PRESIDENT'S MESSAGE
================================================================================

Dear Fellow Shareholder:

During 1997, we increased the number of lives managed by our ohms|cad(R)  system
from  approximately  100,000  at the end of 1996 to over  200,000  at the end of
1997.  Long-term  ohms|cad  contracts were signed with the  prestigious San Jose
Medical Group in California and the first National HMO contract was entered into
with CIGNA HealthCare,  with CIGNA HealthCare of Ohio being the first designated
CIGNA  Health Plan to  implement  ohms|cad.  The  pipeline of possible  accounts
exceeds 3 million lives at present.

The ohms|cad disease  management  program  facilitates  early  identification of
coronary  disease  patients who are at high risk for a cardiac event in the near
term. It assists  primary care  physicians in the  implementation  of preventive
strategies,  thereby  enhancing  health  outcomes  and  thus  reducing  invasive
procedures  and  hospitalization.  As a result,  cardiac  costs  can be  reduced
significantly.

In  November,  we  presented  ohms|cad  health  outcomes at the 70th  Scientific
Sessions  of the  American  Heart  Association.  The  health  outcomes  effect a
40,321-member  managed care practice in Bakersfield,  California,  wherein 1,546
coronary  patients were referred for ohms|cad  care. The impact of ohms|cad care
on the total population  resulted in a 25% reduction in the total of all cardiac
events.  Specifically,  heart attacks were reduced by 30%;  hospitalizations for
angina, unstable angina, and rule-out heart attacks were reduced by 34%; cardiac
catheterizations were reduced by 20%; and angioplasty was reduced by 20%. Bypass
surgery increased slightly. From a financial perspective,  the results showed an
overall cost reduction of 17% in the first 12 months and a 24% cost reduction by
the 18th month.

We reported  that this study  demonstrates  that a coronary  disease  management
program  designed to  identify  high risk  patients  early,  significantly  aids
primary care physicians to practice  preventive  strategies and reduce morbidity
from coronary disease in their patients.

Compliance with ohms|cad recommendations also was shown to be very beneficial in
the  management  of ischemia,  hypertension  and lipids.  For  ischemia,  it was
determined that 90% of the physicians complied with the ohms|cad recommendations
for  ischemia  management,  and as a result  ischemia was  eliminated  in 79% of
patients.  In contrast,  the patients  treated by physicians  who did not comply
with the  ohms|cad  recommendations  showed a  worsening  of  ischemia in 84% of
patients.  In hypertension  management,  70% of the physicians complied with the
ohms|cad recommendations,  resulting in normalized or improved blood pressure in
72% of patients.  In lipid management,  48% of the physicians  complied with the
ohms|cad recommendations,  and LDL lipids were normalized or improved by greater
than 10% in 79% of these patients as well.

The data for these patients is the first confirmation that a systematic ohms|cad
approach to coronary disease management delivered through primary  practitioners
can achieve  positive  outcomes and enhance patient  management and satisfaction
equal  to or  better  than  "traditional  care",  and it can be done  more  cost
effectively.

In terms of retaining our proprietary advantage,  the Company received a "Notice
of Allowance" in September  1997 from the US Patent Office  effecting all of the
claims  submitted.  This  broad  Patent,  coupled  with  the  continued  patient
expansion  of the  ohms|cad  database  which now  exceeds  over  5,000  ohms|cad
interventions, is, in our opinion, a strong barrier to competition.

In  December,  we  completed  a $2 million  round of  financing  with a group of
investors  led by Galen  Partners III, LP. The proceeds will be used to continue
the direct  marketing and  implementation  of ohms|cad to customers as they sign
on.

In  preparation  for the expected  increase in managed care lives under ohms|cad
management,  the  Company  expects to bring on line  "ohms|cad  2.0"  during the
second quarter of 1998. This new version of ohms|cad will be capable of handling
over 1,000  patients  per day giving the system the capacity to handle up to 9.6
million managed care lives.

Our goal is to place ohms|cad with HMOs, Physician Practice Management companies
(PPMs) and large employer groups. It is our expectation that during 1998 we will
add over 600,000 new lives into the ohms|cad system.  If successful,  we believe
that the Company could operate profitably during the last quarter of 1998 or the
first quarter of 1999.

We continue to appreciate each shareholder's confidence.

Very truly yours,



Michael W. Cox
President


                           Annual Report 1997 Page - 1
<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 in1995, 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.

     The  Company  has   developed   and  markets  a  full  line  of  ambulatory
computerized  ischemic heart disease  monitors  utilizing  patented  technology.
These   ambulatory   products,   marketed  under  the  name  "Monitor   One(R)",
continuously  analyze  and  interpret  the  discrete  marker of  ischemic  heart
disease, the ST-segment of electrocardiographic ("ECG") signals generated by the
heart utilizing  patented and  proprietary  technology in real time. 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.

     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.


                           Annual Report 1997 - Page 2
<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 life  style,  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 1997 - Page 3
<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 1997 - Page 4
<PAGE>

SELECTED FINANCIAL DATA

     The selected  financial  data  presented  below as of November 30, 1997 and
1996 and for each of the three years in the three year period ended November 30,
1997 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, 1995,  1994 and 1993 and the years ended  November 30,
1994 and 1993 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:

                                                1997          1996          1995           1994           1993
                                                ----          ----          ----           ----           ----
<S>                                             <C>           <C>           <C>            <C>            <C>    

RESULTS OF OPERATIONS

Net Sales                                   $ 2,412,149   $ 3,316,659    $ 5,648,754    $ 8,369,461    $ 9,423,688
Cost of sales                                   891,930     1,320,481      1,579,196      2,027,090      2,436,053
                                            -----------   -----------    -----------    -----------    -----------
Gross profit                                  1,520,219     1,996,178      4,069,558      6,342,371      6,987,635

Selling, general and administrative
  expenses                                    3,925,661     4,227,234      5,164,478      5,806,320      6,646,607
Provisions for uncollectible
  accounts                                      214,601        16,051         25,347        106,826         38,271
Research and development expenses               179,519       348,840        382,244        337,277        563,784
Impairment charge                                     -       341,683              -              -              -
                                            -----------   -----------    -----------    -----------    -----------
(Loss) earnings from operations              (2,799,562)   (2,937,630)    (1,502,511)        91,948       (261,027)
Interest income                                  98,214       117,623              -              -         50,973
Interest expense                                (25,430)      (33,876)       (68,142)       (84,429)       (93,028)
(Loss) gain on sale of securities               (30,574)       42,473              -              -              -
                                            -----------   -----------    -----------    -----------    -----------
(Loss) earnings before provision
  for income taxes                           (2,757,352)   (2,811,410)    (1,570,653)         7,519       (303,082)
Provision for income taxes                            -             -              -              -              -
                                            -----------   -----------    -----------    -----------    -----------
(Loss) earnings before minority
  interest                                   (2,757,352)   (2,811,410)    (1,570,653)         7,519       (303,082)
Minority interest in loss of
  subsidiary                                          -             -         16,000         17,000         17,000
                                            -----------   -----------    -----------    -----------    -----------
(Loss) earnings before extraordinary
  item                                       (2,757,352)   (2,811,410)    (1,554,653)        24,519       (286,082)
Extraordinary item-benefit from
  utilization of net operating
    loss carryforwards                                -             -              -              -              -
                                            -----------   -----------    -----------    -----------    -----------
Net (loss) income                           $(2,757,352)  $(2,811,410)   $(1,554,653)   $    24,519    $  (286,082)
                                            ===========   ===========    ===========    ===========    ===========

PER SHARE DATA

(Loss) Income per common and
  dilutive common equivalent
    shares                                  $      (.29)  $      (.30)   $      (.19)   $       .00    $      (.04)
                                            ===========   ===========    ===========    ===========    ===========
BALANCE SHEET DATA (AT END OF PERIODS)

Working Capital                             $   803,415   $ 3,481,104    $ 3,369,177    $ 1,826,909    $ 2,079,786     

Total Assets                                  2,450,533     5,171,064      6,014,620      4,399,104      4,729,195

Total Debt                                      888,015     1,072,585      1,777,393      2,002,865      2,360,101

Stockholders' equity                          1,562,518     4,098,479      4,237,227      2,380,239      2,336,094

</TABLE>

                           Annual Report 1997 - Page 5


<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,            1997      1996      1995
                                                          ------------
                                                                                   vs.       vs.       vs.

                                                     1997      1996      1995     1996      1995      1994
                                                     ----      ----      ----     ----      ----      ----
<S>                                                 <C>       <C>       <C>      <C>       <C>       <C>
Net sales                                           100.0     100.0     100.0    (27.3)    (41.3)    (32.5)
Cost of sales                                        37.0      39.8      28.0    (32.5)    (16.4)    (22.1)
                                                   ------    ------    ------    

Gross profit                                         63.0      60.2      72.0    (23.8)    (50.9)    (35.8)
Selling, general and administrative expenses        162.7     127.5      91.4     (7.1)    (18.1)    (11.1)
Provisions for uncollectible accounts                 8.9        .5        .4   1237.0     (36.7)    (76.3)
Research and development expenses                     7.4      10.5       6.8    (48.5)     (8.7)    (13.3)
Impairment charge                                       -      10.3         -      *         *         *
                                                   ------    ------    ------

(Loss) earnings from operations                    (116.0)    (88.6)    (26.6)    (4.7)    (72.8)      *
Interest Income                                       4.1       3.5         -    (16.5)      *         *
Interest expense                                     (1.1)     (1.0)     (1.2)   (24.9)    (50.3)    (19.3)
(Loss) gain on sale of securities                    (1.2)      1.3         -      *         *         *
                                                   ------    ------    ------
(Loss) earnings before income taxes                (114.2)    (84.8)    (27.8)    (1.9)     79.0       *
Income taxes                                            -         -         -      *         *         *
                                                   ------    ------    ------

(Loss) earnings before minority interest           (114.2)    (84.8)    (27.8)    (1.9)     79.0       *
Minority interest in loss of subsidiary                 -         -        .3      *         *        (5.9)
                                                   ------    ------    ------
Net (loss) income                                  (114.2)    (84.8)    (27.5)    (1.9)     80.8       *  
                                                   ======    ======    ======
</TABLE>

*Not meaningful

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.  This  decrease  is  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 its wholly owned
subsidiary,  Interactive Heart Management Corp.  (IHMC). The decision to place a
decreasing  emphasis  on the sales of capital  equipment  is  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 have resulted in adding San Jose Medical  Group and CIGNA  HealthCare of
Ohio to the managed care organizations utilizing ohms|cad during 1997. The total
number of lives under ohms|cad management exceeds 200,000.

                          Annual Report 1997 - Page 6

<PAGE>


     Revenues  received  through IHMC for ohms|cad  services 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 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  managed  care
organization  then  pays  the  Company  the  agreed  portion  of the  calculated
reduction  in such  costs.  From the  inception  of the  contract,  the  Company
receives a monthly  prepayment which is recorded as revenue,  reflecting a small
percentage of the  statistically  determined share of the expected  reduction in
costs of providing ohms|cad care for CAD patients.  Once the actual reduction of
cost is calculated, the prepayments are subtracted and any additional revenue is
billed and recorded at that time.

     The Company intends to  aggressively  market the ohms|cad system to leading
health care  providers  throughout  the United States during 1998.  Although the
Company has recently  entered into  contractual  arrangements  with San Jose and
CIGNA HealthCare,  the recognition of significant revenue from reducing the cost
of providing CAD care will lag behind  administrative and marketing costs for at
least the first year.  Included in the  Company's net loss of  $(2,757,352)  was
approximately $(2,005,000) from IHMC.

     The Company's  gross profit margin  increased  from 60.2% in fiscal 1996 to
63.0% in fiscal 1997. The increase was primarily due to the reduction of certain
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
$300,000 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.

     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
developing an implementation 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 resolve the problem as well.  The Company is developing and
expects 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 $250,000
during  fiscal  1998 and 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 March 1997, the Financial  Accounting  Standards Board issued  Statement
128,  "Earnings  per  Share",  superseding  Opinion  15.  The main  goals of the
Statement is to harmonize  the EPS  calculation  in the United States with those
common in other countries and with International  Accounting Standard No. 33 and
to address  criticisms from consultants that Opinion 15 contained  unnecessarily
complex and arbitrary  provisions.  The Statement is effective for periods after
December 15, 1997.

     In March 1997,  the FASB issued SFAS No. 129,  "Disclosure  of  Information
About Capital Structure".  Statement 129 continues the existing  requirements to
disclose the pertinent rights and privileges of all securities


                          Annual Report 1997 - Page 7


                                      
<PAGE>

other  than   ordinary   common  stock  but  expands  the   number of  companies
subject to portions of its requirements.  Specifically,  the Statement  requires
all entities to provide the capital structure disclosures previously required by
Opinion 15.  Companies  that were exempt from the  provisions of Opinion 15 will
now need to make those  disclosures.  The  Statement is effective  for financial
statements for periods ending after December 15, 1997.

     In July  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income".  Statement  130  establishes  standards  for  reporting  and display of
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial  statements.  The objective of the Statement is to report a measure of
all changes in equity of an enterprise that result from  transactions  and other
economic   events  of  the  period   other   than   transactions   with   owners
("Comprehensive  income").  Comprehensive income is the total net income and all
other non-owner  changes in equity.  The Statement is effective for fiscal years
beginning after December 15,1997, with earlier application permitted.

     In July 1997, the FASB issued SFAS No. 131,  "Disclosures About Segments of
an Enterprise and Related  Information".  Statement No. 131 requires disclosures
for each segment that are similar to those required under current standards with
the addition of quarterly  disclosure  requirements and a finer  partitioning of
geographic  disclosures.  It requires limited segment data on a quarterly basis.
It also requires  geographic data by country,  as opposed to broader  geographic
regions as permitted  under  current  standards.  The Statement is effective for
fiscal  years  beginning  after  December 15,  1997,  with  earlier  application
permitted.

     In  management's  opinion,  SFAS Nos.  128, 129, 130 and 131, when adopted,
will not have a material effect on the Company's financial statements.

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  had 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.  SmithKline  purchased  $2,000,000
worth of the Company's common stock 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 60.2%
during  fiscal 1996.  The  decrease was directly  related to the decrease in net
sales.

     Selling,  general and  administrative  expenses  decreased by approximately
$930,000,  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  continues to maintain  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.


                          Annual Report 1997 - Page 8


                                      
<PAGE>



FISCAL 1995 COMPARED WITH FISCAL 1994

     Net sales for fiscal 1995 decreased  approximately 32.5% to $5,648,754 when
compared to  $8,369,461  for fiscal 1994.  The decrease was  primarily  due to a
slowdown in unit sales to primary care physicians through the Company's domestic
sales force. This slowdown,  in management's  opinion,  was due to the increased
number of  physicians  joining  large group  practices and entering into managed
care contracts  where  revenues or procedures  may be controlled.  During fiscal
1995 much of its efforts were focused on  developing  and marketing the ohms|cad
technology,  a disease  management  system for coronary artery  disease,  to the
managed care market.

     During March 1995, the Company formed IHMC to develop, market and implement
ohms|cad  (on-line  health  management  system  for  coronary  artery  disease).
Included  in the net loss of  $(1,554,653)  for fiscal year ended  November  30,
1995, was approximately $(593,000) from IHMC.

     The Company's gross profit margin decreased from 75.8% to approximately 72%
during  fiscal 1995.  The  decrease was directly  related to the decrease in net
sales.

     Selling,  general and  administrative  expenses  decreased by approximately
$640,000 due to a reduction in  sales-related  expenses.  While  management  cut
administrative  expenses as necessary,  others rose in connection  with start-up
costs for ohms|cad, such as travel and legal expenses.

     The  provision  for doubtful  accounts  decreased to less than 1% of sales.
While this  decrease is directly  related to the decrease in sales,  the Company
also maintains strict credit policies.

     Research and development expenses remained consistent with prior years.

LIQUIDITY AND CAPITAL RESOURCES

     To date,  the  Company's  principal  sources of working  capital  have been
provided  by  proceeds  from  public  and  private   placements  of  securities,
operations and the sale of certain assets. Since the Company's inception,  sales
of  securities  and  assets  have  generated   approximately   $18,000,000  less
applicable expenses through November 30, 1997.

     On December 18, 1997, the Company sold an aggregate $2,000,000 8%
Convertible Subordinated Notes due December 18, 2002 (the "Notes"), without
discount or premium, in a private placement to three investors led by Galen
Partners III, L.P. Interest on the Notes is accrued monthly, compounded annually
and will be due at maturity. The Notes are convertible into shares of the
Company's common stock at the rate of $5.60 per share, provided that if the
average closing price of the shares of the Company's common stock for the 90
trading days following the closing exceeds $7.25, then the conversion price will
increase to $6.00. The Company may redeem the Notes in the event the average
closing price of shares of the Company's common stock equals or exceeds $12.00
for a period of 90 days at the following times with the following premiums and
may elect to pay the redemption price in shares of common stock:

     Year                    Redemption Price
     ----                    ----------------
     1998                         105%
     1999                         104%
     2000                         103%
     2001                         102%
     2002                         100%

     The Company is required to redeem the Notes at higher premiums in the event
of a change of control.

     In  connection  with the sale of the Notes,  the  Company  granted  certain
rights to the purchasers, including registration rights and the right to appoint
a member  of the  Company's  board of  directors.  The Note  Purchase  Agreement
prohibits the Company from paying dividends until the Notes are paid.


                          Annual Report 1997 - Page 9


                                       
<PAGE>

     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.

     The Company had working  capital of $803,415 at November 30, 1997  compared
to  $3,481,104  at  November  30,  1996 and ratios of current  assets to current
liabilities  of 2.0:1 and 4.6:1 as of November 30, 1997 and 1996,  respectively.
The working capital  decrease of  approximately  $2,600,000 was primarily due to
the  Company's  net loss of  $2,757,352  for the year ending  November 30, 1997.
Assuming the Company's sale of Notes,  described above, had occurred on November
30,  1997,  the Company  would have had working  capital  after  expenses of the
offering of $2,759,220 and a ratio of current  assets to current  liabilities of
4.6:1, each on a pro forma basis.

     The Company  believes that funds generated from  operations,  together with
cash,  investments  and the proceeds of the Notes sold in December 1997, will be
sufficient to meet its working capital needs for the current year.  However,  in
the event  revenues do not meet  management's  expectations,  the Company may be
required  to seek  additional  financing  to support  IHMC's  sales  efforts and
operations.

     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 19.2%
of the  receivables  balance at November 30, 1997  compared to 19.1% at November
30, 1996. The Company is  aggressively  seeking  payment  arrangements  on these
overdue amounts.

     The Company, with its IHMC subsidiary, enters into contractual arrangements
with physician groups and managed care organizations where a prepayment toward a
cost savings is made per month.  As of November 30, 1997 the Company had entered
into  two  agreements  whereby  it  received  prepayments  toward a share in the
reduction of costs and a third  agreement  entered  into in December  1997 under
which  prepayments  are expected to begin in April 1998. The Company's  share of
the  reduction  of costs under one such  agreement in excess of  prepayment  was
$210,454  which was included in 1997  revenue.  The Company  expects  revenue to
increase as it  recognizes  cost savings  from  additional  arrangements  during
fiscal 1998.

INFLATION

     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,  1997,  the  Company had
approximately  $640,000  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.
Subsequent to November 30, 1997, the Company has raised  additional funds in the
amount of  $2,000,000  in order to continue its  operations  until it is able to
generate  sufficient  additional  revenue  from  the  sale of its  products  and
services.  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 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.


                          Annual Report 1997 - Page 10


<PAGE>


     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 a  significant  risk
investors should consider.

     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 1997 - Page 11

<PAGE>


                           CONSOLIDATED BALANCE SHEETS
                                  NOVEMBER 30,

                                     ASSETS

<TABLE>
<CAPTION>
                                                                              1997                  1996
                                                                              ----                  ----
<S>                                                                      <C>                    <C>    
Current assets
     Cash and cash equivalents                                           $    640,266           $   680,686
     Investments                                                                   --             2,144,545
     Accounts receivable, net of allowance for doubtful accounts
      and sales returns of $250,000 and $67,000, respectively                 197,901               403,930
     Inventory                                                                667,255             1,123,664
     Prepaid expenses and other current assets                                 68,439                84,074
                                                                         ------------           -----------
                                                                            1,573,861             4,436,899

Property and equipment, net of accumulated depreciation                       624,761               454,674
Product software development costs                                             60,998                87,140
Other assets                                                                  190,913               192,351
                                                                         ------------           -----------
                                                                         $  2,450,533           $ 5,171,064
                                                                         ============           ===========


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
     Accounts payable and accrued liabilities                            $    770,446           $   855,795
     Current maturities of long-term debt                                          --               100,000
                                                                         ------------           -----------
                                                                              770,446               955,795



Leases payable, long-term                                                      77,522                72,053

Deferred warranty revenue                                                      40,047                44,737
                                                                         ------------           ----------- 
                                                                              888,015             1,072,585
Stockholders' equity
     Common stock $.001 par value; 20,000,000 shares
      authorized; 9,648,519 and 9,483,615 shares issued
      and 9,626,519 and 9,461,615 outstanding                                   9,649                 9,477
     Paid-in capital                                                       18,041,941            17,836,480
     Accumulated deficit                                                  (16,413,447)          (13,656,095)
                                                                         ------------           -----------
                                                                            1,638,143             4,189,862
     Unrealized loss on securities available for sale                              --               (15,758)
     Less: treasury stock at cost, 22,000 common shares                       (75,625)              (75,625)
                                                                         ------------           -----------
        Total stockholders' equity                                          1,562,518             4,098,479
                                                                         ------------           -----------
                                                                         $  2,450,533           $ 5,171,064
                                                                         ============           ===========


           See accompanying notes to consolidated financial statements
</TABLE>

                          Annual Report 1997 - Page 12

<PAGE>


                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        FOR THE YEARS ENDED NOVEMBER 30,

<TABLE>
<CAPTION>
                                                                  1997             1996              1995
                                                                  ----             ----              ----
<S>                                                      <C>                 <C>               <C>   
Sales                                                    $      2,452,084    $   3,529,216     $   6,036,048
Less sales returns and allowances                                  39,935          212,557           387,294
                                                         -----------------   --------------    --------------
                                                                2,412,149        3,316,659         5,648,754

Cost of sales                                                     891,930        1,320,481         1,579,196
                                                         -----------------   --------------    --------------
Gross profit                                                    1,520,219        1,996,178         4,069,558

Selling, general and administrative expenses                    3,925,661        4,227,234         5,164,478
Provision for uncollectible accounts                              214,601           16,051            25,347
Research and development expenses                                 179,519          348,840           382,244
Impairment charge                                                      --          341,683                --
                                                         -----------------   --------------    --------------
Loss from operations                                           (2,799,562)      (2,937,630)       (1,502,511)

Interest income                                                    98,214          117,623                --
Interest expense                                                  (25,430)         (33,876)          (68,142)
(Loss) gain on sale of securities                                 (30,574)          42,473                --
                                                         -----------------   --------------    --------------
Loss before provision for income taxes                         (2,757,352)      (2,811,410)       (1,570,653)

Provision for income taxes                                             --               --                --
                                                         -----------------   --------------    --------------
Loss before minority interest                                  (2,757,352)      (2,811,410)       (1,570,653)

Minority interest in loss of subsidiary                                --               --            16,000
                                                         -----------------   --------------    --------------

Net loss                                                   $   (2,757,352)   $  (2,811,410)    $  (1,554,653)
                                                         =================   ==============    ==============   

Net loss per common share                                  $         (.29)   $        (.30)    $        (.19)
                                                         =================   ==============    ==============

Weighted average number of shares outstanding                   9,562,000        9,287,420         8,113,978
                                                         =================   ==============    ==============
</TABLE>



           See accompanying notes to consolidated financial statements

                          Annual Report 1997 - Page 13


<PAGE>


                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   FOR THE THREE YEARS ENDED NOVEMBER 30, 1997
<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, 1994            $   7,783    $ 11,738,113   $(9,290,032)   22,000    $(75,625)         --       $ 2,380,239

  Exercise of stock options                    88          93,597            --        --          --          --            93,685

  Issuance of common stock
   through private placement                1,079       3,307,004            --        --          --          --         3,308,083
   for cash

  Net loss                                     --              --    (1,554,653)       --          --          --        (1,554,653)

  Unrealized gain on securities
   available for sale                          --              --            --        --          --        9,873            9,873
                                        ---------    ------------   ------------   ------     --------    --------      ------------

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
   and warrants                               349         704,740            --        --          --           --          705,089

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

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

  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
   and warrants                               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
                                        =========    ============   ============   ======     ========    ========      ============
</TABLE>


         See accompanying notes to consolidated financial statements   

                          Annual Report 1997 - Page 14
                                                                               

<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>

                                                                  1997              1996             1995
                                                                  ----              ----             ----
<S>                                                               <C>              <C>              <C>    
CASH FLOWS FROM OPERATING ACTIVITIES
   Net (loss)                                                $ (2,757,352)     $ (2,811,410)     $ (1,554,653) 
   ADJUSTMENTS TO RECONCILE NET (LOSS) TO
    NET CASH (USED) BY OPERATING ACTIVITIES
     Depreciation and amortization                                267,738           297,432           264,272
     Impairment charge                                                 --           341,683                --
     (Increase) decrease in
   Accounts receivable                                            206,029           444,755           184,502
   Inventory                                                      456,409           285,141           114,692
       Prepaid expenses and other current assets                   15,635           (15,671)           34,222
     Increase (decrease) in
   Accounts payable and accrued liabilities                       (85,349)         (410,589)           76,180
       Other, net                                                 (50,917)           16,871           (92,415)
                                                             -------------     -------------     ------------- 
      Total adjustments                                           809,545           959,622           581,453
                                                             -------------     -------------     ------------- 
                                                               (1,947,807)       (1,851,788)         (973,200)
                                                             -------------     -------------     ------------- 

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of securities available for sale                           --        (3,662,600)       (1,701,703)
   Sale of securities available for sale                        2,185,594         3,204,000                --
   Capital expenditures                                          (383,840)         (273,969)         (186,577)
                                                             -------------     -------------     ------------- 
                                                                1,801,754          (732,569)       (1,888,280)


CASH FLOWS FROM FINANCING ACTIVITIES
   Principal payment on long-term debt                           (100,000)         (300,000)         (300,000)
   Proceeds from issuance of common stock                         205,633         2,698,293         3,401,768
                                                             -------------     -------------     ------------- 
                                                                  105,633         2,398,293         3,101,768

Net (decrease) increase in cash and cash equivalents              (40,420)         (186,064)          240,288

Cash and cash equivalents - beginning                             680,686           866,750           626,462
                                                             -------------     -------------     ------------- 
Cash and cash equivalents - ending                           $    640,266      $    680,686      $    866,750
                                                             =============     =============     =============

SUPPLEMENTAL DISCLOSURE OF CASH PAID
   Interest                                                  $     25,430      $     36,708      $     69,892
   Income taxes                                                     5,632             7,853             7,328

</TABLE>



           See accompanying notes to consolidated financial statements

                          Annual Report 1997 - Page 15
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1
SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS 
     QMED,  INC.  and  Subsidiaries  (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  (83%) owned  subsidiary,  Heart Map,  Inc.,  and its wholly (100%)
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.

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  (determined on a 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, 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.  In
fiscal 1996, the Company  focused  primarily on the development and marketing of
the  ohms|cad  system  and  determined  that such  technology  no  longer  had a
realizable  value.  Acquired  technology was being  amortized on a straight-line
basis over the estimated useful life of 7 years. Amortization was $0 in 1997 and
approximately $100,000 in 1996 and 1995.

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 at which both the number of options  granted and the exercise price are
known. 

                          Annual Report 1997 - Page 16

<PAGE>




NOTE 1 
SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

NET LOSS PER COMMON SHARE
     Net loss per common share is computed on the basis of the weighted  average
number of common and common equivalent shares  outstanding  during each year. It
is assumed that all dilutive  stock  options are  exercised at the  beginning of
each year and that the  proceeds  are used to purchase  shares of the  Company's
common stock at the average  market price during the year.  Fully diluted (loss)
income per share  amounts  are not  presented  because  they are not  materially
dilutive.  Net loss per  common  share  calculations  do not give  effect to any
common  equivalent  share  where  their  inclusion  would  have  the  effect  of
increasing earnings per share or decreasing the loss per share.

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.  Management does,  however,  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.  At November 30,  1997,  1996 and 1995,
approximately  $595,000,  $276,000 and $137,000 from the above such contracts is
included in revenue.  Certain contracts contain  stipulations  that, if not met,
would  require the Company to refund a portion of  prepayments  received.  It is
management's opinion that the stipulations will be met.

     The Company sells extended service warranty  contracts to customers 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.

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.

NOTE 2
LIQUIDITY

     The Company has anticipated that funds generated from operations,  together
with cash and  investments,  may not be sufficient  to meet its working  capital
requirements for the current year. The Company received additional  financing in
the form of a convertible  note for  $2,000,000  subsequent to the Balance Sheet
date which it believes will be sufficient to meet its working  capital needs for
the current year (See Note 15).

                          Annual Report 1997 - Page 17

<PAGE>


NOTE 3
INVESTMENTS
<TABLE>
<CAPTION>
                                                               Gross         Gross      
                                            Amortized       Unrealized     Unrealized      Fair          Carrying
                                               Cost            Gains         Losses        Value          Amount
                                            ---------       ----------     ----------      -----         --------
<S>                                        <C>              <C>            <C>          <C>             <C>
NOVEMBER 30, 1996
   Available-for-sale
    U.S. Treasury securities               $ 2,160,303      $      -       $ (15,758)   $ 2,144,545     $ 2,144,545
                                           -----------      ---------      ----------   -----------     -----------
                                           $ 2,160,303      $      -       $ (15,758)   $ 2,144,545     $ 2,144,545
</TABLE>
 
     Available-for-sale  securities  at November  30, 1996 mature in one year or
less.

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


                                                       1997              1996             1995
                                                       ----              ----             ----
<S>                                                    <C>                <C>              <C>
         Proceeds from sale                      $   2,185,594      $  3,204,000      $     --
         Gross realized gains                               --            42,473            --
         Gross realized losses                         (30,574)               --            --

</TABLE>

NOTE 4
INVENTORY

<TABLE>
<CAPTION>

                                                        1997               1996
                                                        ----               ----
<S>                                                      <C>                <C>
     Raw materials
       (component parts and supplies)            $     209,580       $     251,494
     Finished units                                    457,675             872,170
                                                 -------------       --------------
                                                 $     667,255       $    1,123,664
                                                 =============       ==============

</TABLE>

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

NOTE 5
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
                                                        1997                1996
                                                        ----                ----
     <S>                                         <C>                 <C>  
     Machinery and equipment                     $   1,146,762       $    1,102,695
     Loaner equipment                                  204,698                   --
     Furniture and fixtures                            385,527              380,431
     Office equipment                                  611,675              527,537
     Leasehold improvements                             45,846               44,771
     Equipment held under capital lease                235,987              191,222
                                                 -------------       --------------
                                                     2,630,495            2,246,656

     Less accumulated depreciation and
       amortization                                 (2,005,734)          (1,791,982)
                                                 -------------       --------------
     Property and equipment - net                $     624,761       $      454,674
                                                 =============       ==============
</TABLE>


     At November 30, 1997 and 1996, the equipment under the capital leases had a
net book value of approximately $100,000 and $92,000, respectively.

     Depreciation expense was $214,000,  $167,000,  and $131,000 for 1997, 1996,
and 1995, respectively.

NOTE 6
PRODUCT SOFTWARE DEVELOPMENT COSTS
     During the years ended November 30, 1997,  1996, and 1995,  amortization of
costs related to product software  development costs were $26,142,  $26,142, and
$17,428, respectively.


                          Annual Report 1997 - Page 18


<PAGE>

NOTE  7
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

                                            1997             1996
                                            ----             ----

     Accounts payable - trade           $   394,264      $   282,123
     Deferred warranty revenue              204,260          247,368
     Accrued payroll                         76,997           87,417
     Other accrued expenses                  94,925          238,887
                                        -----------      -----------
                                        $   770,446      $   855,795


NOTE 8
LONG TERM DEBT
     Long-term  debt  consisted of a term loan payable to a bank in  twenty-five
monthly  installments  of $25,000 plus  interest at the bank's base rate plus 1%
and was collateralized by substantially all assets of the Company.  The loan was
fully paid on March 31, 1997.

                                                   1997              1996
                                                   ----              ----

                                                $      --        $   100,000
     Less current maturities                           --            100,000
                                                ---------        -----------
     Long-term debt, net of current
      maturities                                $      --        $        --
                                                =========        ===========
     
     The bank's base interest rate at November 30, 1997 was 8.5%.

     During 1997 and 1996, the maximum month-end amounts  outstanding under this
note payable were  $100,000 and  $400,000,  respectively.  Average daily amounts
outstanding  during  1997 and 1996  were  approximately  $62,500  and  $262,500,
respectively,   with  weighted   average  interest  rates  of  9.25%  and  9.3%,
respectively.

     The term  loan  agreement  contained  certain  debt  covenant  restrictions
concerning net worth and current ratio.

NOTE 9
CAPITAL LEASE OBLIGATIONS
     The Company has entered into various capital leases for equipment  expiring
through November 2001 with aggregate monthly payments of $5,263.

     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, 1997:

     For the Years Ending
     November 30,

         1998                                          $    49,976
         1999                                               39,766
         2000                                               26,956
         2001                                               21,803
         2002                                                3,734
                                                       ------------
         Total minimum lease payments                      142,235
         Less amount representing interest                 (29,176)
                                                       ------------
         Present value of net minimum lease
           payments                                        113,059
         Less current maturities                           (35,537)
                                                       ------------
         Long-term maturities                          $    77,522
                                                       ============

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.


                          Annual Report 1997 - Page 19

<PAGE>


NOTE 10
STOCK OPTIONS AND WARRANTS - (CONTINUED)
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  options  expire  ten  years  after  the date of the grant for
incentive stock options and nonqualifying  stock options.  Options granted under
all plans must be at a price per share not less than the fair  market  value per
share of common stock on the date the option is granted.

     Pro forma information  regarding net income and earnings per share has been
determined as if the Company had accounted for its employee  stock options under
the fair value  method.  The fair value for these  options was  estimated at the
date of grant using a  Black-Scholes  option  pricing  model with the  following
weighted-average assumptions for 1997: risk-free interest rate of 6.77%; divided
yields of 0%;  volatility  factor of the expected  market price of the Company's
common stock of 65%; and a  weighted-average  expected life of the option of 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:

                                                 1997                  1996

     Pro forma net loss                     $  (2,895,256)         $      --

     Pro forma earnings per share
         Primary                                     (.30)                --
         Fully diluted                               (.30)                --

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



                          Annual Report 1997 - Page 20


<PAGE>


NOTE 10
STOCK OPTIONS AND WARRANTS - (CONTINUED)
     A summary of the Company's stock option activity,  and related  information
for the years ended November 30, follows:

<TABLE>
<CAPTION>

                                                            Weighted-Average              Number of Shares         Weighted-Average
                                       Options               Exercise Price                 Exercisable             Exercise Price
                                       -------              ----------------              ----------------         -----------------
     <S>                             <C>                          <C>                         <C>                          <C>
     Outstanding
       November 30, 1994              1,148,558                   $ 1.28

         Granted                        253,450                     3.99
         Exercised                      (85,133)                    1.05
         Terminated                     (47,867)                    1.52
                                      ----------

     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

     Weighted-average fair
     value of options granted
     during the year                       1997
                                           ----
              Where exercise price
              equals stock price           $   -

              Where exercise price
              exceeds stock price          $ 4.16

              Where stock price
              exceeds exercise price       $   -
</TABLE>

     Following  is a summary  of the  status  of stock  options  outstanding  at
November 30, 1997:

<TABLE>
<CAPTION>

                       Outstanding Options                                          Exercisable Options
-----------------------------------------------------------------------        ------------------------------
                                      Weighted
                                      Average             Weighted                               Weighted
Exercise Price                       Remaining         Average Exercise                      Average Exercise
   Range               Number     Contractual Life         Price                Number            Price
<S>                    <C>              <C>                <C>                  <C>                 <C>   
                                                                         
$ .75 -  .75          192,324           3.2                $ .75                192,324             $.75
$1.38 - 1.75          414,573           5.6                $1.56                412,906            $1.56
$2.75 - 2.75          110,000           7.6                $2.75                110,000            $2.75  
$6.25 - 6.50          148,533           8.6                $6.37                 70,496            $6.32   
$8.38 - 8.38            2,500           9.4                $8.38                  2,500            $8.38  
------------          -------           ---                -----                -------            -----  
                                                                                                        
$.75 - 8.38           867,930           5.8                $2.37                788,226            $1.97  

</TABLE>

                          Annual Report 1997 - Page 21

<PAGE>
                                                                              
NOTE 10               
STOCK OPTIONS AND WARRANTS - (CONTINUED)
     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.

NOTE 11
INCOME TAXES
     Deferred  tax  attributes  resulting  from  differences  between  financial
accounting  amounts and tax basis of assets and liabilities at November 30, 1997
and 1996 follow:

                                                       1997              1996
                                                       ----              ----
     Current assets and liabilities
         Allowance for doubtful accounts           $    17,600       $   16,000
         Inventory overhead capitalization              41,000           45,900
         Deferred Warranties                            59,000           70,100
                                                   -----------       ----------
                                                       117,600          132,000
         Valuation allowance                           117,600          132,000
                                                   -----------       ----------
     Net current deferred tax asset (liability)    $       --        $      --
                                                   ===========       ==========

     Noncurrent assets and liabilities
         Depreciation                              $     5,800       $   12,100
         General business credit                       211,000          211,000
         Net operating loss carryforward             3,960,000        3,710,100
                                                   -----------       ----------
                                                     4,176,800        3,933,200
         Valuation allowance                         4,176,800        3,933,200
                                                   -----------       ----------
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 increased $229,200 and $1,531,000 in 1997 and 1996, respectively.

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

                                                   1997       1996       1995
     Federal income tax rate                      (34.0)%    (34.0)%    (34.0)%
     Deferred tax charge (credit)                     -          -          -
     Effect of net operating loss carryforward
        and valuation allowance                    34.0%      34.0%      34.0%
     State income tax, net of Federal benefit         -          -          -
     Other                                            -          -          -
                                                  ------     ------     ------
     Effective income tax rate                      0.0%       0.0%       0.0%


                          Annual Report 1997 - Page 22


<PAGE>

NOTE 11
INCOME TAXES - (CONTINUED)
     As of November 30, 1997,  the Company has the following net operating  loss
carryforwards for tax purposes:

     Expiration Date:

       For the Year Ending
          November 30,
         -------------
              2000                    $   438,000
              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
                                      -----------   
                                      $19,213,000
                                      ===========

     As of November 30, 1997, the Company has the following general business tax
credit carryforwards for tax purposes:

     Expiration Date:

       For the Year Ending
          November 30,
          ------------
              1998              $  33,000
              1999                 38,000
              2000                 58,000
              2001                 65,000
              2002                 17,000
                                -----------
                                $ 211,000
                                ===========


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 years ended  November  30, 1996 and 1995.  During 1997 the
Company matched .25 for each dollar up to 6% of an employee's  contribution on a
monthly basis which amounted to approximately $22,000.

NOTE 13
COMMITMENTS AND CONTINGENCIES

LEASES
     The Company  leases its  premises  under  noncancellable  operating  leases
expiring through August 1998. The approximate  future minimum lease payments for
the year ending November 1998 is $134,437.

     Rent  expense for the years ended  November 30,  1997,  1996 and 1995,  was
$173,890, $207,000 and $213,000, respectively.


                          Annual Report 1997 - Page 23

<PAGE>

NOTE 13
COMMITMENTS AND CONTINGENCIES - (CONTINUED)

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  1997.  Major  customers  are
considered  to be those who  accounted  for more than 10% of total  sales.  This
customer  accounted  for  approximately  18% of total  sales for the year  ended
November 30, 1997.

MAJOR SUPPLIER
     A material  amount of the Company's  finished  goods  inventory is acquired
from one supplier, the loss of which may have an adverse effect on the Company.

     For the  years  ended  November  30,  1997,  1996 and  1995,  one  supplier
accounted  for  $123,000,  $257,000  and $222,428 of finished  goods  purchased,
respectively.

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 1997,  1996 and
1995 is as follows:

<TABLE>
<CAPTION>
                                                   Medical         Disease
                                                  Equipment       Management
                                                   Sales          Services          Consolidated
                                                   -----          --------          ------------
<S>                                        <C>                <C>                 <C>
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

1995
----
Sales                                      $     5,512,254    $     136,500       $   5,648,754
Operating (loss)                                  (911,325)        (591,186)         (1,502,511)
Total assets                                     5,649,620          365,000           6,014,620
Depreciation and amortization                      237,062           27,210             264,272
Capital expenditures                               103,589           82,988             186,577

</TABLE>

                          Annual Report 1997 - Page 24

<PAGE>


NOTE 15
SUBSEQUENT EVENT

     On December 18, 1997, the Company sold an aggregate $2,000,000 8%
Convertible Subordinated Notes due December 18, 2002 (the "Notes"), without
discount or premium, in a private placement to three investors. Interest on the
Notes is accrued monthly, compounded annually and will be due at maturity. The
Notes are convertible into shares of the Company's common stock at the rate of
$5.60 per share, provided that if the average closing price of the Company's
common stock for the 90 trading days following the closing exceeds $7.25, then
the conversion price will increase to $6.00.

     The Company may redeem the Notes in the event the average  closing price of
shares of the Company's common stock equals or exceeds $12.00 for a period of 90
days at the following times with the following premiums and may elect to pay the
redemption price in shares of Common Stock:

     Year                    Redemption Price
     ----                    ----------------
     2003                         105%
     2004                         104%
     2005                         103%
     2006                         102%
     2007                         100%

     The Company is required to redeem the Notes at higher premiums in the event
of change of control.

     In  connection  with the sale of the Notes,  the  Company  granted  certain
rights to the purchasers, including registration rights and the right to appoint
a member  of the  Company's  board of  directors.  The Note  Purchase  Agreement
prohibits the Company from paying dividends until the Notes are paid.



                          Annual Report 1997 - Page 25

<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, 1997 and 1996,  and the related  consolidated
statements  of  operations,  stockholders'  equity  and cash flows for the years
ended  November 30, 1997,  1996 and 1995.  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,  the  consolidated  financial  statements  present fairly in all
material  respects the financial  position of qmed, Inc. and  Subsidiaries as of
November 30, 1997 and 1996,  and the results of their  operations and their cash
flows for each of the three  years ended  November  30,  1997,  1996 and 1995 in
conformity with generally accepted accounting principles.

                                   AMPER, POLITZINER & MATTIA P.A.

January 20, 1998
Edison, New Jersey




                          Annual Report 1997 - Page 26

<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, 1995             High              Low

First Quarter                               $   2 1/16        $   1
Second Quarter                                  3 7/16            1 7/8
Third Quarter                                   3 3/4             2 5/8
Fourth Quarter                                  8 1/2             3

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

     As of February 17, 1998,  the Company's  common stock was held of record by
approximately 450 persons.  On February 17, 1998, the closing price reported was
$ 5 7/8.

     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 1997 - Page 27



<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

  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

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

 







                         Annual Report 1997 - Page 28