UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————

QUARTERLY REPORT PURSUANT TO SECTION 13 OR ~~15 (d)~~
15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

~~FOR THE PERIOD ENDED: July~~For the quarterly period ended January 31, ~~2008~~2009

———————

THE QUANTUM GROUP, INC.

(Exact name of registrant as specified in its charter)

———————


~~NEVADA~~	~~000-31727~~Nevada	20-0774748
(State or other jurisdiction of incorporation	(I.R.S. Employer
or organization)	~~Commission~~ ~~File Number~~	~~(IRS Employer~~ Identification No.)

3420 Fairlane Farms Road, Suite C, Wellington, Florida 33414

(Address, including zip code, of principal executive offices)

(561) 798-9800

(Registrant’s telephone number, including area code)

———————

Indicate by check mark whether the registrant ~~(1)~~ has ~~filed all documents~~submitted electronically and ~~reports~~posted on its corporate Web site, if any, every Interactive Data File required to be ~~filed by Sections 13 or 15(d)~~submitted and posted pursuant to Rule 405 of ~~the Securities Exchange Act~~Regulation S-T (§232.405 of ~~1934~~this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to ~~file~~submit and post such ~~reports), and (2) has been subject to such filings for the past 90 days. YES~~files). Yes ý NONo ¨

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


~~Large accelerated filer~~¨		~~Accelerated filer~~¨
~~Non-accelerated filer~~¨		Large accelerated filer¨Accelerated filer¨Non-accelerated filer¨Smaller reporting companyý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ~~YES~~Yes ¨ NONo ý

~~As of September 18, 2008, we have 8,949,501~~There were 10,079,943 shares of ~~our~~the registrant’s common stock, par value $.001 ~~issued and outstanding.~~
per share, outstanding on March 16, 2009.

~~INDEX~~

THE QUANTUM GROUP, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2009

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

~~Condensed Consolidated Balance Sheets~~

~~Condensed Consolidated Statement of Operations~~

~~Condensed Consolidated Statements of Shareholders’ Equity~~

~~Condensed Consolidated Statements of Cash Flows~~

~~Notes to Condensed Consolidated Financial Statements~~

Item 2.

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

1822

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2729

Item 4. 4T.

Controls and Procedures

2729

PART II – OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

2932

Item 3.

Defaults Upon Senior Securities

2933

Item 4.

Submission of Matters to a Vote of ~~Security-Holders~~Security Holders

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

THE QUANTUM GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF ~~JULY~~JANUARY 31, ~~2008~~2009 AND OCTOBER 31, ~~2007~~2008


		July 31, 2008 (Unaudited)			October 31, 2007 (Audited)			January 31, 2009 (Unaudited)		October 31, 2008 (Audited)
Assets	Assets					(Restated)
Current assets	Current assets
	Cash and cash equivalents	$	3,396,908		$	530,720
	Restricted cash		52,140			51,074
	Accounts receivable		1,413			262,026
	Prepaid expenses		147,730			482,017
	Other current assets		266,179			34,073
Cash and cash equivalents								$	162,491	$	1,502,860
Restricted cash									52,258		52,258
Accounts receivable									—		752
Prepaid expenses									139,663		93,352
Total current assets	Total current assets		3,864,370			1,359,910			354,412		1,649,222
Property and equipment, net	Property and equipment, net		358,675			178,214			311,793		341,259
Goodwill	Goodwill		23,300			23,300			23,300		23,300
Other assets	Other assets		382,383			61,865			661,778		546,531
Total assets	Total assets	$	4,628,728		$	1,623,289		$	1,351,283	$	2,560,312
Liabilities and shareholders’ equity (deficit)
Liabilities and shareholders’ deficit
Current liabilities	Current liabilities
	Accounts payable	$	101,423		$	450,372
	Accrued liabilities		302,035			703,524
	Accrued payroll and payroll taxes		547,728			1,119,975
	Due to HMOs, net of receivable of $434,615 and $444,619		1,665,499			344,991
	Notes payable and accrued interest – shareholders – current portion		448,475			474,261
	Notes payable – 8% convertible debentures		—			6,050,000
	Loans payable – current portion, net of discount of $0 and $123,141		45,826			607,893
	Capital lease obligation – current portion		17,104			16,178
	Other current liabilities		233,005			558,347
Accounts payable								$	389,536	$	167,831
Accrued liabilities									380,686		617,584
Accrued payroll and payroll taxes									588,737		566,086
Due to HMOs									4,147,820		2,828,216
Notes payable and accrued interest – shareholders, current portion									590,191		568,653
Promissory notes payable and accrued interest									337,500		30,226
Notes payable, current portion									17,750
Capital lease obligation - current portion									12,245		16,086
Other current liabilities									327,316		249,649
Total current liabilities	Total current liabilities		3,361,095			10,325,541			6,791,781		5,044,331
Long-term debt	Long-term debt
	Loans payable, net of current portion		41,068			28,989
	Notes payable and accrued interest – shareholders, net of current portion		120,178			439,707
	Non-controlling interest in variable interest entities		—			180,932
	Capital lease obligation, net of current portion		34,435			46,940
Loans payable, net of current portion									35,128		38,412
Capital lease obligation, net of current portion									29,964		31,629
Total long-term debt	Total long-term debt		195,681			696,568			65,092		70,041
Total liabilities	Total liabilities		3,556,776			11,022,109			6,856,873		5,114,372

Commitments and contingencies	Commitments and contingencies
Shareholders’ equity (deficit)
	Preferred stock, $.001 par value $.001 per share
	authorized 30,000,000 shares none issued and outstanding		—			—
	Common stock, $.001 par value per share
	170,000,000 shares authorized; 8,949,501shares issued and outstanding		8,950			2,037
	Additional paid in capital		37,624,366			9,269,252
	Accumulated deficit		(36,561,364	)		(18,670,109	)
Total shareholders’ equity (deficit)			1,071,952			(9,398,820	)
Total liabilities and shareholders’ equity		$	4,628,728		$	1,623,289
Shareholders’ deficit
Preferred Stock, $.001 par value per share,									—		—
30,000,000 shares authorized; no shares issued and outstanding
Common Stock, $.001 par value per share,									10,071		9,228
170,000,000 shares authorized; 10,071,229 and 9,227,800 shares issued and outstanding
Additional paid in capital									36,737,024		35,827,081
Accumulated deficit									(42,220,950)		(38,390,369)
Treasury stock, 62,225 and 0 shares									(31,735)		—
Total shareholders’ deficit									(5,505,590)		(2,554,060)
Total liabilities and shareholders’ deficit								$	1,351,283	$	2,560,312

See accompanying notes to condensed consolidated financial statements.

THE QUANTUM GROUP, INC.

CONDENSEDCONSOLIDATED ~~STATEMENT~~STATEMENTS OF OPERATIONS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~JULY~~JANUARY 31, ~~2008~~2009 AND ~~2007~~2008

(UNAUDITED)

For the
three months ended
July 31,

For the
nine months ended
July 31,


2008

2007

2008

2007

Revenues








Provider Network

$
4,446,376

$
861,676

$
10,665,106

$
1,268,253

Management support services

12,986

420,952

309,019

1,247,884

4,459,362

1,282,628

10,974,125

2,516,137

Direct Costs

Provider Network

4,491,647

839,852

11,916,967

1,212,251

Management support services

670

310,142

213,749

898,275

4,492,317

1,149,994

12,130,716

2,110,526

Gross profit

(32,955
)

132,634

(1,156,591
)

405,611

Operating expenses

Salaries and employee costs

1,263,195

986,297

6,187,497

2,336,282

Occupancy

91,627

90,633

263,194

267,042

Depreciation & amortization

56,374

26,285

142,750

74,543

Other general & administrative expenses

681,405

748,158

2,031,079

1,556,102

Total operating expenses

2,092,601

1,851,373

8,624,520

4,233,969

Loss from operations

(2,125,556
)

(1,718,739
)

(9,781,111
)

(3,828,358
)

Non-operating expenses

Amortization of financing fees

—

7,522

4,001,649

749,755

Amortization of debt discount

—

1,762,856

3,687,229

3,789,747

Interest

149,680

176,253

733,731

344,521

Gain on disposal of assets

—

—

(312,465
)

—

Total non-operating expenses

149,680

1,946,631

8,110,144

4,884,023

Loss before income tax provision

(2,275,236
)

(3,655,370
)

(17,891,255
)

(8,712,381
)

Income tax provision

—

—

—

—

Net loss

$
(2,275,236
)
$
(3,655,370
)
$
(17,891,255
)
$
(8,712,381
)

Basic and diluted (loss) per common share

$
(.26
)
$
(1.89
)
$
(2.44
)
$
(5.36
)

Weighted average number of common shares

outstanding

8,904,557

1,943,317

7,331,853

1,626,362


	For the Three Months Ended January 31,
	2009		2008
			(restated)
Revenues
Provider systems	$	7,363,293	$	2,463,542
Management support services		300		275,933
		7,363,593		2,739,475

Direct Costs
Provider systems		8,594,208		2,767,179
Management support services		—		199,579
		8,594,208		2,966,758

Gross profit (loss)		(1,230,615)		(227,283)

Operating expenses
Salaries and employee costs		1,621,436		1,856,640
Occupancy		88,754		86,140
Depreciation and amortization		48,228		30,059
Other general and administrative expenses		752,462		594,781

Total operating expenses		2,510,880		2,567,620

Loss from operations		(3,741,495)		(2,794,903)

Non-operating expenses
Amortization of debt discount		—		3,687,229
Amortization of financing fees		—		4,001,649
Gain on deconsolidation of billing companies		—		(303,662)
Interest and other expense		89,086		509,106

Total non-operating expenses		89,086		7,894,322

Loss before income tax provision		(3,830,581)		(10,689,225)

Income tax benefit		—		—

Net loss	$	(3,830,581)	$	(10,689,225)


Basic and diluted (loss) per common share	$	(0.40)	$	(1.85)

Weighted average number of common shares outstanding		9,461,224		5,783,585

See accompanying notes to condensed consolidated financial statements.

THE QUANTUM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ ~~EQUITY~~DEFICIT

Preferred Stock par value $.001 per share 30,000,000 authorized

Common Stock par value $.001 per share 170,000,000 authorized

Additional
Paid in
Capital


Accumulated
Deficit

Total
Equity

# of
Shares

Amount

# of
Shares

Amount

Balance at
October 31, 2007(Restated)

—

$
—

2,037,359

$
2,037

$
9,269,252

$
(18,670,109
)
$
(9,398,820
)
Issuance of common stock - secondary public offering

—

—

3,600,000

3,600

11,492,944

—

11,496,544

Issuance common stock - debt conversion

—

—

1,853,153

1,853

5,191,863

—

5,193,716

Issuance of common stock - bridge share exchange

—

—

1,170,183

1,170

3,941,205

—

3,942,375

Debt discount-beneficial conversion

—

—

—

—

3,610,491

—

3,610,491

Discount from debt conversion-accrued interest

—

—

—

—

150,628

—

150,628

Issuance of stock - executive conversion

—

—

176,121

176

645,591

—

645,767

Repurchase of private placement warrants

—

—

—

—

(70,911
)

—

(70,911
)
Issuance of common stock - in relation to other loans

—

—

32,164

33

89,130

—

89,163

Issuance of equity for compensation

—

—

53,738

54

125,884

—

125,938

Issuance of common stock - in lieu of cash

—

—

26,783

27

147,770

—

147,797

Amortization of deferred compensation

—

—

—

—

3,030,519

—

3,030,519

Net (loss)

—

—

—

—

—

(17,891,255
)

(17,891,255
)
Balance at
July 31, 2008

—

$
—

8,949,501

$
8,950

$
37,624,366

$
(36,561,364
)
$
1,071,952


	Preferred Stock			Common Stock			Additional Paid-in Capital		Treasury Stock		Accumulated Deficit		Total Equity
	# of Shares	Amount		# of Shares	Amount		Additional Paid-in Capital		Treasury Stock		Accumulated Deficit		Total Equity
Balance at October 31, 2008	—	$	—	9,227,800	$	9,228	$	35,827,081	$	—	$	(38,390,369)	$	(2,554,060)
Issuance of common stock – consultants	—		—	255,374		255		164,245		—		—		164,500
Issuance of common stock – employees	—		—	529,594		529		261,297		—		—		261,826
Issuance of common stock – board of directors	—		—	58,461		59		99,961		—		—		100,020
Issuance of equity for compensation	—		—	—		—		144,030		—		—		144,030
Amortization of deferred compensation	—		—	—		—		208,675		—		—		208,675
Contribution of shares received	—		—	—		—		31,735		(31,735)		—		—
Net loss	—		—	—		—		—		—		(3,830,581)		(3,830,581)
Balance at January 31, 2009	—	$	—	10,071,229	$	10,071	$	36,737,024	$	(31,735)	$	(42,220,950)	$	(5,505,590)

See accompanying notes to condensed consolidated financial statements.

THE QUANTUM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~SIX~~THREE MONTHS ENDED ~~JULY~~JANUARY 31, ~~2008~~2009 AND ~~2007~~2008

(UNAUDITED)

For the Nine Months Ended
July 31,

2008

2007

Operating activities

Net loss

$
(17,891,255
)
$
(5,047,012
)
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

142,750

48,257

Amortization of financing costs

4,001,649

2,769,125

Amortization of debt discount

3,687,229

―

Amortization of deferred compensation

3,030,519

197,340

Issuance of equity for compensation

125,938

32,754

Issuance of stock in lieu of cash

147,797

36,610

Issuance of stock as payment of interest

150,628

―

Gain on sale of property and equipment

(8,803)

―

Changes in operating assets and liabilities:

(Increase) decrease in accounts receivable

54,966

(144,448
)
(Increase) decrease in other assets

(168,633
)

47,087

Increase in due to HMOs

1,320,508

―

Increase (decrease) in accounts payable and accrued liabilities

(319,929
)

517,421

Total adjustments

12,164,619

3,504,146

Net cash used in operating activities

(5,726,636
)

(1,542,866
)
Investing activities

Purchase of property and equipment

(589,123
)

(17,983
)
Sale of fixed assets

7,053

─

Net cash used in investing activities

(582,070
)

(17,983
)
Financing activities

Proceeds from secondary public offering

13,200,000

―

Proceeds from private placement

―

3,425,000

Proceeds from other loans

140,000

Proceeds from credit line

―

306,371

Payments of placement agent fees and expenses

—

(473,984
)
Repurchase of private placement warrants

(50,207
)

―

Payment of expenses – secondary public offering

(1,352,632
)

―

Repayments on convertible debt

(1,535,969
)

―

Repayments on loans and notes payable

(1,074,720
)

(980,209
)
Repayments of capital lease obligations

(11,578
)

(6,000
)
Net cash provided by financing activities

9,174,894

2,411,178

Net increase (decrease) in cash and cash

2,866,188

850,329

Cash at beginning of period

530,720

32,077

Cash at end of period

$
3,396,908

$
882,406

Supplemental disclosures of cash flow information:

Cash paid during the period for interest

$
572,026

$
46,838

Supplemental disclosures of non-cash investing and financing activities:

Issuance of units - conversion of debt

$
5,193,716

$
―

Issuance of units - bridge share exchange

$
3,942,375

$
―

Issuance of units – conversion of executive accrued compensation

$
645,767

$
―

Capital lease obligations incurred on purchases of equipment

$
―

$
6,048

Issuance of stock as deferred finance costs on loans

$
―

$
1,326,065

Issuance of stock - credit line fee

$
―

$
190,940

Note payable - fixed asset acquisition

$
49,133

$
3,148


	For the Three Months Ended January 31,
	2009		2008
			(restated)
OPERATING ACTIVITIES
Net Loss	$	(3,830,581)	$	(10,689,225)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		87,081		30,059
Amortization of financing costs and debt discount		12,500		7,688,878
Stock-based compensation – employees		614,531		506,279
Stock-based compensation – consultants and board of directors		294,228		14,907
Stock as part of interest		—		150,628
Changes in operating assets and liabilities:
Decrease in accounts receivable		—		54,966
Decrease in other assets		—		106,425
Increase in prepaid expenses		(89,121)		—
Increase in due to HMOs		1,319,604		322,726
Increase (decrease) in accounts payable and accrued liabilities		106,668		(165,742)

Total adjustments		2,345,491		8,709,126

Net cash used in operating activities		(1,485,090)		(1,980,099)

INVESTING ACTIVITIES
Purchase of property and equipment		(9,011)		(25,551)
Purchase of software		(150,000)		—

Net cash used in investing activities		(159,011)		(25,551)

FINANCING ACTIVITIES
Proceeds from secondary public offering		—		13,200,000
Proceeds from promissory notes		325,000		—
Payment of expenses – secondary public offerings		—		(1,352,632)
Repurchase of private placement warrants		—		(50,207)
Repayment on convertible debt		—		(1,398,144)
Repayments on capital lease obligations		(5,506)		(3,778)
Repayments on loans and notes payable		(15,762)		(760,285)

Net cash provided by financing activities		303,732		9,634,954

Net (decrease) increase in cash and cash equivalents		(1,340,369)		7,629,304

Cash and cash equivalents at beginning of period		1,502,860		530,720

Cash and cash equivalents at end of period	$	162,491	$	8,160,024

See accompanying notes to condensed consolidated financial statements.

THE QUANTUM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JANUARY 31, 2009 AND 2008

(UNAUDITED)


	For the Three Months Ended January 31,
	2009		2008
			(restated)
Supplemental disclosures of cash flow information:

Cash paid during the period for interest	$	4,059	$	248,729

Supplemental disclosures of non-cash investing and financing activities:

Shares reacquired	$	31,735	$	—
Issuance of units for bridge share exchange	$	—	$	3,941,205
Issuance of units for conversion of debt	$	—	$	5,205,882
Grant of options – consultants	$	84,300
Issuance of units – conversion of executive accrued compensation	$	—	$	645,591
Debt discount	$	57,352	$	—

See accompanying notes to condensed consolidated financial statements.

THE QUANTUM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~JULY~~JANUARY 31, ~~2008~~2009

(UNAUDITED)

Note 1: Description of Company

~~We offer~~The Company is a Healthcare Services Organization (HSO), which provides business process solutions to the healthcare industry including support services and leading-edge technology. The Company coordinates the care of patients on behalf of the payers that have contracted with the company through the utilization of its network of independent physicians, other healthcare providers and its own technology systems. The Company’s primary stream of revenue flows from the monthly premiums received for assuming full risk management of these patients. The Company currently has contracts with payers for two types of insurance products, Medicare and Medicaid; and the Company is expanding services to include commercial and universal insurance products.

The Company’s model interacts with each of the three key hubs of the healthcare industry – the providers (primary care physicians/specialists/ancillary facilities), hospitals and payers. To accomplish the connectivity required for these communications, the Company has developed software technology to better manage its core business. The Company has a HIPAAcompliant enterprise platform that includes multiple applications used by provider offices or hospitals. The platform, known as PWeR™ (Personal Wellnesselectronic Record™) is a low cost, multi-application, patient-centric platform capable of receiving patient information from multiple sources. PWeR is a simple to ~~health maintenance organizations (HMOs) that market Medicare Advantage managed~~use software system written as Web-based, open architecture and is a software as a service (SaaS) platform. The scalability of PWeR allows for centralized patient data to be accumulated at local, state, national and global levels. Additional ly, the Company has developed 18 provisional patents which provide business process design and medical trending analysis for the purpose of reducing medical costs and increasing individual wellness. PWeR is currently being marketed to the Company’s network of healthcare ~~plans in the state of Florida,~~providers as well as healthcare providers outside the network, hospitals and other payers (i.e., state governments).

The Company also provides other services and products to healthcare providers in and outside of its network. These services include purchasing, technology and insurance products. These services are designed to reduce administrative time and expense from the ~~state. We refer to this segment of our business as~~~~provider systems~~. Medicare Advantage is Medicare’s managed care alternative to Medicare’s traditional fee-for-service model. The foundation of our business model is a network of medical service providers, including primary care physicians, specialists and ancillary service providers such as laboratories and pharmacies, among others, all of whom must satisfy the requirements of the Centers for Medicare & Medicaid Services (CMS), which is the U.S. Federal agency that administers Medicare, Medicaid and the Medicare Advantage program. We also offer healthcare providers various~~management support services~~ ~~that enable providers to decrease their operating costs~~physician’s practice and increase ~~efficiency and productivity. These management support services are available to all healthcare providers, whether or not they are part of our provider system. In~~their revenue collection rate.

Since its inception, the ~~future, we expect to leverage our relationships with our healthcare providers to cross-market our management support services and the benefits of participation in our network. The~~ Company has ~~five HMO contracts~~been heavily dependent upon the receipt of ~~which four are providing members~~capital investment or other financing and revenue to fund its continuing activities. In addition to the normal risks associated with a ~~number of~~new business venture, there can be no assurance that the Company’s ~~Community Health Systems (CHS) in~~product development will be successfully completed or that it will be a commercial success. Further, the ~~State of Florida. The~~ Company is ~~at-full-risk for the medical costs for HMO members for two of these contracts. The Revenue from the other two contracts is equal~~dependent upon certain related parties to the HMO’s payment of a capitation or fee-for-service fee due our contracted primary care physicians. One of these contracts will be at-full-risk when the membership under our care reaches 300. The fifth contract becomes active August 1, 2008.provide funding and capital resources.

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

Going Concern

~~Our condensed consolidated~~The accompanying financial statements have been prepared ~~in accordance with generally accepted accounting principles~~assuming that the Company will continue as a going concern. The Company has negative cash flows from operating activities of approximately $1.6 million for ~~interim~~the first quarter of 2009 and an accumulated deficit of approximately $42.2 million at January 31, 2009 that raises substantial doubt about its ability to continue as a going concern. If we do not obtain additional funding during March 2009, we may substantially curtail or cease our operations all together. The financial ~~information and Regulation S-X. Accordingly, they~~statements do not include ~~all~~any adjustments that might result from the outcome of this uncertainty.

For the ~~information and notes required by generally accepted accounting principles for complete financial statements.~~

~~The accompanying condensed consolidated financial statements are unaudited. However, in the opinion~~remainder of management, they include all adjustments necessary for a fair presentation of financial position, results of operations and cash flows. All adjustments made during the nine months ended July 31, 2008 and 2007 were of a normal, recurring nature. The amounts presented for the nine months ended July 31, 2008, are not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year. Additional information is contained in the Annual Report on Form 10-KSB for the year ended October 31, ~~2007 as amended, which should~~2009, the Company will need additional cash infusions to meet its operating expenses. The Company’s common stock trades on the NYSE Amex and the Company intends to raise additional public or private equity or debt. The Company may also secure strategic alliances or other joint ventures to defray a portion of its expenditures. No assurances can be ~~read~~made that the Company will be successful in ~~conjunction with this quarterly report.~~these activities. Should the events not occur the financial statements will be materially affected. See “Liquidity and Capital Resources” for additional information.

THE QUANTUM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~JULY~~JANUARY 31, ~~2008~~2009

(UNAUDITED)

Note 2: Basis of Presentation and Summary of Significant Accounting Policies (continued)

Restatement of Period Ended January 31, 2008 Financial Statements

The Company has restated its condensed consolidated financial statements for the first quarter of fiscal 2008 (the “Restatement”), and certain disclosures in notes to the condensed consolidated financial statements have been amended to reflect the Restatement adjustments.

The financial statements included in the original report have been restated to reflect (i) the appropriate allocation of the components of the Company’s securities offered in connection with various private placements dated August 29, 2006, December 18, 2006 and March 29, 2007, which securities included secured convertible debentures with a beneficial conversion feature and common stock, and (ii) the resulting amortization of the corresponding costs. In addition, the Company updated and corrected its revenue and medical cost disclosures following one of the HMO payer’s notification to the Company that it had reported to a regulatory agency that the Company was not at full risk during the year ended October 31, 2007, which was contrary to information previously provided to the Company. The full risk transactions related to the HMO payer in question have been reversed and the correct not at risk revenue and expenses have been rec orded for the fiscal period in question. The table below illustrates the individual account/line items affected by the Restatement.

As Restated

As Previously Reported
Condensed Consolidated Balance Sheet

Due to HMOs

$
667,717

$
613,154
Total current liabilities

2,627,370

2,572,807
Total liabilities

3,044,222

2,989,659
Additional paid in capital

34,844,782

31,923,418
Accumulated deficit

(29,359,334)

(26,313,013)
Total shareholders’ deficit

5,494,323

5,548,886

Condensed Consolidated Statement of Operations

Provider systems - revenue

$
2,463,542

$
2,660,022
Provider systems – direct costs

2,767,179

2,981,569
Gross profit

(227,283)

(245,193)
Loss from operations

(2,794,903)

(2,812,813)
Amortization of debt discount

3,687,229

76,738
Interest and other expenses

509,106

358,478
Total non-operating expenses

7,894,322

4,133,203
Loss before income tax provision

(10,689,225)

(6,946,016)
Net loss

(10,689,225)

(6,946,016)
Basic and diluted (loss) per common share

(1.85)

(1.20)

Condensed Consolidated Statement of Cash Flows

Adjustments to reconcile net loss to net cash used in operating activities:

Amortization of debt discount

$
3,687,229

$
76,738
Issuance of stock as payment of interest

150,628

—
Increase in due to HMOs

322,726

340,636
Issuance of units for bridge share exchange

3,804,733

3,942,375

9

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2009
(UNAUDITED)

Note 2: Basis of Presentation and Summary of Significant Accounting Policies (continued)
Cash Equivalents
The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. At ~~July~~both January 31, ~~2008~~2009 and October 31, ~~2007,~~2008, the Company ~~has $52,140 and $51,074, respectively, in~~had restricted cash of $52,258, which ~~is restricted and~~ serves as collateral for a surety bond in connection with the development of the Company’s third party administrator operations.
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of its cash. At ~~July~~January 31, ~~2008,~~2009, the Company maintained a cash balance of ~~$299,293~~$69,430 in a checking account, and ~~$2,901,949~~$93,061 in a money market account, respectively, at one banking institution. The bank has a ~~“strong”~~strong rating issued by Standard and ~~Poor.~~Poor’s. The aforementioned cash balance is not in excess of the ~~$100,000 FDIC~~$250,000 Federal Deposit Insurance Corporation (FDIC) insurable limit.
Property and Equipment
Furniture and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to five years.
Use of Estimates
The preparation of condensed consolidated 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;~~liabilities, disclosure of contingent assets and liabilities at the date of the financial ~~statements;~~statements, and the reported amount of ~~revenues~~revenue and expenses during the reporting period. Actual results could differ from those estimates and the differences could be material.
Due ~~from~~to HMO and IBNR
The ~~HMOs~~HMO payers pay medical claims and other costs on ~~our~~the Company’s behalf. Based on the terms of the contracts with the ~~HMOs,~~HMO payers, a fund surplus or deficit is calculated from the ~~HMOs~~HMO payers that is calculated by offsetting revenue earned with medical claims expense, calculated as claims paid on ~~our~~the Company’s behalf plus an amount reserved for claims incurred but not reported ~~(IBNR)~~(“IBNR”). Estimated liability for IBNR claims ~~incurred but not reported~~ is independently estimated based on industry experience as ~~we do~~the Company does not yet have sufficient historical data for payment patterns, cost trends, utilization of healthcare services and other relevant factors including independent actuarial calculation.
Income Taxes
~~We have~~The Company has not recognized any future tax benefit arising from net operating loss carry forward in the accompanying condensed consolidated financial statements in accordance with the provisions of Statements of Financial Accounting Standards No. 109 (SFAS No. 109), ~~“Accounting~~Accounting for Income Taxes”, as the realization of this deferred tax benefit is not likely. A 100% valuation allowance has been established to offset the entire amount of ~~our~~the Company’s net deferred tax asset.
WeThe Company adopted the provisions of FASB Interpretation No. 48 ~~“Accounting~~(FIN No. 48),Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109~~” (FIN 48)~~, which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return, including issues relating to financial statement recognition and measurement. FIN 48 provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is ~~‘more-likely-than-not”~~more-likely-than-not of being sustained if the position were to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the ~~“more-likely-than-not”~~more-likely-than-not threshold, the largest amount of tax benefit that is greater than 50% likely of being recognized upon ultimate settlement with the taxing authority is recorded.

810

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
~~JULY~~JANUARY 31, ~~2008~~2009
(UNAUDITED)

Note 2: Basis of Presentation and Summary of Significant Accounting Policies ~~– (Continued)~~(continued)
Goodwill and Other Intangible Assets
In accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142),Goodwill and Other Intangible Assets, the Company accounts for goodwill in a purchase business combination as the excess of the cost over the fair value of net assets acquired. Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over the estimated useful lives. SFAS No. 142 requires companies to test goodwill for impairment on an annual basis (or an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value) using a two-step method. The Company conducts this review during the fourth quarter of each fiscal year absent any triggering event. No impairment resulted from the annual review performed in fiscal 2008. SFAS No. 142 also requires that an identifiable intangible asset that is determined to have an indefinite useful economic life not be amortized, but separately tested for impairment, at least annually, using a one step fair value based approach or when certain indicators of impairment are present.
Goodwill is recorded in connection with business combinations as the excess purchase price over the fair value of the net assets acquired. Goodwill is not amortized, but tested for recoverability annually or more frequently if indicators of possible impairment exist. WeThe Company will recognize an impairment loss if the carrying value of the asset exceeds the fair value determination. As of ~~July~~January 31, ~~2008,~~2009, there was no impairment of goodwill.
~~Principles~~Long-Lived Assets
In accordance with Statement of ~~Consolidation~~Financial Accounting Standards No. 144 (SFAS No. 144),Accounting for Impairment or Disposal of Long-Lived Assets, the Company determines whether there has been an impairment of long-lived assets, excluding goodwill and identifiable intangible assets that are determined to have indefinite useful economic lives, when certain indicators of impairment are present. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future gross, undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to market value is required. Future adverse changes in market conditions or poor operating results of underlying long-lived assets could result in losses or an inability to recover the carrying value of the long-lived assets that may not be reflected in the assets’ current carrying value, thereby possibly requiring an impairment charge in the future.
The ~~accompanying condensed consolidated financial statements~~Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its intangible assets, management performs an analysis of the anticipated undiscounted future net cash flow of the individual assets over the remaining amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows. During the year ended October 31, 2008 the Company entered into an agreement with Net.Orange, Inc. for the ~~period ended July 31, 2008, include the accounts~~development of ~~The Quantum Group, Inc. and~~additional software capabilities to incorporate enhancements to its ~~subsidiaries, Renaissance Health Systems, Inc., Quantum Medical Technologies, Inc., QMed Solutions, Inc., The Quantum Agency, Inc. and Renaissance Administrative Services, Inc. Prior~~healthcare software system for a monthly fee of $50,000. Amortization is expected to January 1, 2008, we consolidated two billing companies under FASB Interpretation No 46(R) (FIN 46(R)), as we had full risk of operations. The management agreements for the billing and collection companies were terminated on December 31, 2007. All intercompany accounts have been eliminated in consolidation.
~~Variable Interest Entities~~
We were a counter-party to various management agreements, which terminated as of December 31, 2007, with certain entities that meet the definition of a Variable Interest Entity pursuant to FIN 46(R). We have included operations of these entities through the termination date, December 31, 2007. The balance sheet accounts have been deconsolidated as of January 1, 2008, as we believe we no longer were the Primary Beneficiary, as definedbegin in the ~~Interpretation. These entities engaged in the business~~second quarter of medical billing and collections. The revenues and net gain derived from these entities for the two months ended December 31, 2007 before deconsolidation were $273,070 and $70,473, respectively. In settlement of the agreements, the owner of these entities agreed to forgo a consulting fee and other expenses, and agreed to accept 9,000 unregistered shares of common stock of the Company, valued at $54,660, previously agreed upon, as payment in full of all amounts owed under the agreements.fiscal 2009.
Reclassifications
Certain reclassifications have been made to the ~~prior~~ period ended January 31, 2008 to conform to the current period classifications. These reclassifications had no effect on reported results of operations or financial ~~conditions.~~condition.

11

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2009
(UNAUDITED)

Note 2: Basis of Presentation and Summary of Significant Accounting Policies (continued)
Revenue Recognition
Provider Systems
~~We have~~The Company has entered into ~~full-risk~~full risk contracts with ~~five HMOs~~eight payers of which ~~four~~five are HMO payers offering Medicare Advantage plans and providing members to a number of the Company’s ~~Community Health Systems (CHS)~~community health systems (CHSs) in the ~~State~~state of Florida. The Company is ~~at-full-risk~~at full risk for the medical costs for HMO payer members for ~~two~~four of these contracts. The ~~Revenue~~revenue from the other ~~two contracts~~contract is equal to the ~~HMO’s~~HMO payer’s payment of a capitation or fee-for-service fee due ~~our~~the Company’s contracted primary care physicians. One of these contracts will be ~~at-full-risk~~at full risk when the membership under ~~our~~ care reaches 300. Currently, ~~we receive~~the Company receives income from the HMO payer at a contracted ~~fee for service~~fee-for-service for its primary care physicians plus an additional administrative fee on a per member per month basis. ~~The fifth contract was active on August 1, 2008.~~ Under a full risk contract, ~~we receive~~the Company receives a monthly fee for each patient that chooses one of ~~our~~the Company’s physicians as their primary care ~~physician.~~phys ician. The fixed fee is based on a percentage of the premium ~~t he~~the HMO payer receives from ~~CMS. Revenues~~the Centers for Medicare and Medicaid Services (CMS). Revenue under this agreement ~~are~~is generally recorded in the period that ~~we assume~~the Company assumes responsibility to provide services at the rates then in effect, with quarterly adjustments. The direct medical costs under the full risk contracts are a combination of actual medical costs paid by the HMO payer plus a reserve for future medical costs incurred but not reported (IBNR).

9

~~THE QUANTUM GROUP, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~
~~JULY 31, 2008~~
~~(UNAUDITED)~~

~~Note 2: Summary of Significant Accounting Policies – (Continued)~~
Management Support Services
~~In December 2006, we entered into~~The majority of our revenue from management ~~agreements with two additional~~support services was generated by the medical billing ~~companies which had been consolidated as Variable Interest Entities. Each of~~and collection services company. We received a contractual fee based on the ~~two companies signed similar agreements. Under the terms of these agreements, we paid 1,500 shares of our common stock per month and were responsible for~~ total ~~operations. In return,~~claim reimbursement received by the billing ~~companies assigned all revenues and expenses to us. The~~company’s clients. These management agreements were terminated onas of December 31, 2007.
~~Our insurance subsidiary entered into an agreement with an HMO to assist in~~ Currently the ~~recruitment of members for a fixed fee per member enrolled. We recognize revenue, net of commissions paid, in the month when the member signs up with the HMO.~~Company does not have any active management contracts.
~~Reverse Stock Split~~
On August 31, 2006, the shareholders authorized the board of directors to effect a reverse stock split of our outstanding common stock to comply with the initial listing requirements of a national securities exchange or initial quotation requirement on an automatic quotation system of a national securities association with the ratio to be determined by the board in our best interest. On March 9, 2007, the board of directors approved a 1:25 reverse stock split which was effectuated on March 29, 2007. All shares and per share amounts have been restated to reflect the reverse stock split.
~~New~~Recent Accounting Pronouncements
In September 2006, the FASB issued ~~SFAS~~Statement of Financial Accounting Standards No. 157 ~~“Fair~~(SFAS No. 157),Fair Value Measurements”, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. The Company adopted SFAS No. 157 ~~applies~~for financial assets and liabilities in the period ended January 31, 2009. The Company is required to ~~other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements.~~adopt SFAS No. 157 ~~is effective~~ for ~~fiscal years beginning after November 15, 2008. Although we will continue to evaluate~~nonfinancial assets and liabilities in the ~~application~~period ended January 31, 2010. Adoption of SFAS No. 157 ~~we do~~for financial assets and liabilities did not ~~currently believe adoption of SFAS No. 157 will~~ have a material impact on ~~our~~the Company’s condensed consolidated financial condition or operating results.
In February 2007, the FASB issued ~~SFAS~~ Statement of Financial Accounting StandardsNo. 159 ~~“The~~(SFAS No. 159),The Fair Value Option for Financial Assets and Financial Liabilities, ~~- Including~~including an Amendment of FASB Statement No. ~~115.”~~115. SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for financial statements issued for an entity’s first fiscal year beginning after November 15, 2007. Adoption of SFAS No. 159 is not expected to have a material ~~effect~~impact on ~~our~~the Company’s condensed consolidated ~~statements of~~ financial condition ~~income~~ or ~~cash flows.~~

10

~~THE QUANTUM GROUP, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~
~~JULY 31, 2008~~
~~(UNAUDITED)~~

~~Note 2: Summary of Significant Accounting Policies – (Continued)~~operating results.
In December 2007, the FASB issued ~~SFAS~~Statement of Financial Accounting Standards No. 141(R) (SFAS No. 141(R)),Business Combinations, ~~“Business Combinations,”~~ and ~~SFAS~~Statement of Financial Accounting Standards No. 160 ~~“Noncontrolling~~(SFAS No. 160),Noncontrolling Interest in Consolidated Financial ~~Statements.”~~Statements. These ~~Statements~~statements replace FASB Statement of Financial Accounting StandardsNo. 141 ~~“Business~~(SFAS No. 141),Business Combinations”, and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS No. 141(R) also makes significant amendments to other Statements and other authoritative guidance. The Statements are effective for years beginning on or after December 15, 2008. ~~We are~~The Company is evaluating if the ~~adoption~~impact of these new standards ~~would have a material effect~~ on ~~our~~its condensed consolidated financial position or ~~operating~~opera ting results.

12

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2009
(UNAUDITED)

Note 2: Basis of Presentation and Summary of Significant Accounting Policies (continued)
In May 2008, the FASB issued ~~SFAS~~Statement of Financial Accounting Standards No. 162 ~~“The~~ (SFAS No. 162), TheHierarchy of Generally Accepted Accounting Principles”, which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The Company does not expect that this Statement will result in a change in current practice.
Note 3: Fair Value of Financial Instruments
~~The carrying amounts~~On November 1, 2008, the Company adopted Statement SFAS No. 157, which clarifies the definition of ~~cash and cash equivalents, accounts payable, notes payable and accrued liabilities approximate their~~ fair value, ~~because~~prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about fair value measurements. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
·
Level 1: valuations based on quoted prices for identical assets and liabilities in active markets.
·
Level 2: valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
·
Level 3: valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
Adoption of SFAS No. 157 for financial assets and liabilities did not have material impact on the ~~short maturity of these~~Company’s condensed consolidated financial ~~instruments.~~condition or operating results.
Note 4: Property and Equipment
Property and equipment ~~consist~~consists of the ~~following:~~following at January 31, 2009 and October 31, 2008:

January 31,
2009

October 31, 2008
Computer and other equipment

$
234,917

$
225,908
Furniture and fixtures

184,587

184,587
Automobile

49,574

49,574
Leasehold improvements

125,915

125,915
Total, at cost

594,993

585,984
Less: Accumulated depreciation

(283,200)

(244,725)
Property, plant and equipment, net

$
311,793

$
341,259

July 31,
2008

October 31,
2007



Furniture and fixtures
$
182,552

$
110,884

Leasehold improvements

125,915

66,457

Computer equipment

206,112

182,102

Vehicle

49,574

38,953

Total, at cost

564,153

398,396

Less: Accumulated depreciation

(205,478
)

(220,182
)
Property, plant and equipment, net
$
358,675

$
178,214

Depreciation expense for the ~~nine months~~period ended ~~July~~January 31, 2009 and 2008 was $38,476 and ~~2007 was $59,931 and $52,606,~~$27,100, respectively.
Note 5: ~~Loss Per Share~~Intellectual Property
~~Basic loss per share is computed by dividing loss available~~Intellectual property consists of licensed technology and ongoing development costs relating to ~~common shareholders by~~ the weighted average number of common shares for the period. The computation of diluted loss per share is similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares, such as warrantsCompany’s healthcare clinical operating system and ~~options, had been issued. The impacts of warrants and options have been excluded from the calculation of diluted loss per share as their effects would be anti-dilutive.~~enhancements.

January 31,
2009

October 31, 2008
Licensed technology

$
100,000

$
100,000
Development costs

500,000

350,000
Total, at cost

600,000

450,000
Less: Accumulated amortization

(100,000)

(75,000)
Intellectual property, net

$
500,000

$
375,000
For the period ended July 31, 2008 and 2007 we had 10,360,236 warrants, with exercise prices ranging from $5.00 to $12.50 per share and 108,315 with exercise prices ranging from $5.00 and $125.00 per share, respectively. For the period ended July 31, 2008 and 2007 we had 1,336,262 vested options with exercise prices ranging from $2.03 to $37.50 per share, which were exercisable at July 31, 2008 and 227,581 vested options with exercise prices ranging from $3.50 to $37.50 per share, which were exercisable at July 31, 2007, respectively. In addition, we have 120,000 underwriter purchase options for units at an exercise price of $13.20 per unit.

1113

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
~~JULY~~JANUARY 31, ~~2008~~2009
(UNAUDITED)

Note 5: Intellectual Property (continued)
Amortization expense for the three months ended January 31, 2009 and the year ended October 31, 2008 was $25,000 and $75,000, respectively.
Note 6: Debt
Secured Convertible Debentures
WeThe Company raised $6,050,000 selling 121 private placement units consisting of an 8% secured convertible debt and 6,061 unregistered shares of common stock (bridge shares) during the period between August 2006 and May 2007 through the issuance of three private placement ~~memorandums.~~memoranda. Included in the terms of the units was the right of the investor to exchange the bridge shares received into unregistered units consistent with the units offered in the Company’s secondary public offering.On November 17, 2007, wethe Company gave the bridge investors two conversion options. Under the first option, the Bridge Notes converted into the Conversion Securities at 100% of the public offering price, which Conversion Securities and underlying securities are subject to a ~~one-year~~one year lockup. Under the second option, the Bridge Notes converted into the Conversion Securities at a 30% discount to the public offering price, which Conversion Securities and underlying securities are subject to a ~~two-year~~two year lockup. On December 13, 2007, in accordance with agreements signed by the investors, the Company has converted $1,458,775 of debt and accrued interest, $1,302,500 and $156,275, respectively, under Option 1 into 132,650 unregistered units similar to the public offering units, and $3,748,965 of debt and accrued interest, $3,397,500 and $351,465, respectively, under Option 2 into 486,929 unregistered units similar to the public offering units. The conversion of $351,465 accrued interest under Option 2 created additional interest expense of $150,628. The intrinsic value of the beneficial conversion feature of the convertible debt was calculated at the date of issuance of the convertible debt (the commitment date), based on the post-allocation effective conversion price. On the conversion date, December 13, 2007, the value assigned to the beneficial conversion feature of $3,610,491 was fully expensed. Bridge Notes totaling $1,398,144 in debt and accrued interest were extinguished from the net proceeds of the secondary offering. Under conversion options, ~~we have~~the Company had agreed to pay an inducement fee of 3% the aggregate amount of principal and accrued interest, payable quarterly for one year, unless the lockups are earlier released. The first and second quarterly ~~payment was~~payments were made on April 15, 2008 and September 23, 2008, in the amount of ~~$155,336. Additionally, a total~~$155,336 and $138,692, respectively. The remaining balance of ~~936,573 bridge shares were exchanged for 702,420 unregistered units based upon an offering price of $11.00 per unit.~~$327,316 was due and payable at December 17, 2008, which remains outstanding at January 31, 2009.
Notes Payable
On November 30, 2005, wethe Company entered into a 13% two ~~(2)-year~~year callable loan agreement for $100,000. The terms of the loan agreement included quarterly interest-only payments. Additional compensation included 1,200 shares of common stock. The agreement contained an anti-dilution provision on the additional compensation shares whereby the lender received additional shares to maintain a specific percentage of ownership. WeThe Company issued a total of 24,611 shares in common stock of which 18,926 shares were issued during the ~~quarter~~period ended January 31, 2008. This note was paid off from the proceeds from ~~our~~the Company’s secondary public offering on December 13, 2007.
In October 2007, we entered into two financing arrangements which, in the aggregate, resulted in $484,000 in net proceeds to us. Namely, we issued a two-year 10% promissory note in the aggregate principal amount of $250,000 to Paulson Investment Company, Inc., representative of the underwriters of our secondary public offering. In addition, we executed a financing agreement with High Capital Funding, LLC, a principal shareholder (HCF), and a third party lender that had no prior affiliation with us (TPL). The financing arrangement involved the issuance of two-year promissory notes to each of HCF and TPL in the aggregate principal amounts of $166,667 and $83,333, respectively. In satisfaction of the notes in full, we agreed to pay to HCF and TPL $238,094 and $119,047, respectively, with $71,427 and $35,714 representing the respective original issue discounts on the HCF and TPL notes. We also agreed to prepay the full principal amount of th e notes at the closing of any public or private financing for which we receive gross proceeds of at least $10,000,000. We incurred a 5% cash commission in the amount $12,500 to Newbridge Securities Corporation, one of the underwriters in this offering, in connection with the HCF and TPL financings. Net proceeds to us from the HCF and TPL financing arrangements were $234,000. All three promissory notes have been extinguished from the proceeds of the secondary public offering completed on December 13, 2007.

12

~~THE QUANTUM GROUP, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~
~~JULY 31, 2008~~
~~(UNAUDITED)~~

~~Note 6: Debt – (Continued)~~
Notes ~~Payable-Shareholder~~Payable-Shareholders
On November 14, 2005, a shareholder advanced us $50,000. We and the shareholder agreed to a 12% interest rate on the unpaid balance and 400 shares of common stock. This note was paid off from the secondary public offering completed on December 13, 2007.
On December 16, 2005, we executed a $100,000 promissory note payable to Maj-Britt Rosenbaum. This note was due July 31, 2006, and bore an interest rate of 8% per annum payable at term of the note. Additional compensation included 600 shares of our common stock per month for each month the debt was outstanding. On February 9, 2006, the husband of the note holder, Michael Rosenbaum, was elected to our board of directors. On February 25, 2006, an additional $25,000 was advanced to us by Mrs. Rosenbaum for a total of $125,000. Mrs. Rosenbaum and the Company agreed to extend the term of the note based on terms consistent with the Bridge Financing Agreement which included the issuance of 6,667 shares of common stock. The value of the stock was determined by the closing market price on the date of the loan and was amortized over the term of the loan. On April 20, 2007, an agreement was reached to repay the loan of $125,000 to Mrs. Rosenbaum, plus interest at 8%, from the proceeds of the March 2007 Private Placement and agreed to exchange the shares into units of the Company’s secondary offering. The loan was repaid on May 4, 2007, along with interest of $10,800. At that time, we issued a total of 15,152 shares of common stock to Mrs. Rosenbaum under the terms of the agreement. On December 13, 2007, the bridge shares were exchanged for 11,364 unregistered units.
On August 1, 2007, the Board agreed to allow Mr. ~~Cohen~~Noel J. Guillama and Mr. ~~Guillama~~Donald B. Cohen to convert up to 50% of their accrued but unpaid compensation and bonuses as approved by the Board of Directors and other liabilities as of August 31, 2007, into unregistered units of common stock, Class A warrants and Class B warrants otherwise identical to the units offered in the Company’s secondary offering. Mr. Guillama and Mr. Cohen received a bonus as additional compensation to cover the tax liabilities associated with this conversion in the amount of $279,697 and $83,101, respectively, for the conversion into units of $487,647 and $158,121 of accrued compensation and other amounts owed, respectively. Mr. Guillama and Mr. Cohen received 44,332 and 14,375 units on December 13, 2007. The balance of the amounts ~~due:~~due are $487,647 for Mr. Guillama, which is composed of the $176,446 outstanding ~~balance~~balan ce on the ~~pr omissory~~promissory note, ~~$ 7,514~~$7,514 in unreimbursed expenses and $303,687 in accrued ~~compensation;~~compensation, and $158,121 for Mr. Cohen, which includes $128,213 in accrued compensation and $29,908 in unreimbursed ~~expenses; and~~expenses. In addition, $234,583 of accrued compensation ~~for~~due to Mrs. Susan Guillama ~~were~~was converted into ~~two-year~~two year promissory notes at an interest rate of 8% per annum. On September 21, 2007, the Company executed the promissory notes with the three executives. As of ~~July~~January 31, ~~2008,~~2009, the balance of the shareholder promissory notes for Mr. Guillama, Mr. Cohen and Mrs. Guillama were ~~$315,019;~~$315,019, $102,226 and $151,408, ~~respectively. Interest paid~~respectively, and accrued interest of $27,510. These notes are considered in default and classified as short term.

14

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2009
(UNAUDITED)

Note 6: Debt (continued)
On December 26, 2008, the Company entered into an agreement for the private placement of securities with Paulson Investment Company, to serve as exclusive agent to place up to $2,000,000 of unsecured promissory notes. The minimum offering amount is $500,000 with a minimum subscription of $25,000 for each investor of the notes for this offering. The Company will pay a cash fee equal to 10% of the gross proceeds of the notes sold in this offering and a non-accountable expense allowance equal to 3% of the gross proceeds of the notes sold in this offering. The engagement will terminate on March 31, 2009.
On January 5, 2009, the Company executed a $100,000 promissory note payable to Noel J. Guillama, the Company’s Chairman of the Board, Chief Executive Officer and President, with a maturity date of March 31, 2009. No interest will accrue during the ~~three~~term of this note, except as otherwise provided herein. In lieu of the interest, the Company will pay Mr. Guillama the principal sum of $117,647 as payment in full. The difference between the obligation and ~~nine~~the principal payment is being treated as “original issue discount” and is reported as interest expense over the term of the note. As of January 31, 2009, $5,882 was charged to interest expense. If the obligation has not been paid in full by March 31, 2009, the obligation, plus interest accruing from the maturity date through the date of payment at the rate of 15%, compounded monthly and on the basis of a 360-day year of twelve 30-day months, ~~ended July~~in arrears, on a proportionate basis, w ill thereafter be payable 60 days after demand for payment by Mr. Guillama. The Company will repay any or all amounts due under this note at the closing of any public or private financing for which the Company receives gross proceeds of at least $2,000,000.
On January 12, 2009, the Company executed an $85,000 promissory note payable to Paulson Investment Company, Inc. with a maturity date of March 31, ~~2008~~2009. No interest will accrue during the term of this note, except as otherwise provided herein. In lieu of the interest, the Company will pay Paulson Investment Company the principal sum of $100,000 as payment in full. The difference between the obligation and ~~2007~~the principal payment is being treated as “original issue discount” and is reported as interest expense over the term of the note. As of January 31, 2009, $2,500 was ~~$8,313; $46,639; $0~~charged to interest expense. If the obligation has not been paid in full by March 31, 2009, the obligation, plus interest accruing from the maturity date through the date of payment at the rate of 15%, compounded monthly and ~~$0, respectively.~~on the basis of a 360-day year of twelve 30-day months, in arrears, on a proportionate basis, will thereafter be payable 60 days after demand for payment by Paulson Investment Company. The Company will repay any or all amounts due under this note at the closing of any public or private financing for which the Company receives gross proceeds of at least $2,000,000.
On January 16, 2009, the Company executed a $100,000 promissory note payable to Charlemagne Holdings, Inc. (“CHI”) with a maturity date of March 31, 2009. CHI is solely owned by Gregg M. Steinberg, the Company’s Director. No interest will accrue during the term of this note, except as otherwise provided herein. In lieu of the interest, the Company will pay CHI the principal sum of $117,647as payment in full. The difference between the obligation and the principal payment is being treated as “original issue discount” and is reported as interest expense over the term of the note. As of January 31, 2009, $2,941 was charged to interest expense. If the obligation has not been paid in full by March 31, 2009, the obligation, plus interest accruing from the maturity date through the date of payment at the rate of 15%, compounded monthly and on the basis of a 360-day year of twelve 30-day months, in arrears, on a proportionate basis, will thereafter be payable 60 days after demand for payment by CHI. The Company will repay any or all amounts due under this note at the closing of any public or private financing for which the Company receives gross proceeds of at least $2,000,000.
On January 23, 2009, the Company executed a $40,000 promissory note payable to Jose de la Torre, the Company’s Director, with a maturity date of March 31, 2009. No interest will accrue during the term of this note, except as otherwise provided herein. In lieu of the interest, the Company will pay Dr. de la Torre the principal sum of $47,059 as payment in full. The difference between the obligation and the principal payment is being treated as “original issue discount” and is reported as interest expense over the term of the note. As of January 31, 2009, $1,176 was charged to interest expense. If the obligation has not been paid in full by March 31, 2009, the obligation, plus interest accruing from the maturity date through the date of payment at the rate of 15%, compounded monthly and on the basis of a 360-day year of twelve 30-day months, in arrears, on a proportionate basis, will thereafter be payable 60 days after demand for payment by Dr. de la Torre. The Company will repay any or all amounts due under this note at the closing of any public or private financing for which the Company receives gross proceeds of at least $2,000,000.

15

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2009
(UNAUDITED)

Note 7:Commitments and Contingencies
On February 14, 2008, wethe Company entered into an agreement with Net.Orange, Inc., a software development company, for the licensing of their healthcare clinical operating system and development of additional modules and enhancements. The agreement calls for, among other fees, an annual license fee of $100,000 plus development fees for the production of various modules or applications. This agreement will automatically renew for successive one year periods but is cancelable by either party with notification in writing at least ~~sixty~~60 days prior to expiration of term. The renewal date has been extended to July 1, 2009.

On December 3, 2008, the Company entered into an E-business Hosting Agreement with IBM. This multiyear (36 month) agreement provides an advanced scalable platform for growth into national and international healthcare arenas. This agreement provides for information management, storage, security and privacy focus use in conjunction with the Company’s PWeR healthcare information platform. The Hosting Agreement the Company has entered into with IBM requires the one time payment of $81,217 in fiscal 2009, with recurring monthly payments of $37,000 beginning on the service ready date.
13Note 8: Equity

~~THE QUANTUM GROUP, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~
~~JULY~~During the quarter ended January 31, ~~2008~~2009, 62,225 shares were returned to the Company. The shares were valued at the quoted market price on the date received.
~~(UNAUDITED)~~

Note 8:9: Equity Compensation
2003 Incentive Equity and Stock Option Plan
In October 2003, wethe Company adopted a stock option plan ~~(2003~~titled 2003 Incentive Equity and ~~Stock~~ Option ~~Plan).~~Plan. The purpose of the stock option plan was to increase the employees’ and non-employee directors’ interest in the Company and to align more closely their interests with the interests of ~~our~~the Company’s shareholders, as well as ~~to enable us~~ to attract and retain the services of experienced and highly qualified employees and non-employee directors.
Options granted under this plan may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or options that do not so qualify. Any incentive option must provide for an exercise price of not less than 90% of the fair market value of the underlying shares on the date of such grant, and the exercise price of any incentive option granted to an eligible employee owning more than 10% of ~~our~~the Company’s common stock must be at least 110% of such fair market value as determined on the date of the grant.
The term of each option and the manner in which it may be exercised is determined by the ~~board~~Board of ~~directors,~~Directors, provided that no option may be exercisable more ~~than10~~than 10 years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more ~~than10%~~than 10% of ~~our~~the Company’s common stock, no more than five years after the date of the grant. The ~~board~~Board of ~~directors~~Directors shall determine the exercise price of non-qualified options.
~~We have~~The Company has reserved 200,000 shares of common stock under the plan. The ~~board~~Board of ~~directors,~~Directors, or a committee of the ~~board~~Board of ~~directors,~~Directors, will administer the plan including, without limitation, the selection of the persons who will be granted plan options under the plan, the type of plan option to be granted, the number of shares subject to each plan option, and the plan option price.
The per share exercise price of shares granted under the plan may be adjusted in the event of certain changes in the total purchase price payable upon the exercise in full of options granted under the plan. Officers, directors, and key employees of and consultants to the Company will be eligible to receive non-qualified options under the plan. Only officers, directors and employees of the Company who are employed by ~~us,~~the Company, or by any subsidiary thereof, are eligible to receive incentive options.
~~A summary of shares and options granted under the plan during the nine months ended July 31, 2008 and 2007 is shown below:~~

2008

2007

Options

Options

Incentive Stock Grants

Number of Shares

Weighted Average Exercise Price

Incentive Stock Grants

Number of Shares

Weighted Average Exercise Price

Outstanding at beginning of the period

2,400

—

2,400

—

Granted

—

—

Exercised

—

—

—

—

Forfeited

—

—

—

—

Outstanding at July 31,

2,400

—

2,400

—

Exercisable at July 31,

—

—

Available for issuance at July 31 under the plan

197,600

197,600

1416

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
~~JULY~~JANUARY 31, ~~2008~~2009
(UNAUDITED)

Note 8:9: Equity Compensation ~~– (Continued)~~(continued)
A summary of shares and options granted at January 31, 2009 and October 31, 2008 is shown below:

January 31, 2009

October 31, 2008

Options

Options

Stock Grants

Shares

Weighted Average Exercise Price

Stock Grants

Shares

Weighted Average Exercise Price
Outstanding at beginning of the period

87,030

—

—

2,400

—

—
Granted

—

—

—

84,630

—

—
Exercised

—

—

—

—

—

—
Forfeited

—

—

—

—

—

—
Outstanding at end of the period

87,030

—

—

87,030

—

—

Available for issuance at end of the period under the plan

110,570

110,570

~~Deferred Compensation~~2007 Equity Incentive Plan
~~From time~~On September 23, 2007, the Company’s Board adopted, subject to ~~time, we grant~~stockholder approval, the 2007 Equity Incentive Plan to align the interests of employees, consultants, and non-employee Board members with the interests of the Company’s stockholders, to provide incentives for these persons to exert maximum efforts for the Company’s success and to encourage them to contribute materially to the Company’s growth. The plan is administered by the Compensation and Options Committee, which has exclusive discretion to select the participants who will receive awards under the plan and to determine the type, size and terms of each award. The maximum aggregate number of shares, which may be optioned and sold under the plan, is 5,000,000 shares, subject to certain adjustments. On the first day of each fiscal year while the plan is in effect, such aggregate number of shares under the Plan shall be automatically increased by adding 33 1/3% of the increase in shares of common stock outstanding during the prior fiscal year; however, that the first such automatic increase shall be effective within 93 days following the date of approval of this plan by the Company shareholders, subject to ~~employees, directors~~adjustment to prevent the dilution of rights from stock dividends, stock splits, recapitalization or similar transactions. The plan received stockholder approval on August 1, 2008 and ~~advisors in lieu~~is effective as of ~~or as partial~~September 24, 2007.
On December 10, 2008, the Board of Directors approved a senior executive compensation package that is not only designed to compensate senior staff for ~~services performed~~their hard work and dedication to the Company but to promote Company goals, align the incentive system for the ~~Company. These~~management team and to reward management for meeting their individual goals. The compensation package includes the following:
·
Short-term incentive bonus: paid in Company stock based on actual figures for earnings before tax (EBT) and the increases in revenue from fiscal 2007 to 2008, not to exceed 100% of base pay and payable in Company stock no later than February 28, 2009. The Company shares vest 50% immediately, with the remaining 50% vesting at the first anniversary.
·
One-time retention award: consists of Company shares, vested immediately, and options that have a $0.50 strike that vest over ~~two~~four years with 25% vested immediately.
·
Individual management performance reward: paid 50% in Company stock at the market price on grant date that vest over four years with 25% vested January 2, 2009, 25% vested over the following three years, and ~~three year periods.~~50% paid in stock options priced at the 30-day VWAP preceding the date of award and vested over the same period as the shares.
On December, 10, 2008, the Company granted 657,315 shares of Company stock and 415,875 options to key executives. The ~~value of~~shares were valued using the ~~stock is determined by the closing~~quoted market price at the date of grant. We recognized $9,675; $31,049; $17,529 and $60,733 in compensation expense related to these stock grants for the three and nine months ended July 31, 2008 and 2007, respectively. During the three and nine months ended July 31, 2008 and 2007, -0-, -0-, 0 and 14,400 shares were issued, respectively. During the nine months ended July 31, 2008, 1,520 shares were forfeited with a value of $9,600, in which the value of the stock was determined by the closing market price at the date of grant. In the prior period, the value of the option grants which are earned over a period had been inc luded in deferred compensation.
~~Stock Compensation~~
Effective November 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123, using the modified prospective transition method. Under this method, stock-based compensation expense for the first quarter of fiscal 2007 includes compensation cost for all share-based payments modified or granted prior to, but not yet vested as of November 1, 2006, based on the grant ~~date fair value estimated in accordance with the original provisions of SFAS No. 123.~~date. The Company adopted SFAS 123R beginning on November 1, 2006 and realized an increase in stock based compensation of approximately $413,695; $2,764,317; $244,255 and $554,934, respectively, for the three and nine months ended July 31, 2008 and 2007, as a result of the adoption of SFAS 123(R).
As of July 31, 2008, we have vested options with exercise prices ranging from $1.70 to $37.50 per share and expiring in years 2008 through 2018. We have granted 122,000 options during the quarter ended July 31, 2008, with exercise prices ranging from $1.09 to $2.05 and expiring in years between 2013 and 2018. Using the Black Scholes method these options were valued using a Black-Scholes valuation methodology with a total value of $137,239. The variables used in the Black-Scholes valuation included a volatility rate of 108,190, risk-free rate of 4.5% and a life of four years.

17

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2009
(UNAUDITED)

Note 9: Equity Compensation (continued)
Name

Number of
Shares

Value

Number of
Options

Value
Short-term incentive bonus

241,440

$
117,585

—

$
—
One time retention award

135,000

$
67,500

135,000

$
44,550
Individual management
performance reward

280,875

$
140,438

280,875

$
92,689

A summary of shares and options granted at ~~$133,336. These options vest~~January 31, 2009 and October 31, 2008 is shown below:

Options

Options

Stock
Grants

Shares

Weighted
Average
Exercise
Price

Stock
Grants

Shares

Weighted
Average
Exercise
Price
Outstanding at beginning of the period

984,594

2,580,651

$
      1.26

—

5,093,767


        —
Granted

505,511

3,840,514

$
0.50

984,594

2,580,651

$
1.26
Exercised

—

—

—

—

—

—
Forfeited

—

940,720

—

—

—

—
Outstanding at end of the period

1,490,105

5,480,445

—

984,594

2,580,651

—

Available for issuance at end of the
period under the plan

—

1,528,522

On December 26, 2008, all employees, including officers, were granted one additional option to purchase shares of the Company’s common stock for each option previously granted that have an exercise price between $1.50 and $3.00. Additionally, the ~~years 2008 through 2012. We issued 9,000~~Company granted two additional options to purchase ~~units similar~~shares of the Company’s common stock for each unexpired option previously granted to all employees including officers that have an exercise price above $3.00. A total of 3,346,770 options to purchase the ~~units sold in~~Company’s common stock were granted and have a calculated value of $937,096. The options were valued using a Black-Scholes valuation methodology 113.3% volatility rate, risk-free rate of 3.25% and a life of five years.
On January 15, 2009, the ~~secondary public offering~~senior executives and members of the board of directors forfeited 940,720 options to ~~certain employees at~~purchase shares of the Company’s common stock with an exercise price of $9.95 per unit. These options vested on December 13, 2007, and expire on December 13, 2012. Upon exercise of the unit option, the employee would receive three shares of the company’s common stock and two Class A warrants and two Class B warrants.
~~From time to time, we issue stock to employees~~$3.01 or greater as length of service awards and performance awards. Additionally, we will issue shares to consultants in lieu of cash compensation. These stock issuances are not included in our 2003 Incentive Equity and Stock Option Plan. For the three and nine months ended July 31, 2008 and 2007, we issued 51,911; 77,521; 875 and 2,497 shares of common stock as stock compensation, respectively. The value of the stock is determined by the closing market price on the date earned and issuable. We recorded compensation expense of $53,048; $125,942; $6,344 and $32,871, respectively,outlined in the ~~three and nine months ended July~~table below.
Name
Title/Relationship
Number of
Options
Exercise
Price
Noel J. Guillama
Chairman, Chief Executive Officer,
632,000
$3.50-$12.00
President
Donald B. Cohen
Executive Vice President, Chief
168,000
$3.50-$12.00
Financial Officer
Susan D. Guillama
Executive Vice President, Chief
112,000
$3.50-$12.00
Administrative Officer
Jose de la Torre
Director
10,000
$5.98-$7.25
Alberto Del Valle
Director
10,000
$5.98-$7.25
Lawrence B. Fisher
Director
10,000
$5.98-$7.25
Gregg M. Steinberg
Director
10,000
$5.98-$10.00

18

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, ~~2008 and 2007, respectively.~~2009
(UNAUDITED)

Note 9: Equity Compensation (continued)
Key Executive Contract
On March 24, 2008, wethe Company entered into an amendment to an employment agreement (the ~~“Agreement”~~“Amendment”) with Noel J. Guillama, the Chairman of the Board of Directors and Chief Executive Officer of the Company (the “Executive”). In accordance with the ~~Agreement,~~Amendment, the Executive is entitled to receive additional compensation in the form of various stock options, as described ~~below:~~below.
The Executive was granted options to purchase 600,000 shares of the common stock of the Company on the effective date of the ~~Agreement (“Signing~~Amendment (the “Signing Options”). The Signing Options have an exercise price of the then current ~~VWAP (“~~Volume Weighted Average ~~Price”~~Price (“VWAP”) calculated as the Company’s volume per day multiplied by the Company’s stock closing price for the last 30 days, then divided by the total shares traded for the period of the Company’s stock for the 30 days before the grant date ($2.06 per share). The Signing Options vest 25% on the grant date, with the remaining 75% vesting in three equal installments on January 1, 2009, 2010, and 2011. All Signing Options expire ~~ten~~10 years from the date of grant.

15

~~THE QUANTUM GROUP, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~
~~JULY 31, 2008~~
~~(UNAUDITED)~~

~~Note 8: Equity Compensation~~~~– (Continued)~~
The Executive was granted options to purchase 20,000 shares of the common stock of the Company on the execution date of this ~~First Amendment,~~first amendment, and will receive additional options annually to purchase 10,000 shares of common stock of the Company commencing January 1, 2009 (the “Longevity Options”). The Longevity Options have an exercise price of the then current VWAP of the Company’s stock for the 30 days before the grant date. The Longevity Options vest 25% on grant with the remaining 75% vesting on the first three anniversaries from the grant date. All Longevity Options expire ~~ten~~10 years from date of vesting.
The Executive also is entitled to receive options to purchase shares of the common stock of the Company based on the Company’s achievement of certain performance thresholds ~~(“Performance~~(the “Performance Options”). The Executive is entitled to receive options to purchase 50,000 shares of common stock in the event the Company’s annual ~~revenues are~~revenue is equal or exceed $25 million in a fiscal year. The exercise price per share is equal to the VWAP of the Company’s common stock for the 30 days preceding the grant date. In addition, the Executive will receive options to purchase 50,000 shares of common stock every time the annual run rate (the monthly revenue multiplied by 12) of ~~revenues~~revenue of the Company surpasses an incremental level of $20 million and the Company’s annual ~~revenues are~~revenue is equal or exceed $45 million in increments of $20 million until $305 million in ~~revenues.~~revenue. Each threshold will be paid only once and non o grants will be awarded after March 1, 2013. The options will be granted within 30 days of the close of the fiscal year and will have an exercise price per share equal to the VWAP of the Company’s stock 30 calendar days preceding the grant date.
The Performance Options shall vest 25% on grant date with the remaining 75% vesting on the first three anniversaries from the grant date. All Performance Options shall expire ~~ten~~10 years from the date of vesting.
In addition, The Executive was issued a ~~one-time~~one time grant of a pool of options to purchase 700,000 shares of common stock of the Company ~~(“Extraordinary~~(the “Extraordinary Options”), to be distributed among all key senior executives as proposed by the Executive and the Compensation Committee of the Board. The exercise price per share is equal to the VWAP of the Company’s common stock for the 30 days preceding the grant ~~date.~~date of March 24, 2008, which is the date of contract. The Extraordinary Options immediately vest, and expire ~~ten~~10 years from the date of ~~vesting.~~vesting valued at $1.5 million.
~~Repurchase~~The compensation expense recognized for all equity-based awards is net of ~~Warrants~~expected forfeitures and is recognized over the awards’ respective service periods. The Company recorded equity-based compensation expense for the periods ended January 31, 2009 and 2008 of $9,750 and $0, respectively.
In December 2007, we agreed to repurchase 70,911 placement agent warrants, exercisable at $8.25 per share, originally issued in relation to our private placements dated August 2006, December 2006 and March 2007. We purchased these warrants for $1.00 per warrant for a total of $70,911.

19

THE QUANTUM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2009
(UNAUDITED)

Note 9:10: Secondary Public Offering
~~Our~~The Company’s secondary public offering became effective on December 12, 2007. The offering consisted of 1,200,000 units at a public offering price of $11.00 per unit. The units traded as a single security until separation on the ~~30th~~30^th day, or January 14, 2008, at which time the units separated into the underlying securities. Each unit consisted of three shares of common stock, two Class A ~~7-year~~seven year non-callable warrants and two Class B ~~7-year~~seven year non-callable warrants, each warrant to purchase one share of common stock. Each Class A warrant entitles its holder to purchase one share of common stock at an exercise price of $7.00 per share. Each Class B warrant entitles its holder to purchase one share of common stock at an exercise price of $11.00 per share. The total proceeds from the secondary public offering were $13,200,000. After expenses of $1,089,000 ($759,000, representing the underwriting discount of 5.75%, and $330,000, ~~r epresenting~~representing the representative’s non-accountable expense allowance of 2.5%), the Company received net proceeds of $12,111,000 before additional offering expenses of $614,456, of which $350,824 was paid in the prior fiscal quarter.

Note 11: Loss Per Share
16Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares for the period. The computation of diluted loss per share is similar to basic loss per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares, such as options, had been issued. Diluted loss per share does not give effect to warrants or options granted, as the effects would be anti-dilutive.

~~THE QUANTUM GROUP, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~
~~JULY~~For the periods ended January 31, 2009 and 2008 the Company had 10,419,328 warrants, with exercise prices ranging from $0.50 to $12.50 per share and 10,360,236 warrants with exercise prices ranging from $5.00 to $12.50 per share, respectively. For the periods ended January 31, 2009 and 2008 the Company had 5,574,848 vested options with exercise prices ranging from $0.50 to $37.50 per share, which were exercisable at January 31, 2009 and 303,531 vested options with exercise prices ranging from $2.03 to $37.50 per share, which were exercisable at January 31, 2008, respectively. In addition, the Company has 120,000 underwriter purchase options for units at an exercise price of $13.20 per unit.
~~(UNAUDITED)~~

Note ~~10:~~12: Subsequent ~~Event~~Events
~~2007 Equity Incentive Plan~~
~~On September 23, 2007, our Board adopted, subject~~Subsequent to ~~stockholder approval,~~January 31, 2009, the ~~2007 Equity Incentive Plan (Plan)~~Company issued promissory notes to ~~align~~several individual investors who are also related parties for a total of $726,250. Interest will accrue during the ~~interests~~term of ~~employees, consultants,~~the notes, and ~~non-employee Board members with~~is payable upon maturity dates of the ~~interests of our stockholders,~~notes ranging from March 31, 2009 to ~~provide incentives for these persons to exert maximum efforts for our success and to encourage them to contribute materially to our growth. The Plan is administered~~June 30, 2009. In the event the obligations have not been paid in full by the ~~Compensation and Options Committee which has exclusive discretion to select~~applicable maturity dates, the ~~participants who will receive awards under~~obligations, plus interest accruing from the Plan and to determine the type, size and terms of each award. The maximum aggregate number of shares which may be optioned and sold under the Plan is 5,000,000 shares, subject to certain adjustments. On the first (1st) day of each fiscal year while the Plan is in effect, such aggregate number of shares under the Plan shall be automatically increased by adding thirty-three and one third percent (33 1/3%) of the increase in shares of Common Stock outstanding during the prior fiscal year; however, that the first such automatic increase shall be effective within 93 days followingdate hereof through the date of ~~approval~~payment at the rate of 15%, compounded monthly. The Company will repay any or all amounts due under these notes at the closing of any public or private financing which the Company receives gross proceeds of at least $2,000,000. The investors will have the right to convert any or all of the principal payment at their discretion for common stock of the Company at a price of $0.50 per share.
Palm Beach Medical College, Inc. was incorporated during fiscal 2008 with activity commencing in the second quarter of fiscal 2009. Currently, the principal shareholders are The Quantum Group, Inc., Renaissance Health Systems, Inc., Dr. Carlos Martini, and Dr. Enrique Lavernia. Palm Beach Medical College is involved in aspects of the education of physicians using advanced educational methodologies.
On March 18, 2009, Noel J. Guillama, President and CEO of the Company, made a payment to a vendor on behalf of the Company in the amount of $51,217. Mr. Guillama was granted a collateral interest in all of the outstanding common stock of Renaissance Administrative Solutions, Inc. (RASI), a wholly-owned subsidiary of the Company. The Audit Committee of the Board has reviewed and approved the terms of this Plan by the Company shareholders, subject to adjustment to prevent the dilution of rights from stock dividends, stock splits, recapitalization or similar transactions.The Plan received stockholder approval on August 1, 2008 and is effective as of September 24, 2007.transaction.

17

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related ~~notes.~~notes appearing elsewhere in this Quarterly Report. The discussion in this section regarding our business and operations includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “estimate,” or “continue,” or the negative thereof or other variations thereof or comparable terminology. You are cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from ~~those~~thos e referred to in such forward-looking ~~stateme nts.~~statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various ~~factors, including those set forth in the “Risk Factors” section.~~factors.
General
We ~~offer consulting~~are a Healthcare Services Organization (HSO) that provides business process solutions and ~~outsourcing services~~service chain management to ~~health maintenance organizations (HMOs) that market Medicare Advantage managed~~the healthcare ~~plans as well as to healthcare providers in the state of Florida through our Community Health Systems, also referred to as~~~~provider systems~~. Medicare Advantage is Medicare’s managed care alternative to Medicare’s traditional fee-for-service model. The foundation of our business model is a network of healthcare providers, including primary care physicians, specialists and ancillary service providers such as laboratories and pharmacies, among others, all of whom must satisfy the requirements of the Centers for Medicare & Medicaid Services (CMS),industry, which ~~is the U.S. federal agency that administers Medicare, Medicaid and the Medicare Advantage program. We also offer various~~~~management support services~~ to healthcare providers, HMOs, healthcare facilities and physician associations that enable them to decrease the ir operating costs and increase efficiency and productivity. These management support services are available to all healthcare providers, whether or not they are part of our network. In the future, we expect to leverage our relationships with our healthcare providers to cross-market our managementinclude support services and leading-edge technology. We coordinate the ~~benefits~~care of participation in our network. The Company is additionally leveraging cutting-edge technology with the development and execution of a series of innovative initiatives (including patent pending business processes) designed to make Quantum onepatients on behalf of the ~~leading providers of business solutions for~~payers¹ that have contracted with us through the ~~healthcare industry in Florida.~~
~~The foundation~~utilization of our Company is the 2,000+ healthcare providers affiliated with the Company through Renaissance Health System (RHS) of Florida, Inc., a Quantum subsidiary company. Since launching recruitment efforts in January 2005, RHS has established 26 county based community health systems (CHS) in Florida, with an additional 6 counties to be added by the end of December 2008. The Company plans to continue a measured rollout

18

of additional CHS to eventually encompass all 67 Florida counties. Each county must meet established criteria set forth by CMS as to the number and type of healthcare providers required to meet certification as a complete delivery system. In a small county this may be as few as 31 providers, while in larger counties the minimum requirement averages 70+. Today RHS averages 77 providers per county.
Upon completion of a CHS, RHS is able to market the delivery system to a health plan. RHS has established contracts with numerous health plans. We anticipate continued growth of these contracts in both quantity and scope of service. RHS is assigned patients by each health plan or by physicians, or through direct marketing efforts of the health plan. Beginning in January 2007 with 300 patients, RHS has grown to over 3,000 patients in August 2008. We expect that we will reach 5,000 patient lives under management by the end of the 2008 calendar year.
~~These patients are cared for initially by our 365 primary care physicians (PCP). Some of the PCP’s have as many as 400 patients.~~
As mandated by the Centers for Medicare & Medicaid Services (CMS), the U.S. federal agency that administers Medicare, Medicaid and the Medicare Advantage program, we have separate networks of healthcare providers covering all required medical fields and ancillary services in every county where we currently operate. Each county serves as a community-based comprehensive delivery system of care, called a community health system (CHS).
~~Once CMS-compliant, we then make our county-wide CHS~~ network of ~~healthcare providers~~~~(provider systems)~~ ~~available to health insurance plans with whom we contract on a non-exclusive basis. Our network participants, whether~~independent physicians, ~~physician groups or~~ other healthcare providers, ~~are eligible to treat member/patients~~and our own technology systems. Our primary stream of ~~all of our contracted health plan partners and can do so without going through separate admission processes (negotiating, contracting, credentialing) with~~revenue flows from the ~~various plans.~~
~~The healthcare industry presents a strong need~~monthly premiums received for ~~better quality and productivity. By virtue~~assuming full risk management of these ~~relationships,~~patients. We currently have contracts with payers for two types of insurance products, Medicare and Medicaid, and we ~~relieve the healthcare providers~~are expanding services to include commercial and the health plans of substantial administrative and repetitive burdens generally associated with the operations of a managed care enterprise and with the verification of medical credentials (credentialing) of healthcare providers that desire to participate in the managed care plans of the healthuniversal insurance ~~plans/payers, as required by CMS regulations.~~products.
The Company believes that the value enhancing solutions it brings to the health plans is in these established CHS that provide the opportunity to quickly, and with lower cost, expand and operate into new counties in the State of Florida or enhance an existing network of physicians currently caring for their patients. Additional services of benefit to the payers include our experienced Patient Care Team which closely monitors the treatment and care of patients to ensure efficiency, effectiveness and overall quality patient care.
The Company is also implementing and leveraging cutting-edge technology as it has recognized business process challenges in the management of our patient lives, specifically in coordinating the communications of and interactionsOur model interacts with each of the three key hubs ~~(providers,~~of the healthcare industry – the providers (primary care physicians/specialists/ancillary facilities), hospitals, and payers. To accomplish the connectivity required for these communications, we have recently developed software technology to better manage its core business. We have a HIPAA²compliant enterprise platform that includes multiple applications used by provider offices or hospitals known as PWeR™ (Personal Wellnesselectronic Record™). PWeR is a low cost, multi-application, patient-centric platform, capable of receiving patient information from multiple sources. PWeR is a simple to use software system written as Web-based, open architecture, and is software as a service (SaaS) platform. The scalability of PWeR allows for centralized patient data to be accumulated at local, state, national and global levels. We have engaged International Business Machines Corporation (“IBM”), a New York Stock Exchange listed company, to host our system, thereby providing reliability, security, scalability and privacy. We have filed 18 provisional patents with the United States Patent and Trademark Office, which support technology that is intended to enhance the capabilities of PWeR. The provisional patents include the improvement of prescription accuracy, real-time updates of patient records, streamlined inventory management of supplies within a healthcare provider’s facility, and customized interfaces with the PWeR platform for each user to provide for a more efficient and productive experience. PWeR is currently being marketed to our network of healthcare providers, as well as, healthcare providers outside the network, hospitals and other payers, such as state governments.
Provider Systems Revenue – Medicare Advantage
At the current time, all our revenue is generated from contracts with HMO payers that we have contracted with. We have eight signed contracts with HMO payers, of which we are providing services to five. Four of the five signed contracts are at “full risk”. A full risk contract means we assume the full financial risk of medical costs associated with the healthcare costs of the HMO member and receive a percentage of the premium that the HMO payer receives from the Center for Medicare and Medicaid Services (“CMS”). The fifth contract is also a full risk contract; however, we are not at full risk until we are assigned a minimum of 300 members by the HMO payer. We receive an administrative fee for the use of their network of healthcare providers.
The federal government, under proposed initiatives, is exploring ways to reduce the cost of healthcare as a whole, and Medicare and Medicaid in particular. These initiatives could reduce the premiums that CMS pays our HMO payers and in turn could reduce the revenue per member per month we receive. We cannot predict the certainty of any proposed changes to the Medicare and Medicaid requirements or funding. Any implementation of changes could adversely affect our future development and profitability of our provider systems.
———————
¹
Payer refers to entities other than the patient that finance or reimburse the cost of health ~~plans~~services. In most cases, this term refers to insurance carriers, other third party payers, or health plan sponsors (employers, governmental agencies or unions).
²
HIPAA refers to the Health Insurance Portability and ~~hospitals). The~~Accountability Act of 1996.

We are planning to expand our services to include additional products such as commercial health insurance and expanding the type of payers we contract with.
PWeR™ – Personal Wellness electronic Record™
Due to the lack of automation in ~~this~~the healthcare industry, ~~is exemplified~~we have made a significant investment in our technology solution by ~~the fact that most transactions are still being conducted by either phone, paper or fax. In response to this industry-wide challenge, the Company licensed~~licensing and ~~developed the~~developing various applications of ~~PWeR™, (Personal Wellness Electronic Record) which has been designed and architected~~PWeR to fill a gap in ~~the healthcare~~this industry’s ability to communicate, share information, and make more informed treatment decisions. PWeR is a patient-centric ERP system. ERP stands for Enterprise Resource Planning and is a way of integrating the data and processes of an organization into one single ~~syst em.~~system. Usually ERP systems will have many components, including hardware and software ~~and~~ to achieve ~~integration and most~~integration. Most use a unified database to store data for various functions found throughout the organization.
PWeR is unique to this industry as it is a Web based platform that stores a patient’s medical records from multiple sources, therefore providing the patient with a comprehensive personal health record (PHR). PWeR utilizes middleware architecture to serve as the platform for more than 24 software applications which have been integrated or developed. PWeR is designed to interface with ~~other EMR’s~~electronic medical records (“EMRs”) or practice management software and is the first system to integrate the data from a patient’s ~~electronic medical record (EMR)~~EMR into a comprehensive disease management program, all within the same platform. As a result of the construction and capabilities of PWeR, ~~it will serve as~~we anticipate a ~~low-cost technology solution to all participants~~reduction in ~~the healthcare process.~~

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PWeR has the capability and scalability to serve as a data hub for a community, state or nation. We believe that the ability to access comprehensive patient data from multiple providers will result in better care, reduced cost and increased efficiencies industry-wide. Some of the benefits of PWeR to the healthcare industry include analytical tools to aide in disease management and prevention, elimination ofour medical ~~errors caused by lack of information, improved patient outcomes and diminished~~ costs associated with ~~repetitive tests. Further,~~our provider system. Additionally, we believe that there is a market for this technology solution throughout the ~~system was designed~~healthcare industry. We are starting to ~~provide a high level of security, including authorized access and redundancy capabilities.~~
The Company has filed 18 provisional patents with the United States Patent and Trademark Office which support technology that is intended to enhance the capabilities of PWeR. The provisional patents include the improvement of prescription accuracy; real-time updates of patient records; streamlined inventory management of supplies within a healthcare provider’s facility; and customized interfaces with the PWeR platform for each user to provide for a more efficient and productive experience.
PWeR was launched in July 2008 at the largest free clinic in Palm Beach County, Florida, the Caridad Center. Over 140 healthcare providers volunteer their services at the Clinic and now have exposure to and interaction with PWeR. The Company is in the process of implementing PWeR internally. We anticipate expanding the deployment of PWeRmarket this solution to our network of healthcare providers, healthcare providers outside our network, hospitals and ~~foresee expansion~~payers. With the emphasis by the federal government on the implementation of ~~the platform to a wider geographical market. Quantum has secured exclusive world wide distribution~~technology solutions for the ~~PWeR system.~~
Wehealthcare industry through the American Recovery and Reinvestment Act of 2009, we believe that PWeR meets all requirements. The American Recovery and Reinvestment Act of 2009 authorized up to $19 billion over the next eight years to be spent on reimbursing providers who adopt approved EMR systems. We cannot predict if our ~~network~~PWeR platform will qualify for reimbursement, and if it does, exactly how much and/or how our subscribing users will be compensated. This is in part because the appropriate federal and state agencies have not yet detailed the use of ~~2,000 healthcare providers, multiple health plan partners~~such funds. This could have an impact on the sale and our technology platform places us in the position of being the primary interface between the aforementioned three hubs and affords us the opportunity of becoming the preferred management service provider of administrative, practice management and ancillary services to healthcare providers that participate in our network as well as to other healthcare providers, physician groups, testing facilities, nursing homes and hospitals.
~~Affiliated providers have access to the various~~~~management support services~~ we offer that are customized specificallyfor healthcare providers, health plans, healthcare facilities and physician associations that enable them to decrease their operating costs and increase efficiency and productivity. Additionally, these management support services are available to all healthcare providers, whether or not they are partutilization of our ~~network, which further extends our ability to leverage our relationships with healthcare providers to cross-market our management support services and the benefits of participation in our network.~~PWeR platform.
We maintain a corporate office in Wellington, Florida that houses operational personnel, as well as accounting, marketing and other support staff. Occasionally, we have engaged consultants to assist on a specific project, or for a ~~short time~~short-time period. Office space rent, supplies, other general costs and depreciation expense related to office furniture and equipment costs are also included in general and administrative costs.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of ~~revenues~~revenue and expenses in the reporting period. We regularly make estimates and assumptions that affect the reported amounts of assets and liabilities.
We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.
Our critical accounting policies and estimates involve the use of complicated processes, assumptions, estimates and/or judgments in the preparation of our condensed consolidated financial statements. An accounting estimate is an approximation made by management of a financial statement element, item or account in the financial statements. Accounting estimates in our historical condensed consolidated financial statements measure the effects of past business transactions or events, or the present status of an asset or liability. The accounting estimates described below require us to make assumptions about matters that are uncertain at the time the estimate is made. Additionally, different estimates that we could have used or changes in an accounting estimate that are reasonably likely to occur could have a material impact on the presentation of our condensed consolidated financial condition or

20

results of operations. We base our estimates on ~~historical~~his torical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. Our significant accounting policies are discussed in Note 2 to our ~~Condensed Consolidated Financial Statements.~~condensed consolidated financial statements. We have discussed the development and selection of our critical

accounting policies and related disclosures with our Audit Committee and have identified the following critical accounting policies for the current ~~fiscal year.~~period.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has negative cash flows from operating activities of approximately $1.6 million for the first quarter of 2009 and an accumulated deficit of approximately $42.2 million at January 31, 2009 that raises substantial doubt about its ability to continue as a going concern. If we do not obtain additional funding during March 2009, we may substantially curtail or cease our operations all together. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
For the remainder of the year ended October 31, 2009, the Company will need additional cash infusions to meet its operating expenses. The Company’s common stock trades on the NYSE Amex and the Company intends to raise additional public or private equity or debt. The Company may also secure strategic alliances or other joint ventures to defray a portion of its expenditures. No assurances can be made that the Company will be successful in these activities. Should the events not occur the financial statements will be materially affected.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. See “Liquidity and Capital Resources,” below.
Principles of Consolidation
We consolidate entities when we have the ability to control the operating and financial decisions and policies of that entity. The determination of our ability to control or exert significant influence over an entity involves the use of judgment. Therefore, we have included in our condensed consolidated financial statements the transactions of the billing companies that have been operating under management agreements under which we have taken on the profit and loss risk, ~~through~~thru December 31, 2007, the date of the termination of the management agreement.
Goodwill and Other Intangibles
Statement of Financial Accounting Standards No. 142 ~~“Goodwill~~(SFAS No. 142),Goodwill and Other Intangible Assets,~~” (SFAS No. 142)~~ requires that goodwill and intangible assets with indefinite useful lives be tested for impairment annually or more frequently if an event occurs or circumstances change that may reduce the fair value of our goodwill below its carrying value. We completed animpairment test as required under SFAS No. 142 in thefourth quarter of fiscal ~~year 2007~~2008 and determined that the goodwill was not impaired. Changes in estimates or application of alternative assumptions and definitions could produce significantly different results.
Allowance for Doubtful Accounts
We establish provisions for losses on accounts receivable if we determine that we will not collect all or part of the outstanding balance. We regularly review collectability and establish or adjust our allowance as necessary using the specific identification method.
Medicare Considerations
Substantially all of our provider systems ~~revenues~~revenue from continuing operations ~~are~~is based upon Medicare funded programs. The federal government from time to time explores ways to reduce medical care costs through Medicare reform and through healthcare reform generally. Any changes that would limit, reduce, or delay receipt of Medicare funding or any developments that would disqualify us from receiving Medicare funding could have a material adverse effect on our business, results of operations, prospects, financial results, financial condition or cash flows. Due to the diverse range of proposals put forth and the uncertainty of any proposal’s adoption, we cannot predict what impact any Medicare reform proposal ultimately adopted may have on our business, financial position or results of operations.

Revenue Recognition
Under our ~~full-risk~~full risk contracts with ~~HMOs,~~payers, we receive a percentage of premium or other capitated fee for each patient who chooses one of our network physicians as his or her primary care physician. ~~Revenues~~Revenue under these agreements ~~are~~is generally recorded in the period we ~~assume responsibility~~are responsible to provide services at the rates then in effect as determined by the respective contract. As part of the Medicare Advantage program, CMS periodically re-computes the premiums to be paid to the ~~HMOs~~payers based on the updated health status of participants and demographic factors. We record any adjustments to these revenues at the time that the information necessary to make the determination of the adjustment is received from the ~~HMO.~~payer.
Under our ~~full-risk~~full risk agreements, we assume responsibility for the cost of substantially all medical services provided to the patient (including prescription drugs), even those services we do not provide directly, in exchange for a percentage of premium or other capitated fee. To the extent that patients require more frequent or expensive care, our ~~revenues~~revenue under a contract may be insufficient to cover the costs of care provided. We are covered by ~~stop-loss~~stop loss insurance policies and programs that limit our maximum risk exposure for each of our patients. ~~No contracts were considered loss contracts at July 31, 2008, because we have the right to terminate unprofitable physicians under our managed care contracts.~~

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The majority of our ~~revenues~~revenue from management support services ~~are~~was generated ~~from services provided from~~by the medical billing and ~~collections~~collection services company. We ~~receive~~received a contractual fee based on the total claim ~~reimbursements~~reimbursement received by the billing company’s clients. These management agreements were terminated as of December 31, 2007. Currently we do not have any active management contracts.
Medical Claims Expense Recognition
The cost of healthcare services provided or contracted for is accrued in the period in which the services are provided. This cost includes our estimate of the related liability for medical claims incurred but not reported (“IBNR”) in the ~~period but not yet reported, or IBNR.~~period. IBNR represents a material portion of our medical claims liability ~~which is~~ presented inon the balance sheet. As of ~~July~~January 31, ~~2008,~~2009, the balance of IBNR allowance is ~~$1,774,431.~~$4,147,820. Changes in this estimate can materially affect, either favorably or unfavorably, our results from operations and overall financial position.
Normally, IBNR claims are estimated using historical claims patterns, current enrollment trends, member utilization patterns, timeliness of claims submissions, estimates provided by payers and other factors. However, we have a limited amount of history on which to base our estimated IBNR allowance. Therefore, we are currently using an approximation based on industry experience primarily based on historical claims incurred per ~~membe r~~member per month. We adjust our estimate if we have unusually high or low utilization or if benefit changes provided under the ~~HMO~~payer plans are expected to significantly increase or reduce our claims exposure. We also adjust our estimate for differences between the estimated claims expense that are recorded in prior months toand the actual claims expense as claims are paid by the ~~HMO~~payer and reported to us.
Until we have accumulated adequate history to further refine our calculation of IBNR, we have determined that the current method allows for the calculation of a reasonable estimate of IBNR. There can, however, be no assurance that the ultimate liability will not exceed estimates. Adjustments to the estimated IBNR claims are recorded in results of our operations in the periods when such amounts are determined. Per guidance under ~~SFAS~~Statement of Financial Accounting Standards No. 5 ~~“Accounting~~(SFAS No. 5),Accounting for Contingencies”, we accrue for IBNR claims when it is probable that expected future healthcare costs and maintenance costs under an existing contract have been incurred and the amount can be reasonably estimable. We record a charge related to these IBNR claims as medical claims expense.
Income Taxes
Income taxes are accounted for in accordance with the provisions of ~~SFAS~~Statement of Financial Accounting Standards No. 109 ~~“Accounting~~(SFAS No. 109),Accounting for Income ~~Taxes.”~~Taxes. SFAS No. 109 requires the use of an asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis. We record current income taxes based on our current taxable income, and we provide for deferred income taxes to reflect estimated future tax payments and receipts. Deferred tax assets are reduced by a valuation allowance when, based on our estimates, it is more likely than not that a portion of those assets will not be realized in a future period. The estimates ~~utilized~~utili zed in recognition of deferred tax assets are ~~sub ject~~subject to revision, either up or down, in future periods based on new facts or circumstances. During the ~~nine~~three months ended ~~July~~January 31, ~~2008,~~2009, we

determined that it is more likely than not that the deferred tax assets will not be realized, resulting in a full valuation allowance at ~~July~~January 31, ~~2008.~~2009. We adopted the provisions of FASB Interpretation No. 48 ~~“Accounting~~(FIN 48),Accounting for Uncertainty in Income ~~Taxes-an~~Taxes, an Interpretation of FASB Statement 109~~” (FIN 48)~~, which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return, including issues relating to financial statement recognition and measurement. FIN 48 provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is ~~‘more-likely-than-not”~~more-likely-than-not of being sustained if the position were to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the ~~“more-likely-than-not” threshold,~~more-likely-than-not th reshold, the largest amount of tax benefit that is greater than 50% likely of being recognized upon ultimate settlement with the taxing authority is recorded.
Share-Based Payment
~~Effective November 1, 2006, we adopted the~~The provisions of ~~SFAS~~Statement of Financial Accounting Standards No. 123R (SFAS No. 123(R)),“Share-Based Payment~~” which~~, establishes accounting for stock-based awards exchanged for employee and non-employee services. Accordingly, equity classified stock-based compensation cost is measured at grant date, based on the fair value of the award and is recognized as expense over the requisite service period. Liability classified stock-based compensation cost is re-measured at each reporting date and is recognized over the requisite service period. We have elected to calculate the fair value of our employee stock options using the Black-Scholes option pricing model and

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the expense for option awards with graded vesting provisions is recognized on a straight-line basis over the requisite service period of each separately vesting portion of the award.
~~Results of Operations~~
From inception, we have focused on building networks of healthcare providers, negotiating and signing contracts with HMOs, providing services for members of our health plan partners and developing our business administration and support team. We have executed full risk contracts with multiple HMOs. These contracts encompass all 26 counties in Florida where RHS has established community health systems. In addition, the contracts provide for the continual expansion of the partnership as RHS builds community health systems throughout the state.
Under a full-risk contract, we receive a monthly dollar amount (a capitated rate) for each patient that chooses one of our contracted healthcare providers as his or her primary care physician. A contract generally will not generate revenues until we have a complete CMS-compliant county network of healthcare providers or a CHS that is ready to provide comprehensive care to the Medicare Advantage patients in the specified counties, and patients enrolled under the contract with contracted healthcare providers in our CHS. Annually, beginning on November 15, health plans can sign up new members who may elect to join our provider systems during the open enrollment period under a managed care plan operated under the Medicare Advantage program. Open enrollment ends March 31 of each year. This is our “window of opportunity” for new contracts to begin generating revenues on January 1 of each calendar year. Although not as predi ctable, other opportunities also occur at the time that a person becomes eligible to participate in a managed care plan,~~e.g.~~, when he or she becomes 65 years of age or becomes disabled, when enrolled patients are transferred from another plan, when another managed care plan is terminated by CMS or when a person moves from one service area to another. Revenues under these agreements are generally recorded in the period in which we are responsible for providing services at the rates then in effect as determined by the respective contract. As part of the Medicare Advantage program, CMS periodically re-computes the premiums to be paid to the HMOs based on the updated health status of the member and updated demographic factors. Any change in premium from CMS to the HMO will adjust the premiums we receive from the health plan. We record any adjustments to these revenues at the time that the information necessary to make the determination of the adjustment is received from the health plan. We commenced gene rating revenues under one contract in September 2005 in Volusia County, Florida, with Dade and Broward Counties added in January 2006, under the next health plan contract in December 2006, and under the next contract in January 2007 and under the next health plan contract in February 2008.
Our provider systems’ revenues generally consist of a percentage of premiums paid by CMS to the contracted health plans on a “Per Member Per Month” (PMPM) basis, known as a capitated fee. The actual percentage is negotiated with the health plan. The amount of PMPM varies depending upon the CMS premium, which is influenced by a patient’s age, residing county, health profile and other factors. Management support services revenues are generated by contracting with healthcare providers to provide billing and collections services and, to a limited degree, insurance products specifically tailored to physician’s needs, such as health, life, disability and malpractice insurance. Our insurance revenues are commissions paid to us on insurance products sold. The provider systems’ direct medical costs are a combination of actual medical costs paid by the health plan plus a reserve for future medical costs incurred but not reported (IBNR). Our provider systems direct costs include capitation payments to participating physicians and specialists, fee-for-service payments to non-participating physicians and specialists, payments to hospitals for in-patient and out-patient services, payments to pharmacies for prescription drugs and the allowance for IBNR. The management support services direct costs are related to the billing companies and include salaries, benefits and claims processing costs.

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~~Three and Six Months Ended July 31, 2008, as Compared to the Three and Six Months Ended July 31, 2007 Revenues and Direct Costs~~
~~The following table presents the revenues and direct costs for the three and six months ended July 31, 2008 and 2007. These items are discussed in detail following the table.~~

For the
three months ended
July 31,

For the
nine months ended
July 31,

2008

2007

2008

2007
Revenues

Provider systems

$
4,446,376

$
861,676

$
10,665,106

$
1,268,253
Management support services

12,986

420,952

309,019

1,247,884

4,459,362

1,282,628

10,974,125

2,516,137

Direct Costs

Provider systems

4,491,647

839,852

11,916,967

1,212,251
Management support services

670

310,142

213,749

898,275

4,492,317

1,149,994

12,130,716

2,110,526

Gross profit

$
(32,955
)
$
132,634

$
(1,156,591
)
$
405,611

~~Revenues~~
Total revenues for the three and nine months ended July 31, 2008, increased $3,176,734 and $8,457,988 compared to the three and nine months ended July 31, 2007, respectively. Provider systems revenues account for approximately 99.7% and 97.1% of our total revenues for the three and nine months ended July 31, 2008. The increase from the same periods last year is a direct result of active contracts with four HMOs. For the nine months ended July 31, 2007, we had only one HMO contract that was not at full risk and therefore generated only minimal revenues. Management support services revenues for the three and nine months ended July 31, 2008, decreased $407,966 and $938,865 compared to the three and nine months ended July 31, 2007. For the nine months ended July 31, 2007, we had only one management contract that had been in effect since December 2006 and was generating only minimal revenues. We are actively searching for other billing and collection companies for future management agreements or acquisitions.
Provider systems revenues growth is dependent on the number of new members/patients that enroll in the HMO network and are assigned to our healthcare providers. Although growth has been steady through fiscal 2008, additional growth has been limited by the fact that members cannot change HMO networks freely due to the statutory restrictions governing the Medicare Advantage plan. During the open enrollment period commencing on November 15, 2007 through March 31, 2008, we experienced 5% growth in the number of participating providers and 99% growth in members. We expect that the growth in the management support services revenues will initially be derived from acquisitions, entering into additional management agreements for existing management support services businesses and joint ventures. As we develop our sales and marketing capabilities, we expect that growth in management support services revenues will be derived from internal grow th as we have the resources to market these services to the healthcare providers in our network.
~~Direct Cos~~ts
Direct costs for the three and nine months ended July 31, 2008, increased $3,342,323 and $10,020,190 compared to the three and nine months ended July 31, 2007, respectively. Provider system costs increased $3,651,795 and $10,704,716, respectively for the three and nine months ended July 31, 2008 and 2007, respectively and management support services costs decreased $309,472 and $684,526 for the three and nine months ended July 31, 2008 and 2007, respectively.. Provider systems direct costs increased because we were responsible for approximately 13,863 additional patient months under our HMO contracts as of the end of the 2008 period as compared to the same period in 2007. The direct cost amount for the nine months ended July 31, 2008, includes $10,899,369 of claims paid and reserved. During the nine months ended July 31, 2008, an additional $787,527 was paid for reinsurance to cover excessive medical costs (stop- loss insurance). We anticipate that the medical costs per member will decrease as we expand the number of members under care and with the implementation of our technology solutions. The majority of the management support services direct costs are composed of the condensed

24

~~consolidated transactions of the billing and collections companies that were under management contracts and which were incurred through December 2007.~~
~~Gross Profit~~
For the three and nine months ended July 31, 2008, the gross profit (loss) from provider systems was ($45,271) and ($1,251,861), respectively, and the gross profit from the management support services was $12,316 and $95,270, respectively. The gross profit margins on the provider systems are directly related to the terms and rates of our HMO agreements and are not likely to change over the life of the individual agreement unless we are able to renegotiate the terms and rates of such agreements to obtain a more favorable rate. The gross profit will increase as the number of member/patients under our care increases and our technology solutions are implemented.
~~Operating and Non-operating Expenses~~
The following table presents the operating and non-operating expenses incurred for the three and nine months ended July 31, 2008 and 2007, respectively. These items are discussed in detail following the table.

For the
three months ended
July 31,

For the
nine months ended
July 31,

2008

2007

2008

2007

Operating expenses



Salaries and employee costs

$
860,400

$
742,042


$
3,432,288

$
1,781,348

Equity compensation

402,795

244,255

2,755,209

554,934

Occupancy

91,627

90,633

263,194

267,042

Depreciation & amortization

56,374

26,285

142,750

74,543

Other general & administrative expenses

681,405

748,158

2,031,079

1,556,102

Total operating expenses

$
2,092,601

$
1,851,373

$
8,624,520

$
4,233,969

Non-operating expenses

Amortization of financing fees

$
—

$
7,522

$
4,001,649

$
749,755

Amortization of debt discount

—

1,762,856

3,687,229

3,789,747

Other income

—

—

—

—

Interest

149,680

176,253

733,731

344,521

Gain on disposal of assets

—

—

(312,465
)

—

Total non-operating expenses

$
149,680

$
1,946,631

$
8,110,144

$
4,884,023

Operating expenses for the three and nine months ended July 31, 2008, increased $241,228 and $4,390,551, respectively. Cash-based salaries and employee costs increased $118,358 and $1,650,940, respectively, due to compensation for additional employees and annual salary increases. During the period, we hired additional employees to service the expansion of provider systems and added corporate staff to support our expanded operations. Equity compensation increased $158,540 and $2,200,275, respectively, with the majority of the increase from the granting of options related to the amendment of the employment agreement of our Chief Executive Officer. Other general and administrative expenses decreased $66,753 for the three months ended July 31, 2008 and increased $474,977 for the nine months ended July 31, 2008, with travel and marketing comprising a majority of the changes. These expenses were incurred due to the continuing efforts to expand our operations. Additionally, our professional fees increased due to the expansion of our operations. Non-operating expenses decreased $1,796,951 and increased $3,226,121, respectively, due to the amortization of debt discount and financing costs during the first quarter related to the exchange of Bridge Shares resulting from the secondary public offering and the amortization of the costs related to various private placements with securities including secured convertible debentures with beneficial conversion features.
~~Net Loss~~
Net loss for the three and nine months ended July 31, 2008 and 2007 was $2,275,236; $3,665,370; $17,891,255 and $8,712,381, respectively. Net loss per share was $0.26; $1.89; $2.44 and $5.36 for the three and

25

~~nine months ended July 31, 2008 and 2007, respectively. The majority of the increase in the net loss for the nine months ended was attributed to costs related to the debt financing.~~

Liquidity and Capital Resources

~~We were a development stage company through July 31, 2006, and began to report revenues from our operations in the third quarter of fiscal 2006.~~ Since our inception, we have funded our business primarily through sales of our equity and debt securities. ~~Since inception through July~~For the quarter ended January 31, ~~2008,~~2009, we have incurred a net loss from operations of more than ~~$17.9~~$3.8 million and an accumulated deficit at January 31, 2009 of more than ~~$36.6~~$42.2 million.

As of July 31, 2008, our principal sources of liquidity were cash and cash equivalents of $3,396,908 which was available as a result of a secondary public offering effective December 13, 2007, in which we sold 1,200,000 of units of our securities at $11.00 per unit, or gross proceeds of $13,200,000. The units traded as a single security until separation on the 30th day or January 14, 2008, at which time the units separated into the underlying securities. Each unit consisted of three shares of common stock, two Class A 7-year non-callable warrants and two Class B 7-year non-callable warrants, each warrant to purchase one share of common stock. Each Class A warrant entitles its holder to purchase one share of common stock at an exercise price of $7.00 per share. Each Class B warrant entitles it holder to purchase one share of common stock at an exercise price of $11.00 per share. After expenses of $1,089,000 ( $759,000, representing the underwriting discount of 5.75%, and $330,000, representing the representative’s non-accountable expense allowance of 2.5%), the Company received net proceeds of $12,111,000. Additional expenses incurred in connection with completion of the offering totaled $614,456.

We had a working capital deficit at ~~July~~January 31, ~~2008,~~2009 of ~~$503,275~~$6,437,369 as compared to a working capital deficit of ~~$7,560,070~~$5,657,271 at ~~July~~January 31, ~~2007,~~2008, which represents an increase of ~~$8,965,631.~~$780,098. The increase in the working capital deficit is due to an increase in debt and due to HMOs. Due to HMOs is the ~~proceeds~~net of premiums received from the ~~secondary public offering as detailed above.~~HMO payers less medical costs paid by the HMO payers less any cash paid to the Company by HMO payer. The amount due HMO increase primarily because the medical expenses paid by the HMO exceeded the premiums earned.

We ~~expect~~have been dependent upon private capital to meet our short and long-term cash needs. Depending on a number of variables including sale of our PWeR system and growth in patients under management we could continue to experience negative cash flow from operating activities through at least the next ~~twelve~~12 months as we continue to build our CHS networks (provider systems) and develop a suite of management support services. If we continue to incur negative cash flow from sources of operating activities for longer than expected, our ability to continue as a going concern could be in substantial doubt. We ~~anticipate that we~~ will ~~have~~require additional funds through debt facilities, and/or public or private equity or debt financings to continue operations. We also may need to raise additional ~~capital during~~financing if our business strategy is not successful, we do not achieve positive cash flow from operating activities, and/or we acquire one or more companies, technologies or assets. During the first quarter of fiscal 2009, we raised $325,000 by issuing promissory notes to our officers, directors and shareholders to meet immediate operational needs of our Company. Terms of these notes are described in detail under Note 6 to the condensed consolidated financial statements. An additional $546,250 was raised during February and March 2009 by issuing additional promissory notes to meet immediate operational needs of our Company. We believe that these proceeds along with our working capital resources are adequate to finance our operations through the ~~issuance~~end of ~~debt~~March 2009, but we will need to engage in capital-raising transactions in 2009 or ~~sale~~we will need to significantly modify our business plan in order to sustain our operations. If we do not obtain additional funding during March 2009, we may substantially curtail or cease our operations all together. Any future, additional capital will likely result in dilution to our current shareholders, which may be substantial. We cannot provide any assura nce that we will be able to obtain the capital we require on a timely basis or on terms acceptable to us. Refer to Item 5, “Other Information,” for information regarding a Notice of ~~equity.~~Continued Listing Deficiency from NYSE Amex.

Our ~~business~~development plan includes the identification of and acquisition or joint venturing of businesses and services that will allow us to provide comprehensive healthcare management support services to the healthcare industry. We anticipate the first acquisitions will be related to the development of the medical staffing services through QMed People, Inc., and the addition of billing and collection services through QMed Solutions, Inc. The guidelines we have established for acquisitions include acquiring companies that are profitable and producing positive cash flow.services. We expect to ~~finance these acquisitions~~secure financing for any such acquisition by obtaining additional financing from outside lenders.

Under the terms of certain lockup agreements between the Company and certain of its convertible debt holders from private placements of the Company’s securities in August 2006 through March 2007, we were required to pay a recurring fee to such debt holders who converted their convertible debt into units of unregistered securities of the ~~issuance~~Company sold in the December 2007 secondary public offering. The conversion fee was to be paid by the Company quarterly at a rate of ~~stock, seller~~1% per month of the principal amount of the convertible debt ~~financing~~plus accrued interest. To date, the Company has paid the first two quarterly payments for March and June 2008 with the ~~securitization of third party financing such as an acquisition line of credit.~~remaining $327,316 unpaid and outstanding to date.

In February 2008, Quantum Medical Technologies, Inc., entered into an agreement with Net.Orange, Inc., a software development company. Net.Orange has developed a clinical operating system, which incorporates multiple applications such as electronic medical records, practice management, billing and collection, archiving and storage, ~~system,~~ and configurable Web portals. With this healthcare technology, we believe we will be able to offer a patient-centric, ~~web-based~~Web-based information system to include our network of over ~~3,000~~2,000 healthcare providers as well as the entire healthcare community at large. The advantages of this healthcare operating system will include the addition of patient care management and disease management software which we believe will assist us in reducing our healthcare costs for our patients under RHS. The agreement with Net.Orange includes an annual fee of $100,000 plus additional user fees. We have also contracted ~~wit h Net.Orange~~with Net. Orange for the development of additional software capabilities to incorporate enhancements to ~~their~~its healthcare software system for a monthly fee of $50,000. Net.Orange has completed the Disease Management Module and is now developing specific disease models, completing enhancements to the EMR system, and is continuing to develop additional functionalities within the PWeR environment. In July of 2008, PWeR was launched as a beta test at the Caridad Center, the largest free clinic in Palm Beach County, Florida. By implementing PWeR at the Caridad Center, we have provided exposure and interaction of PWeR to over 140 healthcare providers who volunteer their services at the Clinic. We are expanding the deployment of PWeR to our network of healthcare providers and expanding the platform to the national market. Quantum has secured exclusive worldwide distribution for the PWeR system.

Financing Activities

Net cash of ~~$9,174,894~~$303,732 was provided by financing activities for the ~~nine~~three months ended ~~July~~January 31, 2009, compared to $9,634,954 for the three months ended January 31, 2008. We received $325,000 in promissory notes in the three months ended January 31, 2009. During the three months ended January 31, 2008, ~~compared to $2,411,178 for the nine months period ended July 31, 2007. We~~we received $11,496,544 in net proceeds, after deducting underwriter commissions, underwriter unaccountable expenses and other offering expenses from the secondary public offering. We repaid approximately $2,520,395 in existing debt and repurchased 50,207 private placement warrants for $1.00 per warrant.

We have been dependent upon private capital to meet our short and long-term cash needs. We expect to continue to experience negative cash flow from operating activities through at least the next twelve months as we continue to build our CHS networks (provider systems) and develop a suite of management support services. If we continue to incur negative cash flow from operating activities for longer than expected, our ability to continue as a going concern could be in substantial doubt. We will require additional funds through debt facilities, and/or public or private equity or debt financings to continue operations. We also may need to raise additional financing if our business strategy is not successful, and we do not achieve positive cash flow from operating activities, or should we acquire one or more companies, technologies or assets.

Our development plan includes the identification of and acquisition or joint venturing of businesses and services that will allow us to provide comprehensive healthcare management support services. We expect to secure financing for any such acquisition by obtaining additional financing from outside lenders.

Operating Activities

Net cash of ~~$5,726,071~~$1,485,090 was used in operating activities for the ~~nine~~three months ended ~~July~~January 31, ~~2008,~~2009, compared to ~~$1,542,866~~$1,980,099 for the ~~nine~~three months ended ~~July~~January 31, ~~2007.~~2008. The ~~increase~~decrease of ~~$4,183,205~~$495,009 was primarily due to ~~an increase~~$300,000 paid in ~~travel~~bonuses and ~~marketing~~$500,000 in ~~our continued efforts to expand our current operations. We also had~~deferred compensation paid during the ~~amortization of the costs related to various private placements with securities including secured convertible debentures with beneficial conversion features.~~period ended January 31, 2008.

Investing Activities

Net cash of ~~$582,070~~$159,011 was used for investing activities for the ~~nine~~three months ended ~~July~~January 31, ~~2008,~~2009, compared to ~~$17,983~~$25,551 for the ~~nine~~three months ~~period~~ ended ~~July~~January 31, ~~2007.~~2008. Net cash for investing activities primarily relates to the purchase of ~~furniture and equipment due~~software for development purchases related to ~~the expansion of the corporate office and additional office space for our Miami operations.~~PWeR.

Inflation

We believe that the relatively moderate rates of inflation in recent years have not had a significant impact on our operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.

Results of Operations

Three Months Ended January 31, 2009 as Compared to Three Months Ended January 31, 2008 (restated)

The following table presents the revenue and direct costs for the three months ended January 31, 2009 and 2008. These items are discussed in detail following the table.


	For the Three Months Ended January 31,
	2009		2008
			(restated)
Revenue
Provider systems	$	7,363,293	$	2,463,542
Management support services		300		275,933
		7,363,593		2,739,475
Direct Costs
Provider systems		8,594,208		2,767,179
Management support services		—		199,579
		8,594,208		2,966,758
Gross Profit	$	(1,230,615)	$	(227,283)

Revenue

Total revenue for the three months ended January 31, 2009 increased by $4,624,118, or 168.8%, compared to the three months ended January 31, 2008. The increase in revenue for the three months ended January 31, 2009 is a direct result of active contracts with five HMO payers. Provider systems revenue of $7,363,293 accounted for 99.9% of our total revenue for the three months ended January 31, 2009 as compared to provider systems revenue of $2,463,542, representing 90% of our total revenue for the three months ended January 31, 2008. Management support services revenue represents 0.1% of our total revenue, which decreased by $275,633 from the three months ended January 31, 2008 and the three months ended January 31, 2009 due to the termination of the medical billing and collection services company contracts as of December 31, 2007.

Provider systems revenue growth is dependent on the number of new members/patients that enroll in the payer plans and are assigned to our healthcare providers. Although growth has been steady through January 31, 2009, additional growth has been limited by the fact that members cannot change payer networks freely due to the statutory restrictions governing the Medicare Advantage plans. We expect that the growth in the management support services revenue will initially be derived from acquisitions, entering into additional management agreements for existing management support services businesses, and joint ventures. Then, as we develop our sales and marketing capabilities, we expect that growth in management support services revenue will be derived from internal growth as we have the resources to market these services to the healthcare providers in our network.

Direct Costs

Direct costs for the three months ended January 31, 2009 increased $5,627,450 compared to the three months ended January 31, 2008. Provider system costs increased $5,827,029 from the three months ended January 31, 2008. Provider systems direct costs increased because we were responsible for approximately 6,538 additional patient months under our HMO payer contracts as of the three months ended 2009 as compared to the same period in 2008. Management support services costs decreased by $199,579 from the three months ended January 31, 2008. This decrease was due to the termination of the medical billing and collection services company contracts as of December 31, 2007.

The direct costs amount for the three months ended January 31, 2009, includes $8,134,082 of claims paid and reserved. During the three months ended January 31, 2009, an additional $460,127 was paid for reinsurance to cover excessive medical costs (stop loss insurance). We anticipate that the medical costs per member will decrease as we expand the number of members under care and with the implementation of our technology solutions, which will eventually reverse our negative gross profit. The majority of the management support services direct costs are composed of the condensed consolidated transactions of the billing and collection services companies that were under management contracts and which were incurred through December 2007.

Operating and Non-operating Expenses

The following table presents the operating and non-operating expenses incurred for the three months ended January 31, 2009 and 2008. These items are discussed in detail following the table.


	For the Three Months Ended January 31,
	2009		2008
			(restated)
Operating expenses
Salaries and employee costs	$	1,158,435	$	1,445,447
Stock-based compensation		463,001		411,193
Occupancy		88,754		86,140
Depreciation and amortization		48,228		30,059
Other general and administrative expenses		752,462		594,781
Total operating expenses	$	2,510,880	$	2,567,620

Non-operating expenses
Amortization of debt discount	$	12,500	$	4,001,649
Amortization of financing costs		—		3,687,229
Gain on deconsolidation of billing companies		—		(303,662)
Interest and other expense		76,586		509,106
Total non-operating expenses	$	89,086	$	7,894,322

Operating expenses for the three months ended January 31, 2009 decreased $56,740 from the three months ended January 31, 2008. Salaries and employee costs decreased $287,012 due to $300,000 in bonuses and $500,000 paid in deferred compensation during January 31, 2008. Headcount increased from January 31, 2008 to January 31, 2009 by 38 employees, which accounted for a $500,000 increase in salaries. Stock-based compensation increased by $51,808 primarily due to the granting of options related to the Amendment to Noel J. Guillama’s Executive Employment Agreement. During this period, we hired additional employees to service the expansion of provider systems and added corporate staff to support our expanded operations. Other general and administrative expenses increased by $157,681, which for the three months ended January 31, 2009 includes $183,413 in legal, consulting, and software development. Non-operating expenses decreased $7,805,236, w hich is due to costs associated with the decrease in the amortization of financing costs and debt discount.

Net Loss

Net loss for the three months ended January 31, 2009 and 2008 was $3,830,581 and $10,689,225, respectively, representing a decrease of $6,858,644 from the three months ended January 31, 2008. The majority of the decrease was attributed to costs related to the debt financing of $3,687,229 and the amortization of the debt discount of $4,001,649 for the three months ended January 31, 2008. Net loss per share was $0.40 and $1.85 for the three months ended January 31, 2009 and 2008.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting ~~issuer~~company as defined in Item 10 of Regulation S-K and thus are not required to report the quantitative and qualitative measures of market risk specified in Item 305 of Regulation S-K.

Item 4.4T.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this ~~report,~~Report, our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) conducted evaluations of our disclosure controls and procedures. As defined ~~under Sections~~in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, ~~Act,~~ as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the ~~SEC’s~~Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure

that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers concluded that our disclosure controls and procedures were not effective. An explanation of the deficiencies and proposed remedies is set forth below.

The Certifying Officers determined that certain deficiencies involving internal controls constituted material weaknesses as of the end of the period covered by this Quarterly Report. The Certifying Officers determined that the Company’s lack of formal control design structure to close financial statements to prepare for the annual audit or quarterly reviews constituted significant deficiencies as of the end of the same period.

The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.

The Company’s management and the Audit Committee considered what changes, if any, were necessary to the Company’s disclosure controls and procedures to ensure that the deficiencies described above would not recur in the future reporting periods. In its review, the management and the Audit Committee noted that the deficiencies described above related principally to the Company’s shortage of qualified accounting and finance personnel and the stress on such personnel currently in place at the Company. The Audit Committee and the management further noted that the deficiencies described above did not have any effect on the accuracy of the Company’s financial statements for the reporting period in question.

As a result of these findings, the Company has determined that in order to remedy these control deficiencies it needed to hire additional accounting and finance personnel having adequate experience in the preparation of financial statements and data of a public reporting company, in the application of US GAAP and SEC reporting matters. No additional changes to the Company’s disclosure controls and procedures were needed in response to the deficiencies described above. The Company commenced its remediation efforts and since then has hired 3 additional accounting and finance personnel having adequate experience in the preparation of financial statements and data of a public reporting company, in the application of US GAAP and SEC reporting matters. No additional changes to the Company disclosure controls and procedures were needed in response to the deficiencies described above.

The Company believes that the completion of these steps will allow it to conclude that its disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by our management on a timely basis in order to comply with our disclosure obligations under the Exchange Act and the rules and regulations there under.

The Company’s Chief Financial Officer is and will continue to oversee accounting and financial reporting personnel and is consulting regularly with the Company’s auditors and the Audit Committee on all such matters.

On September 19, 2008, the Company filed its amended Annual Report on Form 10-KSB, Quarterly Report on Form 10-QSB with interim financial statements for the fiscal periods ended October 31, 2007, January 31, 2008 and April 30, 2008, respectively. The purpose of these restated filings was to reflect (i) the appropriate allocation of

the components of the Company’s securities offered in connection with various private placements dated August 29, 2006, December 18, 2006 and March 29, 2007, which securities included secured convertible debentures with a beneficial conversion feature and common stock, and (ii) the resulting amortization of the corresponding costs. In addition, the Company updated and corrected its revenue and medical cost disclosures following one of the ~~HMO’s~~HMO payer’s notification to the Company that it had reported to a regulatory agency that the Company was not ~~“at risk”.~~at risk. The ~~“at risk”~~full risk transactions related to the HMO payer in question were reversed and the correct ~~“not~~not at ~~risk”~~risk revenue and expenses were recorded for the fiscal periods in question. At the time of its evaluations in connection with ~~this Quarterly~~the Annual Report, the Company did not believe that the restatements were as a result of material weaknesses in the Company’s ~~cont rols~~controls and disclosures. The Company ~~is in the process of reviewing~~reviewed its financial ~~reporting~~ controls ~~to ascertain whether there are any additional procedures and controls required~~ in light of these restatements and

the ~~most recent restatements.~~

As reported in its Quarterly Report for the fiscal period ended April 30, 2008, and amendments thereto, the Certifying Officers noted certain deficiencies related to the monitoring and review of work performed by the Company controller in preparation of audit and financial statement schedules, footnotes and review of financial data provided to the Independent Registered Public Accountants in connection with the annual audit. In addition, the Certifying Officers determined that the Company’s minimal segregation of duties and a lack of formal control design structure to close financial statements to prepare for the annual audit constituted significant deficiencies asisolated, non-recurring nature of the ~~end of the same period. Such material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure.~~transactions that caused such restatements. The Company ~~commenced~~intends to continue its ~~remediation efforts~~reviews and ~~since then has hired 3 additio nal accounting and finance personnel having adequate experience~~updates of its controls procedures, as from time to time, it may deem so appropriate.

Changes in the preparation of financial statements and data of a public reporting company, in the application of US GAAP and SEC reporting matters. No additional changes to the Company disclosure controls and procedures were needed in response to the deficiencies described above. Following the completion of these remediation steps, the Company concluded that its disclosure controls and procedures were effective.Internal Controls over Financial Reporting

There were no ~~further~~ changes in ~~the Company~~our internal control over financial reporting during the ~~fiscal~~ period ~~in question~~ended January 31, 2009 that ~~has~~have materially affected, or isare reasonably likely to materially affect, ~~the Company~~our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

WeThe Company may, from time to time, be involved in various legal matters arising out of its operations in the normal cause of business, none of which are ~~not a party to any pending legal proceedings nor are we aware of any pending legal proceedings against us that,~~expected, individually or in the aggregate, ~~would~~to have a ~~substantial adverse~~material effect on ~~our business, results of operations or financial condition.~~the Company.

Item ~~1.A.~~1A.

Risk Factors

We are a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and thus are not required to report ~~material changes from~~ the risk factors ~~previously disclosed~~specified in ~~our report on Form 10-KSB for the year ended October 31, 2007.~~Item 503(c) of Regulation S-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

~~(a)~~

Recent ~~Sale~~Sales of Unregistered Securities

The securities in each one of the below-referenced transactions were (i) made without registration and (ii) were subject to restrictions under the Securities Act and the securities laws of certain states, in reliance on the private offering exemptions contained in Sections 4(2), 4(6) and/or 3(b) of the Securities Act and ~~on Regulation D promulgated there under, and~~ in reliance on similar exemptions under applicable state laws as a transaction not involving a public offering. Each of the investors had access to the kind of information about us that we would provide in a registration statement, was an “accredited investor,” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act and represented to us his/her/its intention to acquire our securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to ~~th e~~the certificates representing the securities issued. Unless stated otherwise, no placement or underwriting fees were paid in connection with these transactions. Proceeds from the sales of these securities were used for general working capital purposes of the Company. During the ~~fiscal~~first quarter, ~~subject to this report,~~ we issued:

~~28,128~~526,460 shares of common stock to our employees as compensation for their ~~services.~~services;

~~23,783~~255,374 shares of common stock to ~~our Board~~consultants as compensation for their services; and

58,461 shares of ~~Directors~~common stock to the board of directors as compensation for their services.

·From January to March 2009, we executed several promissory notes with certain of our executive officers and directors for the purposes of obtaining working capital to continue our operations. The following table lists certain pertinent information relating to such promissory notes:


Name of the Person/Entity	Title/Relationship	Note Amount (2)			Repayment Amount (2)
Noel J. Guillama	Chairman, Chief Executive Officer, President	$	100,000		$	117,647
Donald B. Cohen	Executive Vice President, Chief Financial Officer	$	70,000	(1)	$	82,354	(1)
Susan Darby Guillama	Executive Vice President, Chief Administrative Officer	$	20,000		$	23,530
Paulson Investment Company, Inc.	Shareholder	$	85,000		$	100,000
Charlemagne Holdings, Inc.	Shareholder (3)	$	100,000		$	117,647
Paulson Investment Company, Inc.	Shareholder	$	106,250		$	125,000
Jose de la Torre	Director	$	40,000		$	47,059
Gendal Associates, Inc. Pension Plan	Shareholder	$	50,000		$	58,824
Paulson Investment Company, Inc.	Shareholder	$	100,000		$	120,000
Nidia Chediak	Investor	$	20,000		$	23,530
Milton Lavernia	Investor	$	70,000		$	82,353
Jose Quinones	Investor	$	20,000		$	23,530
Enrique Lavernia	Investor	$	90,000		$	105,882
Larry Hopfenspirger	Investor	$	60,000		$	70,589
Larry Hopfenspirger	Investor	$	20,000		$	23,530
Paulson Investment Company, Inc.	Investor	$	100,000		$	117,647

~~13,238 shares~~

———————

(1)

Represents (i) February 2, 2009 promissory note in the principal amount of ~~common stock~~$50,000, and (ii) February 4, 2009 promissory note in ~~relation to other loans~~the principal amount of $20,000. The repayment amount on the notes are $58,824 and $23,530, respectively.

(2)

The difference between the obligation and the principal payment will be treated as an original issue discount and be reported as interest expense. The principal payment will be due and payable on various dates through June 30, 2009. If the obligation has not been paid in full by March 31, 2009, the obligation, plus interest accruing from the maturity date through the date of payment at the rate of 15%, compounded monthly and on the basis of a 360-day year of 12 30-day months, in arrears, on a proportionate basis, will thereafter be payable 60 days after demand for payment by each note holder. We will repay any or all amounts due under this note at the closing of any public or private financing for which the Company receives gross proceeds of at least $2,000,000.

(3)

Charlemagne Holdings, Inc. is solely owned by Gregg M. Steinberg, our director.

~~(b)~~Use of Proceeds from Registered Securities

None.

Purchases of Equity Securities by the ~~Registrant~~Issuer and Affiliated Purchasers

~~None~~None.

Item 3.

Defaults Upon Senior Securities

~~None~~None.

Item 4.

Submission of Matters to a Vote of ~~Security-Holders~~Security Holders

The Company held its annual meeting of shareholders on August1, 2008. At the meeting, the shareholders re-elected Noel J. Guillama, Donald B. Cohen, Susan Darby Guillama, Jose de la Torre, Alberto G. Del Valle, Lawrence B. Fisher and Gregg M. Steinberg as Directors to hold office until the next annual meeting of shareholders and until their successors are duly elected. A summary of votes cast follows below:

Nominee

Votes for

Votes Withheld

Abstentions*
Noel J. Guillama

4,411,519

9,500

0
Donald B. Cohen

4,381,519

39,500

0
Susan Darby Guillama

4,410,244

10,775

0
Jose de la Torre

4,407,919

13,100

0
Alberto G. Del Valle

4,377,919

43,100

0
Lawrence B. Fisher

4,407,919

13,100

0
Gregg M. Steinberg

4,381,519

39,500

0

~~———————~~

~~Pursuant to the terms of the Proxy Statement, proxies received were voted, unless authority was withheld, in favor of the election of the six nominees.~~

Shareholders also voted to ratify the appointment of Daszkal Bolton LLP as the Company’s independent registered accountant for the fiscal year ending October 31, 2008, with 4,410,800 votes for, 6,500 votes against, and 3,719 abstentions.

~~Finally, the shareholders approved the 2007 Equity Incentive Plan with 1,390,860 votes for, 49,266 votes against, and 54,565 abstentions.~~

Further information regarding the meeting and the proposals submitted to a vote of the shareholders may be found in the Company’s definitive proxy statement filed with the Securities and Exchange Commission.None.

Item 5.

Other Information

~~None~~Notice of NYSE Amex Delisting

On March 17, 2009, the Company received notice from the NYSE Amex (formerly American Stock Exchange (the “Exchange”)) notifying the Company it is not in compliance with Section 1003(a)(iv) of the Company Guide. Specifically, the Exchange staff noted that the Company sustained losses which are so substantial in relation to its overall operations or its existing financial sources that it appears questionable, in the opinion of the Exchange, as to whether the Company will be able to continue operations and/or meet its obligations as they mature.

In order to maintain its listing, the Company intends to submit a plan by April 16, 2009 outlining its compliance strategy with the continued listing deficiency by September 17, 2009. If the Company’s plan to regain compliance is accepted by the Exchange, the Company may be able to continue its listing during this period, during which time it will be subject to periodic review to determine progress consistent with the plan. If the Company does not submit a plan or if the plan is not accepted by the Exchange, the Company will be subject to delisting procedures as set forth in the Exchange Company Guide. Under Company Guide rules, the Company has the right to appeal the determination by the Exchange staff to initiate delisting proceedings. There is no assurance that the Exchange staff will accept the Company’s plan of compliance or that, even if such plan is accepted, the Company will be able to implement the plan within the prescribe d timeframe. Effective within 5 days of the receipt of the above-referenced deficiency, the Company’s stock trading symbol will be “.BC” indicator denoting the Company’s current noncompliance. The indicator will remain in place until the Company regains compliance with all applicable continued listing requirements.

Item 6.

Exhibits

Copies of the following documents are included or furnished as exhibits to this report pursuant to Item 601 of Regulation S-K.


~~Exhibit~~ ~~No.~~	~~SEC Ref.~~ ~~No.~~	~~Title of Document~~
~~3.1(i)~~		~~Articles of Incorporation, as amended (1)~~
~~10.1~~		~~Master Agreement by and between Quantum Medical Technologies, Inc and Net.Orange, Inc., dated as of February 14, 2008.(2)~~
~~10.2~~		~~Original Equipment Manufacturer Agreement by and between Quantum Medical Technologies, Inc and Net.Orange, Inc., dated as of February 14, 2008.(2)~~
~~10.3~~		~~First Amendment to the Executive Employment Agreement dated as of March 24, 2008. (4)~~
~~31.1~~	31	~~Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)~~
~~31.2~~	31	~~Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)~~
~~32.1~~	32	~~Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)~~
~~32.2~~	32	~~Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)~~


Exhibit No.	SEC Ref. No.	Title of Document
10.1		e-Business Hosting Agreement by and between the Company and IBM dated as of December 2, 2008 (1)
31.1	31	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)
31.2	31	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)
32.1	32	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)
32.2	32	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)

———————

(1)

~~Previously filed as part of Amendment No. 5 to the registration statement on Form SB-2 (SEC File No. 333-142990) filed with the SEC on October 25, 2007.~~

~~(2)~~

Incorporated by reference ~~from the Company’s Current Report on Form 8-K dated March 3, 2008.~~

~~(3)~~

~~Filed herewith.~~

~~(4)~~

~~Incorporated by reference from~~to the Company’s Current Report on Form 8-K filed with the ~~SEC~~U.S. Securities and Exchange Commission on ~~March 28, 2008.~~January 20, 2009.

(2)

Filed herewith.

SIGNATURE

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, duly authorized.

Date: ~~September 22, 2008~~March 23, 2009


	THE QUANTUM GROUP, INC.


	By:	/s/ NOEL J. GUILLAMA
		Noel J. Guillama, President and Chief Executive Officer

3134


		For the three months ended July 31,						For the nine months ended July 31,
		2008			2007			2008			2007
Revenues
	Provider Network	$	4,446,376		$	861,676		$	10,665,106		$	1,268,253
	Management support services		12,986			420,952			309,019			1,247,884
			4,459,362			1,282,628			10,974,125			2,516,137

Direct Costs
	Provider Network		4,491,647			839,852			11,916,967			1,212,251
	Management support services		670			310,142			213,749			898,275
			4,492,317			1,149,994			12,130,716			2,110,526
	Gross profit		(32,955	)		132,634			(1,156,591	)		405,611

Operating expenses
	Salaries and employee costs		1,263,195			986,297			6,187,497			2,336,282
	Occupancy		91,627			90,633			263,194			267,042
	Depreciation & amortization		56,374			26,285			142,750			74,543
	Other general & administrative expenses		681,405			748,158			2,031,079			1,556,102
	Total operating expenses		2,092,601			1,851,373			8,624,520			4,233,969

Loss from operations			(2,125,556	)		(1,718,739	)		(9,781,111	)		(3,828,358	)

Non-operating expenses
	Amortization of financing fees		—			7,522			4,001,649			749,755
	Amortization of debt discount		—			1,762,856			3,687,229			3,789,747
	Interest		149,680			176,253			733,731			344,521
	Gain on disposal of assets		—			—			(312,465	)		—

Total non-operating expenses			149,680			1,946,631			8,110,144			4,884,023

Loss before income tax provision			(2,275,236	)		(3,655,370	)		(17,891,255	)		(8,712,381	)

Income tax provision			—			—			—			—

Net loss		$	(2,275,236	)	$	(3,655,370	)	$	(17,891,255	)	$	(8,712,381	)



Basic and diluted (loss) per common share		$	(.26	)	$	(1.89	)	$	(2.44	)	$	(5.36	)

Weighted average number of common shares
	outstanding		8,904,557			1,943,317			7,331,853			1,626,362


	Preferred Stock par value $.001 per share 30,000,000 authorized				Common Stock par value $.001 per share 170,000,000 authorized				Additional Paid in Capital			Accumulated Deficit			Total Equity
	# of Shares		Amount		# of Shares		Amount		Additional Paid in Capital			Accumulated Deficit			Total Equity
Balance at October 31, 2007(Restated)		—	$	—		2,037,359	$	2,037	$	9,269,252		$	(18,670,109	)	$	(9,398,820	)
Issuance of common stock - secondary public offering		—		—		3,600,000		3,600		11,492,944			—			11,496,544
Issuance common stock - debt conversion		—		—		1,853,153		1,853		5,191,863			—			5,193,716
Issuance of common stock - bridge share exchange		—		—		1,170,183		1,170		3,941,205			—			3,942,375
Debt discount-beneficial conversion		—		—		—		—		3,610,491			—			3,610,491
Discount from debt conversion-accrued interest		—		—		—		—		150,628			—			150,628
Issuance of stock - executive conversion		—		—		176,121		176		645,591			—			645,767
Repurchase of private placement warrants		—		—		—		—		(70,911	)		—			(70,911	)
Issuance of common stock - in relation to other loans		—		—		32,164		33		89,130			—			89,163
Issuance of equity for compensation		—		—		53,738		54		125,884			—			125,938
Issuance of common stock - in lieu of cash		—		—		26,783		27		147,770			—			147,797
Amortization of deferred compensation		—		—		—		—		3,030,519			—			3,030,519
Net (loss)		—		—		—		—		—			(17,891,255	)		(17,891,255	)
Balance at July 31, 2008		—	$	—		8,949,501	$	8,950	$	37,624,366		$	(36,561,364	)	$	1,071,952


	For the Nine Months Ended July 31,
	2008			2007
Operating activities
Net loss	$	(17,891,255	)	$	(5,047,012	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		142,750			48,257
Amortization of financing costs		4,001,649			2,769,125
Amortization of debt discount		3,687,229			―
Amortization of deferred compensation		3,030,519			197,340
Issuance of equity for compensation		125,938			32,754
Issuance of stock in lieu of cash		147,797			36,610
Issuance of stock as payment of interest		150,628			―
Gain on sale of property and equipment		(8,803)			―
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		54,966			(144,448	)
(Increase) decrease in other assets		(168,633	)		47,087
Increase in due to HMOs		1,320,508			―
Increase (decrease) in accounts payable and accrued liabilities		(319,929	)		517,421
Total adjustments		12,164,619			3,504,146
Net cash used in operating activities		(5,726,636	)		(1,542,866	)
Investing activities
Purchase of property and equipment		(589,123	)		(17,983	)
Sale of fixed assets		7,053			─
Net cash used in investing activities		(582,070	)		(17,983	)
Financing activities
Proceeds from secondary public offering		13,200,000			―
Proceeds from private placement		―			3,425,000
Proceeds from other loans					140,000
Proceeds from credit line		―			306,371
Payments of placement agent fees and expenses		—			(473,984	)
Repurchase of private placement warrants		(50,207	)		―
Payment of expenses – secondary public offering		(1,352,632	)		―
Repayments on convertible debt		(1,535,969	)		―
Repayments on loans and notes payable		(1,074,720	)		(980,209	)
Repayments of capital lease obligations		(11,578	)		(6,000	)
Net cash provided by financing activities		9,174,894			2,411,178
Net increase (decrease) in cash and cash		2,866,188			850,329
Cash at beginning of period		530,720			32,077
Cash at end of period	$	3,396,908		$	882,406
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	572,026		$	46,838
Supplemental disclosures of non-cash investing and financing activities:
Issuance of units - conversion of debt	$	5,193,716		$	―
Issuance of units - bridge share exchange	$	3,942,375		$	―
Issuance of units – conversion of executive accrued compensation	$	645,767		$	―
Capital lease obligations incurred on purchases of equipment	$	―		$	6,048
Issuance of stock as deferred finance costs on loans	$	―		$	1,326,065
Issuance of stock - credit line fee	$	―		$	190,940
Note payable - fixed asset acquisition	$	49,133		$	3,148


	As Restated		As Previously Reported
Condensed Consolidated Balance Sheet
Due to HMOs	$	667,717	$	613,154
Total current liabilities		2,627,370		2,572,807
Total liabilities		3,044,222		2,989,659
Additional paid in capital		34,844,782		31,923,418
Accumulated deficit		(29,359,334)		(26,313,013)
Total shareholders’ deficit		5,494,323		5,548,886

Condensed Consolidated Statement of Operations
Provider systems - revenue	$	2,463,542	$	2,660,022
Provider systems – direct costs		2,767,179		2,981,569
Gross profit		(227,283)		(245,193)
Loss from operations		(2,794,903)		(2,812,813)
Amortization of debt discount		3,687,229		76,738
Interest and other expenses		509,106		358,478
Total non-operating expenses		7,894,322		4,133,203
Loss before income tax provision		(10,689,225)		(6,946,016)
Net loss		(10,689,225)		(6,946,016)
Basic and diluted (loss) per common share		(1.85)		(1.20)

Condensed Consolidated Statement of Cash Flows
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount	$	3,687,229	$	76,738
Issuance of stock as payment of interest		150,628		—
Increase in due to HMOs		322,726		340,636
Issuance of units for bridge share exchange		3,804,733		3,942,375


	January 31, 2009		October 31, 2008
Computer and other equipment	$	234,917	$	225,908
Furniture and fixtures		184,587		184,587
Automobile		49,574		49,574
Leasehold improvements		125,915		125,915
Total, at cost		594,993		585,984
Less: Accumulated depreciation		(283,200)		(244,725)
Property, plant and equipment, net	$	311,793	$	341,259


	July 31, 2008			October 31, 2007

Furniture and fixtures	$	182,552		$	110,884
Leasehold improvements		125,915			66,457
Computer equipment		206,112			182,102
Vehicle		49,574			38,953
Total, at cost		564,153			398,396
Less: Accumulated depreciation		(205,478	)		(220,182	)
Property, plant and equipment, net	$	358,675		$	178,214


	January 31, 2009		October 31, 2008
Licensed technology	$	100,000	$	100,000
Development costs		500,000		350,000
Total, at cost		600,000		450,000
Less: Accumulated amortization		(100,000)		(75,000)
Intellectual property, net	$	500,000	$	375,000


	2008					2007
			Options					Options
	Incentive Stock Grants		Number of Shares		Weighted Average Exercise Price	Incentive Stock Grants		Number of Shares		Weighted Average Exercise Price

Outstanding at beginning of the period		2,400		—			2,400		—
Granted							—		—
Exercised		—		—			—		—
Forfeited		—		—			—		—
Outstanding at July 31,		2,400		—			2,400		—
Exercisable at July 31,				—					—

Available for issuance at July 31 under the plan				197,600					197,600


	January 31, 2009			October 31, 2008
		Options			Options
	Stock Grants	Shares	Weighted Average Exercise Price	Stock Grants	Shares	Weighted Average Exercise Price
Outstanding at beginning of the period	87,030	—	—	2,400	—	—
Granted	—	—	—	84,630	—	—
Exercised	—	—	—	—	—	—
Forfeited	—	—	—	—	—	—
Outstanding at end of the period	87,030	—	—	87,030	—	—

Available for issuance at end of the period under the plan		110,570			110,570


Name	Number of Shares	Value		Number of Options	Value
Short-term incentive bonus	241,440	$	117,585	—	$	—
One time retention award	135,000	$	67,500	135,000	$	44,550
Individual management performance reward	280,875	$	140,438	280,875	$	92,689


		Options				Options
	Stock Grants	Shares		Weighted Average Exercise Price	Stock Grants	Shares	Weighted Average Exercise Price
Outstanding at beginning of the period	984,594	2,580,651	$	1.26	—	5,093,767		—
Granted	505,511	3,840,514	$	0.50	984,594	2,580,651	$	1.26
Exercised	—	—		—	—	—		—
Forfeited	—	940,720		—	—	—		—
Outstanding at end of the period	1,490,105	5,480,445		—	984,594	2,580,651		—

Available for issuance at end of the period under the plan		—				1,528,522


Nominee	Votes for	Votes Withheld	Abstentions*
Noel J. Guillama	4,411,519	9,500	0
Donald B. Cohen	4,381,519	39,500	0
Susan Darby Guillama	4,410,244	10,775	0
Jose de la Torre	4,407,919	13,100	0
Alberto G. Del Valle	4,377,919	43,100	0
Lawrence B. Fisher	4,407,919	13,100	0
Gregg M. Steinberg	4,381,519	39,500	0