================================

Dear Fellow Shareholder:

The end of Fiscal  Year 1998 found our  Company  on the brink of major  positive
developments, despite real carnage everywhere evident in the healthcare services
industry.  There  is no  doubt  that  the  industry  problems  which  devastated
physician  practice  management firms (PPMs) like  Medpartners,  FPA Medical and
Phycor, also impacted the time horizon of our efforts,  forcing us to rethink at
least the PPM market.  But the good news is that those  problems  appear to have
had the collateral  effect of making our  ohms|cad(R)  service both more visible
and  necessary  to some of the  largest  HMO and other  payor  organizations  in
American healthcare.

During  the  year we  presented  data on the  patient  health  improvements  and
economic  benefits  derived  from  ohms|cad  to  three  significant   healthcare
conferences.  The data are remarkable. For example, when comparing the health of
those patients whose doctors actually embraced the ohms|cad treatment guidelines
with the health of those patients whose doctors did not, we find that the former
group had very positive  outcomes  while the latter were their near mirror image
in negative outcomes.

                                   Outcomes I*
                         Ischemia and Risk Factor Change
                  (by physician compliance within study group)

[THE FOLLOWING TABLES WERE REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

ISCHEMIA
                     Patients Improved            Patients Worsened
                     -----------------            -----------------

Compliant (90%)             97%                            3%
Non-Compliant (10%)         16%                           84%

BLOOD PRESSURE
                     Patients Improved            Patients Worsened
                     -----------------            -----------------

Compliant (70%)             72%                           28%
Non-Compliant (30%)         27%                           73%

CHOLESTEROL
                     Patients Improved            Patients Worsened
                     -----------------            -----------------

Compliant (50%)             75%                           25%
Non-Compliant (50%)         12%                           88%

As a result of physician  compliance  with ohms|cad  guidelines,  the numbers of
adverse  coronary  events and invasive  medical  procedures  were  substantially
reduced.

                                   Outcomes II
                              Events and Procedures
                           for Patients in ohms Group

 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]

                                                 Reduction in
                                                  Events and
                                                  Procedures
                                                  ----------

             Catheterization                         -59%
             Angioplasty                             -63%
             Heart Attack                            -83%
             Hospital Admissions                     -81%









*All outcomes from  Bakersfield,  California study of 1,546 patients - 18 months
     data and observations.

                          Annual Report 1998 - Page 2


<PAGE>


Combining these outcomes, it is clear that the economic benefit is not dependent
on  depriving  care  to  patients,   but  results  from  refocusing   aggressive
best-practice  care to  prevention  and  management,  and thereby  away from the
traditional  model of  damage  control.  These  kinds  of data  are  incomplete,
however,  until we survey  patients'  satisfaction  not only with their improved
health but also with the process.

                                  Outcomes III
                              Patient Life Measures


                                                               Post-Intervention
    Quality of Life Measures                                     Satisfaction
    ------------------------                                     ------------

    |X| Program's ability to help you understand
        CAD better                                                    92%
    |X| Program's ability to improve your energy
        level and/or ability to do other physical activities          81%
    |X| Knowledge and helpfulness of the nurse who
        worked with you                                               94%
    |X| Overall quality of the care and services
        provided to you                                               94%

When  these  data  are  combined   with  the   economics  of  heart  disease  as
traditionally  practiced,  the  implication  is that ohms|cad is not just a good
thing  but also a good  bet to be a big  business.  The  expenditure  for  heart
disease is already above $100 billion annually and it is growing.  And with baby
boomers nearing Medicare entry, the economics of this most expensive disease are
likely to become a serious  national  problem if not dealt with. At qmed we deal
with it.

In 1998, your Company signed its first regional agreement with Cigna of Ohio, an
operating unit of Cigna HealthCare,  one of the largest  healthcare  insurers in
the country.  Our expectation that it was but the first agreement with Cigna was
verified by an extension of coverage to some Medicare  patients in Ohio,  and by
completion  of an  agreement to enroll  patients in Cigna of Florida,  Tampa Bay
region.  Both these  occurred in the first quarter of 1999. We look forward to a
growing and mutually  beneficial  relationship  with all of Cigna.  In addition,
some of our extended  negotiations with other insurers that began in 1998 should
also result in new business in 1999.

In 1998, we announced an alliance with Life Masters,  Inc., which will enable us
to offer  management of congestive  heart failure (CHF)  patients for the nearly
completed  heart disease  management  coverage  many of our potential  customers
desire.  Life Masters,  a private  company which has contracts with some managed
care  firms  we  have  targeted,   counts  Intel  as  one  of  its   significant
shareholders.

As of  September  1998,  all  devices  sold by qmed  are  Year  2000  compliant.
Customers'  devices under warranty will be upgraded and those not under warranty
will be notified of purchase availability. ohms|cad was designed to be Year 2000
compliant  and  all of our  internal  operations  systems  are on  schedule  for
compliance. In addition, our Vendor Audit Plan has incorporated this issue.

In November 1998, we completed a second round of financing led by Galen Partners
III,  LP.  This  $3.2   million   will  permit  us  to  expand  our   marketing,
implementation and product improvement activities.

While A. Bruce Campbell,  Ph.D.,  M.D., agreed to join our Board of Directors in
February  1999,  I would  nevertheless  like to take this  opportunity  to again
welcome  him.  His  background   includes  former  President,   Monsanto  Health
Solutions,  former  Senior VP of Aetna US  Healthcare  and former chief  medical
officer of Aetna Health Plans.

We  believe  that qmed is at the  brink of  success.  That is why our  dedicated
employees have persevered through the difficult industry environment of the past
eighteen  months.  We appreciate  their  tenacity as we appreciate the hopes and
patience of our shareholders. Thank you.

Very truly yours,



Michael W. Cox
President


                          Annual Report 1998 - Page 3


<PAGE>


Corporate Profile

     qmed,  Inc.  (the  "Company").  The  Company  engages  in the  development,
manufacture,  marketing and sale of advanced  medical  devices and systems.  The
Company,  through Interactive Heart Management Corp.  ("IHMC(R)"),  a subsidiary
founded in 1995,  developed  and is  marketing  an  integrated  coronary  artery
disease  management system under the registered  trademark  "ohms|cad" to assist
managed  care  organizations  in managing  the cost of coronary  artery  disease
("CAD").  The Company has historically focused on producing high quality medical
devices that  provide  reliable  diagnostic  interpretation  of certain  disease
states,   including  a  line  of  ambulatory   ischemic   heart   monitors,   an
interpretative  electrocardiograph,  a device  for the  analysis  of heart  rate
variability and a device for the measurement of venous blood flow. These systems
are  designed  to  address  the  needs of  primary  health  care  physicians  to
appropriately  manage certain diseases cost effectively.  The Company's products
are uniquely  suited to assist primary health care physicians in discharging the
greater  medical  responsibilities  that are  expected to be placed on them,  as
efforts  are  made to  reduce  the  overall  cost of  health  care.  Each of the
Company's present products, and those which are under development by the Company
as well as products  employing  selectively  acquired  technology  developed  by
others, are designed to provide sophisticated  analysis of physiological data in
near or  real-time  and report  these  analytical  results to the  primary  care
physician  in order to  detect  and  manage  early  signs of  potentially  acute
diseases.   These  technologically  advanced  diagnostic  tools  lead  to  early
detection  and  treatment  thereby  facilitating  cost  effective  management of
disease  by a primary  care  physician  rather  than  disease  management  in an
expensive acute care facility, such as a hospital.

     Utilizing the  experience  obtained  through  various drug trials with such
companies as Pfizer,  Ciba Geigy,  ICI and others and the extensive  validations
completed on Monitor One instruments,  the Company developed ohms|cad which is a
comprehensive,  telemedicine disease management system for the CAD patient which
is marketed by the Company's IHMC  subsidiary.  This system  consists of Monitor
One STRx ambulant ischemic  technology,  a remote on-line diagnostic center (The
ohms  Center) and an  integrated  cardiology  consultant  practice.  This entire
system  non-invasively  and reliably  quantifies  the  probable  risk of a heart
attack, unstable angina and death and directs the patient to appropriate therapy
with  the  emphasis   throughout  on  early   detection,   the  modification  of
risk-factors  and medical  intervention.  Early  treatment,  emphasis on medical
intervention and appropriate referrals to the cardiologist results in an overall
lowering of the cost of CAD care and the  improvement in mortality and morbidity
rates in populations having CAD.

     The Company has also  developed  and is  marketing  an  electronic  medical
device under the name,  Monitor One nDx(R)  ("nDx")  which  analyzes  heart rate
variability.  The loss of  variation  in heart rate may assist the  physician in
making a  diagnosis  and  determining  the  severity  of  autonomic  neuropathy.
Autonomic  neuropathy,  a  deterioration  of the autonomic  nervous  system,  is
associated  with  diabetic  patients  which  may  lead to  complications  in the
functioning of the heart,  respiratory  systems,  digestion,  body  temperature,
metabolism, perspiration and the secretion of certain endocrine glands.


                          Annual Report 1998 - Page 4


<PAGE>


ohms|cad System

     ohms|cad  is  Interactive  Heart  Management   Corp.'s  (IHMC)  proprietary
"On-line  Health  Management  Service  for  Coronary  Artery  Disease".  It is a
telecommunication system designed as a total disease management process for CAD.
It  consists  of  Monitor  One  STRx,   IHMC's  Monitor  One  ambulant  ischemia
technology;  a remote  on-line  diagnostic  center  (The  ohms  Center);  and an
integrated cardiology consultant practice.  The entire system non-invasively and
reliably  quantifies  the probable risk of a heart attack,  unstable  angina and
death and rationally directs the patient to appropriate  therapy with the accent
on early  detection,  the  modification  of  critical  risk-factors  and medical
intervention.

     The overall system operates as an "expert system"  emphasizing best medical
treatment options for myocardial  ischemia and continued coronary wellness.  The
system is an evidence based, relational mechanism, using CAD patient descriptors
which include: demographics, medical history, current medical therapy, including
aspirin,  lipid and  hypertension  profiles,  obesity  and  lifestyle,  smoking,
glucose levels and ambulant ischemia in its decision making.

     In addition,  each individual patient's  demographics and risk profiles are
simultaneously  entered into the ohms|cad  database for prevention  analysis and
treatment.  Recommendations  for  management  are  relational and tailored to an
individual  patient  for  lipid  and  hypertension  management,  antithrombosis,
smoking, exercise, obesity and diabetes.

     Because of  centralized,  digital  storage  of all data,  it allows for the
continuous  description  and analysis of  quantifiable  results;  success of the
stratification,  proportion of patients assigned to various therapies, objective
outcomes,  interplay  with  pharmaceutical  and  pharmacy  benefit  managers and
physician and patient compliance and satisfaction.

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

     Because  ohms|cad is an active  disease  management  process  emphasizing a
continuum  of care,  derived  from early  detection  of  ambulant  ischemia  and
modification  of patient risk factors,  similar cost effective  improvements  in
cardiac  events can be expected  from its use. The ohms|cad  system  continually
monitors the care process at the primary care level,  thus, results are reported
as outcomes.  Favorable  outcomes increase market share,  decrease economic risk
and increase product differentiation. In the end, it is "coronary wellness" that
counts. It is durable,  measurable and less costly than conventional  care. As a
result,  the early  implementation  of ohms|cad should contribute to significant
savings and improved health outcomes.


                          Annual Report 1998 - Page 5


<PAGE>


Monitor One and Other Products

     The Company's Monitor One systems utilize  technology which detects changes
in the ECG signal which may be associated  with  diseases of the heart.  Monitor
One systems store analyzed ECG wave forms,  statistical  data,  produce  printed
reports and can  transmit  data either  directly to a printer or over  telephone
lines or to a personal  computer  for  physician  analysis,  interpretation  and
ischemic intervention. The Company's Monitor One, which may be worn on a belt or
carried in the patient's  pocket,  is capable of  interpreting a wide variety of
ECG  signals  which may be  associated  with  cardiac  conditions.  Monitor  One
technology has been independently  validated in controlled  research studies for
the  detection  of  ischemic  episodes   associated  with  coronary   ST-segment
deviations in patients with diagnosed CAD.

     Each Monitor One system is a computerized  monitor with five  high-fidelity
electrodes  which are either  disposable or reusable and attached to the monitor
through a single connector. The reusable electrodes were originally developed by
the National  Aeronautics  and Space  Administration  ("NASA").  Monitoring  for
periods of greater than 24 hours is possible due to  solid-state  memory and the
design of the reusable  electrodes,  which allows  high-fidelity  signal capture
without the need for daily replacement of disposable electrodes.

     The Company  developed  and is marketing a diagnostic  device that analyzes
heart rate  variability  which can  provide  the  physician  information  on the
functioning of the Autonomic  Nervous  System  ("ANS").  ANS  dysfunction is the
failure of the portion of the body's nervous system to regulate such unconscious
functions as respiration, circulation, digestion, heart rate, body temperatures,
metabolism,  sweating  and certain  glandular  secretions.  These  symptoms  are
associated with serious  complications of diabetes leading to blindness,  kidney
failure,  and may contribute to diabetic  cardiac  autonomic  neuropathy,  often
associated  with  "silent  heart  disease,"  heart  attacks and "sudden  cardiac
death." The Company's  Monitor One nDx system ("nDx")  automates the analysis of
heart rate variation  during deep  inspiration  and forced  expiration,  posture
changes and  Valsalva  maneuvers.  The nDx  monitor  assists  the  physician  in
administering  the test by prompting the patient's  breathing  patterns and then
providing a  statistical  analysis.  The Company  believes that this product can
assist  physicians in the early detection of neurological  disorders  related to
diabetes,  before  other more  dangerous  symptoms  (heart  attacks,  blindness,
impotence, etc.) are present and to help manage the treatment of their diagnosed
diabetic patients.  The Company received a U.S. patent for the nDx technology on
March 29, 1994 (Patent No. 5299119).

     The Company  also  manufactures  and  markets  other  non-invasive  medical
devices.


                          Annual Report 1998 - Page 6


<PAGE>


Selected Financial Data

     The selected  financial  data  presented  below as of November 30, 1998 and
1997 and for each of the three years in the three year period ended November 30,
1998 were derived from the Consolidated  Financial  Statements and Notes thereto
of the Company which are included in this report and have been audited by Amper,
Politziner & Mattia, independent auditors. The selected financial data presented
below as of November  30, 1996,  1995 and 1994 and the years ended  November 30,
1995 and 1994 were from the audited  Consolidated  Financial  Statements  of the
Company which are not included in this report.  The data presented  below should
be read  in  conjunction  with  the  Company's  audited  Consolidated  Financial
Statements and Notes thereto which are included in this report.

<TABLE>
<CAPTION>
                                                                          For the Years Ended November 30:
                                                           1998             1997           1996            1995            1994
                                                        -----------     -----------     -----------     -----------     -----------
<S>                                                     <C>             <C>             <C>             <C>             <C>
Results of Operations
Net Sales                                               $ 2,046,627     $ 2,412,149     $ 3,316,659     $ 5,648,754     $ 8,369,461
Cost of sales                                             1,099,515       1,406,480       1,531,851       1,579,196       2,027,090
                                                        -----------     -----------     -----------     -----------     -----------

Gross profit                                                947,112       1,005,669       1,784,808       4,069,558       6,342,371

Selling, general and administrative
  expenses                                                2,623,984       3,038,949       3,910,436       5,164,478       5,806,320
Provisions for uncollectible accounts                       289,716         214,601          16,051          25,347         106,826
Research and development expenses                           486,843         551,681         454,268         382,244         337,277
Impairment charge                                                --              --         341,683              --              --
                                                        -----------     -----------     -----------     -----------     -----------

(Loss) earnings from operations                          (2,453,431)     (2,799,562)     (2,937,630)     (1,502,511)         91,948
Interest income                                              57,081          98,214         117,623              --              --
Interest expense                                           (179,704)        (25,430)        (33,876)        (68,142)        (84,429)
(Loss) gain on sale of securities                                --         (30,574)         42,473              --
                                                        -----------     -----------     -----------     -----------     -----------

(Loss) earnings before provision
  for income taxes                                       (2,576,054)     (2,757,352)     (2,811,410)     (1,570,653)          7,519
Provision for income taxes                                       --              --              --              --              --
                                                        -----------     -----------     -----------     -----------     -----------

(Loss) earnings before minority interest                 (2,576,054)     (2,757,352)     (2,811,410)     (1,570,653)          7,519
Minority interest in loss of subsidiary                          --              --              --          16,000          17,000
                                                        -----------     -----------     -----------     -----------     -----------

(Loss) earnings before extraordinary item                (2,576,054)     (2,757,352)     (2,811,410)     (1,554,653)         24,519
Extraordinary item-benefit from utilization
  of net operating loss carryforwards                            --              --              --              --              --
                                                        -----------     -----------     -----------     -----------     -----------

Net (loss) income                                       $(2,576,054)    $(2,757,352)    $(2,811,410)    $(1,554,653)    $    24,519
                                                        ===========     ===========     ===========     ===========     ===========

Per Share Data

(Loss) Income per common and
  dilutive common equivalent shares                     $      (.26)    $      (.29)    $      (.30)    $      (.19)    $       .00
                                                        ===========     ===========     ===========     ===========     ===========

Balance Sheet Data (at end of periods)

Working Capital                                         $ 2,392,161     $   803,415     $ 3,481,104     $ 3,369,177     $ 1,826,909

Total Assets                                              3,757,424       2,450,533       5,171,064       6,014,620       4,399,104

Total Liabilities                                         1,638,425         888,015       1,072,585       1,777,393       2,002,865

Stockholders' equity                                     (1,902,992)      1,562,518       4,098,479       4,237,227       2,380,239

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

Stockholders equity (including
  temporary equity)                                       2,118,999       1,562,518       4,098,479       4,237,227       2,380,239
</TABLE>


                          Annual Report 1998 - Page 7


<PAGE>


Management's Discussion and Analysis of
Financial Condition and Results of Operations

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

Results of Operations

     The  following  table  presents  the  percentage  of total  revenue for the
periods indicated and changes from period to period of certain items included in
the Company's Consolidated Statements of Operations.

<TABLE>
<CAPTION>
                                                                     % For                          Period -to-Period
                                                                   Year Ended                          % Changes
                                                                  November 30,               ------------------------------
                                                        ------------------------------       1998        1997         1996
                                                                                              vs.         vs.          vs.
                                                         1998        1997        1996        1997        1996         1995
                                                         ----        ----        ----        ----        ----         ----
<S>                                                     <C>         <C>          <C>         <C>          <C>          <C>
Net sales                                                100.0       100.0       100.0       (15.2)      (27.3)       (41.3)
Cost of sales                                             53.7        58.3        46.2       (21.8)       (8.2)        (3.0)
                                                        ------      ------       -----

Gross profit                                              46.3        41.7        53.8        (5.8)      (43.7)       (56.1)
Selling, general and administrative expenses             128.2       126.0       117.9       (13.7)      (22.3)       (24.3)
Provisions for uncollectible accounts                     14.2         8.9          .5        35.0      1237.0        (36.7)
Research and development expenses                         23.8        22.8        13.7       (11.8)      (21.4)        18.8
Impairment charge                                         --          --          10.3         *           *            *
                                                        ------      ------       -----

(Loss) earnings from operations                         (119.9)     (116.0)      (88.6)      (12.4)       (4.7)        95.5
Interest Income                                            2.7         4.1         3.5       (41.9)      (16.5)           *
Interest expense                                          (8.7)       (1.1)       (1.0)      606.7       (24.9)       (50.3)
(Loss) gain on sale of securities                         --          (1.2)        1.3         *           *            *
                                                        ------      ------       -----
(Loss) earnings before income taxes                     (125.9)     (114.2)      (84.8)       (6.6)       (1.9)        79.0
Income taxes                                              --          --          --           *           *            *
                                                        ------      ------       -----

(Loss) earnings before minority interest                (125.9)     (114.2)      (84.8)       (6.6)       (1.9)        79.0
Minority interest in loss of subsidiary                   --          --          --           *           *            *
                                                        ------      ------       -----
Net (loss) income                                       (125.9)     (114.2)      (84.8)       (6.6)       (1.9)        80.8
                                                        ======      ======       =====
</TABLE>

*Not meaningful

Fiscal 1998 Compared with Fiscal 1997

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations

     Net sales for fiscal 1998  decreased  15.2% to $2,046,627  when compared to
net sales of $2,412,149  for fiscal 1997.  This decrease is primarily due to the
continued transition of the Company's business from selling capital equipment to
selling its  ohms|cad  disease  management  services  through  its wholly  owned
subsidiary,  Interactive  Heart Management  Corp. As a result,  sales of capital
equipment  decreased  approximately 28% to $1,300,630 in fiscal 1998 while sales
of disease  management  services  increased 25% for the same period. The Company
continues to focus on selling its ohms|cad system to managed care companies. The
system has  demonstrated  "cost  effective"  outcomes while improving the health
status of the patient.  The ohms|cad program which began in CIGNA of Ohio during
July 1998, was recently expanded to add their Medicare members. CIGNA HealthCare
of Florida has also  recently  entered  into an  agreement  to use the  ohms|cad
program beginning in April 1999.

     Revenues  received  through  IHMC are  structured  on a  contractual  basis
whereby  the  Company  receives  a payment  from  physician  groups  and  health
management  organizations  calculated  as a percentage  of the  reduction of the
organization's costs of providing care for CAD patients.  An initial baseline is
selected and the total CAD


                          Annual Report 1998 - Page 8


<PAGE>


costs are  computed as baseline  costs.  The  ohms|cad  system is then placed in
service and used  throughout the contract period to reduce costs and improve the
health  status of patients with  coronary  disease.  At the end of each contract
year the total CAD costs are then  calculated  and compared to the baseline year
costs.  The savings  derived are  distributed to the Company on a  predetermined
basis by the  contracting  organization.  From  inception of the  contract,  the
Company  receives a monthly  pre-payment of a portion of the estimated  savings.
Such pre-payments are recorded as revenue.  Once the actual reduction of cost is
calculated,   the  pre-payments  are  subtracted  and  any  additional   savings
distribution owed to the Company is billed and recorded at that time.

     The Company intends to aggressively  continue marketing the ohms|cad system
to leading  health care providers  throughout  the United  States.  Although the
Company  has  recently  entered  into  several  contractual  arrangements,   the
recognition  of  total  savings  revenue  will  lag  behind  administrative  and
marketing costs for at least the first year of the contract period.  Included in
the Company's  net loss of  $(2,576,054)  was  approximately  $(2,081,000)  from
Interactive Heart Management Corp.

     The Company's  gross profit margin  increased  from 41.7% in fiscal 1997 to
46.3% in fiscal 1998. The increase was primarily due to the continued  reduction
of fixed costs related to the Company's  production  facility.  These reductions
were made in response to the decline in capital equipment sales.

     Selling,  general and  administrative  expenses  decreased by approximately
$415,000 when compared to fiscal 1997,  primarily due to management's  continued
commitment to reduce overall administrative  expenses to bring them in line with
expected revenues.

     The provision for doubtful accounts increased by approximately $75,000 when
compared to fiscal 1997.  This increase is primarily due to the  reservation  of
certain  accounts  receivable of Interactive  Heart  Management  Corp. While the
Company has reviewed  interim data and believes these amounts are due, a reserve
has been set aside until the final accounting has been reconciled. Management is
aggressively seeking payment on these overdue amounts.

     The Company has conducted a review of its computer  systems and products to
identify  the  systems  that could be  affected  by the "Year 2000" issue and is
implementing  its plan to resolve the issue. The Year 2000 problem is the result
of computer  programs  being written using two digits rather than four to define
the  applicable  year.  Any of the Company's  programs that have  time-sensitive
software  may  recognize a date using "00" as the year 1900 rather than the year
2000.  This  could  result in a major  system  failure or  miscalculations.  The
Company  presently  believes,   with  modifications  to  existing  software  and
converting  to new  software,  the Year 2000 problem  will not pose  significant
operational  problems  for the  Company's  computer  systems as so modified  and
converted.  However,  if such  modifications  and  conversions are not completed
timely,  the Year 2000 problem may have a material  impact on the  operations of
the Company.  Certain of the Company's products will require software upgrade to
deal with the problem as well.  The  Company has begun to  implement a Year 2000
upgrade  for  each of its  products  that  are the  subject  of  warranties  and
estimates that the total expense to be charged, including engineering,  testing,
parts and labor will be approximately  $180,000, most of which has been expensed
as incurred  during  fiscal 1998.  The Company  estimates  the cost of upgrading
internal  software  programs to be about $25,000  which will be incurred  during
1999. While the Company's ohms|cad system is fully compliant, the Company relies
on the information  technology departments of existing and prospective customers
for data  utilized in proposing a contract and in measuring  the amount of costs
saved  through the  implementation  of ohms|cad.  The Company  cannot assess the
effect that Year 2000 programs implemented by these other companies will have.

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting Standards No. 130 ("SFAS 130"),  "Reporting  Comprehensive
Income".  SFAS 130 establishes  standards for the reporting and  presentation of
comprehensive  income,  its components and accumulated  balances.  Comprehensive
income,  as defined,  includes all changes to equity except those resulting from
investments by or distributions  to owners.  Among other  disclosures,  SFAS 130
requires  that all  items  that are  required  to be  recognized  under  current
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial  statement.  The Company will adopt SFAS 130 in the fiscal year ending
November  30,  1999.  Adoption  of this  statement  will  have no  impact on the
Company's financial position or results of operations.

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS

                          Annual Report 1998 - Page 9


<PAGE>


131"),  "Disclosures  about Segments of an Enterprise and Related  Information".
SFAS 131 establishes  standards for the disclosure of certain  information about
the  operating  segments of a  business.  It also  requires  the  disclosure  of
information  about the  products and services of the  business,  the  geographic
areas in which it operates, and its major customers. The Company will adopt SFAS
131 in the fiscal year ending November 30, 1999. Adoption of this Statement will
have no impact on the Company's financial position or results of operations.

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"),  "Accounting for Derivative
Instruments  and  Hedging  Activities".  SFAS  133  establishes  accounting  and
reporting  standards for derivative as either assets or liabilities  and measure
them at  fair  value.  Under  certain  conditions,  the  gains  or  losses  from
derivatives  may be offset  against those from the items the  derivatives  hedge
against.  Otherwise,  gains and losses from derivatives are recognized currently
in the results of operations. The Company will adopt SFAS 133 in the fiscal year
ending November 30, 2000.  Adoption of this statement is not anticipated to have
a material effect on the Company's financial position or results of operations.

     In management's  opinion,  SFAS Nos. 130, 131, and 133, when adopted,  will
not have a material effect on the Company's financial statements.

Fiscal 1997 Compared with Fiscal 1996

     Net sales for fiscal 1997  decreased  27.3% to $2,412,149  when compared to
$3,316,659  for fiscal  1996.  The  decrease  was  primarily  due to the Company
changing its sales focus beginning in fiscal 1995 from selling capital equipment
to selling its ohms|cad disease  management  services through IHMC. The decision
to place a decreasing  emphasis on the sales of capital equipment was responsive
to the general  decline in the market for capital  equipment sold to physicians.
Management believes the demand for office medical equipment decreased because of
the increased  utilization of  "capitation"  arrangements  between  managed care
organizations  and  physicians  resulting in a change in the way  physicians are
compensated for performing testing procedures  utilizing equipment  manufactured
by the Company.  As a result, the Company's sales efforts focused on selling the
ohms|cad system to physician groups and health management  organizations.  These
efforts  resulted in adding San Jose Medical Group and CIGNA  HealthCare of Ohio
to the managed care organizations utilizing ohms|cad during 1997.

     The Company's  gross profit  margin  decreased to 41.7% in fiscal 1997 from
53.8% in fiscal 1996.  The decrease was  primarily due to the decline in capital
equipment sales while certain fixed costs remained constant.

     Selling,  general and administrative  expenses for fiscal 1997 decreased by
approximately  $870,000  when  compared  to  fiscal  1996,  primarily  due  to a
continued  reduction in sales related expenses in the capital equipment segment.
Management has continued to reduce overall administrative expenses while selling
costs related to ohms|cad have grown.

     The provision for doubtful  accounts  increased by  approximately  $200,000
when compared to fiscal 1996.  This increase is primarily due to the reservation
of certain  accounts  receivable of IHMC. While the Company has reviewed interim
data and believes  these amounts are due, a reserve has been set aside until the
final accounting has been reconciled.

Fiscal 1996 Compared with Fiscal 1995

     Net sales for fiscal 1996 decreased  approximately 41.3% to $3,316,659 when
compared to $5,648,754  for fiscal 1995.  This decrease was due to the continued
reduction in capital  equipment sales through the Company's  direct sales force.
This reduction was primarily  attributable  to the primary care market  shifting
from  fee-for-service to prepaid managed contracts.  Throughout fiscal 1996, the
Company's  management  shifted  its  resources  and  focused  its efforts on the
development  and  marketing  of the  ohms|cad  system  through its wholly  owned
subsidiary, IHMC.

     During April 1996, the Company entered into a strategic  alliance agreement
with  SmithKline  Beecham to jointly  market the  ohms|cad  system to  physician
groups and health maintenance organizations, which was


                          Annual Report 1998 - Page 10


<PAGE>


terminated by the parties in March 1998.  SmithKline  purchased $2,000,000 worth
of the  Company's  common  stock and  warrants to fund the  increased  marketing
efforts on the implementation of the ohms|cad system.

     The  Company  has  aggressively  marketed  the  ohms|cad  system to over 20
leading  health care providers  throughout  the United  States.  Included in the
Company's net loss of $(2,811,410) was approximately $(1,566,000) from IHMC.

     The Company's gross profit margin decreased from 72% to approximately 53.8%
during  fiscal 1996.  The  decrease was directly  related to the decrease in net
sales while certain fixed costs remained constant.

     Selling,  general and  administrative  expenses  decreased by approximately
$1,250,000,  primarily  due to a  reduction  in  sales-related  expenses.  While
management has reduced  general and  administrative  expenses  where  necessary,
expenses  related to the marketing and  implementation  of the ohms|cad  disease
management system have risen.

     The provision  for doubtful  accounts  remained less than 1% of sales.  The
Company maintains strict credit policies with respect to capital equipment sales
to primary care physicians.  Revenue received through the Company's  subsidiary,
IHMC, has been on a contractual basis.

     Research and development expenses remained consistent with prior years.

Liquidity and Capital Resources

     To date,  the  Company's  principle  sources of working  capital  have been
provided by proceeds from public and private  placements  of securities  and the
sale of certain assets. Since the Company's  inception,  sales of securities and
assets have generated approximately $20,000,000 less applicable expenses.

     The  Company  had an  installment  note  payable to a bank in the amount of
$625,000 dated March 1, 1995. The Company made monthly  installment  payments of
$25,000  plus  interest at 1% over prime rate.  The note was fully paid on March
31, 1997.

     On December 18, 1997, the Company sold 8%  Convertible  Notes (the "Notes")
in the principal amount of $2,000,000 in a private placement to three investors.
Interest  on the notes  accrued  monthly and was due on December  18,  2002.  On
November  16, 1998,  the Company  sold an  aggregate of 1,926,702  shares of its
common stock for $3,217,626 in a private  placement to investors led by the same
three  investors  that  purchased  the Notes.  The Company  received  gross cash
proceeds  of  $2,020,936  from the sale of shares  and the  balance  was paid by
converting  $1,050,000 of $2,000,000  principal  amount of the Notes and accrued
interest  of  $146,663  into  shares of common  stock.  The  remaining  $950,000
principal  amount of the Notes were amended to increase the interest rate to 16%
per annum, and to grant to Noteholders a security  interest in substantially all
of the Company's assets.  Interest on the Notes is capitalized annually and will
be due at  maturity.  The Company may redeem the Notes for cash or common  stock
for certain  premiums  and subject to  conditions  contained in the amended Note
Agreement. The Company is required to redeem the Notes at higher premiums in the
event of a change of control.  The Note  Agreement  prohibits  the Company  from
paying dividends until the Notes are paid.

     In  connection  with the sale of the shares,  the Company  granted  certain
rights to the purchasers,  including  registration rights and the right to cause
the Company to purchase the shares at the  following  prices in certain  events,
such as bankruptcy,  a default in payments or if the Company is no longer listed
on the NASDAQ Small Cap Market at the following prices:

                  Year                               Redemption Price
                  ----                               ----------------
                  1998                                   $2.0875
                  1999                                   $2.0040
                  2000                                   $1.9205
                  2001                                   $1.8370
                  2002 and thereafter                    $1.6700


                          Annual Report 1998 - Page 11


<PAGE>


In the event the  Company is  required  to redeem  the  shares  for cash,  which
management  believes is not likely during fiscal 1999,  the Company will have to
seek financing or sell assets to pay the redemption  price.  See Note 8 of Notes
to Consolidated Financial Statements.

     The Company had working capital of $2,392,161 at November 30, 1998 compared
to  $803,415  at  November  30,  1997 and  ratios of  current  assets to current
liabilities  of 5.4:1 and 2.0:1 as of November 30, 1998 and 1997,  respectively.
The working capital  increase of  approximately  $1,600,000 was primarily due to
the Company's debt refinancing and sales of securities.

     The Company has anticipated that funds generated from operations,  together
with  cash  and  investments,  may be  sufficient  to meet its  working  capital
requirements  for the current year.  However,  in the event revenues do not meet
management's  expectations or there is an event which causes the Notes to be due
and requires the Company to repurchase the shares in the manner described above,
the  Company  will be  required to seek  additional  financing.  There can be no
assurance that such financing will be available to the Company.

     The  Company  maintains  a general  policy of net 30-day  payment  terms on
equipment sales to distributors,  cash or third-party leasing  arrangements with
direct sales to physicians  and letters of credit for  international  sales.  In
some instances, the Company has extended payment terms beyond net 30 to selected
distributors. The Company's receivables balances over 90 days past due was 11.4%
of the  receivables  balance at November 30, 1998  compared to 19.2% at November
30, 1997. The Company is  aggressively  seeking  payment  arrangements  on these
overdue amounts.

     The Company,  with its IHMC subsidiary,  enters into contract  arrangements
with physician groups and managed care  organizations  where a prepayment toward
cost savings is made per month.  The Company  expects  revenue to increase as it
recognizes cost savings from current contracts and additional  revenues from new
contracts during fiscal 1999.

     The  Company  believes  that there has not been a  significant  impact from
inflation on the Company's operations during the past three fiscal years.

Additional Factors That May Affect Future Results

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

     Need for  Additional  Capital As of  November  30,  1998,  the  Company had
approximately  $2,075,000  cash and short  term  investments.  The  Company  has
experienced  negative cash flows since fiscal 1995 and expects the negative cash
flow to continue until significant service revenue is generated under agreements
to provide ohms|cad services. The Company expects that the monthly negative cash
flow will decrease as a result of increased activities related to ohms|cad.  The
Company's  future  success  is highly  dependent  upon its  continued  access to
sources of financing  which it believes are necessary for the continued  support
of IHMC's sales effort. In addition,  significant  additional financing would be
required  in the event the Company is required to redeem the Notes and shares of
stock issued in a private  placement in November  1998. In the event the Company
is unable to maintain access to its existing financing sources,  or obtain other
sources of financing,  there would be a material adverse effect on the Company's
business, financial position and results of operations.

     Regulation  The  Company's  products  are subject to  extensive  government
regulation in the United States by federal,  state and local agencies  including
the Food and Drug  Administration.  The process of obtaining and maintaining FDA
and other required  regulatory  approvals for the Company's products is lengthy,
expensive  and  uncertain.  There can be no  assurance  that changes in existing
regulations  or the  adoption  of new  regulations  will not  occur  which  will
adversely affect the Company.

     Stock  Price   Fluctuations   The  Company's   participation  in  a  highly
competitive  industry often results in  significant  volatility in the Company's
common stock  price.  This  volatility  in the stock price is  significant  risk
investors should consider.

                          Annual Report 1998 - Page 12


<PAGE>


     Forward   Looking   Statements   This  Annual   Report   contains   certain
forward-looking  statements that are based on current expectations.  In light of
the important  factors that can materially  affect results,  including those set
forth  above  and   elsewhere   in  this  Annual   Report,   the   inclusion  of
forward-looking information herein should not be regarded as a representation by
the Company or any other person that the objectives or plans of the Company will
be achieved. The Company may encounter competitive, technological, financial and
business challenges making it more difficult than expected to continue to market
its products and services; competitive conditions within the industry may change
adversely;  the  Company  may  be  unable  to  retain  existing  key  management
personnel;  the Company's forecasts may not accurately anticipate market demand;
and there may be other material  adverse changes in the Company's  operations or
business.  Certain important  factors  affecting the forward looking  statements
made herein include,  but are not limited to (i) accurately  forecasting capital
expenditures and (ii) obtaining new sources of external  financing.  Assumptions
relating to  budgeting,  marketing,  product  development  and other  management
decisions   are   subjective   in  many   respects  and  thus   susceptible   to
interpretations  and periodic  revisions based on actual experience and business
developments,  the impact of which may cause the  Company  to alter its  capital
expenditure or other budgets,  which may in turn affect the Company's  financial
position and results of operations.


                          Annual Report 1998 - Page 13


<PAGE>


                                            CONSOLIDATED BALANCE SHEETS
                                                   November 30,

<TABLE>
<CAPTION>
                                                      ASSETS

                                                                                                      1998                 1997
                                                                                                  ------------         ------------
<S>                                                                                               <C>                  <C>
Current assets
     Cash and cash equivalents                                                                    $  2,075,179         $    640,266
     Accounts receivable, net of allowance for doubtful accounts
      and sales returns of $500,000 and $250,000, respectively                                         304,465              197,901
     Inventory                                                                                         503,994              667,255
     Prepaid expenses and other current assets                                                          57,776               68,439
                                                                                                  ------------         ------------
                                                                                                     2,941,414            1,573,861

Property and equipment, net of accumulated depreciation                                                578,404              624,761
Product software development costs                                                                      34,856               60,998
Other assets                                                                                           202,750              190,913
                                                                                                  ------------         ------------

                                                                                                  $  3,757,424         $  2,450,533
                                                                                                  ============         ============


                                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
     Accounts payable and accrued liabilities                                                     $    549,253         $    770,446

Convertible long-term debt                                                                             950,000                   --
Leases payable, long-term                                                                              107,724               77,522
Deferred warranty revenue                                                                               31,448               40,047
                                                                                                  ------------         ------------

Total Liabilitites                                                                                   1,638,425              888,015
                                                                                                  ============         ============

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

Stockholders' equity
     Common stock $.001 par value; 20,000,000 shares
      authorized; 11,586,321 and 9,648,519 shares issued
      and 11,564,321 and 9,626,519 outstanding, respectively                                            11,587                9,649
     Paid-in capital                                                                                17,150,547           18,041,941
     Accumulated deficit                                                                           (18,989,501)         (16,413,447)
                                                                                                  ------------         ------------
                                                                                                    (1,827,367)           1,638,143
     Less: treasury stock at cost, 22,000 common shares                                                (75,625)             (75,625)
                                                                                                  ------------         ------------
        Total stockholders' equity                                                                  (1,902,992)           1,562,518
                                                                                                  ------------         ------------

                                                                                                  $  3,757,424         $  2,450,533
                                                                                                  ============         ============
</TABLE>


           See accompanying notes to consolidated financial statements


                          Annual Report 1998 - Page 14

<PAGE>


                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                         For the Years Ended November 30,

<TABLE>
<CAPTION>
                                                            1998                 1997                  1996
                                                        -----------           -----------           -----------
<S>                                                     <C>                   <C>                   <C>
Sales                                                   $ 2,052,157           $ 2,452,084           $ 3,529,216
Less sales returns and allowances                             5,530                39,935               212,557
                                                        -----------           -----------           -----------
                                                          2,046,627             2,412,149             3,316,659

Cost of sales                                             1,099,515             1,406,480             1,531,851
                                                        -----------           -----------           -----------

Gross profit                                                947,112             1,005,669             1,784,808

Selling, general, and administrative expenses             2,623,984             3,038,949             3,910,436
Provision for uncollectible accounts                        289,716               214,601                16,051
Research and development expenses                           486,843               551,681               454,268
Impairment charge                                                --                    --               341,683
                                                        -----------           -----------           -----------

Loss from operations                                     (2,453,431)           (2,799,562)           (2,937,630)
Interest income                                              57,081                98,214               117,623
Interest expense                                           (179,704)              (25,430)              (33,876)
(Loss) gain on sale of securities                                --               (30,574)               42,473
                                                        -----------           -----------           -----------

Loss before provision for income taxes                   (2,576,054)           (2,757,352)           (2,811,410)

Provision for income taxes                                       --                    --                    --
                                                        -----------           -----------           -----------

Net loss                                                $(2,576,054)          $(2,757,352)          $(2,811,410)
                                                        ===========           ===========           ===========


Net loss per share - basic and diluted                  $      (.26)          $      (.29)          $      (.30)
                                                        ===========           ===========           ===========

Weighted average common shares
Outstanding - basic and diluted                           9,893,022             9,562,000             9,287,420
                                                        ===========           ===========           ===========
</TABLE>


           See accompanying notes to consolidated financial statements


                          Annual Report 1998 - Page 15

<PAGE>


                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   For the Three Years Ended November 30, 1998


<TABLE>
<CAPTION>
                                                                                                          Unrealized
                                                                                                         Gain (Loss)
                                                                                      Common Stock      on Securities
                                     Common       Paid-in        Accumulated       Held in Treasury      Available
                                     Stock        Capital          Deficit         Shares    Amount       for Sale         Total
                                     -----        -------          -------         ------    ------       --------         -----
<S>                                 <C>         <C>             <C>                <C>      <C>           <C>           <C>
Balances - November 30, 1995        $ 8,950     $15,138,714     $(10,844,685)      22,000   $(75,625)     $  9,873      $ 4,237,227

  Exercise of stock options             349         704,740               --           --         --            --          705,089
   and warrants

  Issuance fees associated
   with private placements               --          (6,787)              --           --         --            --           (6,787)

  Issuance of common stock
   through strategic alliance
   agreement                            178       1,999,813               --           --         --            --        1,999,991

  Net loss                               --              --       (2,811,410)          --         --            --       (2,811,410)

  Unrealized loss on securities
   available for sale                    --              --               --           --         --       (25,631)         (25,631)
                                    -------     -----------     ------------      -------   --------      --------      -----------

Balances - November 30, 1996          9,477      17,836,480      (13,656,095)      22,000    (75,625)      (15,758)       4,098,479

Exercise of stock options               172         205,461               --           --         --            --          205,633

  Net loss                               --              --       (2,757,352)          --         --            --       (2,757,352)

  Unrealized gain on securities
  available for sale                     --              --               --           --         --        15,758           15,758
                                    -------     -----------     ------------      -------   --------      --------      -----------

Balances - November 30, 1997          9,649      18,041,941      (16,413,447)      22,000    (75,625)           --        1,562,518

  Issuance of common stock
   and put options                    1,927        (806,324)              --           --         --            --         (804,397)
  Issuance fees associated
   with financing                        --        (100,424)              --           --         --            --         (100,424)

  Exercise of stock options              11          15,354               --           --         --            --           15,365

  Net loss                               --              --       (2,576,054)          --         --            --       (2,576,054)
                                    -------     -----------     ------------      -------   --------      --------      -----------

 Balances - November 30, 1998       $11,587     $17,150,547     $(18,989,501)      22,000   $(75,625)     $     --      $(1,902,992)
                                    =======     ===========     ============      =======   ========      ========      ===========
</TABLE>


           See accompanying notes to consolidated financial statements

                          Annual Report 1998 - Page 16


<PAGE>


                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         For the Years Ended November 30,

<TABLE>
<CAPTION>
                                                                      1998                 1997                1996
                                                                  -----------          -----------          -----------
<S>                                                               <C>                  <C>                  <C>
Cash flows from operating activities
  Net loss                                                        $(2,576,054)         $(2,757,352)         $(2,811,410)
                                                                  -----------          -----------          -----------
  Adjustments to reconcile net loss to
    net cash (used) by operating activities
    Depreciation and amortization                                     269,471              267,738              297,432
    Impairment charge                                                      --                   --              341,683
    (Increase) decrease in
    Accounts receivable                                              (106,564)             206,029              444,755
    Inventory                                                         163,261              456,409              285,141
  Prepaid expenses and other current assets                           (28,988)              15,635              (15,671)
    Increase (decrease) in
  Accounts payable and accrued liabilities                            (38,780)             (85,349)            (410,589)
    Other, net                                                          4,583              (50,917)              16,871
                                                                  -----------          -----------          -----------
      Total adjustments                                               262,983              809,545              959,622
                                                                  -----------          -----------          -----------
                                                                   (2,313,071)          (1,947,807)          (1,851,788)
                                                                  -----------          -----------          -----------

Cash flows from investing activities
  Purchase of securities available for sale                                --                   --           (3,662,600)
  Sale of securities available for sale                                    --            2,185,594            3,204,000
  Capital expenditures                                               (168,699)            (383,840)            (273,969)
                                                                  -----------          -----------          -----------
                                                                     (168,699)           1,801,754             (732,569)
                                                                  -----------          -----------          -----------

Cash flows from financing activities
  Principal payment on long-term debt                                      --             (100,000)            (300,000)
  Net proceeds from issuance of long-term
    convertible debt                                                1,980,805                   --                   --
  Net proceeds from issuance of common stock
    and put options                                                 1,935,878              205,633            2,698,293
                                                                  -----------          -----------          -----------
                                                                    3,916,683              105,633            2,398,293
                                                                  -----------          -----------          -----------

Net change in cash and cash equivalents                             1,434,913              (40,420)            (186,064)

Cash and cash equivalents - beginning                                 640,266              680,686              866,750
                                                                  -----------          -----------          -----------

Cash and cash equivalents - ending                                $ 2,075,179          $   640,266          $   680,686
                                                                  ===========          ===========          ===========

Supplemental disclosure of cash paid
  Interest                                                        $    25,416          $    25,430          $    36,708
  Income taxes                                                          4,076                5,632                7,853
</TABLE>


           See accompanying notes to consolidated financial statements


                          Annual Report 1998 - Page 17


<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1

Liquidity

     During  November  1998,  qmed,  Inc.  and   Subsidiaries   (the  "Company")
restructured  certain debt with the Galen Funds (see Note 8) to provide  working
capital and to increase equity.

     Although the Company  anticipates  operating  losses during the 1999 fiscal
year,  the Company  believes that  available cash on hand and the operating plan
for 1999,  which includes new contracts both signed and anticipated to be signed
for its disease management services,  will provide sufficient working capital to
meet its needs for the current year.

Note 2

Significant Accounting Policies

Nature of Business

     The Company operates in two industry segments:  medical equipment sales and
disease management  services.  Sales are made nationwide through direct sales to
physicians and managed care organizations.

Principles of Consolidation

     The consolidated  financial  statements include the accounts of qmed, Inc.,
its  majority  owned (83%)  subsidiary,  Heart Map,  Inc.,  and its wholly owned
subsidiary,  Interactive  Heart Management  Corp. All intercompany  accounts and
transactions have been eliminated in consolidation.

Cash and Cash Equivalents

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

Concentration of Credit Risk

     Financial   instruments   that   potentially   subject   the   Company   to
concentrations of credit risk consist of cash and cash investments.  The Company
restricts cash and cash investments to financial  institutions  with high credit
standings.  At November  30,  1998,  the Company  had  approximately  $2,000,000
invested with one financial institution.

Investments

     Realized gains and losses are determined using the specific  identification
method.

Inventory

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

Depreciation and Amortization

     Property and equipment is depreciated  using the  straight-line  method for
financial statement purposes over a five year period. Leasehold improvements are
amortized  on a  straight-line  basis  over the term of the lease.  Repairs  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.

Product Software Development Costs

     The  Company  capitalizes  certain  costs  related  to the  development  of
computer  software  once  technological  feasibility  of the  software  has been
established.   Product  software  development  costs  are  amortized  using  the
straight-line  method over the  estimated  useful  economic life of the software
developed, which is generally 36 months.

Cost of Technology

     Cost of acquired  technology  is stated at the lower of  amortized  cost or
estimated net realizable value. The balance of $341,683 at November 30, 1996 was
written off since the estimated  realizable  value was deemed to be zero. It was
determined  that such  technology  no longer had a realizable  value  because in
fiscal 1996, the


                          Annual Report 1998 - Page 18


<PAGE>

Note 2

Significant Accounting Policies - (continued)

     Company focused  primarily on the development and marketing of the ohms|cad
system.  Acquired  technology was being amortized on a straight-line  basis over
the estimated useful life of 7 years.  Amortization was $0 in both 1998 and 1997
and approximately $100,000 in 1996.

Stock Option Plan

     The Company has elected to follow  Accounting  Principles Board Opinion No.
25,   "Accounting   for  Stock  Issued  to  Employees"   (APB  25)  and  related
interpretations in accounting for its employee stock options and warrants. Under
this  method,  compensation  cost is  measured as the amount by which the market
price of the underlying  stock exceeds the exercise price of the stock option at
the date that the number of options granted and the exercise price are known.

Earnings Per Common Share

     Effective  for  the  Company's  financial  statements  for the  year  ended
November  30,  1998,  the Company  adopted  Statement  of  Financial  Accounting
Standards  No. 128,  "Earnings  per Share,"  (SFAS 128).  SFAS 128  replaces the
presentation of primary  earnings per share ("EPS") and fully diluted EPS with a
presentation  of basic EPS and diluted  EPS,  respectively.  Basic EPS  excludes
dilution and is computed by dividing earnings  available to common  stockholders
by the  weighted-average  number of common shares outstanding during the period.
Diluted  EPS  assumes  conversion  of dilutive  options  and  warrants,  and the
issuance of common stock for all other  potentially  dilutive  equivalent shares
outstanding.

     All EPS data for prior periods has been restated.  The adoption of SFAS 128
did not have a material effect on the Company's reported EPS amounts.

Revenue Recognition

     Revenue is recognized on equipment  sales when the equipment is shipped and
title passes. The Company does not enter into consignment  arrangements with its
customers;  however,  management  does allow the return of  equipment in certain
situations as an accommodation to the customer, or after exhausting  alternative
means of  collection  of related  accounts  receivable.  Management  establishes
estimated accruals for returns from customers and for allowances granted to them
at the time of shipment.  The Company  has,  from time to time,  introduced  new
products or technologically-advanced  versions of existing products. The Company
allows  certain  customers  the  opportunity  upon  the  introduction  of new or
upgraded products to exchange their existing units for new units. In such cases,
revenue is recognized and additional funds are received to the extent of the net
price differential at the time of exchange.  Contracts entered into generally do
not require collateral.

     The Company enters into contractual  arrangements with physician groups and
managed  care  organizations.   Revenue  is  recognized  based  on  management's
estimates of amounts  earned.  At the  inception of such a contract,  management
estimates the total expected  reduction in coronary artery disease ("CAD") costs
over the term of the contract.  The contract provides for the Company to receive
a monthly  prepayment  toward the Company's fees under the contract,  which is a
negotiated  share of the actual  reduction in CAD costs compared to a base year.
The  prepayment  is a fraction of the  estimated  total fees to be received.  At
specified times during the course of the contract,  the actual  reduction in CAD
costs is calculated and the Company then  recognizes  the amount  billed,  which
exceeds the monthly  payments  received.  For the years ended November 30, 1998,
1997, and 1996,  approximately $745,000,  $595,000, and $276,000,  respectively,
from the above such  contracts  were  included  in  revenue.  Certain  contracts
contain  stipulations  that,  if not met,  would require the Company to refund a
portion of  prepayments  received.  The  maximum  amount of the refund  would be
$164,000 at November  30, 1998.  However,  it is  management's  opinion that the
stipulations will be met.

     The Company sells extended service warranty  contracts to consumers usually
with  terms  of  one  to  three  years  commencing  at  the  termination  of the
manufacturer's  warranty.  The Company  recognizes revenue from the sale of two-
and  three-year  contracts  over  the  period  of  the  contracts  based  on the
historical pattern of costs incurred.  Such related costs incurred over contract
years  one,  two,  and three are 76%,  17%,  and 7%,  respectively.  Revenue  on
one-year warranty contracts is recognized on a straight-line basis.


                          Annual Report 1998 - Page 19


<PAGE>


Note 2

Significant Accounting Policies - (continued)

Research and Development Expenses

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

Use of Estimates

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

Reclassifications

     Certain  reclassifications have been made to the cost of sales in the prior
years income  statements  in order to conform to the current year  presentation.
$514,000 and $212,000 was reclassed from  operating  expenses into cost of goods
sold for 1997 and 1996, respectively.

Note 3

Investments

     Sales of available-for-sale securities for the year ended November 30, were
as follows:

                                         1998           1997             1996
                                         ----           ----             ----
     Proceeds from sale                 $    --     $ 2,185,594      $ 3,204,000
     Gross realized gains                    --              --           42,473
     Gross realized losses                   --         (30,574)              --

Note 4

Inventory
                                                               November 30,
                                                          1998            1997
                                                          ----            ----
     Raw materials
       (component parts and supplies)                   $216,350        $209,580
     Finished units                                      287,644         457,675
                                                        --------        --------
                                                        $503,994        $667,225
                                                        ========        ========

     During 1998 and 1997, the Company  capitalized  as equipment  approximately
$40,000 and $205,000,  respectively,  of inventory which is loaned to physicians
in the event that their original unit is being  repaired.  The estimated  useful
life is five years.

Note 5

Property and Equipment

                                                            November 30,
                                                      1998              1997
                                                      ----              ----

     Machinery and equipment                      $ 1,151,318       $ 1,146,762
     Loaner equipment                                 244,542           204,698
     Furniture and fixtures                           387,011           385,527
     Office equipment                                 622,881           611,675
     Leasehold improvements                            51,746            45,846
     Equipment held under capital leases              341,696           235,987
                                                  -----------       -----------
                                                    2,799,194         2,630,495
     Less accumulated depreciation and
       amortization                                (2,220,790)       (2,005,734)
                                                  -----------       -----------
     Property and equipment - net                 $   578,404       $   624,761
                                                  ===========       ===========

     At November 30, 1998 and 1997,  the equipment  under the capital leases had
net book values of approximately $148,000 and $100,000, respectively.

     Depreciation expenses were $198,000, $214,000, and $167,000 for 1998, 1997,
and 1996, respectively.

                          Annual Report 1998 - Page 20


<PAGE>


Note 6

Product Software Development Costs

     During the years ended  November 30,  1998,  1997,  and 1996,  amortization
costs related to product software development costs were $26,142 per year.

Note  7

Accounts Payable and Accrued Liabilities

                                                              November 30,
                                                        1998              1997
                                                        ----              ----

     Accounts payable - trade                         $278,224          $394,264
     Deferred warranty revenue                         156,813           204,260
     Accrued payroll                                    78,539            76,997
     Other accrued expenses                             35,677            94,925
                                                      --------          --------

                                                      $549,253          $770,446
                                                      ========          ========

Note 8

Convertible Long-Term Debt

     On December 18, 1997, the Company issued 8% Convertible  Subordinated Notes
(the "Notes") at face value, to three investors (the "Galen Funds"), in exchange
for  $2,000,000  cash.  The Notes mature  December 18,  2002.  Interest  accrues
monthly, is compounded  annually,  and is payable upon maturity.  The Notes were
convertible into shares of common stock at the rate of $5.60 per share.

     On November 16, 1998, the Galen Funds  converted Notes with a face value of
$1,050,000,  plus $146,657 of accrued interest, into shares of common stock. The
Galen Funds also  invested an additional  $2,020,936  in cash. In exchange,  the
Company issued to the Galen Funds  1,926,702  shares of common stock and 500,000
seven-year  warrants (the  "Warrants") to purchase  additional  shares of common
stock for $3.6875 per share.  The terms of the remaining  $950,000 of Notes were
changed to increase the interest rate to 16%, to decrease the conversion rate to
$3.6875  per  share,  and to  grant  the  Galen  Funds a  security  interest  in
substantially all of the Company's  assets.  The Galen Funds were also given the
right to  redeem  any or all of the  1,926,702  shares at the  prices  specified
below,  upon the occurrence of an event of default (such as bankruptcy or NASDAQ
delisting), change in control, or transfer or lease of a substantial part of the
Company's assets. The prices at which the Company would be obliged to redeem the
stock are as follows:

     Year                                              Redemption Price
     ----                                              ----------------
     1998                                                  $2.0875
     1999                                                   2.0040
     2000                                                   1.9205
     2001                                                   1.8370
     2002 and after                                         1.6700

     In the event the average closing price of the Company's common stock equals
or exceeds $7.375 for a period of twenty  consecutive  trading days, the Company
may redeem the Notes for cash or common stock for Redemption Price, as specified
in Column A below.  Otherwise,  the Notes may be redeemed by the Company for the
Redemption Price in Column B.

     Year                                           Redemption Price
     ----                                           ----------------
                                                 A                    B
     1998                                      105%                112.1%
     1999                                      104%                125.6%
     2000                                      103%                140.8%
     2001                                      102%                157.7%
     2002                                      100%                176.8%

     The Company is required to redeem the Notes at higher premiums in the event
of a change of control.  The Company is prohibited  from paying  dividends until
the Notes are paid.


                          Annual Report 1998 - Page 21


<PAGE>


Note 8

Convertible Long-Term Debt - (Continued)

     The Company has excluded the maximum  possible cash  obligation  related to
the  potential  redemption  of the  $1,926,702  shares issued to the Galen Funds
outside of permanent equity,  under the caption "Temporary  equity-put  option".
Since this  amount  exceeded  the  proceeds  received  from the Galen  Funds,  a
decrease to additional  paid-in  capital was recorded.  As the maximum  possible
cash obligation  declines in accordance with the redemption  prices noted above,
such decline will be reflected as a decrease to "Temporary  equity-put  option",
and an increase in additional paid-in capital.

Note 9

Capital Lease Obligations

     The Company has entered into various capital leases for equipment  expiring
through November 2001 with aggregate monthly payments of $5,943.

     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, 1998:

        For the Years Ending
           November 30,

          1999                                                 $  63,043
          2000                                                    50,788
          2001                                                    45,080
          2002                                                    27,011
          2003                                                     8,352
                                                               ---------

     Total minimum lease payments                                194,274
     Less amount representing interest                           (39,652)
                                                               ---------
     Present value of net minimum lease
         payments                                                154,622
     Less current maturities                                     (46,898)
                                                               ---------
     Long-term maturities                                      $ 107,724
                                                               =========

Note 10

Stock Options and Warrants

     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).  600,000  shares of the  Company's  common stock are
reserved for this plan.

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

     Under the 1986 stock option plan,  options may be granted until March 1996.
700,000 shares of the Company's common stock are reserved for this plan.

     Under the 1986, 1990, and 1997 plans, options are exercisable in cumulative
33% increments  after the first and each  subsequent  anniversary of the date of
the  grant,  except  for  officers'  options  which  generally  are  exercisable
immediately.  The incentive  and  nonqualifying  stock options  expire ten years
after the date of the grant.

     Options  granted under all plans must be at a price per share not less than
the  fair-market  value  per  share of  common  stock on the date the  option is
granted.

     Pro forma information  regarding net income and earnings per share has been
determined as if the Company had accounted for its employee  stock options under
the fair-value method. The fair value for these options was


                          Annual Report 1998 - Page 22


<PAGE>


Note 10

Stock Options and Warrants - (Continued)

estimated at the date of grant using a  Black-Scholes  option pricing model with
the following weighted-average assumptions for November 30:

                                                1998                1997
                                                ----                ----

     Risk-free interest rate                       4.7%               6.8%
     Expected volatility                          70.0%              65.0%
     Dividend yield                                  --                 --
     Expected life                            5.5 years          5.5 years

     There were no options issued during the year ended November 30, 1996.

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

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma information follows:

                                                   1998                1997
                                                   ----                ----
     Pro forma net loss                      $  (2,576,054)       $  (2,895,256)

     Pro forma loss per share
     Basic                                            (.27)                (.30)
     Diluted                                          (.27)                (.30)

     There was no compensation expense recorded from stock options for the years
ended November 30, 1998, 1997, and 1996.

     A summary of the Company's stock option activity,  and related  information
for the years ended November 30, follows:

<TABLE>
<CAPTION>
                                                      Weighted-Average       Number of Shares      Weighted-Average
                                       Options         Exercise Price          Exercisable              Exercise
                                       -------         --------------          -----------              --------
<S>                                   <C>                  <C>                   <C>                     <C>
Price
     Outstanding
       November 30, 1995              1,269,008            $ 1.81                1,038,328               $ 1.48
         Granted                             --                --
         Exercised                     (280,805)             1.48
         Terminated                     (18,224)             2.58
                                      ---------                                                                

     Outstanding
       November 30, 1996                969,979              1.91                  854,541                 1.58
         Granted                         78,250              6.56
         Exercised                     (164,363)             1.17
         Terminated                     (15,936)             5.20
                                      ---------                                                                

     Outstanding
       November 30, 1997                867,930              2.45                  788,226                 1.97
         Granted                        353,133              3.56
         Exercised                      (11,100)             1.38
         Terminated                    (172,033)             6.57
                                      ---------                                                                

     Outstanding
       November 30, 1998              1,037,930              2.09                  921,224                 1.94
</TABLE>


                          Annual Report 1998 - Page 23


<PAGE>


Note 10

Stock Options and Warrants - (Continued)

     Weighted-average fair
     value of options granted
     during the year                          1998            1997
                                              ----            ----

              Where exercise price
              equals stock price             $  --            $  --

              Where exercise price
              exceeds stock price            $ 3.56           $ 4.16

              Where stock price
              exceeds exercise price         $  --            $  --

Following is a summary of the status of stock  options  outstanding  at November
30, 1998:

<TABLE>
<CAPTION>
                                   Outstanding Options                       Exercisable Options
                                   -------------------                       -------------------

                                      Weighted-
                                       Average            Weighted-                     Weighted-
     Exercise                         Remaining            Average                       Average
     Price Range      Number      Contractual Life      Exercise Price     Number     Exercise Price
     -----------      ------      ----------------      --------------     ------     --------------
<S>                    <C>                 <C>            <C>               <C>           <C>
     $     .75 - .75     192,324           2.2            $     .75         192,324       $    .75
     $   1.38 - 1.75     403,473           4.6            $    1.56         403,473       $   1.56
     $   2.75 - 3.75     442,133           8.3            $    3.16         325,427       $   3.10
     ---------------   ---------     ---------            ---------      ----------       --------

     $    .75 - 3.75   1,037,930           5.7            $    2.09         921,224       $   1.94
</TABLE>

     In April 1992, the Company  issued to a  corporation,  warrants to purchase
20,000  shares of the Company's  common stock at an exercise  price of $2.00 per
share. The warrants were exercised March 1996.

     In May 1996,  the Company  sold  177,777  shares of common stock and 63,942
warrants to a private  investor  resulting  in net proceeds of  $1,999,991.  The
warrants  permit the investor to acquire  additional  shares of common stock for
$15.75 per share for a period of three years.

     During fiscal 1995,  the Company  issued  warrants to various  parties,  to
purchase 435,890 shares of the Company's common stock at exercise prices ranging
from $2.75 - $5.75 per share.  The  warrants are  exercisable  over a three-year
period.  During fiscal 1996,  55,000 of these  warrants were exercised at prices
ranging from $2.75 - $5.75 per share.

     During  fiscal  1996,  the  Company  issued  warrants to two  directors  to
purchase an  aggregate  of 60,000  shares of the  Company's  common  stock at an
exercise  price  of  $8.75  per  share.  The  warrants  are  exercisable  over a
three-year period ending April 16, 1999.

     There were no warrants  exercised  for the fiscal year ended  November  30,
1998 and 1997.


                          Annual Report 1998 - Page 24


<PAGE>


Note 11

Income Taxes

     Deferred  tax  attributes  resulting  from  differences  between  financial
accounting  amounts and tax bases of assets and liabilities at November 30, 1998
and 1997 follow:

                                                      November 30,
                                                       1998              1997
     Current assets and liabilities
         Allowance for doubtful accounts               $    6,600     $   17,600
         Inventory overhead capitalization                 42,900         41,000
         Deferred warranties                               28,200         59,000
                                                       ----------     ----------
                                                           77,700        117,600
         Valuation allowance                               77,700        117,600
                                                       ----------     ----------

     Net current deferred tax asset (liability)        $       --     $       --
                                                       ==========     ==========

     Noncurrent assets and liabilities
         Depreciation                                  $    9,000     $    5,800
         General business credit                               --        211,000
         Net operating loss carryforward                2,354,000      3,960,000
         Capital loss carryforward                          4,600             --
                                                       ----------     ----------
                                                        2,367,600      4,176,800
         Valuation allowance                            2,367,600      4,176,800
                                                       ----------     ----------
     Net noncurrent deferred tax
         asset (liability)                             $       --     $       --
                                                       ==========     ==========

     The  valuation  reserve has been  established  for those tax credits,  loss
carryforwards  and  deductible  temporary  differences  which are not  presently
considered more likely than not to be realized.

     The  statutory  income tax rate differs from the effective tax rate used in
the financial  statements as a result of the current year net operating  losses,
the benefit of which is not being  recognized in the current year. The valuation
allowance  decreased  $1,809,200 in 1998 due to expiration of net operating loss
carryforwards, and increased $229,200 in 1997.

     The  reconciliation  of the  effective  income  tax  rate  to  the  Federal
statutory rate is as follows:

                                                   1998       1997       1996
                                                   ----       ----       ----
     Federal income tax rate                      (34.0)%    (34.0)%    (34.0)%
     Effect of net operating loss carryforward
        and valuation allowance                    34.0%      34.0%      34.0%
                                                   ----       ----       ---- 
     Effective income tax rate                      0.0%       0.0%       0.0%

     As of November 30, 1998,  the Company has the following net operating  loss
carryforwards for tax purposes:

     Expiration Date:

       For the Year Ending
          November 30,
          ------------
              2002                  $     915,000
              2003                      4,340,000
              2004                      1,500,000
              2005                        495,000
              2007                         12,000
              2008                        357,000
              2010                      1,936,000
              2011                      5,821,000
              2012                      3,399,000
                                    -------------
                                    $  18,775,000
                                    =============


                          Annual Report 1998 - Page 25


<PAGE>


Note 11

Income Taxes - (Continued)

     As of November 30, 1998, the Company has the following general business tax
credit carryforwards for tax purposes:

     Expiration Date:

       For the Year Ending
          November 30,
          ------------

              1999                     $   38,000
              2000                         58,000
              2001                         65,000
              2002                         17,000
                                       ----------
                                       $  178,000
                                       ==========

Note 12

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.  There  was no  employer
contribution  for the year ended November 30, 1996.  During the years ended 1998
and 1997 the  Company  matched  $.25 for each  dollar up to 6% of an  employee's
contribution  on a monthly  basis which  amounted to  approximately  $20,800 and
$22,000.

Note 13

Commitments and Contingencies

Leases

     The Company  leases its  premises  under  noncancellable  operating  leases
expiring  through  November 2003. The approximate  future minimum lease payments
for the year ending November 1999 are $202,323.

     Rent  expense for the years ended  November 30,  1998,  1997 and 1996, were
$130,418, $173,890 and $207,000, respectively.

Litigation

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

Major Customer

     The  Company  had one major  customer  during  1998.  Major  customers  are
considered  to be those  who  account  for more  than 10% of total  sales.  This
customer  accounted  for  approximately  15% of total  sales for the year  ended
November 30, 1998.

Major Supplier

     For the years  ended  November  30,  1998,  1997,  and 1996,  one  supplier
accounted  for  $86,000,  $123,000  and  $257,000 of finished  goods  purchased,
respectively.  The loss of this  supplier  may  have an  adverse  effect  on the
Company.


                          Annual Report 1998 - Page 26


<PAGE>


Note 14

Business Segment Information

     The Company's  operations have been classified into two business  segments:
medical equipment sales and disease management services.

     Summarized  financial  information by business  segment for 1998,  1997 and
1996 is as follows:

                                        Medical        Disease
                                       Equipment     Management
                                         Sales         Services     Consolidated
                                         -----         --------     ------------
1998
Sales                                 $ 1,300,630    $   745,997    $ 2,046,627
Operating (loss)                         (494,900)    (2,081,154)    (2,576,054)
Total assets                            3,294,865        462,559      3,757,424
Depreciation and amortization             162,564        106,907        269,471
Capital expenditures                      112,026         56,673        168,699

1997
Sales                                 $ 1,817,069    $   595,080    $ 2,412,149
Operating (loss)                         (797,372)    (2,002,190)    (2,799,562)
Total assets                            2,107,431        343,102      2,450,533
Depreciation and amortization             181,516         86,222        267,738
Capital expenditures                      334,037         49,803        383,840

1996
Sales                                 $ 3,040,295    $   276,364    $ 3,316,659
Operating (loss)                       (1,375,104)    (1,562,526)    (2,937,630)
Total assets                            4,771,064        400,000      5,171,064
Depreciation and amortization             227,349         70,083        297,432
Capital expenditures                      167,183        106,786        273,969

Note 15

Year 2000

     The Company  recognizes the need to ensure that its operations  will not be
adversely impacted by the Year 2000 software failures.  As of November 30, 1998,
all medical  devices  sold by qmed Inc.  are Year 2000  compliant.  ohms/cad was
designed to be Year 2000  compliant.  All of the  Company's  internal  operating
systems are on schedule for compliance and should be completed by August 1999.

     The  Company  has been  upgrading  its  customer's  medical  devices  since
September  1998 and has  notified  all of its  customers of the need for upgrade
where  necessary.  All costs to develop these software  changes were expensed as
incurred during 1998,  which  represent  approximately  $165,000.  The remaining
costs to modify the Company's  systems for Year 2000  compliance are expected to
be less than $50,000.

     In addition to Year 2000 software and equipment implementation  activities,
the Company has  contacted  major  suppliers  for its medical  devices to assess
their compliance. The Company has determined their major suppliers are Year 2000
compliant.  While the ohms/cad system is fully compliant,  the Company relies on
information  from existing and prospective  customers,  usually health insurance
plans,  for data  utilized in proposing  contract  and in measuring  the amounts
saved through  implementation of ohms/cad.  The Company cannot assess the effect
that Year 2000 programs implemented by these other companies will have.

Note 16

New Accounting Standards

Comprehensive Income

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting Standards No. 130 ("SFAS 130"),  "Reporting  Comprehensive
Income".  SFAS 130 establishes  standards for the reporting and  presentation of
comprehensive  income,  its components and accumulated  balances.  Comprehensive
income,  as defined,  includes all changes to equity except those resulting from
investments by or distributions  to owners.  Among other  disclosures,  SFAS 130



                          Annual Report 1998 - Page 27


<PAGE>


Note 16 New Accounting Standards - (Continued)

requires  that all  items  that are  required  to be  recognized  under  current
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial  statement.  The Company will adopt SFAS 130 in the fiscal year ending
November  30,  1999.  Adoption  of this  statement  will  have no  impact on the
Company's financial position or results of operations.

Segment Disclosure

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related  Information".  SFAS 131 establishes  standards for
the  disclosure  of  certain  information  about  the  operating  segments  of a
business.  It also requires the disclosure of information about the products and
services of the business,  the  geographic  areas in which it operates,  and its
major  customers.  The  Company  will adopt SFAS 131 in the fiscal  year  ending
November  30,  1999.  Adoption  of this  Statement  will  have no  impact on the
Company's financial position or results of operations.

Derivative Instruments and Hedging Activities

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"),  "Accounting for Derivative
Instruments  and  Hedging  Activities".  SFAS  133  establishes  accounting  and
reporting  standards for derivative as either assets or liabilities  and measure
them at  fair  value.  Under  certain  conditions,  the  gains  or  losses  from
derivatives  may be offset  against those from the items the  derivatives  hedge
against.  Otherwise,  gains and losses from derivatives are recognized currently
in the results of operations. The Company will adopt SFAS 133 in the fiscal year
ending November 30, 2000.  Adoption of this statement is not anticipated to have
a material effect on the Company's financial position or results of operations.



                          Annual Report 1998 - Page 28


<PAGE>


                          INDEPENDENT AUDITORS' REPORT



Board of Directors
qmed, Inc. and Subsidiaries


We have audited the accompanying  consolidated  balance sheets of qmed, Inc. and
Subsidiaries  as of  November  30, 1998 and 1997,  and the related  consolidated
statements  of  operations,  stockholders'  equity  and cash flows for the years
ended  November 30, 1998,  1997 and 1996.  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  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements  present fairly in all
material  respects the financial  position of qmed, Inc. and  Subsidiaries as of
November 30, 1998 and 1997,  and the results of their  operations and their cash
flows for each of the three  years ended  November  30,  1998,  1997 and 1996 in
conformity with generally accepted accounting principles.



                                            AMPER, POLITZINER & MATTIA P.A.


January 29, 1999
Edison, New Jersey




                          Annual Report 1998 - Page 29


<PAGE>


MARKET INFORMATION

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

Fiscal Year Ended November 30, 1996                  High              Low

First Quarter                                    $   12 1/8       $    5 7/8
Second Quarter                                       13 1/2            8
Third Quarter                                        10 3/4            7 1/8
Fourth Quarter                                       11 1/4            7 1/4

Fiscal Year Ended November 30, 1997                  High              Low

First Quarter                                    $   10 5/8       $    8 1/2
Second Quarter                                       10 1/8            6 1/8
Third Quarter                                        8                 6 1/4
Fourth Quarter                                       11 3/8            7

Fiscal Year Ended November 30, 1998                  High              Low

First Quarter                                    $   7 3/4        $    4 1/2
Second Quarter                                       8 3/8             3
Third Quarter                                        4 3/8             2 3/4
Fourth Quarter                                       4 3/8             2 5/8

     As of February 17, 1998,  the Company's  common stock was held of record by
422 persons. On February 17, 1998, the closing price reported was $ 2 3/4.

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



                          Annual Report 1998 - Page 30


<PAGE>


General Corporate Information


Board of Directors
     Howard L. Waltman
       Chairman of the Board
       Independent Business Consultant

     Michael W. Cox
       President and Treasurer

     Robert A. Burns

     Richard I. Levin, M.D.
       Vice President and Medical Director

     A. Bruce Campbell, Ph.D, M.D.
         CEO & President of
         Camber Companies LLC

     Herbert H. Sommer
         Secretary
         Partner-Sommer & Schneider LLP

Officers
     Michael W. Cox
       President and Treasurer

     Richard I. Levin, M.D.
       Vice President,
       Medical Director

     Herbert H. Sommer
       Secretary

     Debra A. Fenton, C.P.A.
       Controller and Assistant Secretary

Corporate Headquarters
     100 Metro Park South
     3rd Floor
     Laurence Harbor, New Jersey 08878

Counsel
     Sommer & Schneider LLP
     600 Old Country Road, Suite 535
     Garden City, New York 11530

Auditors
     Amper Politziner & Mattia P.A.
     2015 Lincoln Hwy.
     P.O. Box 988
     Edison, New Jersey 08818-0988

Stock Listing
     NASDAQ  SmallCap
     Trading Symbol - QEKG

Registrar and Transfer Agent
     American Stock Transfer &
     Trust Company
     40 Wall Street, 46th Floor
     New York, New York 10005



                          Annual Report 1998 - Page 31