**FORM
      10-KSB**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


x
              Annual
                  report under Section 13 or 15(d) of the Securities Exchange Act
                  of 1934
                  for the year ended December 31, 2007Oro
              Transition
                  report under section 13 or 15(d) of the Securities Act of 1934
                  for the
                  transition period from _____ to
                  _____.




Commission
      File Number: 0-27554


**Conmed
      Healthcare Management, Inc.******


(Name
      of
      small business issuer as specified in its charter)





**Delaware**
            **42-1297992**(State
                or other jurisdiction of
            (IRS
                Employerincorporation
                or organization)
            Identification
                Number)





**7250
                Parkway Dr., Suite 400****Hanover,
                MD**
            **21076**(Address
                and zip code of principal executive offices)
            (Zip
                code)





**410-567-5520**


(Issuer's
      telephone number)





Securities
      registered under Section 12(b) of the Exchange Act: None





Securities
      registered under Section 12(g) of the Exchange Act:





**Common
      Stock, $.0001 par value**


(Title
      of
      class)





Check
      whether the Issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
      for
      such shorter period that the registrant was required to file such reports),
      and
      (2) has been subject to the filing requirements for at least the past 90 days.
      YES x NO o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of the registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





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


YES
o NO x





Issuer's
      net revenues for its most recent fiscal year: $24,568,475





The
      aggregate market value of the voting and non-voting common stock held by
      non-affiliates, based upon the closing sale price of the common stock on March
      28, 2008 was approximately $4,406,090. Shares of common stock held by each
      officer and director and by each person who owns 5% or more of the outstanding
      common stock have been excluded in that such persons may be deemed to be
      affiliates.





The
      number of shares outstanding of each of the issuer's classes of common stock,
      as
      of the latest practicable date:





Number
                of Shares OutstandingClass
            
            March
                28, 2008Common
                Stock, $.0001 par value
            
            11,943,141




Transitional
      Small Business Disclosure Format (Check one): YES oNO x







**CONMED
        HEALTHCARE MANAGMENT, INC.**


**2007
        FORM 10-K ANNUAL REPORT**
  TABLE
          OF
          CONTENTS
  PagePART
                  I.ITEM
                  1.
              Description
                  of Business
              
              1ITEM
                  1A
              Risk
                  Factors
              
              8ITEM
                  2.
              Description
                  of Property
              
              15ITEM
                  3.
              Legal
                  Proceedings.
              
              16ITEM
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              
              16PART
                  II.ITEM
                  5.
              Market
                  for Common Equity and Related Stockholder Matters
              
              17ITEM
                  6.
              Management's
                  Discussion and Analysis or Plan of Operation
              
              17ITEM
                  7.
              Financial
                  Statements
              
              24ITEM
                  8.
              Changes
                  In and Disagreements With Accountants on Accounting and
                  Financial Disclosure
              
              45ITEM
                  8A(T).
              Controls
                  and Procedures
              
              45ITEM
                  8B.
              Other
                  Information
              
              45PART
                  IIIITEM
                  9
              Certain
                  Relationships and Related Transactions, and Director
                  Independence.
              
              46ITEM
                  10.
              Executive
                  Compensation
              
              46ITEM
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and
                  Related Stockholder Matters
              
              46ITEM
                  12.
              Directors,
                  Executive Officers, Promoters , Control Persons and Corporate Governance;
                  Compliance With Section 16(a) of the Exchange Act
              
              46ITEM
                  13.
              Exhibits
              
              47ITEM
                  14.
              Principal
                  Accountant Fees and Services
              
              49SIGNATURES
              
              50


**PART
      I.**




**ITEM 1.**
            **DESCRIPTION
                OF BUSINESS******




**General**





Conmed
      Healthcare Management, Inc. ("CONMED", the "Company", "we" or "us") provides
      healthcare services to county detention centers across the United States. As
      a
      result of the Supreme Court decision in 1976, all individuals held against
      their
      will are required to be provided with community standard healthcare. Under
      this
      requirement, all counties are required to provide healthcare services for their
      inmates. CONMED specializes in providing such services.





**Corporate
      History**





Prior
      to
      January 26, 2007, the Company formerly known as Pace Health Management Systems,
      Inc. ("Pace") traded under the symbol "PCES", was classified as a shell company,
      had no ongoing operations, minimal operating expenses and no employees.





On
      January 26, 2007, we acquired Conmed, Inc. ("Conmed, Inc."), a privately-owned
      provider of correctional healthcare services (the "Acquisition"). Conmed, Inc.
      was formed as a corporation on June 10, 1987 in the State of Maryland for the
      purpose of providing healthcare services exclusively to county detention centers
      located in Maryland. As Conmed, Inc. developed, it accepted more contracts
      for
      additional services including mental health, pharmacy and out-of-facility
      healthcare. In 2000, Conmed, Inc. served more than 50% of the county detention
      healthcare services market in Maryland. In 2003, Conmed, Inc. elected to seek
      contracts outside of Maryland. For the fiscal year ended December 31, 2007,
      Conmed, Inc. had net revenues primarily from medical services provided to
      correctional institutions of $26,073,040.





As
      a
      result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the
      Company and the business of Conmed, Inc. is now our primary business. As of
      December 31, 2007, we were in contract with, and currently providing medical
      services in twenty-two counties in five states including: Kansas, Maryland,
      Oregon, Virginia and Washington.





On
      March
      13, 2007, the Company changed its name to Conmed Healthcare Management,
      Inc.





**Services
      Provided**





***County
      Correctional Healthcare Services***




We
      provide the following array of healthcare services for inmates in county
      facilities under contract with the counties served. The contracts are primarily
      multiple year, fixed-cost contracts with annual escalations, caps on
      out-of-facility healthcare and catastrophic expenses that limit maximum
      financial exposure, and contain adjustments on a per diem basis for changes
      in
      population served.




Correctional
      healthcare services include a broad array of services that support the care
      of
      inmates detained in county detention centers. Correctional healthcare services
      include, but are not limited, to the following categories:


·General healthcare services
              ·Dialysis services·Acute care services
              ·Durable medical equipment·Surgical services
              ·Hospital services·Laboratory services
              ·Mental health services·IV therapy
              ·Pharmacy·EKG's
              ·Physical and occupational therapy·Diagnostic imaging/radiology
              ·Dental services




We
      either
      directly provide these services within the detention facilities or subcontract
      for the provision of these services within or outside the facility. We make
      every effort to safely provide the medical services within the facilities due
      to
      security and cost considerations.




1




***Contracting***




We
      have a
      model for predicting healthcare costs based on 23 years of accumulated
      experience, external data on healthcare costs, trending, and knowledge of
      current and future drivers of cost. This predictive model is the basis for
      the
      cost proposals we provide in competitive bids. The model addresses and
      aggregates costs related to staffing, on-site costs, out-of-facility costs,
      pharmacy, supplies, administrative costs, taxes, and contract fees. We have
      found that having predictive reliability of costs assures a higher probability
      of sustained profits.




***Staffing***




We
      provide staffing of healthcare professionals at each of our contracted
      facilities. The staffing patterns are obtained from the Request for Proposals
      (RFP) distributed by the counties soliciting bids on services provided and
      cost.
      The level of staffing varies depending on the size of the facility, i.e., larger
      facilities typically require a larger staff. The ratio of staff members to
      inmates varies depending on the physical structure of the facilities and the
      specific desire of the administration of the individual facilities and service
      provided. Generally, we contract with existing staff at the facility to the
      greatest extent possible when entering into a new contract. The on-site staffing
      for any facility may include RNs, LPNs, medics, medication aides, nursing
      assistants, physicians, psychiatrists, psychologists, social workers, physician
      assistants, nurse practitioners, medical records' clerks, administrative and
      support staff.




***Pharmacy***




We
      provide medications for inmates within our contracted detention facilities.
      Medications are currently provided from two national pharmacy contractors,
      Diamond Pharmacy and Correct RX, which specialize in the provision of
      pharmaceutical services to detention centers. We have accumulated information
      regarding pharmacy expenses in our contracted facilities, which is useful in
      the
      cost proposal portions of our bids.




***In-Facility
      Services***




We
      provide comprehensive healthcare services from the time an inmate enters the
      facility until the time of such inmate's release from the facility. In some
      cases, we are responsible for providing healthcare services to an individual
      at
      the time of his or her arrest. The vast majority of such services are provided
      on site by our clinical staff. Our healthcare services begin at intake with
      a
      screening examination and triage. Such services are continued through the
      provision of daily sick calls. Most states have implemented a statutory or
      audit
      requirement for a physical examination and dental examination of each inmate,
      to
      be conducted within 14 days of admission to the facility. The initial and
      subsequent examinations include psychiatric screening evaluations to detect
      suicide potential and major psychiatric illness requiring special
      treatment.




The
      costs
      for services provided within the facility are generally regionally-based and
      easily predicted. The highest costs relate to on-site x-rays, the majority
      of
      which are chest x-rays completed to discount active tuberculosis and x-rays
      for
      minor trauma .




***Out-of-Facility
      Services***




Inmates
      requiring services outside the facility fall into two broad categories: (i)
      emergencies and (ii) circumstances that require services beyond the capability
      of the facility. Out-of-facility services are broken down into several
      categories, including third party administrators ("TPA **"** )
      and
      hospital services. Most of our out-of-facility services are provided through
      the
      use of a local or regional contracted network using a TPA. In addition,
      utilization management and utilization review services are employed.




1. Case
      management and utilization reviews - To
      assure the most cost effective and medically appropriate length stays, we often
      utilize the services of a contracted professional utilization management and
      utilization review ("UM/UR") organization. When an inmate is hospitalized,
      the
      UM/UR maintains daily contact with the provider and the Medical Director for
      the
      site to assure appropriate care.




2. TPA - We
      contract with TPAs serving most of the facilities in which we provide healthcare
      services. The TPAs provide a network of physicians, hospitals and ancillary
      services that are paid based on contracted fee schedules. These fee schedules
      typically include discounts that average approximately 17% over the submitted
      charges. The TPA is compensated based on a percent of our savings for the
      repriced claims.




2




***Dental
      Services***




Dental
      services are provided on-site for most of our contracted facilities. Such
      facilities maintain dental suites with equipment for conducting dental x-rays
      depending on the RFP requirements.





***Additional
      Services***





Value-added
      services that we provide to our clients include the following:




·
            Healthcare
                services consultations - On request from the facility administration,
                we
                will provide consultations on healthcare issues such as Tuberculosis,
                Avian Flu, AIDS, Hepatitis, Methadone, Reentry programs and many
                other
                topics pertinent to correctional healthcare patients. These consultations
                typically relate to policy issues affecting multiple facilities.
                In many
                cases, we have provided expert testimony to state legislative bodies
                and
                agencies.·
            Audit
                compliance programs - We provide an audit compliance program as part
                of
                our core responsibility to all sites. We have experts in all state
                and
                national audit processes on staff. These individuals provide guidance
                to
                the sites to assure 100% audit compliance.·
            OSHA
                compliance programs - Regulation 1910.1030 of the U.S. Department
                of
                Labor, Occupational Safety & Health Administration ("OSHA"), provides
                guidelines and universal precautions that shall be observed to prevent
                contact with blood or other potentially infectious materials. Such
                regulations are applicable to all occupational exposure to blood
                or other
                potentially infectious materials. We comply with OSHA and provide
                to our
                staff members, among other things, appropriate personal protective
                equipment such as gloves, gowns, laboratory coats, face shields or
                masks
                and eye protection, as well as mouthpieces, resuscitation bags, pocket
                masks, or other ventilation devices. The purpose of such protective
                equipment is to prevent blood or other potentially infectious materials
                to
                pass through to or reach our employee's clothes, undergarments, skin,
                eyes, mouth, etc. Other procedures we implement in accordance with
                OSHA
                include, but are not limited to, ensuring a clean and sanitary worksite,
                procedures for discarding contaminated waste, and cleaning and laundering
                our staff's clothing and equipment.·
            Risk
                management - We promote risk management through a process of daily
                monitoring of significant healthcare events, weekly and monthly review
                of
                trends and subsequent measured actions. Through attention to detail
                in the
                provision and documentation of healthcare, adherence to standards
                of care
                and monitoring of events, we are able to substantially reduce the
                risk of
                poor outcomes and/or litigation.·
            Sick
                call services for staff - We provide limited sick call services to
                detention center staff for acute problems. This often allows the
                staff to
                continue at work rather than taking a sick day for a doctor's visit.
                This
                value-added service is appreciated by the facility staff and
                administration.·
            Emergency
                services for staff and visitors - We believe it is imperative that
                our
                medical staff be well trained and equipped to handle emergencies.
                Thus, we
                ensure that our medical staff is familiar with the correctional facility
                and is equipped to deliver prompt emergency care anywhere in the
                facility.
                Specific equipment is maintained and restocked when necessary, within
                each
                facility in the event of an emergency, including an emergency kit
                capable
                of maintaining basic life support.




**Sales
      and Marketing**




Our
      sales
      and marketing efforts for correctional healthcare services are based on the
      following:




1.
            Market
                analysis - In 2004, we engaged in a national market analysis and
                survey
                searching for markets with attractive opportunities. We have designated
                Florida, Georgia, Kansas, Iowa, New Jersey, North Carolina, Oklahoma,
                Oregon, Pennsylvania, South Carolina, Texas, Virginia and Washington
                as
                early targets. The following are our prime
                targets:




a.
            Facilities
                of 500 inmates or more that are currently not served by a correctional
                healthcare contractor;




b.
            Facilities
                of 500 inmates or more that are served by a local hospital or healthcare
                provider;




3




c.
            Facilities
                of 500 inmates or more where a competitor's services are not meeting
                the
                facility's expectations; and




d.
            Facilities
                of 500 inmates or more that are served by a competitor that is leaving
                the
                county detention center market to focus on
                prisons.




2.
            Word
                of Mouth – We have a contact network through our existing contracts and
                through strategic relationships with national pharmacy contractors.
                This
                network has provided early indications of counties considering outsourcing
                healthcare services, changing their current contractors or seeking
                proposals for other reasons.




3.
            Online
                procurement services – We have a contract with an on-line government
                contracting research service to establish early determinations of
                county
                intentions to seek proposals.




4.
            Trade
                meetings – Our staff attends annual regional and national trade meetings.
                These meetings serve as an opportunity to meet and greet new potential
                clients. Our trade show booth attracts attention with a variety of
                marketing tools and techniques. We often sponsor special events and
                awards
                at these meetings.




5.
            Cold
                calls – We use, to a limited extent, cold calls, typically only in cases
                where some collateral indication of a probability of interest
                exists.




6.
            Advertising
                in trade journals.




7.
            Public
                speaking engagements for special topics on
                request.




8.
            Website
                promotion of our capabilities and
                experience.




We
      currently utilize our CEO, Chief Medical Officer and Vice President of Strategic
      Development, as well as a network of regional consultants to implement our
      marketing strategy.




**Competition**




We
      are
      aware of four major sources of competition:





1. National
      contracting companies that serve both the county and state prison
      systems .
      While
      we are aware of several national companies that provide healthcare services
      to
      county detention centers, it appears this is not their main focus. These
      companies, including Prison Health Services, Inc., Correctional Medical
      Services, Inc., Correct Care Solutions Inc., Wexford Health
      Sources, Inc. ,
      Naphcare, Inc. and Armor Correctional Health Services are primarily in the
      business of providing services to state prisons.





2. Local
      or regional companies focused on county detention centers .
      There
      are a few companies that provide healthcare services to county detention centers
      within confined regions, such as California Forensic Medical Group Inc. in
      California, and Primecare Medical, Inc. in Pennsylvania. These companies are
      privately held and can be characterized as small to medium size businesses
      when
      compared to the major national prison healthcare companies. There are several
      small local groups in markets which we are developing at this time.





3. Local
      hospitals .
      We have
      seen several incidences of local hospital systems providing healthcare services
      to the county detention centers. Such incidences arose out of the absence of
      other interested providers. The hospital costs for these counties are often
      extremely high and counties seeking cost savings may seek the services of a
      professional medical service contractor other than the local
      hospital.





4. Local
      physicians. In some
      cases, our competitor is a local solo physician or group of physicians. Such
      contractors typically provide only the on-site sick call services and may have
      limited expertise in the provision of full service correctional healthcare.
      Such
      physicians are often unable to obtain cost effective and appropriate liability
      insurance that will cover both their primary work, as well as their correctional
      healthcare services.




4


**Intellectual
      Property**




CONMED
      does not currently own and has not registered any trademarks, patents, or any
      other intellectual property.




**Government
      Regulation**




The
      industries in which we operate are subject to extensive federal, state and
      local
      regulations and/or orders of judicial authorities, including healthcare,
      pharmaceutical and safety regulations and judicial orders, decrees and
      judgments. Some of the regulations and orders are unique to the Company's
      industries, and the combination of regulations and orders it faces is unique.
      Generally, prospective providers of healthcare and pharmaceutical services
      to
      correctional facilities must be able to detail their readiness to, and must
      comply with, a variety of applicable state and local regulations and state
      and
      national standards. Our contracts typically include reporting requirements,
      supervision and on-site monitoring by representatives of the contracting
      governmental agencies. **** In
      addition, the doctors, nurses, pharmacists and other healthcare professionals
      who provide services on our behalf are, in most cases, required to obtain and
      maintain professional licenses and are subject to state regulation regarding
      professional standards of conduct. Our services are also subject to operational
      and financial audits by the governmental agencies with which we have contracts
      and by the courts of competent jurisdiction. Additionally, services provided
      to
      health benefit plans in certain cases, are subject to the provisions of the
      Employee Retirement Income Security Act of 1974, as amended ("ERISA"). We may
      not always successfully comply with these regulations and failure to comply
      can
      result in material penalties, non-renewal or termination of contracts with
      correctional facilities or prohibition from proposing for new business in
      certain jurisdictions.





*Health
      Insurance Portability and Accountability Act of 1996.* The
      Administrative Simplification Provisions of the Health Insurance Portability
      and
      Accountability Act of 1996 ("HIPAA") require the use of uniform electronic
      data
      transmission standards for healthcare claims and payment transactions submitted
      or received electronically. These provisions are intended to encourage
      electronic commerce in the healthcare industry. We do not electronically file
      at
      present, but may do so in the future, subjecting us to all of the regulations
      of
      HIPAA. HIPAA also includes regulations on standards to protect the security
      and
      privacy of health-related information. The privacy regulations extensively
      regulate the use and disclosure of individually identifiable health-related
      information, whether communicated electronically, on paper or
      orally.




*Corporate
      Practice of Medicine/Fee Splitting* .
      Many of
      the states in which we operate have laws that prohibit unlicensed persons or
      business entities, including corporations, from employing physicians or laws
      that prohibit certain direct or indirect payments or fee-splitting arrangements
      between physicians and unlicensed persons or business entities. Possible
      sanctions for violations of these restrictions include loss of a physician's
      license, civil and criminal penalties and rescission of business arrangements
      that may violate these restrictions. These statutes vary from state to state,
      are often vague, and seldom have been interpreted by the courts or regulatory
      agencies. We review, on an ongoing basis, the applicable laws in each state
      in
      which we operate and review our arrangements with our healthcare providers
      to
      ensure that these arrangements comply with all applicable laws. We have no
      assurance that governmental officials responsible for enforcing these laws
      will
      not assert that we, or transactions in which we are involved, are in violation
      of such laws, or that such laws ultimately will be interpreted by the courts
      in
      a manner consistent with our interpretations.




*Regulation
      of Bid Process and Contracting.* Contracts
      with governmental agencies are obtained primarily through a competitive bidding
      process, which is governed by applicable state and local statutes and
      ordinances. Although practices vary, typically a formal RFP is issued by the
      governmental agency, stating the scope of work to be performed, length of
      contract, performance bonding requirements, minimum qualifications of bidders,
      selection criteria and the format to be followed in the bid or proposal.
      Usually, a committee appointed by the governmental agency reviews bids and
      makes
      an award determination. The committee may award the contract to a particular
      bidder or decide not to award the contract. The committees consider a number
      of
      factors, including the technical quality of the proposal, the bid price and
      the
      reputation of the bidder for providing quality care. The award of a contract
      may
      be subject to formal or informal protest by unsuccessful bidders through a
      governmental appeals process. If the committee does not award a contract, the
      correctional agency may, among various options, continue to provide healthcare
      services to its inmates with its own personnel or the existing provider.





Certain
      RFPs and contracts require the bidder to post a bid bond or performance bond.
      Performance bonding requirements may cover one year or up to the length of
      the
      contract. Since September 11, 2001, the surety market has sharply
      contracted and the cost of surety bonds has substantially increased. In order
      to
      avoid the additional costs that performance bonds add to the contracts,
      increasingly clients are reducing or eliminating the need for performance bonds.




5




*U.S.
      Department of Labor, Occupational Safety and Health Administration
      (OSHA).* In
      addition to state and national standards of compliance with OSHA federal
      regulations is mandatory. OSHA Standard 29 CFR 1910 requirements include, but
      are not limited to, blood borne and airborne pathogens (tuberculosis), needle
      stick prevention, fire safety, hazard communications, respiratory protection,
      program, and hazardous waste. The federal OSHA standards have been adopted
      by
      state regulatory agencies to conduct routine environmental
      inspections.





*National
      Fire Protection Association (NFPA).* Environmental fire safety is promulgated by the NFPA 101: Life Safety Code
      derived from the American Standards Institute (ANSI). Enforcement of NFPA
      regulation is accomplished by annual inspections conducted by the state.





Our
      contracts with governmental agencies often require us to comply with numerous
      additional requirements regarding recordkeeping and accounting,
      non-discrimination in the hiring of personnel, safety, safeguarding confidential
      information, management qualifications, professional licensing requirements,
      emergency healthcare needs of corrections employees and other matters. If a
      violation of the terms of an applicable contractual or statutory provision
      occurs, a contractor may be disbarred or suspended from obtaining future
      contracts for specified periods of time in the applicable location. We have
      never been disbarred or suspended from seeking procurements in any
      jurisdiction.





**Major
      Contracts**





Substantially
      all of our operating revenue is derived from contracts with county governmental
      entities. Our top five clients, Baltimore County Detention Center, Sedgwick
      County Detention Center, Harford County Detention Center, Yakima County
      Detention Center and Charles County Detention Center generated approximately
      fifty-seven percent (57%) of our total revenues for the twelve months ended
      December 31, 2007. Summaries of our largest contracts follow below.





*Baltimore
      County Detention Center Contract.* We
      entered into a Services Agreement with the Board of County Commissioners of
      Baltimore County, Maryland ("BCDC"), on March 29, 2007, for a period of
      approximately two (2) years and six (6) months, and BCDC, at its option, may
      extend the agreement annually for two (2) additional three-year terms upon
      written notice. BCDC pays us a base monthly fee, which may be adjusted for
      changes in inmate population levels. Under the agreement, we are subject to
      mandatory staffing requirements. The agreement also contains provisions that
      allow the BCDC to assess penalties if certain staffing criteria are not
      maintained and certain liquidated damages in the event certain performance
      standards are not met. We also provide, at our own expense, a performance bond
      for one hundred percent (100%) of the annual amount of the awarded contract,
      as
      well as a payment bond for approximately twenty-five percent (25%) of the annual
      amount of the awarded contract. BCDC may terminate the agreement upon ninety
      (90) days written notice without cause and may immediately terminate the
      agreement for a material breach of the agreement subject to certain cure
      provisions.





*Sedgwick
      County Detention Center Contract.* We
      entered into a Services Agreement with the Board of County Commissioners of
      Sedgwick County, Kansas ("Sedgwick County"), on January 31, 2005, for a period
      of two (2) years. On June 1, 2007, the agreement was amended to extend the
      basic
      term through December 31, 2009, and Sedgwick County may, at its option, extend
      the agreement annually for two (2) additional one-year terms upon written
      notice. In addition, the amendment waives the previous requirement for a
      performance bond, increases the medical staffing, raises the base monthly fee,
      and provides for a cost of living increase in 2009. Sedgwick County pays us
      a
      base monthly fee, which may be adjusted for changes in inmate population levels.
      Sedgwick County may terminate the agreement upon thirty (30) days written notice
      without cause. Either party may immediately terminate the agreement for a
      material breach of the agreement subject to certain cure provisions.





*Hartford
      County Detention Center Contract.* We
      entered into a Health Services Agreement with the Sheriff of Harford County
      on
      May 31, 2007, to provide medical services to the inmates at the Harford County
      Detention Center ("HCDC"), for an initial term of one (1) year, with the HCDC
      having the exclusive option to renew such agreement for five (5) additional
      one
      (1) year terms. The HCDC pays us a base monthly fee, which may be adjusted
      for
      changes in inmate population levels. Under the agreement, we are subject to
      mandatory staffing requirements. HCDC may terminate the agreement with or
      without cause without prior written notice.





*Yakima
      County Detention Center Contract.* We
      entered into a Health Services Agreement with the Board of County Commissioners
      for Yakima County, Washington on August 12, 2006, to provide medical services
      to
      the inmates at the Yakima County Department of Correction's facilities ("Yakima
      County"), for an initial term of one (1) year, with Yakima County having the
      exclusive option to renew such agreement for four (4) additional one (1) year
      terms. The agreement was amended on April 3, 2007 and September 4, 2007, to
      provide pharmacy services and medical services for the Yakima County DOC Justice
      Center. Yakima County pays us an annual compensation, which is paid in equal
      monthly installments. Either party may terminate the agreement upon one hundred
      twenty (120) days written notice without cause. Yakima County may immediately
      terminate the agreement for a material breach of the agreement subject to
      certain cure provisions.




6




*Charles
      County Detention Center Contract.* Effective
      July 1, 2004, we entered into a medical services agreement with the Sheriff's
      Office of Charles County, Maryland to provide both on-site and off-site
      healthcare services to the inmates of the Charles County Detention Facility
      ("CCDF"). The two (2) year agreement commenced on July 1, 2004, and the
      agreement provides the CCDF with three (3) successive one (1) year options
      to
      extend the term of the agreement. The CCDF pays us an annual compensation,
      which
      is paid equal monthly installments. Such monthly installments are adjusted
      for
      changes in inmate population levels. Conmed may terminate the agreement upon
      thirty (30) days written notice in the event the CCDF fails to make timely
      payment due to Conmed.





**Employees**





As
      of
      December 31, 2007, we had approximately 360 full-time and 28 part-time employees
      and 79 per diem employees, and 32 position contractors. We provide all full-time
      employees with a comprehensive benefits package including medical insurance,
      education stipend, dental insurance, 401(k) and paid vacation. We believe that
      our relations with our employees are good. None of our employees belong to
      a
      union.




7




**ITEM
      1A.  RISK FACTORS**





*An
      investment in our securities is extremely risky. You should carefully consider
      the following risks, in addition to the other information presented in* *this
      Annual Report on* *Form
      10-KSB* *bef* *ore
      deciding to buy or exercise our securities. If any of the following risks
      actually materialize, our business and prospects could be seriously harmed,
      the
      price and value of our securities could decline and you could lose all or part
      of your investment.*




***Risks
      Related to Our Business***





**OUR
      ABILITY TO CONTINUE OR EXPAND OUR BUSINESS AND SECURE NEW CONTRACTS TO PROVIDE
      HEALTHCARE AND MEDICAL SERVICES TO CORRECTIONAL AND DETENTION FACILITIES DEPENDS
      ON MANY FACTORS OUTSIDE OUR CONTROL.** Our
      growth is generally dependent upon our ability to obtain new contracts to
      provide healthcare and medical services to inmates in county correctional and
      detention facilities. This possible growth depends on a number of factors we
      cannot control, including crime rates and sentencing patterns in various
      jurisdictions and acceptance of privatization. The demand for our services
      could
      be adversely affected by the relaxation of enforcement efforts, leniency in
      conviction and sentencing practices or through the decriminalization of certain
      activities currently proscribed by our criminal laws. For instance, any changes
      with respect to drugs and controlled substances or illegal immigration could
      affect the number of persons arrested, convicted and sentenced, thereby
      potentially reducing demand for correctional facilities to house them, and
      thus,
      reduce the number of inmates receiving medical services. Legislation has been
      proposed in numerous jurisdictions that could lower minimum sentences for some
      non-violent crimes and make more inmates eligible for early release based on
      good behavior. Also, sentencing alternatives under consideration could put
      some
      offenders on probation with electronic monitoring who would otherwise be
      incarcerated. Similarly, reductions in crime rates could lead to reductions
      in
      arrests, convictions and sentences requiring incarceration at correctional
      facilities.





**WE
      PROVIDE CONTRACTED BUSINESS SERVICES. IN ANY CONTRACT BUSINESS, IT IS POSSIBLE
      A
      CONTRACT WILL BE TERMINATED, DEFAULTED UPON OR NOT RENEWED.** Our
      top
      three county contracts, Baltimore County Detention Center, Sedgwick County
      Detention Center and Hartford County Detention Center, generated approximately
      fifty percent (50%) of our total revenues for the year ended December 31, 2007.
      These same clients generated approximately thirty-eight percent (38%) of our
      gross profit. If a contracted detention facility, particularly one of our
      primary detention facilities, terminates its contract, which generally may
      be
      effective upon ninety (90) day written notice, our business and financial
      performance may be seriously harmed.





**MOST
      OF OUR CONTRACTS ARE FOR SHORT-TERMS, AND MAY NOT BE
      EXTENDED.** Our
      detention center medical services contracts are typically short-term, ranging
      from one to three years, with renewal or extension options in favor of the
      contracting governmental agency. Including extension options, we have several
      smaller contracts subject to renewal in 2008, which accounted for approximately
      7% of revenue and 8% of the gross profit, respectively, for the year ended
      December 31, 2007. We cannot assure you that these or any other contracts will
      be renewed or that extension options will be exercised. Additionally, the
      contracting governmental agency typically may terminate a facility contract
      without cause by giving us adequate written notice. We customarily incur
      significant development and start-up costs in establishing our services within
      the new facilities, and the termination or non-renewal of a contract would
      require an immediate write-off of any unamortized costs associated with the
      contract, including unamortized costs for service contracts acquired and
      goodwill, and could have a material adverse effect upon our financial condition,
      results of operations and liquidity.




**OUR
      CONTRACTS ARE SUBJECT TO GOVERNMENTAL FUNDING.** Our
      detention center medical services contracts are subject to either annual or
      bi-annual governmental appropriations. Failure by a governmental agency to
      receive such appropriations could result in termination of the contract by
      such
      agency or a reduction of the fee payable to us. In addition, even if funds
      are
      appropriated, delays in payments may occur which could have a material adverse
      effect on our financial condition, results of operations and
      liquidity.




**OUR
      INABILITY TO OBTAIN REQUIRED PERFORMANCE AND/OR PAYMENT BONDS MAY LIMIT OUR
      ABILITY TO MAINTAIN EXISTING CONTRACTS AND ACQUIRE ADDITIONAL CONTRACTS.** In
      order
      to expand our business and obtain new facilities' contracts, as well as maintain
      certain existing contracts, we will need to obtain bonds in certain counties
      for
      which we provide our services. In order to obtain such bonds, or renew existing
      bonds, we are required to fulfill certain financial requirements and standards.
      To the extent we are unable to fulfill the necessary financial requirements
      and
      standards, we may not be able to acquire new facilities' contracts and could
      lose our existing contracts, all of which could negatively impact our business
      operations and financial condition.




8




**WE
      ARE UNCERTAIN AS TO OCCUPANCY LEVELS AT CERTAIN FACILITIES WE SERVICE.** A
      small
      portion of our revenues are generated under detention center medical services
      contracts that specify an offset for populations under a specified number.
      Under
      such a per diem rate structure, a decrease in occupancy levels could cause
      a
      decrease in the facilities' needs for medical services, and therefore, could
      cause a decrease in revenue and profitability, and may have some adverse effect
      on our overall financial condition, results of operations and
      liquidity.





**DISTURBANCES
      AT FACILITIES WE SERVICE WOULD IMPACT US NEGATIVELY.** An
      escape, riot, epidemic, catastrophic or other disturbance that seriously impacts
      the health of a large number of inmates at one of our facilities could have
      a
      material adverse effect on our financial condition, results of operations and
      liquidity. As a result of a disturbance, inmates may suffer multiple injuries
      for which the cost of care may have a temporary, but significant effect on
      profitability. Approximately 81% of our healthcare services' revenues for the
      year ended December 31, 2007 are operated under caps which provide limits on
      the
      cost of exposure; however, multiple events with significant costs may exceed
      budget targets.





The
      remaining 19% of our correctional healthcare services' revenues from continuing
      operations contain no limits on our exposure for treatment costs related to
      catastrophic illnesses or injuries to inmates. Although we attempt to compensate
      for the increased financial risk when pricing contracts that do not contain
      catastrophic limits for facilities that have not had any catastrophic illnesses
      or injuries to inmates that exceeded its insurance coverage in the past, we
      cannot assure you that we will not experience a catastrophic illness or injury
      of a patient that exceeds its coverage in the future. The occurrence of severe
      individual cases outside of those catastrophic limits could render contracts
      unprofitable and could have a material adverse effect on our financial condition
      and results of operations.





**WE
      MAY EXPERIENCE MALPRACTICE LITIGATION AND OTHER LIABILITY SUITS.** Our
      medical services to correctional and detention facilities exposes us to
      potential third-party claims or litigation by inmates or other persons for
      adverse outcomes (medical malpractice), as well as suits related to infringement
      of their 8 th and
      14 th amendment rights (deliberate indifference and civil rights). It is likely
      that as we grow, we will be exposed to additional healthcare liability issues.
      We currently maintain medical professional liability insurance to cover
      potential malpractice losses, in the amounts of $1,000,000 per incident and
      $5,000,000 in the aggregate, as well as $1,000,000 general liability coverage.
      Such insurance is expensive, subject to various coverage exclusions and
      deductibles and may not be obtainable in the future on terms acceptable to
      us,
      or at all. A successful claim against us in excess of our insurance coverage
      could materially harm our business.





**WE
      MAY INCUR SIGNIFICANT START-UP AND OPERATING COSTS ON NEW CONTRACTS BEFORE
      RECEIVING RELATED REVENUES, WHICH MAY IMPACT OUR CASH FLOWS AND NOT BE
      RECOUPED.** ** When
      we
      are awarded a contract to provide medical services to a facility, we may incur
      significant start-up and operating expenses, including the cost of purchasing
      equipment and staffing the facility, before we receive any payments under the
      contract. These expenditures could result in a significant reduction in our
      cash
      reserves and may make it more difficult for us to meet other cash obligations.
      In addition, a contract may be terminated prior to its scheduled expiration
      and
      as a result, we may not recover these expenditures or realize any return on
      our
      investment.




**WE
      UTILIZE THIRD PARTY ADMINISTRATORS (TPA) AND PROVIDER NETWORKS TO OBTAIN
      OUT-OF-FACILITY CARE IN VARIOUS MARKETS. SHOULD THOSE NETWORKS BECOME
      INACCESSIBLE, OUR COSTS FOR PROVIDING THOSE SERVICES WOULD RISE 13 TO 15%.** Our
      current profit margin is, in part, due to our ability to reduce out-of-facility
      costs that are defined by contracted networks. Our net costs are typically
      approximately 13% less than the stated charges for these services. It is
      important to note that healthcare providers for the general public utilize
      these
      same programs. It is unlikely the environment will change, causing the return
      of
      payments based on healthcare provider's charges without discounts. The trend
      over the past ten years has been one of deeper discounting against these
      charges. If the trend reversed or slowed, it would negatively impact our
      operating margins and could have a material adverse effect on us.





**CHANGES
      IN STATE AND FEDERAL REGULATIONS COULD RESTRICT OUR ABILITY TO CONDUCT OUR
      BUSINESS.** We
      are
      subject to extensive regulation by both the federal government and the states
      in
      which we conduct our business. There are numerous healthcare and other laws
      and
      regulations that we are required to comply with in the conduct of our business.
      These laws may be materially changed in the future or new or additional laws
      or
      regulations may be adopted with which we will be required to comply. The cost
      of
      compliance with current and future applicable laws, rules and regulations may
      be
      significant.




9




These
      state and federal laws and regulations that affect our business and operations
      include, but are not necessarily limited to:




·
            healthcare
                fraud and abuse laws and regulations, which prohibit illegal referral
                and
                other payments;·
            Employee
                Retirement Income Security Act of 1974 and related regulations, which
                regulate many healthcare plans;·
            pharmacy
                laws and regulations;·
            privacy
                and confidentiality laws and regulations;·
            civil
                liberties protection laws and regulations;·
            state
                and national correctional healthcare auditing bodies;·
            various
                licensure laws, such as nursing and physician licensing
                bodies;·
            drug
                pricing legislation; and·
            Medicare
                and Medicaid reimbursement
                regulations.





We
      believe we are operating our business in substantial compliance with all
      existing legal requirements material to the operation of our business. There
      are, however, significant uncertainties regarding the application of many of
      these legal requirements to our business, and there cannot be any assurance
      that
      a regulatory agency charged with enforcement of any of these laws or regulations
      will not interpret them differently or, if there is an enforcement action,
      that
      our interpretation would prevail. In addition, there are numerous proposed
      healthcare laws and regulations at the federal and state levels, many of which
      could materially affect our ability to conduct business or adversely affect
      our
      results of operations.




**WE
      ARE SUBJECT TO HIPAA, THE FAILURE WITH WHICH TO COMPLY COULD ADVERSELY AFFECT
      OUR BUSINESS.** On
      August
      21, 1996, Congress passed the Health Insurance Portability and Accountability
      Act of 1996 ("HIPAA"). This legislation required the Secretary of the Department
      of Health and Human Services to adopt national standards for electronic health
      transactions and the data elements used in such transactions. The Secretary
      has
      adopted safeguards to ensure the integrity and confidentiality of such health
      information. Violation of the standards is punishable by fines and, in the
      case
      of wrongful disclosure of individually identifiable health information,
      imprisonment. Failure to do so could have an adverse effect on our
      business.





**GOVERNMENT
      AGENCIES MAY INVESTIGATE AND AUDIT OUR CONTRACTS AND, IF ANY IMPROPRIETIES
      ARE
      FOUND, WE MAY BE REQUIRED TO REFUND REVENUES WE HAVE RECEIVED, REQUIRED TO
      FOREGO ANTICIPATED REVENUES, AND SUBJECT TO PENALTIES AND
      SANCTIONS.** Certain
      government agencies have the authority to audit and investigate our contracts.
      As part of that process, government agencies may review our performance of
      the
      contract, our pricing practices, our cost structure and our compliance with
      applicable laws, regulations and standards. For contracts that actually or
      effectively provide for reimbursement of expenses, if an agency determines
      we
      have improperly allocated costs to a specific contract, we may not be reimbursed
      for those costs, and we could be required to refund the amount of any such
      costs
      that have been reimbursed. If a government audit asserts improper or illegal
      activities by us, we may be subject to civil and criminal penalties and
      administrative sanctions, including termination of contracts, forfeitures of
      profits, suspension of payments, fines and suspension or disqualification from
      doing business with certain government entities.





**THERE
      ARE LARGE COMPETITORS IN THE HEALTHCARE INDUSTRY THAT COULD CHOOSE TO COMPETE
      AGAINST US, REDUCING OUR PROFIT MARGINS OR CAUSING US TO LOSE CUSTOMERS.** Existing
      national correctional healthcare contract companies, local and regional
      contracting companies, hospitals and integrated health systems are our potential
      competitors. These companies include well-established companies which may have
      greater financial, marketing and technological resources than we do, such as
      PHS, CMS and Wexford Health. Increased price competition could result in the
      loss of customers or otherwise reduce our profit margins and have a material
      adverse effect on us.





**THERE
      ARE BARRIERS TO ENTRY INTO THE CORRECTIONAL HEALTHCARE SERVICES MARKET WHICH
      COULD BE OVERCOME RESULTING IN GREATER COMPETITION.** The
      barriers to entrance to compete for contracts are typically 5 years experience
      providing the same services and demonstrated financial stability. It would
      be
      possible for an investor to purchase an existing experienced company, add
      capital and quickly become competitive on a national scale.




10




**WE
      ARE DEPENDENT ON GOVERNMENT APPROPRIATIONS.** Our cash
      flow is subject to the receipt of sufficient funding of, and timely payment
      by,
      contracting governmental entities. If the appropriate governmental agency does
      not receive sufficient appropriations to cover its contractual obligations,
      it
      may terminate our contract or delay or reduce payment to us. Any delays in
      payment, or the termination of a contract, could have an adverse effect on
      our
      cash flow and financial condition. In addition, as a result of, among other
      things, recent economic developments, federal, state and local governments
      have
      encountered, and may encounter, unusual budgetary constraints. As a result,
      a
      number of state and local governments are under pressure to control additional
      spending or reduce current levels of spending. Accordingly, we may be requested
      in the future to reduce our existing per diem contract rates or forego
      prospective increases to those rates. In addition, it may become more difficult
      to renew our existing contracts on favorable terms or otherwise.





**OUR
      INABILITY TO REACT EFFECTIVELY TO CHANGES IN THE HEALTHCARE INDUSTRY COULD
      ADVERSELY AFFECT OUR OPERATING RESULTS.** In
      recent
      years, the healthcare industry has undergone significant change driven by
      various efforts to reduce costs, including potential national healthcare reform,
      trends toward managed care, cuts in Medicare reimbursements, and horizontal
      and
      vertical consolidation within the healthcare industry. Proposed changes to
      the
      U.S. healthcare system may increase governmental involvement in healthcare
      and
      ancillary health services, and otherwise change the way payers, networks and
      providers conduct business. Healthcare organizations may react to these
      proposals and the uncertainty surrounding them by reducing or delaying purchases
      of cost control mechanisms and related services that we provide. Other
      legislative or market-driven changes in the healthcare system that we cannot
      anticipate could also materially adversely affect our business. Our inability
      to
      react effectively to these and other changes in the healthcare industry could
      adversely affect our operating results and business. We cannot predict whether
      any healthcare reform efforts will be enacted and what effect any such reforms
      may have on us or our customers.





**THE
      CONTINUED SERVICES AND LEADERSHIP OF OUR SENIOR MANAGEMENT IS CRITICAL TO OUR** **ABILITY
      TO MAINTAIN GROWTH AND ANY LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR
      BUSINESS.** The
      future of our business depends, to a significant degree, on the skills and
      efforts of our senior
      executives, in particular, Dr. Richard Turner, our President and **** Chief
      Executive Officer and Howard
      Haft, MD, MMM, CPE, our Executive Vice President and Chief Medical Officer. If we lose the services
      of
      any of our senior
      executives, and especially if any of our executives join a competitor or forms a competing company, our business
      and financial performance could be seriously harmed.





We
      have
      executed employment agreements with Dr. Haft and Dr. Turner, effective as of
      the
      closing of the Acquisition, which include, except for Dr. Turner's employment
      agreement, noncompetition clauses that expire three (3) years after termination
      of employment, or during the period that such employee is an owner of any of
      our
      issued and outstanding stock. If, for any reason, we lose any of our executive
      officers' skills, knowledge of the industry, contacts and expertise, it could
      result in a setback to our operating plan.





**AS
      A PUBLIC COMPANY, WE INCUR SUBSTANTIAL ADDITIONAL COSTS AND MAY BE UNABLE TO
      OPERATE PROFITABLY.** Prior
      to
      the consummation of the Plan of Recapitalization, we were a privately-held
      company. As a result of becoming a publicly-traded company, we incurred
      significant additional costs. These costs include, among other things, the
      payment of a salary to our Chief Executive Officer, Dr. Richard Turner and
      additional legal and accounting costs incurred as a result of becoming a public
      company, and the additional compliance, reporting, corporate governance
      requirements and investor relations activities which this entails. Furthermore,
      the financial, administrative and managerial structures necessary to operate
      as
      a public company, or the development of such structures require a significant
      amount of management's time and other resources including financial resources,
      which may hinder our ability to operate profitably.





**OUR
      REVENUE MARGINS MAY DECREASE DUE TO FIXED REVENUE BASE.** Our
      existing contracts are primarily structured as fixed fee contracts. The costs
      of
      inmate healthcare may fluctuate from what we anticipated due to several
      variables, including increases in inmate population and increased inmate
      illness. Such additional costs may not be easily passed through under those
      contracts containing a fixed fee structure, and therefore, we may not always
      have sufficient revenue to cover such increased costs. As a result, our revenue
      margins may fall. If our revenue margins decrease more than 1 or 2 percentage
      points, our ability to perform under its contracts may be limited, which could
      negatively impact our business operations and financial
      performance.





**WE
      MAY BE UNSUCCESSFUL IN THE HIRING AND RETENTION OF SKILLED PERSONNEL.** The
      future growth of our business depends on successful hiring and retention of
      skilled personnel, and we may be unable to hire and retain the skilled personnel
      we need to succeed. Qualified personnel are in great demand throughout the
      healthcare industry, thus it is difficult to predict the availability of
      qualified personnel or the compensation levels required to hire and retain
      them.
      We face stiff competition for staffing, which may increase our labor costs
      and
      reduce profitability. We compete with other healthcare and service providers
      in
      recruiting qualified management and staff personnel for the day-to-day
      operations of our business, including nurses and other healthcare professionals.
      In some markets, the scarcity of nurses and other medical support personnel
      has
      become a significant operating issue to healthcare businesses. This scarcity
      may
      require us to enhance wages and benefits to recruit and retain qualified nurses
      and other healthcare professionals. Because a significant percentage of our
      existing contracts are structured as fixed fee contracts, we have a limited
      ability to pass along increased labor costs to existing customers. The failure
      to attract and retain sufficient skilled personnel at economically reasonable
      compensation levels may limit our ability to perform under our contracts, which
      could lead to the loss of existing contracts or our ability to gain new
      contracts, and may impair our ability to operate and expand our business, as
      well as harm our financial performance.




11




**WE
      MAY EXPERIENCE UNBUDGETED INCREASES IN COSTS RELATED TO THE PROVISION OF
      HEALTHCARE.** Currently,
      we predict the costs of healthcare based on prior experience and projected
      increases. The projections for future increases are based on historical trends
      and expected increases related to the development of new healthcare initiatives,
      treatments and disease states. For example, recent increases in the use of
      high
      cost psychiatric medications have triggered increases in the projected costs
      of
      those medications in the bid process. However, mid-cycle increases, such as
      those associated with the need to use a more expensive antibiotic for a drug
      resistant infection, or the development of a standard treatment for Hepatitis
      C,
      for example, would produce significant cost overruns in pharmacy budgeted
      expenses.





**WE
      ARE SUBJECT TO NECESSARY INSURANCE COSTS.** Workers'
      compensation, employee health, and medical professional and general liability
      insurance represent significant costs to us. Because we significantly
      self-insure for workers' compensation, employee health, medical professional
      and
      general liability risks, our insurance expense is dependent on claims
      experience, our ability to control our claims experience, and in the case of
      workers' compensation and employee health, rising healthcare costs in general.
      Further, additional terrorist attacks, such as those on September 11, 2001,
      and
      concerns over corporate governance and corporate accounting scandals, could
      make
      it more difficult and costly to obtain liability and other types of insurance.
      Unanticipated additional insurance costs could adversely impact our results
      of
      operations and cash flows, and the failure to obtain or maintain any necessary
      insurance coverage could have a material adverse effect on us.





**WE
      FACE RISKS ASSOCIATED WITH ACQUISITIONS.** We
      intend
      to grow through internal expansion and through selective acquisitions. We cannot
      assure you that we will be able to identify, acquire or profitably manage
      acquired operations or that operations acquired will be profitable or achieve
      levels of profitability that justify the related investment. Acquisitions
      involve a number of special risks, including possible adverse short-term effects
      on our operating results, diversion of management's attention from existing
      business, dependence on retaining, hiring and training key personnel, risks
      associated with unanticipated problems or legal liabilities, and amortization
      of
      acquired intangible assets, any of which could have a material adverse effect
      on
      our financial condition, results of operations and liquidity.




**THE
      LIABILITY OF OUR OFFICERS AND DIRECTORS IS LIMITED.** On
      March
      13, 2007, we reincorporated as a Delaware corporation and we provide our
      officers and directors indemnification to the fullest extent allowed under
      the
      Delaware General Corporation Law. We also carry directors and officer's
      liability insurance. In addition, we plan to enter into an indemnification
      agreement with our officers and directors in 2008 which will provide for
      expanded indemnification rights for such individuals. As a result of the
      foregoing, stockholders may be unable to recover damages against our officers
      and directors for actions taken by them which constitute negligence, gross
      negligence or a violation of their fiduciary duties and may otherwise discourage
      or deter our stockholders from suing our officers or directors even though
      such
      actions, if successful, might otherwise benefit us and our
      stockholders.





**WE
      HAVE LIMITED EXPERIENCE ATTEMPTING TO COMPLY WITH PUBLIC COMPANY OBLIGATIONS,
      INCLUDING SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002.** As
      directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC has adopted
      rules requiring public companies to include a report of management on the
      company's internal controls over financial reporting in their annual reports
      on
      Form 10-K. In addition, the registered certified public accounting firm auditing
      a public company's financial statements must attest to and report on
      management's assessment of the effectiveness of the company's internal controls
      over financial reporting. The requirement for a report of management, as
      currently in effect, will first apply to our annual report on Form 10-K for
      our
      fiscal year ending December 31, 2007. The requirement for our auditor to attest
      on management assessment will apply for the fiscal year ending December 31,
      2009. If we are unable to conclude that we have effective internal controls
      over
      financial reporting, or if our independent auditors are unable to provide us
      with an unqualified report as to the effectiveness of our internal controls
      over
      financial reporting as required by Section 404 of the Sarbanes-Oxley Act of
      2002, investors could lose confidence in the reliability of our financial
      statements, which could result in a decrease in the value of our
      securities.




12




**CERTAIN
      STOCKHOLDERS CAN EXERT CONTROL OVER US AND MAY NOT MAKE DECISIONS THAT FURTHER
      THE BEST INTERESTS OF ALL STOCKHOLDERS.** Our
      officers, directors and principal stockholders (greater than 5% stockholders)
      together own a majority of our issued and outstanding common stock.
      Consequently, these stockholders, if they act individually or together, may
      exert a significant degree of influence over our management and affairs and
      over
      matters requiring stockholder approval, including the election of directors
      and
      approval of significant corporate transactions. In addition, this concentration
      of ownership may delay or prevent a change of control of us and might affect
      the
      market price of our common stock, even when a change of control may be in the
      best interest of all stockholders. Furthermore, the interests of this
      concentration of ownership may not always coincide with our interests or the
      interests of other stockholders, and accordingly, they could cause us to enter
      into transactions or agreements which we would not otherwise
      consider.





**OUR
      ORGANIZATIONAL DOCUMENTS AND DELAWARE LAW MAKE IT HARDER FOR US TO BE ACQUIRED
      WITHOUT THE CONSENT AND COOPERATION OF OUR BOARD OF DIRECTORS AND
      MANAGEMENT.** **** Provisions
      of our organizational documents and Delaware law may deter or prevent a takeover
      attempt, including a takeover attempt in which the potential purchaser offers
      to
      pay a per share price greater than the current market price of our common stock.
      Under the terms of our certificate of incorporation, our Board of Directors
      has
      the authority, without further action by the stockholders, to issue shares
      of
      preferred stock in one or more series and to fix the rights, preferences,
      privileges and restrictions of such shares. The ability to issue shares of
      preferred stock could tend to discourage takeover or acquisition proposals
      not
      supported by our current Board of Directors. In addition, we are subject to
      Section 203 of the Delaware General Corporation Law, which restricts business
      combinations with some stockholders once the stockholder acquires 15% or more
      of
      our common stock.




**Risks
      Related to Our Securities**




**TRADING
      IN OUR COMMON STOCK HAS BEEN LIMITED, SO INVESTORS MAY NOT BE ABLE TO SELL
      AS
      MANY OF THEIR SHARES AS THEY WANT AT PREVAILING PRICES.** Shares
      of
      our common stock are traded on the OTC Bulletin Board. Approximately 4,864
      shares were traded on an average daily trading basis for the twelve (12) months
      ended December 31, 2007. If limited trading in our common stock continues,
      it
      may be difficult for investors once and if the securities are registered, to
      sell the securities acquired by them. Also, the sale of a large block of our
      common stock could depress the market price of our common stock to a greater
      degree than a company that typically has a higher volume of trading of its
      securities.





**THE
      MARKET PRICE OF OUR COMMON STOCK MAY BE HIGHLY VOLATILE, WHICH MAY LEAD TO
      LAWSUITS AGAINST US.** Our
      common stock is currently traded on the OTC Bulletin Board under the symbol
      "CMHM". The quotation of our common stock on the OTC Bulletin Board does not
      assure that a meaningful, consistent and liquid trading market currently exists,
      and in recent years such market has experienced extreme price and volume
      fluctuations that have particularly affected the market prices of many companies
      like ours. Our common stock is thus subject to this volatility. Sales of
      substantial amounts of our common stock, or the perception that such sales
      might
      occur, could adversely affect prevailing market prices of our common
      stock.





The
      trading price of our common stock could also be subject to wide fluctuations
      in
      response to quarter-to-quarter variations in our operating results,
      announcements of new contracts, cancellations of existing contracts or new
      acquisitions by us or our competitors, changes in financial estimates by
      securities analysts or other events or factors. When the market price of a
      company's stock drops significantly, stockholders often institute securities
      class action lawsuits against that company. A lawsuit against us could cause
      us
      to incur substantial costs and could divert the time and attention of our
      management and other resources.





**AN
      ACTIVE AND VISIBLE TRADING MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP.** We
      cannot
      predict whether an active market for our common stock will develop in the
      future. In the absence of an active trading market:


·
              investors
                  may have difficulty buying and selling or obtaining market
                  quotations;·
              market
                  visibility for our common stock may be limited; and·
              a
                  lack of visibility for our common stock may have a depressive effect
                  on
                  the market price for our common stock.




The
      OTC
      Bulletin Board is an unorganized, inter-dealer, over-the-counter market that
      provides significantly less liquidity than NASDAQ, and quotes for stocks
      included on the OTC Bulletin Board are not listed in the financial sections
      of
      newspapers, as are those for the NASDAQ Stock Market. The trading price of
      the
      common stock is expected to be subject to significant fluctuations in response
      to variations in quarterly operating results, changes in analysts' earnings
      estimates, announcements of innovations by us or our competitors, general
      conditions in the industry in which we operate and other factors. These
      fluctuations, as well as general economic and market conditions, may have a
      material or adverse effect on the market price of our common stock.




13




**OUR
      COMMON STOCK IS SUBJECT TO, AND OUR ADDITIONAL FINANCING REQUIREMENTS COULD
      RESULT IN, DILUTION TO EXISTING STOCKHOLDERS.** Our
      common stock is subject to dilution from shares reserved for issuance.
      Additional financings which we may require have and may in the future be
      obtained through one or more transactions which have diluted or will dilute
      (either economically or in percentage terms) the ownership interests of our
      stockholders. Further, we may not be able to secure such additional financing
      on
      terms acceptable to us, if at all. We have the authority to issue additional
      shares of common stock and preferred stock, as well as additional classes or
      series of ownership interests or debt obligations which may be convertible
      into
      any one or more classes or series of ownership interests. The issuance of
      additional warrants or options, and the exercise of such warrants or options,
      may also cause further dilution of the ownership interests of our
      stockholders.




**PENNY
      STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR COMMON
      STOCK.** The
      Commission has adopted regulations which generally define a "penny stock" to
      be
      any equity security that has a market price of less than $5.00 per share or
      an
      exercise price of less than $5.00 per share, subject to certain exceptions.
      As a
      result, our common stock, which qualifies as "penny stock", is subject to rules
      that impose additional sales practice requirements on broker-dealers who sell
      such securities to persons other than established customers and accredited
      investors (generally those with assets in excess of $1,000,000 or annual income
      exceeding $200,000, or $300,000 together with their spouse). For transactions
      covered by these rules, the broker-dealer must make a special suitability
      determination for the purchase of such securities and have received the
      purchaser's written consent to the transaction prior to the purchase.
      Additionally, for any transaction involving a penny stock, unless exempt, the
      rules require the delivery, prior to the transaction, of a risk disclosure
      document mandated by the Commission relating to the penny stock market. The
      broker-dealer must also disclose the commission payable to both the
      broker-dealer and the registered representative, current quotations for the
      securities and, if the broker-dealer is the sole market maker, the broker-dealer
      must disclose this fact and the broker-dealer's presumed control over the
      market. Finally, monthly statements must be sent disclosing recent price
      information for the penny stock held in the account and information on the
      limited market in penny stocks. Consequently, the "penny stock" rules may
      restrict the ability of broker-dealers to sell our securities and may affect
      the
      ability of investors to sell our securities in the secondary market and the
      price at which such purchasers can sell any such securities.





Stockholders
      should be aware that, according to the Commission, the market for penny stocks
      has suffered in recent years from patterns of fraud and abuse. Such patterns
      include:


·
              Control
                  of the market for the security by one or a few broker-dealers that
                  are
                  often related to the promoter or issuer;·
              Manipulation
                  of prices through prearranged matching of purchases and sales and
                  false
                  and misleading press releases;·
              "Boiler
                  room" practices involving high pressure sales tactics and unrealistic
                  price projections by inexperienced sales persons;·
              Excessive
                  and undisclosed bid-ask differentials and markups by selling
                  broker-dealers; and·
              The
                  wholesale dumping of the same securities by promoters and broker-dealers
                  after prices have been manipulated to a desired level, along with
                  the
                  inevitable collapse of those prices with consequent investor
                  losses.




Purchasers
      of penny stocks may have certain legal remedies available to them in the event
      the obligations of the broker-dealer from whom the penny stock was purchased
      violates or fails to comply with the above obligations or in the event that
      other state or federal securities laws are violated in connection with the
      purchase and sale of such securities. Such rights include the right to rescind
      the purchase of such securities and recover the purchase price paid for them.
      Application of these penny stock regulations to our common stock could adversely
      affect the market liquidity of the shares, which in turn may affect the ability
      of holders of our common stock to resell the stock.





**ADDITIONAL
      AUTHORIZED SHARES OF OUR COMMON STOCK AVAILABLE FOR ISSUANCE MAY ADVERSELY
      AFFECT THE MARKET.** We
      are
      authorized to issue 40,000,000 shares of common stock and 5,000,000 shares
      of
      preferred stock. As of December 31, 2007, there are 11,943,141 shares of common
      stock and no shares of preferred stock issued and outstanding. However, the
      total number of shares of common stock issued and outstanding does not include
      shares reserved for issuance upon the exercise of outstanding options or
      warrants or shares reserved for issuance under our 2007 Stock Option Plan (the
      "Stock Option Plan"). In addition, under most circumstances, our Board of
      Directors has the right, without stockholder approval, to issue authorized
      but
      unissued and nonreserved shares of our common stock. If all of these shares
      were
      issued, it would dilute the existing stockholders and may depress the price
      of
      our common stock.




14




As
      of
      December 31, 2007, we had outstanding warrants to purchase 1,380, 000
      shares of common stock, exercisable at $0.30 per share, and expiring **** 5
      years
      from the grant date, and warrants to purchase 500,000 shares of common stock,
      exercisable at $2.50 per share, expiring 5 years from the grant date, all of
      which were issued to investors in the private
      placement .
      Further, we issued warrants to purchase 300,000 shares of common stock to the
      placement agent in the private
      placement ,
      at an
      exercise price equal to $2.75 per share expiring 5 years from the grant date
      and
      warrants to purchase 225,000 shares of common stock exercisable at $0.30 per
      share as converted, expiring October 24, 2010 and were issued by Pace in 2005.
      In addition, the Board of Directors and our stockholders have approved the
      Stock
      Option Plan which reserves up to 1,600,000 shares of our common stock for
      issuance under its terms, all of which have been authorized for issuance at
      exercise prices of $2.01 and $3.30 per share, which the Board deemed to be
      the
      fair value at the time such options were awarded .





Our
      Board
      of Directors has the authority, without stockholder approval, to create and
      issue additional stock options, warrants and one or more series of preferred
      stock and to determine the voting, dividend and other rights of the holders
      of
      such preferred stock. Depending on the rights, preferences and privileges
      granted when the preferred stock is issued, it may have the effect of delaying,
      deferring or preventing a change in control without further action by the
      stockholders, may discourage bids for our common stock at a premium over the
      market price of the common stock and may adversely affect the market price
      of
      and voting and other rights of the holders of our common stock. As indicated
      above, no shares of preferred stock are currently outstanding.





To
      the
      extent shares of our common stock or preferred stock are issued, or options
      or
      warrants are exercised, investors in our securities will experience further
      dilution and the presence of such derivative securities may make it more
      difficult to obtain any future financing. In addition, in the event any future
      financing should be in the form of, or be convertible into or exchangeable
      for,
      equity securities, upon the issuance of such equity securities, investors may
      experience additional dilution.





**SHARES
      ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.** In
      addition, from time to time, certain of our stockholders may be eligible to
      sell
      all or some of their shares of common stock by means of ordinary brokerage
      transactions in the open market pursuant to Rule 144, promulgated under the
      Securities Act of 1933, as amended, subject to certain limitations.
      Approximately 3,147,207 shares held for more than 6 months by non-affiliates
      may
      be available for public sale without regard to volume limitations and by means
      of ordinary brokerage transactions in the open market pursuant to Rule
      144.





In
      general, pursuant to Rule 144, after satisfying a six-month holding period:
      (i)
      affiliated stockholder (or stockholders whose shares are aggregated) may, under
      certain circumstances, sell within any three-month period a number of securities
      which does not exceed the greater of 1% of the then outstanding shares of common
      stock or the average weekly trading volume of the class during the four calendar
      weeks prior to such sale and (ii) non-affiliated stockholders may sell without
      such limitations, provided we are current in our public reporting obligations.
      Rule 144 also permits the sale of securities by non-affiliates that have
      satisfied a one-year holding period without any limitation or restriction.
      Any
      substantial sale of our common stock pursuant to Rule 144 or pursuant to any
      resale prospectus may have a material adverse effect on the market price of
      our
      securities.





**WE
      DO NOT INTEND TO PAY ANY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE
      FUTURE.** We
      currently intend to retain all future earnings, if any, to finance our current
      and proposed business activities and do not anticipate paying any cash dividends
      on our common stock in the foreseeable future. We may also incur indebtedness
      in
      the future that may prohibit or effectively restrict the payment of cash
      dividends on our common stock. If we determine that we will pay dividends to
      the
      holders of our common stock, there is no assurance or guarantee that such
      dividends will be paid on a timely basis.




**ITEM 2.**
            **DESCRIPTION
                OF PROPERTY******




As
      of
      December 31, 2007, we had leases for the following office facilities.





Hanover,
      Maryland. In December 2007, we entered into a five-year (5) office lease
      agreement for approximately 6,668 square feet of office space to house our
      executive and administrative offices at an annual rent of $131,693 beginning
      February 2008 and increasing to $148,222 in the final year of the lease, which
      expires on February 28, 2013, subject to a five-year renewal option.





La
      Plata,
      Maryland. In November, 2004, we entered into an office lease agreement for
      approximately 2,424 square feet of office space at an annual rental of $29,088
      for 2004, increasing to $32,738 in the final year of the lease, which expires
      on
      November 30, 2009, subject to a 5-year renewal option.




15




**ITEM 3.**
            **LEGAL
                PROCEEDINGS******




We
      are
      currently involved in the following legal proceedings:




(i) Linda
      Courtillet, et al. v. Stephen Goldberg, MD, et al. - Linda
      Courtillet has brought a wrongful death action against us, among others, on
      behalf of her son, Logan Courtillet, an inmate at Charles County Detention
      Facility who committed suicide on the premises on March 1, 2005. A complaint
      seeking money damages was filed in the Circuit Court for Charles County, MD.
      The
      case is in the middle of discovery and is scheduled for trial on July 14, 2008.
      Currently, our previous insurer, National Fire and Marine, is providing a
      defense in this action.




(ii) Board
      of Nursing - In
      early 2005, the State of Maryland Board of Nursing ("BON") commenced an
      investigation (is currently ongoing) regarding whether certain of our employees
      licensed by the BON, or at least subject to the jurisdiction of BON, performed
      work at certain detention facilities in contract with us whereby such employees
      were not properly licensed. BON has acknowledged that it does not have
      jurisdiction over our actions; however, BON has threatened to take disciplinary
      action against ten (10) to twenty (20) of our current or former employees.
      Our
      management has fully cooperated with BON and has implemented a number of changes
      intended to address BON's stated concerns. To the best of our knowledge, BON
      has
      conducted all necessary employee interviews, and we are currently awaiting
      BON's
      next steps or actions relating to these employees.




(iii) Theresa
      Lynn Rhoderick, PR for the Estate of Michael Rutherford, Sr., et al. v. CONMED,
      Inc. ,
      Case
      No. 06-2379 - This matter was brought in the Circuit Court for Frederick County,
      Maryland. Michael Rutherford, a known asthmatic inmate with a significant
      medical history, died of congestive heart failure with an underlying condition
      of mitral stenosis at John Hopkins Hospital on September 25, 2005. A wrongful
      death and survival action has been filed against us on behalf of Mr. Rutherford.
      Our previous insurer, National Fire and Marine, is providing a defense of this
      action. The case recently settled for $115,000.00, within our policy's limits.




(iv) Derek
      L. Simms v. Steven R. Williams, et al. ,
      Civil
      Action No. WMN-06-2867 - This claim was brought in the United States District
      Court for the District of Maryland. Derek Simms filed a complaint alleging
      that
      he suffered injuries which were caused by negligent medical care provided by
      us
      while he was incarcerated in Dorchester County Detention Center. Mr. Simms
      alleged that he did not receive adequate analgesic medication from us, as he
      was
      treated for an infectious disease. Our previous insurer, National Fire and
      Marine is providing a defense in this action and retained Mr. Francis X. Leary
      to serve as our defense counsel in this matter. On December 21, 2006, Mr. Leary
      filed a Motion to Dismiss, or in the alternative, a Motion for Summary Judgment.
      The Motion was based on the failure of Mr. Simms to state a cause of action
      upon
      which relief may be granted, and the failure to state a claim for violation
      of
      his 8th and 14th Amendment rights. The Court of Appeals for the Fourth Circuit
      affirmed the dismissal of the 8 th Amendment claim but reversed, in part, and reinstated, the 14 th Amendment claim. The court granted Simms' request for appointment of Pro Bono
      counsel on November 27, 2007. Pro Bono counsel Lawrence Quinn was appointed
      on
      December 11, 2007. The case will proceed to discovery and another possible
      motion for summary judgment to dismiss the 14 th Amendment claim.





(v) Derek
      L. Simms v. Steven R. Williams, et al. ,
      Civil
      Action No. WMN-07-2208. This claim was also brought in the United States
      District Court for the District of Maryland. Derek Simms filed a complaint
      asserting another 8th Amendment claim for deliberate indifference to his alleged
      serious medical needs. This claim seems to be duplicative of the claim that
      was
      dismissed in the related case set forth above. The crux of the claim is that
      Simms maintains his Anal Crohn's disease was not properly treated. We reported
      this case to AIG on December 18, 2007 and AIG is currently investigating Simms'
      claims. According to a letter dated February 15, 2008, AIG is providing a
      defense in this action and retained Angela W. Russell from the law firm of
      Wilson Elser Moskowitz Edelman & Dicker, LLP to serve as our defense counsel
      in this matter. AIG has provided coverage subject to a full Reservation of
      Rights while it is investigating Simms' claims. The matter is proceeding to
      discovery. As of February 8, 2008, counsel for Mr. Simms has dismissed Dr.
      Haft,
      Nurse Whitman and Warden Williams as defendants. Mr. Simms' deposition is now
      scheduled for February 22, 2008.





(vi) Lauren
      Elizabeth Gildersleeve v. Carroll County et al .,
      Case
      No. 06-C-07-048188. This claim was filed in the Circuit Court for Carroll
      County and
      alleged claims for personal injury. The law firm of Cromwell & Unglesbee
      represented the plaintiff but filed a motion to strike its appearance, dated
      October 12, 2007. The plaintiff had ten days to notify the Circuit Court of
      her
      intention to proceed with a new attorney or without an attorney. According
      to an
      Order of the Circuit Court dated December 5, 2007, the case was
      dismissed.




(vii) John
      Theodore Lee Sr. v. Cecil County Sheriff et al. ,
      Case
      No. 07-C-07-000388. This case was filed in the Circuit Court for Carroll County,
      Maryland on December 10, 2007. Lee filed a complaint alleging that he suffered
      injuries which were caused by the denial of medical care. He also alleges that
      he suffered physical and mental abuse by Cecil County Sheriff's Deputies. We
      reported this case to AIG on January 16, 2008 and AIG is currently investigating
      Lee's claims. We anticipate that AIG will provide a defense to us in this
      action.





**ITEM 4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS******





No
      matters were submitted to a vote of the shareholders of the Company in the
      fourth quarter of 2007.





16




**PART
      II.**




**ITEM 5.**
            **MARKET
                FOR COMMON****EQUITY AND RELATED STOCKHOLDER MATTERS******




Our
      common stock is quoted on the OTC Bulletin Board under the symbol "CMCH." From
      May 19, 1998 until March 14, 2007, our common stock was been quoted on the
      OTC
      Bulletin Board under the symbol "PCES." From our initial public offering on
      April 27, 1995 through May 18, 1998, our common stock was traded on The NASDAQ
      Small Cap Market.





The
      following table sets forth the range of high and low sales prices of our common
      stock by quarter over the last two years. These quotations reflect inter-dealer
      prices, without retail markup, markdown, or commission and may not reflect
      actual transactions. Share prices are adjusted to reflect the 1-for-20 reverse
      stock split approved by the shareholders on March 13, 2007, as part of the
      Plan
      of Recapitalization.





**Quarter
                ended**
            
            **High**
            
            **Low**3/31/06
            
            
            10.00
            
            
            2.006/30/06
            
            
            7.20
            
            
            3.009/30/06
            
            
            8.00
            
            
            3.2012/31/06
            
            
            4.40
            
            
            3.603/31/07
            
            
            6.60
            
            
            3.006/30/07
            
            
            4.00
            
            
            2.019/30/07
            
            
            4.25
            
            
            2.9012/31/07
            
            
            3.50
            
            
            2.75





On
      March
      26, 2008, the high and low closing prices of our common stock were $1.50 and
      $1.35, respectively.





In
      January 2007, holders of the Series A Preferred Stock of Pace, our predecessor
      in interest, converted 50% of the accrued but unpaid dividends on their Series
      A
      Preferred Stock into an aggregate of 130,000 shares of Pace's Common Stock
      as
      adjusted for the 1 for 20 reverse stock split.




On
      March
      14, 2007, all existing Series A Preferred Stock of Pace was converted into
      4,584,196 shares of our common stock (immediately after the 1 for 20 reverse
      stock split) in exchange for conversion of and waiver of remaining accrued
      and
      unpaid dividends and liquidation rights on the Series A Preferred
      Stock.





As
      of
      March 18, 2008, there were 81 shareholders of record of our common
      stock.





**Dividend
      Policy**





We
      have
      declared no cash dividends since inception with respect to the Common Stock,
      and
      have no plan to declare a dividend in the near future. The Board had not
      declared any cash dividends with respect to the preferred stock of Pace
      outstanding prior to the consummation of the Plan of Recapitalization. The
      payment by us of dividends, if any, in the future, rests within the sole
      discretion of our Board of Directors. The payment of dividends will depend
      upon
      our earnings, our capital requirements and our financial condition, as well
      as
      other relevant factors.




**ITEM 6.**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONFINANCIAL STATEMENTS**




*Information
      included in this section contains forward-looking statements regarding the
      business, operations and financial condition of both the Company and Conmed,
      Inc. within the meaning of Section 27A of the Securities Act of 1933, as amended
      and Section 21E of the Securities Exchange Act of 1934, as amended (the
      "Exchange Act"). This information may involve known and unknown risks,
      uncertainties and other factors which may cause the Company's actual results,
      performance or achievements to be materially different from our future results,
      performance or achievements expressed or implied by any forward-looking
      statements. Forward-looking statements, which involve assumptions and describe
      the Company's future plans, strategies and expectations, are generally
      identifiable by use of the words "may," "will," "should," "expect,"
      "anticipate," "estimate," "believe," "intend," "plan," "potential" or "project"
      or the negative of these words or other variations on these words or comparable
      terminology. These forward-looking statements are based on assumptions that
      may
      be incorrect, and there can be no assurance that these projections included
      in
      these forward-looking statements will come to pass. The Company's actual results
      could differ materially from those expressed or implied by the forward-looking
      statements as a result of various factors. The Company cautions you not to
      place
      undue reliance on these forward-looking statements. Such forward-looking
      statements relate only to events as of the date on which the statements are
      made. The Company undertakes no obligation to update any forward-looking
      statements, whether as a result of new information, future events or otherwise,
      even if experience or future changes make it clear that any projected results
      or
      events expressed or implied therein will not be realized. You are advised,
      however, to consult any further disclosures the Company makes in future public
      statements and press releases.*




17




**General**





Prior
      to
      January 26, 2007, the Company was classified as a shell company and had no
      ongoing operations, minimal operating expenses, no employees and operated under
      the name Pace Healthcare Management Systems, Inc.





On
      January 26, 2007, we acquired Conmed, Inc., a provider of correctional
      healthcare services since 1984. Conmed Inc. was formed as a corporation on
      June
      10, 1987 in the State of Maryland for the purpose of providing healthcare
      services exclusively to county detention centers located in Maryland. As Conmed,
      Inc. developed, it accepted more contracts for additional services including
      pharmacy and out-of-facility healthcare expenses. In 2000, Conmed, Inc. served
      more than 50% of the county detention healthcare services market in Maryland.
      In
      2003, Conmed, Inc. elected to seek contracts outside of Maryland and by December
      2007, it had secured contracts in Kansas, Oregon, Virginia, and Washington.
      Currently, Conmed, Inc. is in contract with and services 25 detention centers
      and facilities at the county level in the United States. As a result of the
      Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the Company and the
      business of Conmed, Inc. is now our primary business.




**Critical
      Accounting Policies**




Our
      discussion and analysis of our financial position and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of these consolidated financial statements requires
      us
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities, and the disclosure of contingent assets and liabilities at the
      date
      of the consolidated financial statements and the reported revenues and expenses
      during the period. Actual results could differ from those
      estimates.





A
      summary
      of our significant accounting policies is as follows:





*Acquisition*


The
      Acquisition was recorded based on Financial Accounting Standards Board Statement
      No. 141, ("SFAS 141") *Business
      Combinations* ,
      using
      the purchase method. Under purchase accounting, assets acquired should be stated
      on the financial statements at "fair value" (see definition in Standard of
      Value
      section below). SFAS 141 requires that intangible assets be recognized as assets
      apart from goodwill if they meet one of two criteria, (1) the contractual-legal
      criterion, or (2) the separability criterion. SFAS 141 also requires disclosure
      of the primary reasons for business combination and the allocation of the
      purchase price paid to the assets acquired and the liabilities assumed by major
      balance sheet caption.





We
      employed an independent valuation firm to assist us in the identification of
      the
      intangible assets acquired and in estimating the fair value of those assets.





*Service
      Contracts Acquired*


There
      are
      material costs in obtaining a customer list, especially customers with recurring
      revenue streams. As part of the Acquisition, we gained access to Conmed, Inc.'s
      customers, thereby avoiding the cost of obtaining them directly. The value
      of
      the contract list is represented by the future revenue streams from existing
      contracts. Therefore, the Income Approach is the most applicable fair value
      measurement approach to value this asset. The operating income streams of the
      service contracts was calculated based on net present value of estimated
      earnings at an interest rate of 20%. Operating income streams were estimated
      on
      a contract by contract basis and an overall cost factor was used to estimate
      management expenses. Total future contracted operating income totaled
      $6,083,000. After discounting for the time value of money using a 20% rate,
      the
      net present value of future revenues is $4,500,000. Service contracts acquired
      are amortized over the life of each individual contract, ranging from
      approximately one to four years.




18




*Non-Compete
      Agreements*


We
      acquired non-compete agreements with key personnel as part of the stock purchase
      agreement with Conmed, Inc. Key considerations in estimating the value of such
      agreements include consideration of the potential losses resulting from such
      competition, the enforceability of the terms of the agreement, and the
      likelihood of competition in the absence of the agreement. Given the potential
      loss from competition and the probability of competition, $1,000,000 was
      identified to allocate to these agreements. Non-compete agreements are amortized
      over the lives of the agreements, approximately three to four
      years.





*Goodwill*


We
      recorded goodwill as the excess of purchase price over the fair value of the
      identifiable net assets we acquired. SFAS No. 142, *Goodwill
      and Other Intangible Assets* ,
      prescribes a two-step process for impairment testing of goodwill, which we
      perform annually, as well as when an event triggering impairment may occur.
      The
      first step tests for impairment, while the second step, if necessary, measures
      the impairment. Since creation of the goodwill, there have been no indicators
      of
      impairment. We
      have
      elected to perform our annual analysis during the fourth quarter of each fiscal
      year.





*Revenue
      Recognition*


Our
      principal source of revenue is contracts to provide medical assistance to county
      correctional facilities. Deferred revenue represents amounts that may be paid
      in
      advance of delivery under these contracts.




Most
      of
      our contracts call for a fixed monthly fee. In addition, some contracts have
      incremental charges or a contractual fee adjustment based on the inmate
      population. Revenues from contracts are recognized ratably for fixed fees,
      or
      monthly for contracts with variable charges. We have one contract that partially
      operates on cost plus basis. The timing of each payment varies per contract.
      Credit terms are not more than 30 days from the date of invoice.





Certain
      contracts include "stop/loss" limits, which create a ceiling to our financial
      responsibility for an individual inmate's care or a maximum amount in the
      aggregate for certain categories of medical expenses, whereby we are protected
      from catastrophic medical losses. In circumstances where a stop/loss is reached,
      we are reimbursed for any costs incurred over the predetermined stop/loss
      amount. Any reimbursement we receive is recorded as revenue. During the 340-day
      period ended December 31, 2007, the 25-day period ended January 25, 2007, and
      the twelve-month period ended December 31, 2006, we received stop/loss
      reimbursements of approximately $321,000, $15,000 and $173,000, respectively,
      which were included in revenue.





*Accrued
      Medical Claims Liability*


Medical
      expenses include the costs associated with medical services provided by off-site
      medical providers; pharmacy, laboratory and radiology fees; professional and
      general liability insurance as well as other generally related medical expenses.
      The cost of medical services provided, administered or contracted for are
      recognized in the period in which they are provided based in part on estimates
      for unbilled medical services rendered through the balance sheet date. The
      Company estimates an accrual for unbilled medical services using available
      utilization data including hospitalization, one-day surgeries, physician visits
      and emergency room and ambulance visits and other related costs, which are
      estimated. Additionally, Company personnel review certain inpatient hospital
      stays and other high cost medical procedures and expenses in order to attempt
      to
      identify costs in excess of the historical average rates. Once identified,
      reserves are determined which take into consideration the specific facts
      available at that time.




Actual
      payments and future reserve requirements will
      differ from the Company's current estimates. The differences could be material
      if significant adverse fluctuations occur in the healthcare cost structure
      or
      the Company's future claims experience. Changes in estimates of claims resulting
      from such fluctuations and differences between estimates and actual claims
      payments are recognized in the period in which the estimates are changed or
      the
      payments are made.




*Stock
      Compensation*


Effective
      January 1, 2006, we adopted SFAS No. 123 Revised ("SFAS 123R"), *Shared-Based
      Payments* ,
      using
      the modified prospective transition method. Prior to that date, we accounted
      for
      stock option awards under Accounting Principles Board Opinion No. 25. In
      accordance with SFAS 123R, compensation expense for stock-based awards is
      recorded over the vesting period at the fair value of the award at the time
      of
      grant. No options were granted or vested in 2006. We recognized stock-based
      compensation expense of $556,000 during the year ended December 31, 2007. The
      exercise price of options granted under the Company's incentive plans is equal
      to the fair market value of the underlying stock at the grant date. The Company
      assumes no projected forfeitures on its stock-based compensation, since actual
      historical forfeiture rates on its stock-based incentive awards have been
      negligible.




19




*Income
      Taxes*


Deferred
      taxes are provided on a liability method whereby deferred tax assets are
      recognized for deductible temporary differences and operating loss carryforwards
      and deferred tax liabilities are recognized for taxable temporary differences.
      Temporary differences are the differences between the reported amounts of assets
      and liabilities and their tax basis. Deferred tax assets are reduced by a
      valuation allowance when, in the opinion of management, it is more likely than
      not that some portion or all of the deferred tax assets will not be realized.





**Recently
      Adopted Accounting S** **tandards**





We
      adopted the provisions of Financial Accounting Standards Board ("FASB")
      Interpretation No. 48 ("FIN 48"), *Accounting
      for Uncertainty in Income Taxes* ,
      effective January 1, 2007 *.* The
      Interpretation provides clarification on accounting for uncertainty in income
      taxes recognized in an enterprise's financial statements in accordance with
      SFAS
      No. 109, *Accounting
      for Income Taxes.* The
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. As a result of our evaluation of the
      implementation of FIN 48, no material income tax uncertainties were identified.
      Therefore, we recognized no adjustment for unrecognized income tax benefits
      during the twelve months ended December 31, 2007. Corporate tax returns for
      the
      years 2004 through 2007 remain open to examination by taxing
      authorities.





**New
      Accounting Pronouncements**





In
      September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), *Fair
      Value Measurements* .
      This
      statement defines fair value, establishes a framework for measuring fair value,
      and expands disclosures about fair value measurements. SFAS 157 also emphasizes
      that fair value is a market-based measurement, not an entity-specific
      measurement, and sets out a fair value hierarchy with the highest priority
      being
      quoted prices in active markets. Under SFAS 157, fair value measurements are
      disclosed by level within that hierarchy. The requirements of SFAS 157 are
      first
      effective for our fiscal year beginning January 1, 2008. However, in February
      2008, the FASB decided that an entity need not apply this standard to
      nonfinancial assets and liabilities that are recognized or disclosed at fair
      value in the financial statements on a nonrecurring basis until the subsequent
      year. Accordingly, our adoption of this standard on January 1, 2008 is limited
      to financial assets and liabilities and any nonfinancial assets and liabilities
      recognized or disclosed at fair value on a recurring basis. We are currently
      evaluating the impact that the adoption of this statement will have on our
      financial position, results of operation and cash flows.





In
      February 2007, the FASB issued SFAS No. 159 ("SFAS 159"), *The
      Fair Value Option for Financial Assets and Financial Liabilities – Including an
      amendment of SFAS No. 115,* which
      provides all entities, including not-for-profit organizations, with an option
      to
      report selected financial assets and liabilities at fair value. The objective
      of
      the statement is to improve financial reporting by providing entities with
      the
      opportunity to mitigate volatility in earnings caused by measuring related
      assets and liabilities differently without having to apply the complex
      provisions of hedge accounting. Certain specified items are eligible for the
      irrevocable fair value measurement option as established by SFAS 159. SFAS
      159
      is effective as of the beginning of an entity's first fiscal year beginning
      after November 15, 2007. Early adoption is permitted as of the beginning of
      a
      fiscal year that begins on or before November 15, 2007 provided the entity
      also
      elects to apply the provisions of SFAS No. 157, *Fair
      Value Measurements* .
      We are
      currently evaluating the impact that the adoption of this Statement will have
      on
      our financial position, results of operation and cash flows.





In
      December 2007, the FASB issued SFAS No. 141(Revised) ("SFAS 141R"), *Business
      Combinations* .
      SFAS
      141R replaces the original SFAS. This statement applies to all transactions
      in
      which an entity obtains control of one or ore businesses. SFAS 141R requires
      an
      acquirer to recognize the assets acquired, the liabilities assumed, and any
      noncontrolling interest in the acquiree at their fair values, with limited
      exceptions, as of the acquisition date. Goodwill is to be recognized as a
      residual. If the acquisition-date fair value exceeds the consideration
      transferred, a gain is to be recognized. The statement generally requires that
      acquisition costs be expensed. This statement is effective for business
      combinations for which the acquisition date is on or after January 1, 2009.
      We
      do not expect the adoption of this statement will have a material impact on
      our
      financial position or results of operations.





In
      December 2007, the FASB issued SFAS No. 160 ("SFAS 160"), *Noncontrolling
      Interests in Consolidated Financial Statements* .
      SFAS
      160 requires companies to report ownership interest in subsidiaries held by
      other parties (minority interest) be clearly identified, labeled and presented
      in the consolidated statement of financial condition separately within the
      equity section. The amount of consolidated net income attributable to the parent
      company and to the noncontrolling interest is to be clearly identified and
      presented on the face of the consolidated statement of income. The statement
      is
      effective beginning January 1, 2009. We do not expect the adoption of this
      statement will have a material impact our financial position or results of
      operations.




20





**Presentation
      of Share and Per Share I** **nformation**





All
      common stock share and per share information has been adjusted to reflect the
      1
      for 20 reverse stock split effective on March 14, 2007.





**Results
      of Operations**





*Twelve-Months
      Ended December 31, 2007 Compared to December 31, 2006*


The
      following discussion of financial results below is derived from proforma
      unaudited financial statements for the twelve months ended December 31, 2007,
      prepared on the bases that the Acquisition was completed on January 1, 2007
      and
      2006, respectively. The proforma adjustments were based on available information
      and on assumptions that we believe are reasonable under the circumstances.
      The
      unaudited proforma financial information is presented for informational purposes
      and is based on management's estimates. The unaudited proforma statements of
      operations do not purport to represent what results of operations actually
      would
      have been if the transactions set forth above had occurred on the dates
      indicated or what results of operations will be for future periods. Proforma
      adjustments for the twelve months ended December 31, 2007, reflect the results
      of the 340-day period ended December 31, 2007, and the consolidated 25-day
      period ended January 25, 2007, plus adjustments to reflect the amortization
      of
      intangible assets which increased depreciation and amortization by $175,442.
      Conmed's Proforma adjustments for the twelve-month period ended December 31,
      2006, include consolidation of the Company and Conmed, Inc. for the full
      twelve-month period, plus adjustments to reflect the amortization of intangible
      assets, which increased depreciation and amortization by $2,228,000 of which
      $176,000 is for the 25-day Predecessor period ended January 25, 2007, and the
      2007 BAFBU income tax rate.





**Twelve Months Ended**
              **December 31, 2007**
            
            **Twelve Months Ended**
              **December 31, 2006****PROFORMA**
              **Amount**
            
            **% of**
              **Revenue**
            
            **PROFORMA**
              **Amount**
            
            **% of**
              **Revenue**Service
                contract revenue
            
            $
            26,073,040
            
            
            100.0
            %
            $
            16,776,724
            
            
            100.0
            %HEALTHCARE
                EXPENSES:Salaries,
                wages and employee benefits
            
            
            13,652,623
            
            
            52.4
            %
            
            8,377,063
            
            
            49.9
            %Medical
                expenses
            
            
            6,652,558
            
            
            25.5
            %
            
            4,858,654
            
            
            29.0
            %Other
                operating expenses
            
            
            906,848
            
            
            3.5
            %
            
            641,217
            
            
            3.8
            %Total
                healthcare expenses
            
            
            21,212,029
            
            
            81.4
            %
            
            13,876,934
            
            
            82.7
            %Gross
                profit
            
            
            4,861,011
            
            
            18.6
            %
            
            2,899,790
            
            
            17.3
            %OPERATING
                EXPENSES:Selling,
                general & administrative expenses
            
            
            4,558,838
            
            
            17.5
            %
            
            2,274,989
            
            
            13.6
            %Depreciation
                and amortization
            
            
            2,268,675
            
            
            8.7
            %
            
            2,268,162
            
            
            13.5
            %Total
                operating expenses
            
            
            6,827,513
            
            
            26.2
            %
            
            4,543,151
            
            
            27.1
            %Operating
                loss
            
            
            (1,966,502
            )
            
            (7.5
            )%
            
            (1,643,361
            )
            
            (9.8
            )%Net
                interest income
            
            
            306,309
            
            
            1.2
            %
            
            70,154
            
            
            0.4
            %Loss
                before income taxes
            
            
            (1,660,193
            )
            
            (6.4
            )%
            
            (1,573,207
            )
            
            (9.4
            )%Income
                tax expense
            
            
            162,000
            
            
            0.6
            %
            
            154,000
            
            
            0.9
            %Net
                (loss)
            
            $
            (1,822,193
            )
            
            (7.0
            )%
            $
            (1,727,207
            )
            
            (10.3
            )%





Net
      revenue, as defined earlier, from medical services provided primarily to
      correctional institutions for the twelve months ended December 31, 2007 and
      2006, was $26,073,040 and $16,776,724, respectively, which represents an
      increase of $9,296,316 or 55.4%. The net loss was $1,822,193 or 7.0% of revenue
      and $1,727,207 or 10.3% of revenue for the twelve months ended December 31,
      2007
      and 2006, respectively. Improvement resulting from the increase in service
      contract revenue and gross profit margin was offset by increased operating
      expenses.




21


*Revenues*


The
      improvement in revenue for the twelve months ended December 31, 2007 compared
      to
      the same period for the prior year resulted from the addition of new contracts
      with Yakima County, Washington, and Baltimore County, Maryland, in September
      2006, and as a result, we only recorded revenue from these contracts for part
      of
      the year in 2006 compared to the entire year in 2007. Together, these contracts
      accounted for $5,094,400 or 54.8% of the increase in revenue for the period.
      Additionally, we entered into new medical service contracts with Jackson County,
      Oregon, Henrico County, Virginia, Kitsap County, Washington and Wicomico County,
      Maryland, which added $3,030,300 or 32.6% of the increase. Expansion of the
      services provided to a number of our existing contracts initiated in prior
      years
      resulted in revenue improvement totaling approximately $642,500 or 6.9% of
      the
      increase. Price increases related to existing service requirements totaled
      approximately $540,560 or 5.7% of the increase.




*Healthcare
      Expenses*


*Salaries
      and Employee Benefits*


Salaries
      and employee benefits were $13,652,623 or 52.4% of revenue for the twelve-month
      period ended December 31, 2007, compared to $8,377,063 or 49.9% of revenue
      for
      the twelve months ended December 31, 2006. The increase in spending for
      salaries, wages, and employee benefits of $5,275,560 or 63.0% is due to the
      addition of new healthcare employees required to support the increased staffing
      requirements resulting from our new medical service contracts. The primary
      factors causing the increase in salaries, wages, and employee benefits as a
      percentage of revenue was the addition of new service contracts with Yakima
      County, WA, which provided staffing and pharmacy services, plus Henrico County,
      VA, Kitsap County, WA, and Wicomico County, MD, which provided only staffing
      services. As a result, these contracts increased the mix of salaries, wages,
      and
      employee benefits as a percentage of total revenue as compared to contracts
      that
      provide for full service medical expenses.




*Medical
      Expenses*


Medical
      expenses for the twelve months ended December 31, 2007 and 2006 were $6,652,558
      or 25.5% of revenue and $4,858,654 or 29.0% of revenue, respectively, which
      represented an increase of $1,793,904 or 36.9%. The increase in spending for
      medical expenses reflects increases for medical services both in and out of
      the
      facility plus increased expenditures for pharmacy and radiology services. The
      reduced spending in medical expenses as a percentage of revenue reflects the
      favorable mix of these expenses compared to salaries, wages and benefits as
      described above. In absolute dollars, the increased spending is primarily due
      to
      the higher revenue and the increased number of inmates covered by our services
      under the new service contracts. The reduction in spending as a percentage
      of
      revenue results primarily from lower expenditures for hospitalization and
      related out-of-facility costs at two correctional institutions.





*Other
      Operating Expenses*


Other
      operating expenses were $906,848 or 3.5% of revenue for the twelve months ended
      December 31, 2007, compared to $641,217 or 3.8% of revenue for the twelve-month
      period ended December 31, 2006. The increase of $265,631 in spending is directly
      related to the increase in the number of inmates served as a result of the
      new
      service contracts and reflects increased spending for employment advertising,
      professional liability insurance, and performance and payment
      bonds.





*Operating
      Expenses*


*Selling,
      General and Administrative Expenses*


Selling,
      general and administrative expenses for the twelve months ended December 31,
      2007 and 2006 were $4,558,838 or 17.5% of revenue and $2,274,989 or 13.6% of
      revenue, respectively. The increased expenditures reflect higher salaries and
      benefits in business development personnel, plus increased spending on travel
      and entertainment and information systems, as well as other professional fees.
      In addition, Conmed became a public company in January 2007, resulting in
      increased accounting, legal, and other related administrative expenses. Stock
      based compensation for the twelve-month period ended December 31, 2007 and
      2006
      was $556,449 and $0, respectively, reflecting stock option's awards issued
      in
      2007.





*Depreciation
      and Amortization*


Depreciation
      and amortization primarily reflects the amortization of intangible assets
      related to the Acquisition reflected in both periods. Amortization of service
      contracts and non-compete agreements that were acquired as part of the
      acquisition of Conmed, Inc. on January 26, 2007 were $1,801,000 and $251,000,
      respectively. Depreciation expense increased $513 and was relatively consistent
      with the prior year.





*Interest
      Income*


Interest
      income was $306,309 for the twelve months ended December 31, 2007, compared
      to
      $70,154 for the same period in 2006, reflecting an increase in cash on hand
      as a
      result of the Private Placement in January 2007.




22





*Interest
      Expense*


Interest
      expense decreased $76 due to a reduction in outstanding automobile loans in
      the
      twelve months ended December 31, 2007.





*Income
      Tax Expense*


Income
      tax expense for the twelve-month period ended December 31, 2007 was $162,000
      due
      to the valuation allowance on certain deferred tax assets. And the tax benefit
      for certain warrant exercises in additional paid in capital. The proforma
      tax expense for the twelve-month period ended December 31, 2006 was adjusted
      $154,000 on a proforma basis. In 2006, Conmed, Inc. was an S-corporation and
      as
      such, not subject to corporate level income taxes.





**LIQUIDITY
      AND CAPITAL RESOURCES**




Financing
      is generally provided by funds generated from our operating activities. Current
      working capital balances and funds used to acquire Conmed, Inc. were provided
      by
      the Private Placement.





*Cash
      Flow for the 340-day Period from January 26, 2007 to December 31,
      2007*


Cash
      as
      of December 31, 2007 and January 25, 2007 was $7,136,720 and $662,305,
      respectively.





Cash
      flows from operations totaled $1,530,954, reflecting $2,719,984 in adjustments
      for non-cash expense and by $564,991 in changes in working capital components
      partially offset by the net loss of $1,754,021.





Investing
      activities used $8,002,784. The acquisition of Conmed, Inc. used $7,794,597
      and
      purchases of computer and office equipment used $208,187.





Financing
      activities provided cash of $12,946,245. Net cash proceeds from the Private
      Placement were $12,916,997, and a short-term loan to finance the purchase of
      an
      insurance policy added $289,368 partially offset by payments on an automobile
      loan and the short-term loan of $296,120. Proceeds from the exercise of 120,000
      warrants totaled $36,000.





*Loans*


As
      of
      December 31, 2007, we had a note outstanding for a vehicle in the amount of
      $13,216.




*Off
      Balance Sheet Arrangements*


We
      are
      required to provide performance and payment guarantee bonds to county
      governments under certain contracts. As of December 31, 2007, we have two
      performance bonds totaling $6,864,933 and two payment bonds for $2,695,128,
      totaling $9,560,061. The surety issuing the bonds has recourse against our
      assets in the event the surety is required to honor the bonds.





*Contractual
      Obligations*


The
      following table presents our expected cash requirements for contractual
      obligations outstanding as of December 31, 2007:




**Total**
            
            **Current**
            
            **2
                - 3 years**
            
            **4
                - 5 years**
            
            **Thereafter**Automobile
                loan
            
            $
            13,216
            
            $
            7,798
            
            $
            5,418
            
            $
            —
            
            $
            —Office
                equipment leases
            
            
            48,219
            
            
            17,535
            
            
            20,812
            
            
            9,872
            
            
            —Automobile
                leases
            
            
            18,450
            
            
            9,840
            
            
            8,610
            
            
            —
            
            
            —Office
                space leased & other facility leases
            
            
            791,551
            
            
            183,083
            
            
            304,699
            
            
            291,417
            
            
            12,352Total
            
            $
            871,436
            
            $
            218,256
            
            $
            339,539
            
            $
            301,289
            
            $
            12,352




*Effects
      of Inflation*


We
      do not
      believe that inflation and changing prices over the past three years have had
      a
      significant impact on our revenue or results of operations.





*Potential
      Future Service Contract Revenue*


As
      of
      December 31, 2007, we have entered into 25 agreements with county governments
      to
      provided medical and healthcare services to county correctional institutions.
      Most of these contracts are for multiple years and include option renewal
      periods which are, in all cases, at the county's option. The terms of the
      contracts are from one to nine years. These medical service contracts have
      potential future service contract revenue of $124 million as of December 31,
      2007, with a weighted-average term of 5.7 years, of which approximately $103
      million relates to the option renewal periods.




23




**ITEM 7.**
            **FINANCIAL
                STATEMENTS******




**CONTENTS**




REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              25CONSOLIDATED
                  FINANCIAL STATEMENTSConsolidated
                  Balance Sheets
              26Consolidated
                  Statements of Operations
              27Consolidated
                  Statements of Shareholders' Equity
              28Consolidated
                  Statements of Cash Flows
              29Notes
                  to Consolidated Financial Statements
              31




24




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
        the
        Board of Directors and Shareholders
 Conmed
        Healthcare Management, Inc. and Subsidiary
  
 We
        have
        audited the accompanying consolidated balance sheets of Conmed Healthcare
        Management, Inc. and Subsidiary as of December 31, 2007 (successor) and 2006
        (predecessor), and the related consolidated statements of operations,
        shareholders' equity and cash flows for the 340 day period January 26, 2007
        to
        December 31, 2007 (successor) and for the year ended December 31, 2006
        (predecessor). These consolidated financial statements are the responsibility
        of
        the Company's management. Our responsibility is to express an opinion on
        these
        consolidated financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Conmed Healthcare
        Management, Inc. as of December 31, 2007 (successor) and 2006 (predecessor),
        and
        the results of their operations and their cash flows for the 340 day period
        January 26, 2007 to December 31, 2007 (successor) and for the year ended
        December 31, 2006 (predecessor) in conformity with U.S. generally accepted
        accounting principles.
 
 We
        were
        not engaged to examine management’s assertion about the effectiveness of Conmed
        Healthcare Management, Inc. and Subsidiary’s internal control over financial
        reporting as of December 31, 2007 included in the Annual Report included
        in Form
        10KSB and, accordingly, we do not express an opinion thereon.
 
 Des
        Moines, Iowa
 March
        31,
        2008


25




**CONMED
      HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARY**




**CONSOLIDATED
      BALANCE SHEETS**




**SUCCESSOR**
                **December 31, 2007**
              
              **PREDECESSOR**
                **December 31, 2006****ASSETS**CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              7,136,720
              
              $
              122,269Accounts
                  receivable
              
              
              1,622,424
              
              
              1,304,193Prepaid
                  expenses
              
              
              214,834
              
              
              226,629**Total
                  current assets**
              
              
              8,973,978
              
              
              1,653,091PROPERTY
                  AND EQUIPMENT, NET
              
              
              212,815
              
              
              45,861DEFERRED
                  TAXES
              
              
              90,000
              
              
              —OTHER
                  ASSETSService
                  contracts acquired, net
              
              
              2,699,000
              
              
              —Non-compete
                  agreements, net
              
              
              749,000
              
              
              —Goodwill
              
              
              4,852,338
              
              
              —Deposits
              
              
              58,698
              
              
              2,4248,359,036
              
              
              2,424$
              17,635,829
              
              $
              1,701,376**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              837,144
              
              $
              580,507Accrued
                  expenses
              
              
              1,563,020
              
              
              987,979Deferred
                  revenue
              
              
              353,075
              
              
              103,673Notes
                  payable, current portion
              
              
              7,798
              
              
              7,326Income
                  taxes payable
              
              
              5,000
              
              
              —**Total
                  current liabilities**
              
              
              2,766,037
              
              
              1,679,485NOTES
                  PAYABLE, LONG-TERM
              
              
              5,418
              
              
              13,236SHAREHOLDERS'
                  EQUITYPreferred
                  stock no par value; authorized 5,000,000 shares; issued and outstanding
                  0
                  shares as of December 31, 2007
              
              
              —
              
              
              —Common
                  stock, $0.0001 par value, authorized 40,000,000 shares; issued
                  and
                  outstanding 11,943,141 shares as of December 31, 2007
              
              
              1,194
              
              
              300Additional
                  paid-in capital
              
              
              35,901,874
              
              
              —Retained
                  earnings (deficit)
              
              
              (21,038,694
              )
              
              8,355**Total
                  shareholders' equity**
              
              
              14,864,374
              
              
              8,655$
              17,635,829
              
              $
              1,701,376




*See
      Notes to Consolidated Financial Statements.*




26





**CONMED
      HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARY**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS** ****




**SUCCESSOR**
                **For the 340-Day**
                **Period January****26, 2007 to**
                **December 31,**
                **2007**
              
              **PREDECESSOR**
                **For the 25-Day**
                **Period January 1,**
                **2007 to January**
                **25, 2007**
                **(unaudited)**
              
              **PREDECESSOR**
                **For the Year**
                **Ended December**
                **31, 2006****Service
                  contract revenue**
              
              $
              24,568,475
              
              $
              1,504,565
              
              $
              16,776,724HEALTHCARE
                  EXPENSES:Salaries,
                  wages and employee benefits
              
              
              12,810,048
              
              
              842,575
              
              
              8,377,063Medical
                  expenses
              
              
              6,253,352
              
              
              439,206
              
              
              4,858,654Other
                  operating expenses
              
              
              861,296
              
              
              45,552
              
              
              641,217**Total
                  healthcare expenses**
              
              
              19,924,696
              
              
              1,327,333
              
              
              13,876,934**Gross
                  profit**
              
              
              4,643,779
              
              
              177,232
              
              
              2,899,790Selling
                  and administrative expenses
              
              
              4,450,939
              
              
              92,264
              
              
              1,808,303Depreciation
                  and amortization
              
              
              2,090,977
              
              
              1,698
              
              
              40,162**Total
                  operating expenses**
              
              
              6,541,916
              
              
              93,962
              
              
              1,848,465**Operating
                  income (loss)**
              
              
              (1,898,137
              )
              
              83,270
              
              
              1,051,325INTEREST
                  INCOME (EXPENSE)Interest
                  income
              
              
              312,964
              
              
              287
              
              
              9,941Interest
                  (expense)
              
              
              (6,848
              )
              
              (93
              )
              
              (7,017
              )**Total
                  interest income**
              
              
              306,116
              
              
              194
              
              
              2,924**Income
                  (loss) before income taxes**
              
              
              (1,592,021
              )
              
              83,464
              
              
              1,054,249Income
                  tax expense
              
              
              162,000
              
              
              —
              
              
              —**Net
                  income (loss)**
              
              $
              (1,754,021
              )
              $
              83,464
              
              $
              1,054,249LOSS
                  PER COMMON SHAREBasic
                  and diluted
              
              $
              (0.17
              )WEIGHTED-AVERAGE
                  SHARES OUTSTANDINGBasic
                  and diluted
              
              
              10,310,994




*See
      Notes to Consolidated Financial Statements.*




27




**CONMED
      HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**


**YEARS
      ENDED DECEMBER 31, 2007 AND 2006**




**Preferred**
            
            **Preferred**
            
            **Preferred**
            
            **Preferred**
            
            **Preferred**
            
            **Preferred**
            
            **Common**
            
            **Common**
            
            **Additional**
            
            **RetainedEarnings****Stock
                      A**
                    **Shares**
            
            **Stock
                  A**
                **Amount**
            
            **Stock
                  B**
                **Shares**
            
            **Stock
                  B**
                **Amount**
            
            **Stock
                    C**
                  **Shares**
            
            **Stock
                  C**
                **Amount**
            
            **Stock**
                **Shares**
            
            **StockAmount**
            
            **Paid-In**
                **Capital**
            
            **(Accumulated**
                **Deficit)**
            
            **Total****Predecessor**Balance
                at December 31, 2006
            
            
            **-**
            
            $
            **-**
            
            
            **-**
            
            $
            **-**
            
            
            **-**
            
            $
            **-**
            
            
            300
            
            $
            300
            
            $
            -
            
            $
            163,637
            
            $
            163,937Distributions
                to stockholders
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            (1,209,531
            )
            
            (1,209,531
            )Net
                income
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            1,054,249
            
            
            1,054,249Balance,
                December 31, 2007
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            300
            
            
            300
            
            
            **-**
            
            
            8,355
            
            
            8,655Net
                income
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            -
            
            
            **-**
            
            
            83,464
            
            
            83,464Balance
                at January 25, 2007 (unaudited)
            
            
            **-**
            
            $
            **-**
            
            
            **-**
            
            $
            **-**
            
            
            **-**
            
            $
            **-**
            
            
            300
            
            $
            300
            
            **$**
            **-**
            
            $
            91,819
            
            $
            92,119**Successor**Balance,
                Janaury 26, 2007
            
            
            2,875,000
            
            $
            2,875,000
            
            
            **-**
            
            $
            **-**
            
            
            **-**
            
            $
            **-**
            
            
            415,804
            
            $
            42
            
            $
            17,748,580
            
            $
            (19,284,673
            )
            $
            1,338,949Sale
                of Series B Preferred Stock
            
            
            **-**
            
            
            **-**
            
            
            15,000
            
            
            12,916,997
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            12,916,997Issuance
                of Series C Preferred Stock
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            8,000
            
            
            1,608,000
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            1,608,000Conversion
                of Series A Preferred Stock
            
            
            (2,875,000
            )
            
            (2,875,000
            )
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            4,584,222
            
            
            458
            
            
            2,874,542
            
            
            **-**
            
            
            -Conversion
                of Series B Preferred Stock
            
            
            **-**
            
            
            **-**
            
            
            (15,000
            )
            
            (12,916,997
            )
            
            **-**
            
            
            **-**
            
            
            6,000,000
            
            
            600
            
            
            12,916,397
            
            
            **-**
            
            
            -Conversion
                of Series C Preferred Stock
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            (8,000
            )
            
            (1,608,000
            )
            
            800,000
            
            
            80
            
            
            1,607,920
            
            
            **-**
            
            
            -Exercise
                of warrants, including tax benefit of $162,000
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            143,115
            
            
            14
            
            
            197,986
            
            
            **-**
            
            
            198,000Stock
                option expense
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            556,449
            
            
            **-**
            
            
            556,449Net
                loss
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            (1,754,021
            )
            
            (1,754,021
            )Balance,
                December 31, 2007
            
            
            **-**
            
            $
            **-**
            
            
            **-**
            
            $
            **-**
            
            
            **-**
            
            $
            **-**
            
            
            11,943,141
            
            $
            1,194
            
            $
            35,901,874
            
            $
            (21,038,694
            )
            $
            14,864,374





*See
      Notes to Consolidated Financial Statements.*




28


**CONMED
      HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARY**




CONSOLIDATED
      STATEMENTS OF CASH FLOWS




**SUCCESSOR**
                **For the 340-Day**
                **Period January****26, 2007****toDecember 31,**
                **2007**
              
              **PREDECESSOR**
                **For the 25-Day**
                **Period January 1,****2007 to January**
                **25, 2007**
                **(unaudited)**
              
              **PREDECESSOR**
                **For the Twelve**
                **Months Ended**
                **December 31,**
                **2006**CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income (loss)
              
              $
              (1,754,021
              )
              $
              83,464
              
              $
              1,054,249Adjustments
                  to reconcile net income (loss) to net cash provided by operating
                  activitiesDepreciation
              
              
              39,535
              
              
              1,698
              
              
              40,162Amortization
              
              
              2,052,000
              
              
              —
              
              
              —Stock-based
                  compensation
              
              
              556,449
              
              
              —
              
              
              —Loss
                  on disposal of property
              
              
              —
              
              
              —
              
              
              9,734Deferred
                  income taxes
              
              
              (90,000
              )
              
              —
              
              
              —Income
                  tax benefit for warrant exercises
              
              
              162,000
              
              
              —
              
              
              —Changes
                  in working capital componentsDecrease
                  (increase) in accounts receivable
              
              
              (512,785
              )
              
              197,327
              
              
              (756,943
              )Increase
                  in taxes receivable
              
              
              (85,000
              )
              
              —
              
              
              —Decrease
                  (increase) in prepaid expenses
              
              
              329,035
              
              
              30,687
              
              
              (125,656
              )Increase
                  in deposits
              
              
              (56,274
              )
              
              —
              
              
              —Increase
                  (decrease) in accounts payable
              
              
              (415,917
              )
              
              258,562
              
              
              105,223Increase
                  (decrease) in accrued expenses
              
              
              937,375
              
              
              (469,320
              )
              
              550,848Increase
                  in income taxes payable
              
              
              167,000
              
              
              —
              
              
              —Increase
                  (decrease) in deferred revenue
              
              
              278,557
              
              
              (29,155
              )
              
              (9,325
              )**Net
                  cash provided by operating activities**
              
              
              1,692,954
              
              
              73,263
              
              
              868,292CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of property and equipment
              
              
              (208,187
              )
              
              —
              
              
              (23,350
              )Proceeds
                  received from sale of property and equipment
              
              
              —
              
              
              —
              
              
              53,085Acquisition
                  of Conmed, Inc., net of cash acquired
              
              
              (7,794,597
              )
              
              —
              
              
              —**Net
                  cash provided by (used in) investing activities**
              
              
              (8,002,784
              )
              
              —
              
              
              27,735CASH
                  FLOWS FROM FINANCING ACTIVITIESBorrowings
                  on line of credit
              
              
              —
              
              
              —
              
              
              550,000Short-term
                  borrowings
              
              
              289,368
              
              
              —
              
              
              —Payments
                  on line of credit
              
              
              —
              
              
              —
              
              
              (550,000
              )Payments
                  in loans payable
              
              
              (296,120
              )
              
              (594
              )
              
              (51,256
              )Net
                  proceeds from Private Placement
              
              
              12,916,997
              
              
              —
              
              
              —Proceeds
                  from exercise of warrants
              
              
              36,000
              
              
              —
              
              
              —Income
                  tax benefit from warrant exercise
              
              
              162,000
              
              
              —
              
              
              —Distributions
                  to shareholders
              
              
              —
              
              
              —
              
              
              (1,209,531
              )**Net
                  cash provided by (used in) financing activities**
              
              
              12,784,245
              
              
              (594
              )
              
              (1,260,787
              )**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              6,474,415
              
              
              72,669
              
              
              (364,760
              )CASH
                  AND CASH EQUIVALENTSBeginning
              
              
              662,305
              
              
              122,269
              
              
              487,029Ending
              
              $
              7,136,720
              
              $
              194,938
              
              $
              122,269
 29




**CONMED
      HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARY**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**SUCCESSOR**
                **For the 340-Day**
                **Period January**
                **26, 2007 to****December 31,**
                **2007**
              
              **PREDECESSOR**
                **For the 25-Day**
                **Period January 1,****2007 to January**
                **25, 2007**
                **(unaudited)**
              
              **PREDECESSOR**
                **For the Twelve**
                **Months Ended**
                **December 31,**
                **2006**NON-CASH
                  INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:Escrow
                  payments on Acquisition in prior periods
              
              $
              500,000
              
              $
              —
              
              $
              —Acquisition
                  expenses paid in prior periods
              
              
              239,935
              
              
              —
              
              
              —Private
                  Placement expenses paid in prior periods
              
              
              148,652
              
              
              —
              
              
              —$
              888,587
              
              $
              —
              
              $
              —SUPPLEMENTAL
                  DISCLOUSURES OF CASH FLOW INFORMATIONCash
                  payments for interest
              
              $
              6,848
              
              $
              93
              
              $
              7,017Income
                  taxes paid
              
              $
              85,000
              
              $
              —
              
              $
              —




*See
      Notes to Consolidated Financial Statements.*




30




**CONMED
      HEALTHCARE MANAGEMENT, INC.**




**NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS**




NOTE
      1.Nature
      of
      Business




*Nature
      of Business*


Prior
      to
      January 26, 2007, Conmed Healthcare Management, Inc. and Subsidiary (the
      "Company") formerly known as Pace Health Management Systems, Inc. traded under
      the symbol "PCES", was classified as a public shell, had no ongoing operations,
      minimal operating expenses and no employees.





On
      January 26, 2007, the Company acquired Conmed, Inc. ("Conmed, Inc.") a provider
      of correctional healthcare services (the "Acquisition"). Conmed, Inc. was formed
      as a corporation on June 10, 1987 in the State of Maryland for the purpose
      of
      providing healthcare services exclusively to county detention centers located
      in
      Maryland. As Conmed, Inc. developed, it accepted more contracts for additional
      services including mental health, pharmacy and out-of-facility healthcare
      expenses. In 2000, Conmed, Inc. served more than 50% of the county detention
      healthcare services market in Maryland. In 2003, Conmed, Inc. elected to seek
      contracts outside of Maryland. For the fiscal year ended December 31, 2007,
      Conmed, Inc. had net revenues primarily from medical services provided to
      correctional institutions.





As
      a
      result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the
      Company and the business of Conmed, Inc. is now our primary business. As of
      December 31, 2007, we were in contract with, and currently providing medical
      services in twenty-two counties in five states including: Kansas, Maryland,
      Oregon, Virginia and Washington.





On
      March
      13, 2007, the Company changed its name to Conmed Healthcare Management,
      Inc.




*Stock
      Purchase Agreement*


On
      August
      2, 2006, we entered into a Stock Purchase Agreement ("Agreement") with Conmed,
      Inc., a Maryland corporation and all of the stockholders of Conmed, Inc., (the
      "Conmed, Inc. Stockholders"), pursuant to which we agreed to purchase all the
      issued and outstanding capital stock of Conmed, Inc. from the Conmed, Inc.
      Stockholders. We previously reported the execution of the Agreement in a Form
      8-K filed on August 8, 2006, and its extension in a Form 8-K filed on January
      17, 2007.





We
      paid
      to Conmed, Inc., a non-refundable cash deposit of $250,000 upon execution of
      the
      Agreement, which was released to the Conmed, Inc. Stockholders upon expiration
      of the original agreement on October 31, 2006. Thereafter, an amendment to
      the
      Agreement was executed on January 12, 2007 to extend the closing date to January
      31, 2007. As a result of such extension, and upon execution of such amendment,
      we paid to Conmed, Inc. an additional non-refundable cash deposit of $250,000
      (the "Additional Cash Deposit"), which was deducted from the $8,000,000 cash
      payment paid to the Conmed, Inc. Stockholders at the closing of the
      Acquisition.





On
      January 26, 2007, the Acquisition was completed and under the terms of the
      Agreement and Acquisition, we paid to the Conmed, Inc. Stockholders
      consideration consisting of: (i) $8,000,000 in cash, the Additional Cash Deposit
      (as defined above) and an adjustment of $30,602 representing an adjustment
      for minimum equity requirement of Conmed, Inc. and (ii) 8,000 shares of
      Pace's Series C Convertible Preferred Stock, which was subsequently converted
      into 800,000 shares of common stock effective March 14, 2007.





The
      amounts shown in the Consolidating Statements of Operations and Cash Flows
      for
      the twelve months ended December 31, 2006 and the 25-day period from January
      1,
      2007 to January 25, 2007 are all Conmed, Inc. pre-Acquisition amounts and hence
      are designated as PREDECESSOR amounts. The amounts for the 340-day period from
      January 26, 2007 to December 31, 2007 are after the Acquisition and reflect
      the
      combined activities of Conmed, Inc. and Conmed Healthcare Management, Inc.
      from
      the date of Acquisition and, as a result, these amounts are designated as
      SUCCESSOR amounts. The December 31, 2007 Consolidated Balance Sheet includes
      the
      consolidated amounts of Pace and Conmed, Inc. as of that date and, as a result,
      are designated as SUCCESSOR amounts. The comparative balance sheet amounts
      as of
      December 31, 2006 are for Conmed, Inc. pre-Acquisition and are designated as
      PREDECESSOR amounts.




31




*Private
      Placement*


On
      January 26, 2007, in a transaction which closed simultaneously with the
      Acquisition, we completed a private placement ("Private Placement") of
      $15,000,000 of units of Series B Convertible Preferred Stock and warrants,
      of
      which approximately $8,000,000 was paid directly to the Conmed, Inc.
      Stockholders as consideration for the sale of Conmed Inc's capital stock.





In
      connection with the Private Placement, we sold to certain "accredited investors" 150
      units, each unit consisting of (i) 100 shares of its Series B Convertible
      Preferred Stock ("Series B Preferred Stock"), (ii) a common stock purchase
      warrant entitling the holder to purchase up to 10,000 shares of its Common
      Stock
      at an exercise price equal to $0.30 per share and (iii) a common stock purchase
      warrant entitling the holder to purchase up to 3,333 shares of its Common Stock
      at an exercise price equal to $2.50 per share (such units, the "Units"), in
      a
      private offering pursuant to exemption from registration under Section 4(2)
      of
      the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated
      thereunder. Each Unit was sold for $100,000, for an aggregate purchase price
      of
      $15,000,000. The proceeds from the sale of the Units were used to purchase
      all
      the issued and outstanding capital stock of Conmed, Inc. and to provide working
      capital following such purchase.The fair
      value of the 1,500,000 and 500,000 warrants issued using the Black-Scholes
      pricing model was $2,628,347 and $289,664, respectively




In
      connection with the sale of the Units, we retained Maxim Group LLC, a NASD
      member broker-dealer as our exclusive placement agent (the "Placement Agent").
      The Placement Agent received the following compensation: (i) a cash fee of
      10%
      of the gross proceeds (an aggregate of $1,500,000) and (ii) a warrant to
      purchase 5% of the common stock issuable upon conversion of the Units, at an
      exercise price equal to $2.75 per share of common stock (an aggregate of 300,000
      shares). In addition, we reimbursed the Placement Agent for its accountable
      expenses in the amount of $50,000, as well as filing fees associated with Blue
      Sky filings, in the amount of $5,000. The fair value of the 300,000 warrants
      issued using the Black-Scholes pricing model was $154,940.





*Plan
      of Recapitalization*


On
      March
      13, 2007, at a special shareholders meeting, our shareholders approved a Plan
      of
      Recapitalization the ("Plan") and implemented the following effective as of
      the
      close of business on March 14, 2007:





o
            Reincorporate
                the Company into the State of Delaware pursuant to the Merger
                Agreement.Created a subsidiary (the "Merger Sub") under the laws of the State
                of
                Delaware and merge the Company into the Merger Sub. All of the liabilities
                and assets of the Company existing prior to the reincorporation were
                transferred, assumed and assigned to the Delaware entity. The certificate
                of incorporation and bylaws of the Delaware entity became our new
                Certificate of Incorporation and Bylaws, and reflect the Plan.





o
            Change
                in name.Changed our name from Pace Health Management Systems, Inc. to Conmed
                Healthcare Management, Inc.





o
            Reverse
                stock split.
                Enacted a reverse stock split on a 1 for 20 bases; thereby reducing
                the
                number of outstanding shares to 415,830 shares of Common Stock from
                the
                8,316,074 shares of Common Stock outstanding at that
                time.





o
            Change
                in authorized shares.Increased the number of authorized common shares to
                40,000,000.





o
            Conversion
                of Series A Preferred Stock.
                Converted the Series A Preferred Stock (and the waiver of all accrued
                and
                unpaid dividends and liquidation rights on the Series A Preferred
                Stock
                after conversion of 50% of such accrued and unpaid dividends into
                shares
                of Common Stock in connection with the transactions contemplated
                by the
                Plan of Reorganization) into 4,584,196 shares of Common Stock on
                a
                post-reverse split basis.





As
      a
      result of the approval of the Plan by our shareholders, in addition to the
      conversion of Series A Preferred Stock, the 15,000 shares of Series B Preferred
      Stock and the 8,000 shares of Series C Preferred Stock converted into 6,000,000
      and 800,000 shares of common stock, respectively, following the reverse stock
      split. As a result of the reverse stock split and the conversion of all the
      outstanding preferred stock, the total number of shares of Conmed, Inc. common
      stock outstanding was approximately 11,800,000 and no preferred shares remained
      outstanding.


.


A
      certificate of merger and articles of merger were filed with the Secretary
      of
      State of the States of Delaware and Iowa, respectively, on March 13, 2007,
      and
      each became effective as of the close of business on March 14,
      2007.





32




*Reclassifications* **


Certain
      reclassifications have been made to the PREDECESSOR amounts to conform to
      current presentation of the operating statement.




NOTE
      2.Significant
      Accounting Policies




The
      accompanying consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America.
      The preparation of these consolidated financial statements requires management
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities, and the disclosure of contingent assets and liabilities at the
      date
      of the consolidated financial statements and the reported revenues and expenses
      during the period. Actual results could differ from those
      estimates.





A
      summary
      of the Company's significant accounting policies is as follows:





*Accounting
      Estimates and Assumption* s


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Our methods of revenue recognition from contracts
      are based primarily on estimates as are accrued expenses. Actual results could
      differ from those estimates.





*Acquisition*


The
      Acquisition was recorded based on FASB Statement No. 141, ("SFAS 141") *Business
      Combinations* ,
      using
      the purchase method. Under purchase accounting, assets acquired should be stated
      on the financial statements at "fair value" (see definition in Standard of
      Value
      section below). SFAS 141 requires that intangible assets be recognized as assets
      apart from goodwill if they meet one of two criteria, (1) the contractual-legal
      criterion, or (2) the separability criterion. SFAS 141 also requires disclosure
      of the primary reasons for business combination and the allocation of the
      purchase price paid to the assets acquired and the liabilities assumed by major
      balance sheet caption.





We
      employed an independent valuation firm to assist management in the
      identification of the intangible assets acquired and in estimating the fair
      value of those assets. Estimates of the fair value of the identifiable
      intangible assets acquired in the Acquisition as of January 26, 2007, are as
      follows:





**Fair
                Value****Asset**Service
                contracts acquired
            
            $
            4,500,000Non-compete
                agreements
            
            
            1,000,000Goodwill
            
            
            4,852,338**Total**
            
            $
            10,352,338





*Service
      Contracts Acquired*


There
      are
      material costs in obtaining a customer list, especially customers with recurring
      revenue streams. As part of the Acquisition, we gained access to Conmed, Inc.'s
      customers, thereby avoiding the cost of obtaining them directly. The value
      of
      the contract list is represented by the future revenue streams from existing
      contracts. Therefore, the Income Approach is the most applicable fair value
      measurement approach to value this asset. The operating income streams of the
      service contracts was calculated based on net present value of estimated
      earnings at an interest rate of 20%. Operating income streams were estimated
      on
      a contract by contract basis and an overall cost factor was used to estimate
      management expenses. Total future contracted operating income totaled
      $6,167,000. After discounting for the time value of money using a 20% rate,
      the
      net present value of future revenues is $4,500,000. Service contracts acquired
      are amortized over the life of each individual contract, ranging from
      approximately one to four years. The service contracts will be amortized over
      a
      weighted-average period of 3.9 years.





33




Projected
      amortization of service contracts at December 31, 2007 is as
      follows:





2008
            
            $
            1,459,0002009
            
            
            869,0002010
            
            
            277,0002011
            
            
            94,000$
            2,699,000





Accumulated
      amortization of service contracts as of December 31, 2007 was $1,801,000. There
      was no accumulated amortization at December 31, 2006.





*Non-Compete
      Agreements*


Non-compete
      agreements were acquired as part of the Agreement with Conmed, Inc. Key
      considerations in estimating the value of such agreements include consideration
      of the potential losses resulting from such competition, the enforceability
      of
      the terms of the agreement, and the likelihood of competition in the absence
      of
      the agreement. Given the potential loss from competition and the probability
      of
      competition, $1,000,000 was identified to allocate to these agreements.
      Non-compete agreements are amortized over the lives of the agreements,
      approximately three to four years. The non-compete agreement will be amortized
      over a weighted-average period of 2.9 years.





Projected
      amortization of non-compete agreements at December 31, 2007 is as
      follows:





2008
            
            $
            268,0002009
            
            
            269,0002010
            
            
            200,0002011
            
            
            12,000$
            749,000





Accumulated
      amortization of non-compete agreements as of December 31, 2007 was $251,000.
      There was no accumulated amortization at December 31, 2006.





Amortization
      expense recognized on all intangibles was approximately $2,052,000, $0 and
      $0
      for the 340-day period ending December 31, 2007, the 25-day period ending
      January 25, 2007 and the twelve-month period ending December 31, 2006,
      respectively.




*Goodwill:*


We
      recorded as goodwill the excess of purchase price over the fair value of the
      identifiable net assets acquired. SFAS No. 142, *Goodwill
      and Other Intangible Assets* ,
      prescribes a two-step process for impairment testing of goodwill, which is
      performed annually, as well as when an event triggering impairment may have
      occurred. The first step tests for impairment, while the second step, if
      necessary, measures the impairment. Since creation of the goodwill there have
      been no indicators of impairment. We have
      elected to perform our annual analysis during the fourth quarter of each fiscal
      year.





*Cash
      and Cash Equivalents*


We
      consider all highly liquid debt instruments purchased with a maturity of three
      months or less to be cash equivalents. At December 31, 2007 and December 31,
      2006, cash equivalents consisted of an interest-bearing money market account
      and
      a certificate of deposit at a commercial bank.





*Concentration
      of Credit Risk*


We
      maintain cash in bank deposit accounts that at times may exceed federally
      insured limits. We have not experienced any losses in such accounts.





*Fair
      Value of Financial Instruments*


Financial
      instruments include cash, receivables, accounts payable, accrued expenses,
      deferred revenue and long-term debt. We believe the fair value of each of these
      instruments approximates their carrying value in the balance sheet as of the
      balance sheet date. The fair value of current assets and current liabilities
      is
      estimated to approximate carrying value due to the short-term nature of these
      instruments. The fair value of the long-term debt is estimated based on
      anticipated interest rates which we believe would currently be available to
      us
      for similar issues of debt, taking into account our current credit risk and
      the
      other market factors.




34




*Principles
      of Consolidation:*


The
      consolidated financial statements include the accounts of the Company and our
      wholly owned subsidiary, Conmed, Inc. All significant intercompany balances
      and
      transactions have been eliminated in consolidation.





*Revenue
      Recognition*


Our
      principal source of revenue is contracts to provide medical assistance to state
      and local correctional facilities. Deferred revenue represents amounts that
      may
      be billed in advance of delivery under these contracts.





Most
      of
      our contracts call for a fixed monthly fee. In addition, most contracts have
      incremental charges based on the average daily population ("ADP") of the
      correctional facility or a contractual fee adjustment based on the ADP. Revenues
      from contracts are recognized ratably for fixed fees, or monthly for contracts
      with variable charges based on ADP. We have one contract that partially operates
      on cost plus basis. The timing of each payment varies per contract. Credit
      terms
      are not more than 30 days from the date of invoice.





Certain
      contracts include "stop/loss" limits, which create a ceiling to our financial
      responsibility for an individual inmate's care or a maximum amount in the
      aggregate for certain categories of medical expenses, whereby we are protected
      from catastrophic medical losses. In circumstances where a stop/loss is reached,
      we are reimbursed for any costs incurred over the predetermined stop/loss
      amount. Any reimbursement received by us is recorded as revenue. During the
      340-day period ended December 31, 2007, the 25-day period ended January 25,
      2007, and the twelve-month period ended December 31, 2006, we received stop/loss
      reimbursements of approximately $321,000, $15,000 and $173,000, respectively,
      which were included in revenue.





*Accounts
      Receivables*


Receivables
      are carried at original invoice amount less payment received and an estimate
      made for doubtful receivables based on a review of all outstanding amounts
      on a
      monthly basis. Receivables are generally considered past due 30 days after
      invoice date. We determine the allowance for doubtful amounts by regularly
      evaluating individual receivables and considering a creditor's financial
      condition, credit history and current economic conditions. Receivables are
      written off when deemed uncollectible. Recoveries of receivables previously
      written off are recorded when received. As of December 31, 2007 and December
      31,
      2006, there was no allowance for doubtful receivables. There was no bad debt
      expense for the 340-day period ended December 31, 2007, the 25-day period ended
      January 25, 2007, and the twelve months ended December 31, 2006.





*Property
      and Equipment*


Property
      and equipment are recorded at cost. Depreciation is provided using the
      straight-line and accelerated methods of depreciation over the estimated useful
      lives of three to seven years. It is our policy to capitalize purchases of
      equipment and fixtures that benefit future periods. Repairs and maintenance
      costs are expensed when incurred.





*Accrued
      Medical Claims Liability*


Medical
      expenses include the costs associated with medical services provided by off-site
      medical providers; pharmacy, laboratory and radiology fees; professional and
      general liability insurance as well as other generally related medical expenses.
      The cost of medical services provided, administered or contracted for are
      recognized in the period in which they are provided based in part on estimates
      for unbilled medical services rendered through the balance sheet date. The
      Company estimates an accrual for unbilled medical services using available
      utilization data including hospitalization, one-day surgeries, physician visits
      and emergency room and ambulance visits and other related costs, which are
      estimated. Additionally, Company personnel review certain inpatient hospital
      stays and other high cost medical procedures and expenses in order to attempt
      to
      identify costs in excess of the historical average rates. Once identified,
      reserves are determined which take into consideration the specific facts
      available at that time.




Actual
        payments and future reserve requirements will
        differ from the Company's current estimates. The differences could be material
        if significant adverse fluctuations occur in the healthcare cost structure
        or
        the Company's future claims experience. Changes in estimates of claims resulting
        from such fluctuations and differences between estimates and actual claims
        payments are recognized in the period in which the estimates are changed
        or the
        payments are made.




*Stock
      Compensation*


Effective
      January 1, 2006, we adopted SFAS No. 123 Revised, *Shared-Based
      Payments* ("SFAS
      123R"), using the modified prospective transition method. Prior to that date,
      we
      accounted for stock option awards under Accounting Principles Board Opinion
      No.
      25. In accordance with SFAS 123R, compensation expense for stock-based awards
      is
      recorded over the vesting period at the fair value of the award at the time
      of
      grant. The recording of such compensation began on January 1, 2006 for shares
      not yet vested as of that date and for all new grants subsequent to that date.
      At December 31, 2006, all stock options were either exercised or expired. We
      recognized stock-based compensation expense of approximately $556,000 during
      the
      year ended December 31, 2007. The exercise price of options granted under our
      incentive plans is equal to the fair market value of the underlying stock at
      the
      grant date. We assume no projected forfeitures on its stock-based compensation,
      since actual historical forfeiture rates on our stock-based incentive awards
      have been negligible.




35




*Income
      Taxes*


Deferred
      taxes are provided on a liability method whereby deferred tax assets are
      recognized for deductible temporary differences and operating loss carryforwards
      and deferred tax liabilities are recognized for taxable temporary differences.
      Temporary differences are the differences between the reported amounts of assets
      and liabilities and their tax basis. Deferred tax assets are reduced by a
      valuation allowance when, in the opinion of management, it is more likely than
      not that some portion or all of the deferred tax assets will not be realized.





*Basic
      and Diluted Loss Per Share*


We
      have
      adopted SFAS No. 128, *Earnings
      per Share* ("SFAS
      128"), which requires us to present basic and diluted income (loss) per share
      amounts. Basic income (loss) per share is based on the weighted-average number
      of common shares outstanding during the period. Diluted income (loss) per share
      is based on the weighted-average number of common shares and dilutive potential
      common shares outstanding during the period. Dilutive potential common shares
      consist of stock options and warrants (using the treasury stock method) and
      convertible preferred stock (using the if-converted method).





*Recently
      Adopted Accounting Standards*


We
      adopted the provisions of FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (FIN
      48) *,* effective January 1, 2007 *.* FIN 48
      provides clarification on accounting for uncertainty in income taxes recognized
      in an enterprise's financial statements in accordance with SFAS No. 109, *Accounting
      for Income Taxes.* FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. As a result of our evaluation of the implementation
      of
      FIN 48, no material income tax uncertainties were identified. Therefore, we
      recognized no adjustment for unrecognized income tax benefits during the twelve
      months ended December 31, 2007. Corporate tax returns for the years 2004 through
      2006 remain open to examination by taxing authorities. If interest and penalties
      are assessed, the Company will recognize them in operating
      expenses.





*New
      Accounting Pronouncements*


In
      September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), *Fair
      Value Measurements* .
      This
      statement defines fair value, establishes a framework for measuring fair value,
      and expands disclosures about fair value measurements. SFAS 157 also emphasizes
      that fair value is a market-based measurement, not an entity-specific
      measurement, and sets out a fair value hierarchy with the highest priority
      being
      quoted prices in active markets. Under SFAS 157, fair value measurements are
      disclosed by level within that hierarchy. The requirements of SFAS 157 are
      first
      effective for our fiscal year beginning January 1, 2008. However, in February
      2008, the FASB decided that an entity need not apply this standard to
      nonfinancial assets and liabilities that are recognized or disclosed at fair
      value in the financial statements on a nonrecurring basis until the subsequent
      year. Accordingly, our adoption of this standard on January 1, 2008 is limited
      to financial assets and liabilities and any nonfinancial assets and liabilities
      recognized or disclosed at fair value on a recurring basis. We are currently
      evaluating the impact that the adoption of this statement will have on our
      financial position, results of operation and cash flows.





In
      February 2007, the FASB issued SFAS No. 159 ("SFAS 159"), *The
      Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of SFAS No. 115,* which
      provides all entities, including not-for-profit organizations, with an option
      to
      report selected financial assets and liabilities at fair value. The objective
      of
      the statement is to improve financial reporting by providing entities with
      the
      opportunity to mitigate volatility in earnings caused by measuring related
      assets and liabilities differently without having to apply the complex
      provisions of hedge accounting. Certain specified items are eligible for the
      irrevocable fair value measurement option as established by SFAS 159. SFAS
      159
      is effective as of the beginning of an entity's first fiscal year beginning
      after November 15, 2007. Early adoption is permitted as of the beginning of
      a
      fiscal year that begins on or before November 15, 2007, provided the entity
      also
      elects to apply the provisions of SFAS No. 157. We are currently evaluating
      the
      impact that the adoption of this Statement will have on our financial position,
      results of operation and cash flows.





In
      December 2007, the FASB issued SFAS No. 141(Revised) ("SFAS 141R"), *Business
      Combinations* .
      SFAS
      141R replaces the original SFAS. This statement applies to all transactions
      in
      which an entity obtains control of one or more businesses. SFAS 141R requires
      an
      acquirer to recognize the assets acquired, the liabilities assumed, and any
      noncontrolling interest in the acquiree at their fair values, with limited
      exceptions, as of the acquisition date. Goodwill is to be recognized as a
      residual. If the acquisition-date fair value exceeds the consideration
      transferred, a gain is to be recognized. The Statement generally requires that
      acquisition costs be expensed. This Statement is effective for business
      combinations for which the acquisition date is on or after January 1, 2009.
      We
      do not expect the adoption of this Statement will have a material impact on
      our
      financial position or results of operations.





36




In
      December 2007, the FASB issued SFAS No. 160 ("SFAS 160"), *Noncontrolling
      Interests in Consolidated Financial Statements* .
      SFAS
      160 requires companies to report ownership interest in subsidiaries held by
      other parties (minority interest) be clearly identified, labeled and presented
      in the consolidated statement of financial condition separately within the
      equity section. The amount of consolidated net income attributable to the parent
      company and to the noncontrolling interest is to be clearly identified and
      presented on the face of the consolidated statement of income. The Statement
      is
      effective beginning January 1, 2009. We do not expect the adoption of this
      Statement will have a material impact on our financial position or results
      of
      operations.




*Presentation
      of share and Per Share Information*


All
      common stock shares and per share information has been adjusted to reflect
      the 1
      for 20 reverse stock split effective on March 14, 2007.




**NOTE
      3** **.**  **Business
      Combination**




The
      Acquisition of Conmed, Inc. that occurred on January 26, 2007, was recorded
      using purchase accounting in accordance with SFAS 141. The cost of Conmed,
      Inc.
      to our consolidated assets and liabilities is based on their fair value as
      of
      that date. The fair value of Conmed, Inc.'s intangible assets was determined
      by
      valuations performed by an independent appraiser. The purchase price exceeded
      the fair value of Conmed, Inc.'s net assets acquired with the excess amount
      recorded as goodwill.





The
      purchase price, including related acquisition costs, totaled $10,337,471. This
      purchase was financed with funds obtained in the Private Placement discussed
      in
      Note 4.





The
      following table details the net assets of Conmed, Inc., acquired:




**Conmed,
                  Inc. net assets acquired**CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              194,938Accounts
                  receivable
              
              
              1,106,866Prepaid
                  expenses
              
              
              195,943**Total
                  current assets**
              
              
              1,497,747PROPERTY
                    AND EQUIPMENT, NET
              
              
              44,163OTHER
                ASSETSService
                  contracts acquired
              
              
              4,500,000Non-compete
                  agreements acquired
              
              
              1,000,000Deposits
              
              
              2,424**Total
                  other assets**
              
              
              5,502,424**Total
                  assets**
              
              
              7,044,334CURRENT
                  LIABILITIESAccounts
                  payable
              
              
              839,070Accrued
                  expenses
              
              
              625,645Deferred
                  revenue
              
              
              74,518Notes
                  payable, current portion
              
              
              7,362**Total
                  current liabilities**
              
              
              1,546,595NOTES
                  PAYABLE, LONG-TERM
              
              
              12,606**Total
                  liabilities**
              
              
              1,559,201**Conmed,
                  Inc. net assets acquired**
              
              
              5,485,133**Goodwill**
              
              $
              4,852,338




37




The
      following table details the purchase price of Conmed, Inc:





**Conmed,
                Inc. purchase price**Cash
                purchase price
            
            $
            8,000,000Equity
                adjustment at closing
            
            
            30,602Escrow
                deposit forfeited
            
            
            250,000§338
                tax election
            
            
            110,000Deal
                expenses
            
            
            338,869Less:
                Conmed, Inc. cash acquired
            
            
            (194,938
            )**Net,
                cash purchase price**
            
            
            8,534,533Addback:
                Conmed, Inc. cash acquired
            
            
            194,938Common
                stock issued to Conmed, Inc.'s shareholders
            
            
            1,608,000**Total
                purchase price**
            
            $
            10,337,471





The
      goodwill amount includes the original escrow deposit of $250,000, which was
      forfeited when the Acquisition did not close by October 31, 2006, an estimated
      $338,869 in third party acquisition costs, and 800,000 shares of common stock
      valued at $1,608,000 at the time of the closing of the Acquisition. An equity
      adjustment of $30,602 at the time of closing resulting from the minimum
      contractual equity requirement of $400,000 at the time of closing. The purchase
      price was adjusted during the fourth quarter of 2007 to reflect additional
      costs
      of approximately $560,000 associated with the Acquisition.





The
      former shareholders of Conmed, Inc. filed an IRS Section 338 (h) (10) ("§338")
      election to treat the sale as an asset purchase for income tax purposes. This
      election created additional tax basis in the goodwill and intangible assets.
      Substantially all of the goodwill and intangible assets listed above will be
      deductible for income tax purposes in future periods.





The
      following selected pro forma information from the statements of operations
      is
      prepared assuming we had acquired Conmed, Inc. at the beginning of the years
      presented:




**2007**
              
              **2006**Revenue
              
              $
              26,073,040
              
              $
              16,776,724Net
                  income
              
              
              (1,822,193
              )
              
              (1,727,207
              )Basic
                  and diluted earnings (loss) per share
              
              $
              (0.18
              )
              $
              (0.17
              )





The
      pro
      forma net income 2007 and for 2006 reflects adjustments made for depreciation
      and amortization and income taxes as discussed in managements Discussion and
      Analysis.




The
      pro
      forma basic and diluted net loss per share have been calculated assuming the
      common shares issued in connection with the acquisition of Conmed, Inc. were
      issued at the beginning of 2006.




**NOTE
      4** **.**  **Private
      Placement**




The
      following table details the net cash received from the Private Placement after
      the payment of fees and related expenses.


**Acquisition
                  financed by:**Cash
                  received from sale of preferred stock
              
              $
              15,000,000Stock
                  issuance costs
              
              
              (2,237,943
              )Net
                  proceeds from sales of preferred stock
              
              
              12,762,057Add-back
                  non-cash banker warrant expense
              
              
              154,940Net
                  cash received from sale of securities
              
              $
              12,916,997




**NOTE
      5** **.**  **Common
      Stock Warrants and Options**




*Common
      Stock Warrants*





Existing
      Warrants @ $0.30 per share


On
      October 24, 2005, Pace issued 37,500 warrants to purchase common stock, as
      adjusted for the 1 for 20 reverse stock split. Of these warrants, 30,000 were
      issued to John Pappajohn, Pace's sole director and acting chairman, and the
      remaining 7,500 warrants were issued to his designees. The warrants were issued
      as compensation for past services rendered and all warrants were immediately
      vested. The warrants had an exercise price of $10.00, which exceeded the market
      price of Pace's common stock at the time of issuance. The value of the warrants
      was separately estimated at $0.20 per share or $10,000 based on the
      Black-Scholes valuation of the call option associated with a five-year warrant.
      As part of the Private Placement, Mr. Pappajohn relinquished the 30,000 warrants
      that were issued to him, and the remaining 7,500 warrants issued to his
      designees were adjusted to 250,000 warrants (post-Plan of Recapitalization)
      to
      purchase common stock exercisable at $0.30 per share, expiring October 23,
      2010.




38




During
      the 340-day period ended December 31, 2007, 25,000 warrants were exercised
      using
      the cashless exercise function and as a result, 23,115 shares of common stock
      were issued. As of December 31, 2007, 225,000 warrants remain
      outstanding.





Investor
      Warrants @ $0.30 per share


In
      connection with the Private Placement, each investor received a warrant to
      purchase up to a number of shares of common stock equal to 25% of such
      investor's subscription amount, divided by the conversion price of the Series
      B
      Preferred Stock, with an exercise price equal to $0.30. As a result, we issued
      to investors warrants to purchase an aggregate of 1,500,000 shares of common
      stock, exercisable at $0.30 per share, expiring March 13, 2012.





During
      the 340-day period ended December 31, 2007, 120,000 warrants were exercised
      generating net proceeds of $36,000. As of December 31, 2007, 1,380,000 warrants
      remain outstanding.





Investor
      Warrants @ $2.50 per share


In
      connection with the Private Placement, each investor received a warrant to
      purchase up to a number of shares of common stock equal to 8.3% of such
      investor's subscription amount, divided by the conversion price of the Series
      B
      Preferred Stock, with an exercise price equal to $2.50 per share. As a result,
      we issued to investors warrants to purchase an aggregate of 500,000 shares
      of
      common stock, exercisable at $2.50 per share, expiring March 13,
      2012.





As
      of
      December 31, 2007, no warrants have been exercised and 500,000 warrants remain
      outstanding.




Placement
      Agent Warrants @ $2.75 per share


In
      connection with the Private Placement, we issued to the Maxim Group LLC, a
      warrant to purchase 300,000 shares of common stock, or 5% of the common stock
      issuable upon conversion of the Series B Preferred Stock, at an exercise price
      equal to $2.75 per share and expiring January 26, 2012.





As
      of
      December 31, 2007, no warrants have been exercised and 300,000 warrants remain
      outstanding.





Summary


As
      of
      December 31, 2007, we have outstanding warrants to purchase an aggregate of
      2,405,000 shares of common stock at an average exercise price of $1.06 and
      have
      reserved shares of our common stock for issuance in connection with the
      potential exercise thereof. During the 340-day period ended December 31, 2007,
      145,000 warrants were exercised resulting in the issuance of 143,115 common
      shares of stock and generating net proceeds of $36,000.





*Common
      Stock Options*


The
      Board
      of Directors has adopted, and our stockholders have approved, the 2007 Stock
      Option Plan (the "2007 Plan"). The 2007 Plan provides for the grant of 1,600,000
      (post-Plan of Recapitalization) incentive stock options, nonqualified stock
      options, restricted stock, stock bonuses and stock appreciation rights. The
      2007
      Plan is administered by the Board of Directors, which has the authority and
      discretion to determine: the persons to whom the options will be granted; when
      the options will be granted; the number of shares subject to each option; the
      price at which the shares subject to each option may be purchased; and when
      each
      option will become exercisable. The options generally vest over three to five
      years and expire no later than ten years from the date of grant.




39




The
      table
      below reflects option activity for the period indicated:


**Number ofShares**
              
              **Weighted-AverageExercise Priceper Share**
              
              **Weighted-AverageRemaining
                  ContractualTerm(Years)**
              
              **AggregateIntrinsicValue**Outstanding,
                  December 31, 2006
              
              
              —
              
              
              —
              
              
              —
              
              
              —Granted
              
              
              1,737,000
              
              $
              2.15Forfeited
              
              
              (138,333
              )
              
              2.01Exercised
              
              
              —
              
              
              —Outstanding,
                  December 31, 2007
              
              
              1,598,667
              
              $
              2.16
              
              
              9.1
              
              $
              1,228,554Exercisable
                  at December 31, 2007
              
              
              100,000
              
              $
              2.01
              
              
              9.1
              
              $
              89,000Remaining
                  shares available for grant
              
              
              1,333




During
      the 340-day period ended December 31, 2007, the 25-day period ended January
      25,
      2007, and the twelve-month period ended December 31, 2006, we recorded
      stock-based compensation expense net of reversals for forfeited options totaling
      $556,449, $0 and $0, respectively.




As
      of
      December 31, 2007, stock-based compensation expense not yet recognized in income
      totaled $1,457,328, which is expected to be recognized over a weighted-average
      remaining period of 3.0 years. The total grant date fair value of stock options
      vested during the
      340-day period ended December 31, 2007, the 25-day period ended January 25,
      2007, and the twelve-month period ended December 31, 2006 was
      $117,205, $0, and $0, respectively.





Management
      intends to issue new shares of Common Stock upon the exercise of
      options.





During
      the twelve months ended December 31, 2007, the Board of Directors authorized
      a
      stock option grant to purchase 65,000 shares of common stock at an average
      exercise price of $3.09 per share. This grant was in excess of the total shares
      available under the 2007 Plan. An increase in the number of shares available
      to
      grant has not been approved by the shareholders. We have determined under SFAS
      123R that the grant date has not yet occurred for these options. Therefore,
      no
      compensation expense has been recognized and these options are not reflected
      in
      any of the option tables as outstanding.





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




Equity
      instruments issued to non-employees in exchange for goods, fees and services
      are
      accounted for under the fair value-based method of SFAS 123.




The
      following table presents the weighted-average assumptions, used to estimate
      the
      fair values of the stock options granted to employees, using the Black-Scholes
      option pricing formula: the risk-free interest rate for periods within the
      contractual life of the option is based on the U.S. Treasury yield curve in
      effect at the time of grant. The expected life is based on our estimate of
      option exercises since we don’t have historical data. Expected volatility is
      based on the average reported volatility of the vesting period of a
      representative sample of six comparable companies in healthcare services niches
      with market capitalizations between $45 million and $1.5 billion.




40




The
      fair
      value of our stock-based awards was estimated assuming no expected dividends
      and
      the following weighted-average assumptions for the 340-day period ended December
      31, 2007:





Expected
                life (years)
            
            
            6.0Expected
                volatility
            
            
            57.15
            %Risk-free
                interest rate
            
            
            4.7
            %Expected
                dividend yield
            
            
            0.0
            %Weighted-average
                fair value of options granted during the period
            
            $
            1.25




The
      following table summarizes additional information about stock options
      outstanding and exercisable as of December 31, 2007:





**Options Outstanding**
            
            **Options Exercisable****ExercisePrice**
            
            **OptionsOutstanding**
            
            **Weighted-Average
                Remaining ContractualLife**
            
            **Weighted-AverageExercisePrice**
            
            **SharesExercisable**
            
            **Weighted-AverageExercisePrice**$
            2.01
            
            
            1,364,667
            
            
            9.08
            
            $
            2.01
            
            
            100,000
            
            $
            2.01$
            2.55
            
            
            40,000
            
            
            9.26
            
            $
            2.55
            
            
            —
            
            $
            0$
            2.95
            
            
            82,500
            
            
            9.48
            
            $
            2.95
            
            
            —
            
            $
            0$
            3.10
            
            
            14,500
            
            
            9.61
            
            $
            3.10
            
            
            —
            
            $
            0$
            3.30
            
            
            97,000
            
            
            9.20
            
            $
            3.30
            
            
            —
            
            $
            01,598,667
            
            
            9.11
            
            $
            2.16
            
            
            100,000
            
            $
            2.01




NOTE
      6. **Property
      and Equipment**




A
      summary
      of property and equipment is as follows:




**SUCCESSOR**
                **December 31,2007**
              
              **PREDECESSOR
                  December 31,2006**Furniture
              
              $
              19,548
              
              $
              13,900Equipment
              
              
              30,693
              
              
              21,475Computers
              
              
              141,178
              
              
              42,152Vehicles
              
              
              36,802
              
              
              36,087Construction
                  in progress
              
              
              93,022
              
              
              —**Tota**l
              
              
              321,243
              
              
              113,614Accumulated
                  depreciation and amortization
              
              
              (108,428
              )
              
              (67,753
              )**Property
                  and equipment, net**
              
              $
              212,815
              
              $
              45,861




NOTE
      7.Notes
      Payable




The
      Company has a note payable for $13,216 and $20,562 at December 31, 2007 and
      December, 31, 2006, respectively. The note requires monthly payments of $695
      including interest at 5.9%. The note is collateralized by a vehicle.




41




NOTE
      8.Accrued
      Expenses




A
      summary
      of accrued expenses is as follows:




**SUCCESSOR
                    December 31,2007**
                
                **PREDECESSOR
                    December 31,2006**Accrued
                    salaries and employee benefits
                
                $
                1,005,852
                
                $
                806,435Accrued
                    medical claims liability
                
                
                542,975
                
                
                181,544Other
                
                
                14,193
                
                
                —**Total
                    accrued expenses**
                
                $
                1,563,020
                
                $
                987,979




**NOTE
      9.****Earnings
      Per Share**




The
      following table sets forth the computation of basic and diluted (loss)
      per-share:




**Per-Share****Amount****Numerator**
              
              **Denominator**
              
              **Net
                  (loss)****340
                  days ended December 31, 2007**Net
                  (loss)
              
              $
              (1,592,021
              )
              
              10,310,994
              
              $
              (0.15
              )





Earnings
      (loss) per share and weighted shares outstanding were not calculated for the
      25-day period ended January 25, 2007 and the twelve-month period ended December
      31, 2006 since these periods reflect activity of the PREDECESSOR and
      are
      not applicable to this presentation.





Common
      stock warrants and options outstanding totaling 4,003,667 shares are not
      included in diluted earnings per common share as they would have an antidilutive
      effect upon earnings per common share.




NOTE
      10.401(k)
      Plan




We
      offer
      a 401(k) plan for the benefit of substantially all of our employees. The
      contributions to the plan include employee voluntary salary reductions, which
      can be no greater than the maximum deduction allowable for federal income tax
      reporting purposes. We offer a safe harbor matching contribution of each
      participant's contribution up to 4% of eligible compensation. We also can
      provide a profit sharing contribution at our discretion. Expenses related to
      this plan totaled approximately $100,000, $6,000 and $81,000 for the 340-day
      period ended December 31, 2007, the 25-day period ended January 25, 2007 and
      the
      year ended December 31, 2006, respectively.




NOTE
      11.Operating
      Leases




We
      lease
      office space and various equipment under certain noncancelable operating leases,
      which expire at various dates through 2013.





Future
      minimum annual lease payments at December 31, 2007 are as follows:





**Twelve
                months ending December 31:**2008
            
            $
            210,4582009
            
            
            184,9022010
            
            
            149,2192011
            
            
            152,1702012
            
            
            149,119Thereafter
            
            
            12,352**Total**
            
            $
            858,220




Rental
      expense under operating leases was $44,342, $2,676 and $39,063 for the 340-day
      period ended December 31, 2007, the 25-day period ended January 25, 2007 and
      the
      twelve-month period ended December 31, 2006, respectively.




42




NOTE
      12.Major
      Customers and Commitments




During
      the 340-day period ended December 31, 2007, the 25-day period ended January
      25,
      2007 and the twelve months ended December 31, 2006, we had approximate sales
      with major customers and related approximate receivables as
      follows:




**SUCCESSOR**
                **For the Period January 26, 2007to December 31, 2007**
              
              **PREDECESSOR**
                **For the Period January 1, 2007 to
                  January 25, 2007**
              
              **PREDECESSOR**
                **For the Twelve Months Ended
                  December 31, 2006****Revenue**
              
              **Accounts
                  Receivable**
              
              **Revenue**
              
              **Accounts
                  Receivable**
              
              **Revenue**
              
              **Accounts
                  Receivable**Company A
              
              $
              5,386,000
              
              $
              55,000
              
              $
              374,000
              
              $
              26,000
              
              $
              1,680,000
              
              $
              10,000Company B
              
              
              3,244,000
              
              
              286,000
              
              
              240,000
              
              
              —
              
              
              3,453,000
              
              
              293,000Company C
              
              
              1,866,000
              
              
              178,000
              
              
              135,000
              
              
              173,000
              
              
              1,882,000
              
              
              334,000Company D
              
              
              1,862,000
              
              
              230,000
              
              
              103,000
              
              
              127,000
              
              
              509,000
              
              
              127,000Company E
              
              
              1,442,000
              
              
              —
              
              
              101,000
              
              
              —
              
              
              1,474,000
              
              
              —




In
      connection with our normal contract activities, we are required to acquire
      performance and payment bonds for certain service contracts. The surety issuing
      the bonds has recourse against certain assets in the event the surety is
      required to honor the bonds. The lengths of our bond contracts vary. Most
      contracts are one year or less, but periodically contracts are obtained which
      exceed one year. At December 31, 2007, the Company had $9,560,061 in outstanding
      bonds.




NOTE
      13.Income
      Tax Matters




Approximate
      deferred taxes consist of the following components:




**As
                    ofDecember 31,2007****Deferred
                    tax asset**Net
                    operating loss carryforwards
                
                $
                6,498,000Research
                    and development credit carryforwards
                
                
                391,000Intangible
                    assets
                
                
                640,000Other
                    timing differences
                
                
                143,0007,672,000Less:
                    valuation allowance
                
                
                7,466,000**Net
                    deferred tax asset**
                
                
                206,000**Deferred
                    tax liability**Goodwill
                
                
                (116,000
                )**Deferred
                    tax asset**
                
                $
                90,000


We
        have
        recorded a valuation allowance of $7,466,000 and $6,982,000 against deferred
        tax
        assets at December 31, 2007 and December 31, 2006, respectively, to reduce
        the
        total to an amount that management believes will more likely than not be
        realized. Management applied a valuation allowance against certain deferred
        tax
        assets because of a limited history of taxable income, the long-term nature
        of
        the deferred tax asset and certain limitations regarding the utilization
        of the
        net operating loss carryforwards. We recognized $90,000 of deferred tax assets
        for the amount we estimate will be realized in the short term. The net operating
        loss carryforwards will expire in years 2008 through 2026. Realization of
        deferred tax assets is dependent upon sufficient future taxable income during
        the period that deductible temporary differences and carryforwards are expected
        to be available to reduce taxable income.


43




The
      Company’s ability to utilize its net operating loss carryforwards is currently
      limited due to Section 382 limitations on change of control. As a result, the
      maximum benefit the company could realize under current federal tax regulations
      is approximately $342,000 over the years 2008 to 2026. Similarly,
      the research and development credit carry foward is also limited due to
      change of control limitations and the maximum benefit is $162,000 for years
      2008 to 2018.




The
      acquisition of Conmed, Inc. in January 2007 is being treated as an asset
      acquisition for federal income tax purposes under Section 338(h)(10), which
      allows the Company to capitalize and amortize for federal income tax
      purposes over a 15-year period.




The
      provision for income taxes differs from the approximate amount of income tax
      benefit determined by applying the U.S. Federal income tax rate to pre-tax
      loss,
      due to the following:




**For
                    340-DayPeriod Ended December 31,2007**Computed
                    federal income tax benefit
                
                $
                (541,000
                )Other,
                    including state income tax benefit
                
                
                (118,000
                )Permanent
                    difference related to stock options
                
                
                194,000Expiration
                    of net operating losses
                
                
                143,000Change
                    in valuation allowance
                
                
                484,000Current
                    income tax expense as shown in statement of operations
                
                $
                162,000Tax
                  benefit of warrant exercises
                  separated in additional paid in capital
                
                
                (162,000
                )Total
                  tax expense shown in financial
                  statements
                
                
                0


At
      December 31, 2007, we had approximately $16,662,000 of net operating loss
      carryforwards subject to Internal Revenue Service ("IRS") change of control
      limitations to offset future federal taxable income.




No
      amounts have been presented for 2006 as the Predecessor was an S-corporation
      and
      as such, not subject to corporate level income taxes.




NOTE
      14. **RELATED
      PARTY TRANSACTIONS**




During
      the first quarter of 2007 and the entire year of 2006, we accrued $4,167 on
      a
      monthly basis, plus direct expenses, to Equity Dynamics, Inc., an entity wholly
      owned by John Pappajohn, Chairman of the Company, for administrative services
      that include: accounting, investor relations, SEC reporting and other consulting
      services. In addition to these administrative expenses, we also reimbursed
      Equity Dynamics, Inc. for expenses related to the negotiation and consummation
      of the Acquisition and Plan of Recapitalization. Such accruals related to Equity
      Dynamics, Inc. for the 340-day period ended December 31, 2007, the 25-day period
      ended January 25, 2007 and the twelve-month period ended December 31, 2006
      and
      totaled $8,353, $6,264 and $37,500, respectively. Accounts payable to Equity
      Dynamics, Inc. as of December 31, 2007 and December 31, 2006 were $0 and $5,796,
      respectively.





On
      October 24, 2005, the Company issued 37,500 warrants to purchase common stock.
      Of these warrants, 30,000 were issued to John Pappajohn and the remaining 7,500
      warrants were issued to his designees. The warrants were issued as compensation
      for past services rendered and all warrants were immediately vested. The
      warrants had an exercise price of $10.00, which exceeded the market price of
      the
      Company's common stock at the time of issuance. The value of the warrants was
      separately estimated at $0.20 per share or $10,000 based on the Black-Scholes
      valuation of the call option associated with a five-year warrant. As part of
      the
      Private Placement, Mr. Pappajohn relinquished the 30,000 warrants that were
      issued to him, and the remaining 7,500 warrants issued to his designees were
      adjusted to 250,000 warrants (post-Plan of Recapitalization) to purchase common
      stock exercisable at $0.30 per share, expiring October 23, 2010. (These figures
      are adjusted to reflect the 1 for 20 reverse stock split effective as of March
      14, 2007).




44




**NOTE
      15.**  **SUBSEQUENT
      EVENT**




On
      February 29, 2008 we acquired nine healthcare contracts with six counties in
      Oregon from Emergency Medicine Documentation Consultants, P.C. for cash and
      stock totaling $490,000. We issued 40,000 warrants expiring on February 28,
      2013, at an exercise price of $1.85 to two employees of a holding company
      controlled by one the Company's directors who assisted us with the acquisition.




**ITEM
              8.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE******




None




**ITEM
      8A** **(T).**   **CONTROLS
      AND PROCEDURES**




*Evaluation
      of Disclosure Controls and Procedures.* Under
      the supervision and with the participation of our management, including our
      Chief Executive Officer and Chief Financial Officer, we evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934 (the "Exchange Act") as of the end of the period covered
      by
      this report. Based upon that evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures as
      of
      the end of the period covered by this report were effective such that the
      information required to be disclosed by us in reports filed under the Securities
      Exchange Act of 1934 is (i) recorded, processed, summarized and reported
      within the time periods specified in the SEC's rules and forms and
      (ii) accumulated and communicated to our management, including our Chief
      Executive Officer and Chief Financial Officer, as appropriate, to allow timely
      decisions regarding disclosure. A controls system cannot provide absolute
      assurance, however, that the objectives of the controls system are met, and
      no
      evaluation of controls can provide absolute assurance that all control issues
      and instances of fraud, if any, within a company have been
      detected.





*Management's
      Annual Report on Internal Control over Financial Reporting.* Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting (as defined in Rule 13a-15(f) under the
      Exchange Act). Our internal control over financial reporting is a process
      designed to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      of
      accounting principles generally accepted in the United States.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Therefore, even those systems determined to
      be
      effective can provide only reasonable assurance of achieving their control
      objectives. ****





Our
      management, with the participation of the Chief Executive Officer and Chief
      Financial Officer, evaluated the effectiveness of the Company's internal control
      over financial reporting as of December 31, 2007. In making this
      assessment, our management used the criteria set forth by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO) in Internal
      Control — Integrated Framework. Based on this evaluation, our management,
      with the participation of the Chief Executive Officer and Chief Financial
      Officer, concluded that, as of December 31, 2007, our internal control over
      financial reporting was effective.





This
      annual report does not include an attestation report of the Company's registered
      public accounting firm regarding internal control over financial reporting.
      Management's report was not subject to attestation by the Company's registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the Company to provide only management's report
      in this annual report.





*Changes
      in Internal Control Over Financial Reporting.* There
      have not been any changes in our internal control over financial reporting
      (as
      defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during
      the
      most recent fiscal quarter that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial reporting.




**ITEM
      8B.**  **OTHER
      INFORMATION**




None




45




**PART
      III.**




**ITEM
              9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
                ACT**




The
      information required by this item is incorporated by reference from our 2008
      Proxy Statement for our Annual Meeting of Stockholders to be filed with the
      SEC
      within 120 days after the end of the fiscal year ended December 31,
      2007.




**ITEM
              10.**
            **EXECUTIVE
                COMPENSATION******




The
        information required by this item is incorporated by reference from our 2008
        Proxy Statement for our Annual Meeting of Stockholders to be filed with the
        SEC
        within 120 days after the end of the fiscal year ended December 31,
        2007.


**ITEM
              11.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                SHAREHOLDER MATTERS******




The
        information required by this item is incorporated by reference from our 2008
        Proxy Statement for our Annual Meeting of Stockholders to be filed with the
        SEC
        within 120 days after the end of the fiscal year ended December 31,
        2007.


**ITEM
              12.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
                INDEPENDENCE**




The
      information required by this item is incorporated
      by reference from our 2008 Proxy Statement for our Annual Meeting of
      Stockholders to be filed with the SEC within 120 days after the end of the
      fiscal year ended December 31, 2007.




46




**ITEM
      13.**  **EXHIBITS** ****




(a)
      The
      following exhibits are filed as a part of this report.


2.1
              
              Agreement
                  and Plan of Merger dated February 14, 2007 (4)3.1
              
              Certificate
                  of Incorporation of Conmed Healthcare Management, Inc.
                  (4)3.1.1
              
              Certificate
                  of Merger effective as of March 14, 2007 (5)3.1.2
              
              Articles
                  of Merger effective as of March 14, 2007 (5)3.2
              
              Bylaws
                  (5)4.1
              
              Amendment
                  to Certificate of Incorporation defining rights of Series B Preferred
                  Stock (3)4.2
              
              Amendment
                  to Certificate of Incorporation defining rights of Series C Preferred
                  Stock (3)4.3
              
              Form
                  of Investor Warrant ($.30) (3)4.4
              
              Form
                  of Investor Warrant ($2.50) (3)4.5
              
              Form
                  of Common Stock Certificate (6)10.1
              
              Stock
                  Purchase Agreement by and among Pace, CONMED and the CONMED Stockholders
                  set forth therein, dated August 2, 2006 (1)10.2
              
              Side
                  letter by and among Pace, CONMED and the CONMED Stockholders set
                  forth
                  therein, dated as of January 12, 2007 (2)10.3
              
              Form
                  of Subscription Agreement dated January 26, 2007, with Registration
                  Rights, by and among Pace and certain investors in the Private
                  Placement
                  (3)10.4
              
              Placement
                  Agency Agreement dated January 16, 2007, by and between Pace and
                  Maxim
                  Group LLC (3)10.5
              
              Form
                  of Securities Purchase Agreement dated January 26, 2007, by and
                  among Pace
                  and certain investors in the Private Placement (3)10.6
              
              Form
                  of Registration Rights Agreement dated January 26, 2007 by and
                  among Pace
                  and certain investors in the Private Placement (3)10.7
              
              Employment
                  Agreement dated January 26, 2007, by and between Richard W. Turner
                  and
                  Pace Health Management Systems, Inc. (6)10.8
              
              Employment
                  Agreement dated January 26, 2007 by and between Howard M. Haft
                  and Pace
                  Health Management Systems, Inc.(6)10.9
              
              Employment
                  Letter Agreement dated August 21, 2006, by and between Thomas Fry
                  and Pace
                  Health Management Systems, Inc. (6)10.10
              
              Form
                  of Employment Letter Agreement dated January 24, 2007, by and between
                  Larry Doll and Conmed Healthcare Management, Inc. (6)10.11
              
              2007
                  Stock Option Plan of Conmed Healthcare Management,
                  Inc.(4)
  47
  10.12
              
              Office
                  Lease Agreement dated November 15, 2004, by and between Susan D.
                  Moxley
                  and Richard R. Olson (dba ConMed, Inc.) (6)10.13
              
              Consulting
                  Agreement dated January 26, 2007, by and between Yankee Partners
                  LLC and
                  Pace Health Management Systems, Inc.(7)10.14
              
              Services
                  Agreement, dated January 31, 2005, by and between The Board of
                  County
                  Commissioners of Sedgwick County, Kansas and ConMed, Inc., as
                  amended(7)10.15
              
              Health
                  Services Agreement, dated March 14, 2002, by and between Sheriff
                  of
                  Harford County and ConMed, Inc., as amended(7)10.16
              
              Medical
                  Service Agreement, dated July 1, 2004, by and between the Sheriff’s Office
                  of Charles County and ConMed, Inc., as amended(7)10.17
              
              Medical
                  Services Agreement, dated January 1, 2006, by and between the Board
                  of
                  County Commissioners of Frederick County and ConMed, Inc., as
                  amended(7)10.18
              
              Agreement
                  dated April 25, 2005, by and between Howard County and ConMed,
                  Inc., as
                  amended(7)10.19
              
              Medical
                  Services Agreement, dated July 1, 2004, by and between the Sheriff
                  of
                  Cecil County and ConMed, Inc., as amended (7)10.20
              
              Agreement
                  for Service, dated July 1, 2005, by and between the County of Loudoun
                  and
                  ConMed, Inc., as amended(7)10.21
              
              Agreement,
                  dated August 12, 2006, by and between the Board of County Commissioners
                  for Yakima County, Washington and ConMed, Inc. (7)10.22
              
              Medical
                  Services Agreement, by and among Conmed, Inc. and Baltimore County,
                  Maryland, dated March 26, 2007 (8)10.23
              
              Medical
                  Services Agreement, by and among Conmed, Inc. and Henrico County
                  Virginia,
                  dated May 7, 2007 (8)10.24
              
              Amendment
                  to Medical Services Agreement, by and among Conmed, Inc. and Yakima
                  County, Washington, dated April 3, 2007 (9)10.25
              
              Contract
                  Renewal Agreement, by and among Conmed, Inc. and Yakima County,
                  Washington, dated September 4, 2007 (9)10.26
              
              Amendment
                  to Medical Services Agreement, by and among Conmed, Inc. and Yakima
                  County, Washington, dated September 4, 2007 (9)10.27
              
              First Amendment to
                  Services Agreement, by and among Conmed, Inc. and Sedgwick County,
                  Kansas,
                  dated June 1, 2007 (9)10.28
              
              Medical
                  Services Agreement, by and among Conmed, Inc. and Yakima County,
                  Washington, dated October 2, 2007 (9)10.29
              
              Office
                  Lease Agreement by and between Conmed, Inc, and 7250 Limited Partners,
                  LLLP dated December 10, 2007*21
              
              Subsidiaries
                  *31.1
              
              Certification
                  of Registrant’s Chief Executive Officer pursuant to Rule
                  13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
                  *
  48
  31.2
              
              Certification
                  of Registrant’s Chief Financial Officer pursuant to Rule
                  13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
                  *32.1
              
              Certification
                  of Registrant’s Chief Executive Officer pursuant to Rule
                  13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and
                  18 U.S.C.
                  Section 1350. *32.2
              
              Certification
                  of Registrant’s Chief Financial Officer pursuant to Rule
                  13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and
                  18 U.S.C.
                  Section 1350. *




*
            Filed
                herewith(1)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K filed on August
                8, 2006(2)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K filed on January
                17, 2007(3)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K filed on February
                1, 2007(4)
            Incorporated
                by reference to the Company’s Definitive Proxy Statement on Schedule 14A
                filed on February 27, 2007(5)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K filed on March
                19, 2007(6)
            Incorporated
                by reference to the Company’s Registration Statement on Form SB-2 filed on
                April 3, 2007(7)
            Incorporated
                by reference to the Company’s Registration Statement on Form SB-2/A filed
                on May 10, 2007(8)
            Incorporated
                by reference to the Company’s Quarterly Report on Form 10-QSB filed August
                14, 2007(9)
            Incorporated
                by reference to the Company’s Quarterly Report on Form 10-QSB filed
                November 14, 2007(10)
            Incorporated
                by reference to the Company’s Registration Statement on Form SB-2/A filed
                on May 25, 2007




**ITEM
      14.****PRINCIPAL
      ACCOUNTANT FEES AND SERVICES******




The
      information required by this item is included under the caption "Independent
      Public Accountants" in the 2008 Proxy Statement and is incorporated herein
      by
      reference.




49




SIGNATURES





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**Conmed
                Healthcare Management, Inc.**March
                    31, 2008By
                  /s/ Richard W. TurnerRichard
                  Turner, President and Chief Executive
                  Officer





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




March
                  31, 2008By
                  /s/ John PappajohnJohn
                  Pappajohn, Chairman of the Board of DirectorsBy
                  /s/ Richard W. TurnerRichard
                  Turner, President and Chief Executive Officer
                  andDirectorBy
                  /s/ Edward B. BergerEdward
                  B. Berger, DirectorBy
                  /s/ Terry E. BranstadTerry
                  E. Branstad, DirectorBy
                  /s/ John W. CollotonJohn
                  W. Colloton, DirectorBy
                  /s/ Howard M. HaftHoward
                  M. Haft, Executive Vice President and Chief
                  MedicalOfficerBy
                  /s/ Thomas W. FryThomas
                  W. Fry, Chief Financial Officer and
                  Secretary




50