Table of Contents





# U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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# FORM 10-KSB

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# x  
Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the year ended December 31, 2005

# o  
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

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PACE HEALTH MANAGEMENT SYSTEMS, INC.
(Name of small business issuer as specified in its charter)

|Iowa                            |  | 42-1297992                           | 
|------------------------------- |  | ------------------------------------ | 
|(State or other jurisdiction of |  | (IRS Employer Identification Number) | 
|incorporation or organization)  | 

2116 Financial Center
Des Moines, IA 50309
(Address and zip code of principal executive offices)

(515) 244-5746
(Issuers telephone number, including area code)

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

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

Common Stock, no par
(Title of class)

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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  x   NO o

Issuers net revenues for its most recent fiscal year: $0

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 22, 2006 as reported by Reuters, Ltd., was
approximately $869,104. 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:

|Class                |  | Number of Shares OutstandingMarch 28, 2006
|-------------------- |  | ------------------------------------------
|Common Stock, no par |  | 5,716,074                                 

Transitional Small Business Disclosure Format (Check one):    Yes   o   
NO x





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# PACE HEALTH MANAGEMENT SYSTEMS, INC.
2005 FORM 10-KSB ANNUAL REPORT

TABLE OF CONTENTS

|          |  |                                                                                                                 |  |    | 
|--------- |  | --------------------------------------------------------------------------------------------------------------- |  | -- | 
|
|PART I.  
|         
|ITEM 1.   |  | Description of Business                                                                                         |  | 1  | 
|         
|ITEM 2.   |  | Description of Property                                                                                         |  | 1  | 
|         
|ITEM 3.   |  | Legal Proceedings                                                                                               |  | 1  | 
|         
|ITEM 4.   |  | Submission of Matters to a Vote of Security Holders                                                             |  | 1  | 
|         
|         
|PART II.  | 
|         
|ITEM 5.   |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 2  | 
|         
|ITEM 6.   |  | Managements Discussion and Analysis or Plan of Operation                                                       |  | 2  | 
|         
|ITEM 7.   |  | Financial Statements                                                                                            |  | 3  | 
|         
|ITEM 8.   |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                            |  | 13 | 
|         
|ITEM 8A.  |  | Controls and Procedures                                                                                         |  | 13 | 
|         
|ITEM 8B.  |  | Other Information                                                                                               |  | 13 | 
|         
|         
|PART III. | 
|         
|ITEM 9.   |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act |  | 13 | 
|         
|ITEM 10.  |  | Executive Compensation                                                                                          |  | 14 | 
|         
|ITEM 11.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 15 | 
|         
|ITEM 12.  |  | Certain Relationships and Related Transactions                                                                  |  | 16 | 
|         
|ITEM 13.  |  | Exhibits                                                                                                        |  | 16 | 
|         
|ITEM 14.  |  | Principal Accountant Fees and Services                                                                          |  | 17 | 

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Table of Contents

# PART I.

# ITEM 1.   DESCRIPTION OF BUSINESS

# GENERAL

Prior to October 1998, PACE developed and marketed advanced patient care
management software systems that enabled healthcare providers to standardize the delivery of care, maximize resource utilization
and improve clinical outcomes.

On October 7, 1998, the Company completed the sale of substantially all of
its assets to, and the assumption of certain of its liabilities by, Minnesota Mining and Manufacturing Company (3M)
(the Transaction). The sale was made pursuant to an Asset Purchase Agreement dated June 30, 1998, as amended, as
described in Companys definitive proxy statement dated September 14, 1998. The Transaction was approved by the holders of
both the common stock and the preferred stock at a special meeting of shareholders held on October 7, 1998.

The purchase price of the Transaction was approximately $5.9 million,
including $4.75 million in cash, of which $750,000 was originally placed in escrow to secure the Companys indemnification
obligations under the Asset Purchase Agreement, plus the assumption of substantially all of the Companys liabilities other
than $2.1 million in line of credit balances, which were paid off from proceeds at closing. Subsequent to the closing of the
Transaction, the Company agreed that $25,000 of the amount in escrow could be paid to 3M as part of a purchase price adjustment
contemplated by the Asset Purchase Agreement, leaving an escrow balance of $725,000.

In July 1999, the Company received proceeds from the restricted escrow
account totaling approximately $525,000. In December 2000, the Company received final proceeds from the restricted escrow account
totaling $104,953. A like amount was also paid to 3M in final settlement and as an adjustment to the purchase price.

Following the Transaction, the Company has no ongoing operations and no
revenues and has minimal operating expenses. The Company presently has no employees. The Companys December 31, 2005 balance
sheet reflects current assets of $1,738,858 million and current liabilities of $3,523.

The net proceeds from the transaction will be retained by the Company pending
a determination of whether to engage in a follow-on transaction. The Company has been seeking a business combination with another
entity, before considering possible liquidation and distribution of its assets. The Company believes that with the cash on hand
and net operating loss carryforwards, subject to the limitation of such carryforwards under the Internal Revenue Code, such a
combination may be attractive to potential partners and would better serve the interests of the Companys shareholders. As of
the date of this Form 10-KSB, no definitive agreement has been signed for a follow-on transaction. If no suitable business
combination is identified, the Company may elect to liquidate and distribute the remaining net proceeds to shareholders. If the
Company liquidated at the present time, all of the net assets of the Company would be paid to holders of the Companys
preferred stock.

# ITEM 2.   DESCRIPTION OF PROPERTY

The Company does not currently have any office facilities.

# ITEM 3.   LEGAL PROCEEDINGS

None

# ITEM 4.   SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the shareholders of the Company in the
fourth quarter of 2005.

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Table of Contents

# PART II.

# ITEM 5.   MARKET FOR COMMON EQUITYAND RELATED STOCKHOLDER MATTERS

Beginning May 19, 1998, PACE Common Stock has been quoted on the OTC Bulletin
Board under the symbol PCES. From the Companys initial public offering on April 27, 1995 through May 18, 1998,
the Companys Common Stock was traded on The NASDAQ Small Cap Market. The following table sets forth the range of high and
low sales prices of the Companys 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.

|Quarter ended |  | High |  | Low 
|------------- |  | ---- |  | ----
|3/31/04       |  | 0.20 |  | 0.07
|6/30/04       |  | 0.16 |  | 0.08
|9/30/04       |  | 0.11 |  | 0.07
|12/31/04      |  | 0.13 |  | 0.06
|3/31/05       |  | 0.27 |  | 0.08
|6/30/05       |  | 0.20 |  | 0.11
|9/30/05       |  | 0.15 |  | 0.10
|12/31/05      |  | 0.15 |  | 0.10

The Company has declared no cash dividends since its inception with respect
to the Common Stock, and has no plan to declare a dividend in the near future. If declared by the Board of Directors, the holders
of Preferred Stock are entitled to receive annual dividends at the rate of $0.10 per share. The Board has declared no cash
dividends with respect to the Preferred Stock and has no plan to declare a dividend in the near future other than in connection
with the completion of a follow-on transaction or the liquidation of the Company. As of March 22, 2006, there were 71 shareholders
of record of the Companys common stock. The Company did not repurchase any of its equity securities during 2005.

On October 24, 2005, the Company
issued five-year warrants to purchase an aggregate of 750,000 shares of the Companys
Common Stock at $.50 per share, which warrants were immediately exercisable.  The
issuance of the warrants was exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended, which provides an exemption for transactions not involving a
public offering.

# ITEM 6.   MANAGEMENTS DISCUSSIONAND ANALYSIS OR PLAN OF OPERATION

# CRITICAL ACCOUNTING POLICIES

Since, at this time, the Company has no ongoing operations or revenues, we
have not identified any critical accounting policies.

# RESULTS OF OPERATIONS

REVENUES:   Following the Transaction, the Company has no
ongoing operations or revenues.

GENERAL AND ADMINISTRATIVE EXPENSES:   General and
administrative expenses include bookkeeping costs, legal fees, expenses associated with shareholder relations and SEC reporting
requirements, and insurance. General and administrative expenses were $119,394 and $110,316 in 2005 and 2004, respectively,
representing an increase of 8.2%.

INTEREST INCOME:   Interest income was $47,963 and $19,461 in
2005 and 2004, respectively, representing an increase of 146.5%. This increase is the result of higher interest rates achieved
with the purchase of a certificate of deposit.

PROVISION FOR INCOME TAXES:   No provision for income tax
benefit has been recorded due to the Company recording a valuation allowance on the deferred tax assets.

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# LIQUIDITY AND CAPITAL RESOURCES

Since inception in 1987 through 1994, the Companys primary source of
funding for working capital needs, capital expenditures and its operating losses was from the sale of common and convertible
preferred stock. During this time, the Company completed numerous private placements, receiving approximately $7.8 million in
aggregate net proceeds. In 1995, the Company completed its initial public offering by selling 1,300,000 shares of common stock at
$5.00 per share for net proceeds to the Company of approximately $5.5 million. Additionally, in September 1996, PACE sold 900,000
shares of common stock at $3.25 per share providing net proceeds of approximately $2.8 million. In the third and fourth quarters
of 1997, the Company sold 2,250,000 shares of convertible preferred stock at $1.00 per share representing total proceeds of
$2,250,000. In the first quarter of 1998, the Company sold an additional 625,000 shares of convertible participating preferred
stock at $1.00 per share representing proceeds of $625,000. Each share of preferred stock is convertible into 2 shares of common
stock.

The Company recorded net losses of $71,431 and $90,855 with cash used in
operations of $69,601 and $89,119 for 2005 and 2004, respectively.

Net cash provided by financing activities for the years ended December 31,
2005 and 2004 was none and none, respectively.

As of December 31, 2005, the Company had liabilities of $3,523, and cash and
cash equivalents of $1,738,958. As of March 28, 2006 the Company has no ongoing operations and no revenues and has minimal
operating expenses. The Company presently has no employees.

The net proceeds from the transaction will be retained by the Company pending
a determination of whether to engage in a follow-on transaction. The Company has been seeking a business combination with another
entity, before considering possible liquidation and distribution of its assets. The Company believes that with the cash on hand
and net operating loss carryforwards, subject to the limitation of such carryforwards under the Internal Revenue Code, such a
combination may be attractive to potential partners and would better serve the interests of the Companys shareholders. As of
the date of this Form 10-KSB, no definitive agreement has been signed for a follow-on transaction. If no suitable business
combination is identified, the Company may elect to liquidate and distribute the remaining net proceeds to shareholders. If the
Company liquidated at the present time, all of the net assets of the Company would be paid to holders of the Companys
preferred stock.

# ITEM 7.   FINANCIAL STATEMENTS

# CONTENTS

|                                                       
|-------------------------------------------------------
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|                                                       
|                                                       
|FINANCIAL STATEMENTS                                   
|Balance Sheets                                         
|Statements of Operations                               
|Statements of Shareholders Equity                     
|Statements of Cash Flows                               
|Notes to Financial Statements                          

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# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
PACE Health Management Systems, Inc.
Des Moines, Iowa

We have audited the accompanying balance sheets of PACE Health Management
Systems, Inc. as of December 31, 2005 and 2004, and the related statements of operations, shareholders equity and cash flows
for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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 financial statements referred to above present fairly, in
all material respects, the financial position of PACE Health Management Systems, Inc. as of December 31, 2005 and 2004, and the
results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting
principles.

McGladrey & Pullen, LLP
Des Moines, Iowa
March 25, 2006

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# PACE HEALTH MANAGEMENT SYSTEMS, INC.

# BALANCE SHEETS
DECEMBER 31, 2005 AND 2004

|ASSETS                                                             | 2005 |  | 2004
|------------------------------------------------------------------ | ---- |  | ----
|CURRENT ASSETS                                                     |      |  |     
|Cash and cash equivalents (Note 5)                                 |      |  | $   
|Interest receivable                                                |      |  |     
|Prepaid expenses                                                   |      |  |     
|                                                                   |      |  |     
|                                                                   |      |  | $   
|                                                                   |      |  |     
|LIABILITIES AND SHAREHOLDERS EQUITY                               |      | 
|                                                                  
|CURRENT LIABILITIES                                               
|Accounts payable                                                   |      |  | $   
|                                                                   |      |  |     
|TOTAL CURRENT LIABILITIES                                          |      |  |     
|                                                                   |      |  |     
|SHAREHOLDERS EQUITY                                               |      | 
|Serial preferred stock, no par value, authorized 1,000,000 shares;
|issued none                                                        |      |  |     
|Convertible participating preferred stock, Series A, no par        |      | 
|value; authorized 4,000,000 shares; issued and outstanding         |      | 
|2,875,000 shares (liquidation preference of; 2005 5,187,500;       |      | 
|2004 4,900,000 (Note 6)                                            |      |  |     
|                                                                  
|Common stock, no par value; authorized 20,000,000 shares;         
|issued and outstanding 5,716,074 shares                            |      |  |     
|Additional paid-in capital                                         |      |  |     
|Accumulated deficit                                                |      |  |     
|                                                                   |      |  |     
|                                                                   |      |  |     
|                                                                   |      |  |     
|                                                                   |      |  | $   
|                                                                   |      |  |     

# See Notes to Financial Statements.

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# PACE HEALTH MANAGEMENT SYSTEMS, INC.

# STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004

|                                             | 2005 |  | 2004
|-------------------------------------------- | ---- |  | ----
|Net revenues                                 |      |  | $   
|                                            
|General and administrative expenses (Note 7) |      |  |     
|                                             |      |  |     
|(LOSS) FROM OPERATIONS                       |      |  |     
|                                             |      |  |     
|                                            
|Other income (expense):                      |      | 
|Interest income                              |      |  |     
|                                             |      |  |     
|                                             |      |  |     
|                                             |      |  |     
|(LOSS) BEFORE INCOME TAXES                   |      |  |     
|                                            
|Provision for income taxes (Note 4)          |      |  |     
|                                             |      |  |     
|NET (LOSS)                                   |      |  |     
|Preferred dividends in arrears               |      |  |     
|                                             |      |  |     
|NET (LOSS) AVAILABLE TO COMMON SHAREHOLDERS  |      |  | $   
|                                             |      |  |     
|                                            
|(Loss) per share (Note 3)                    |      | 
|Basic                                        |      |  | $   
|                                             |      |  |     
|Fully diluted                                |      |  | $   
|                                             |      |  |     

# See Notes to Financial Statements.

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# PACE HEALTH MANAGEMENT SYSTEMS, INC.

# STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004

|                           | PreferredStock |  | Common Stock |           | AdditionalPaid-InCapital |   | AccumulatedDeficit |  | Total
|-------------------------- | -------------- |  | ------------ | --------- | ------------------------ | - | ------------------ |  | -----
|Balance, December 31, 2003 |                |  |              | 2,875,000 |                          |   | 17,065,136         |  |      
|Net (loss)                 |                |  |              |          |                          |   |                   |  |      
|                           |                |  |              |           |                          |   |                    |  |      
|Balance, December 31, 2004 |                |  |              | 2,875,000 |                          |   | 17,065,136         |  |      
|Net (loss)                 |                |  |              |          |                          |   |                   |  |      
|Warrant Compensation       |                |  |              |          |                          |   |                   |  |      
|                           |                |  |              |           |                          |   |                    |  |      
|BALANCE, DECEMBER 31, 2005 |                |  | $            | 2,875,000 |                          | $ | 17,065,136         |  | $    
|                           |                |  |              |           |                          |   |                    |  |      

# See Notes to Financial Statements.

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# PACE HEALTH MANAGEMENT SYSTEMS, INC.

# STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004

|                                                          | 2005 |  | 2004
|--------------------------------------------------------- | ---- |  | ----
|CASH FLOWS FROM OPERATING ACTIVITIES                      |      |  |     
|Net (loss)                                                |      |  | $   
|Adjustments to reconcile net (loss) to net cash (used in)
|operating activities:                                    
|Warrant compensation                                      |      |  |     
|Change in working capital components:                    
|(Increase) in interest receivable                         |      |  |     
|Decrease in accounts receivable                           |      |  |     
|Decrease in prepaid expenses                              |      |  |     
|Increase(decrease) in accounts payable                    |      |  |     
|                                                          |      |  |     
|NET CASH (USED IN) OPERATING ACTIVITIES                   |      |  |     
|                                                          |      |  |     
|                                                         
|(DECREASE) IN CASH AND CASH EQUIVALENTS                   |      |  |     
|                                                         
|CASH AND CASH EQUIVALENTS                                 |      | 
|Beginning                                                 |      |  |     
|                                                          |      |  |     
|Ending                                                    |      |  | $   
|                                                          |      |  |     
|                                                         
|SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES,
|Warrant compensation                                      |      |  |     

# See Notes to Financial Statements.

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Table of Contents

# PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

# NOTE 1.   NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of business:   Prior to the sale of the majority of its
assets, the Company was in the business of developing, marketing and supporting advanced clinical software that automates the
recording, storage and management of patient care information. The software provided complete care management solutions to
physicians, nurses and other clinicians in multiple settings at the point of care. The Company has no ongoing operations and has
minimal operating expenses. The Company presently has no employees.

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

Accounting estimates and assumptions:   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. Actual results could differ from those estimates.

Cash equivalents:   The Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash equivalents. At December 31, 2005, cash equivalents
consisted of an interest-bearing money market account and a certificate of deposit at a commercial bank.

Stock-based compensation:   The Company has adopted Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation as amended by SFAS 148, which
establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for
transactions in which an entity issues its equity instruments to acquire goods and services from non-employees. However, SFAS 123
allows employee compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion (APBO) No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures.
The Company has elected to continue to apply the intrinsic value based method of accounting for stock-based employee compensation.
Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the quoted market price
of the Companys stock at the date of grant over the amount an employee must pay to acquire the stock.

At December 31, 2005, the Company has stock-based compensation plans which
are described in Note 2. The Company applies the principles of APB 25 and related interpretations in accounting for its plans. At
December 31, 2005 and 2004, all stock options were either exercised or expired.

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 bases. 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:   The Company has adopted
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, which requires the Company to present basic and
diluted income (loss) per share amounts. Basic 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).

New Accounting Pronouncements:   In December 2004, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123 (Revised),
Share-Based Payment (SFAS No. 123(R)), establishing accounting standards for transactions in which an entity exchanges
its equity instruments for goods or services. SFAS No. 123(R) also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entitys equity instruments, or that may be settled by
the issuance of those equity instruments. SFAS No. 123(R) covers a wide range of share-based compensation arrangements, including
stock options, restricted stock plans, performance-based stock awards, stock appreciation

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rights, and employee stock purchase plans. SFAS No. 123(R) replaces existing
requirements under SFAS No. 123, Accounting for Stock-Based Compensation, and eliminates the ability to account for
share-based compensation transactions using APB Opinion No. 25. The provisions of SFAS No. 123(R) are effective for PACE Health
Management Systems, Inc. on January 1, 2005. The adoption of SFAS No. 123(R) will not have an impact on the company since there
are no outstanding stock options at December 31, 2005.

# NOTE 2.   COMMON STOCK WARRANTS AND OPTIONS

Common stock warrants

The Company issued common stock purchase warrants to various shareholders,
directors, employees, and certain accredited investors. The warrants expire ten years after the date of issuance. At December 31,
2004, warrants to purchase 70,000 were outstanding and exercisable. The warrants are exercisable at a price of $3.00 per share.
All 70,000 warrants expired in August, 2005.

On October 24, 2005, the Company issued 750,000 warrants to purchase common
stock.  Of these warrants, 600,000 were issued to John Pappajohn and the remaining 150,000 warrants were issued to his
designees.  The warrants were issued as compensation for past services rendered and all warrants were immediately
vested.  The warrants have an exercise price of $0.50, 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 $0.01 per share or $10,000 based on the
Black-Scholes valuation of the call option associated with a five year warrant.

The Company has warrants outstanding and exercisable for the purchase of
750,000 shares of common stock at December 31, 2005. These warrants have a weighted average exercise price of $0.50.

Common stock options

In December 1994, the Board of Directors adopted the Companys 1995
Stock Compensation Plan (the stock compensation plan). The stock compensation plan provides for the grant of incentive
stock options, nonqualified stock options, restricted stock, stock bonuses and stock appreciation rights. The stock compensation
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; 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. Options under the stock compensation plan
expire on the second anniversary of the date the employee ceased employment with the Company. On January 5, 1998 by Board action,
the exercise price for all current employee options was changed to $0.50. The exercise price was subsequently reduced to $0.10 for
options held by one employee in recognition of his continued employment by the Company subsequent to the sale of assets. At
December 31, 2005 and 2004, all options to purchase shares were either exercised or expired, and there were 461,311 shares
available for grant with no shares outstanding. There was no activity under the 1995 stock compensation plan during the years
ending December 31, 2005 and 2004.

In March 1996, the Board of Directors adopted the Nonqualified Executive
Stock Option Plan (the stock option plan). The stock option plan provides for the grant of nonqualified stock options
to executive officers of the Company. The Company has reserved 800,000 shares for issuance pursuant to the stock option plan.
Options may be granted at prices determined by the Board of Directors, which may not be less than 85% of the fair market value of
the shares subject to the options as of the date of grant. Options vest at the rate of 20% on the first anniversary date of the
grant and 20% on each of the next four anniversary dates of the grant. On January 5, 1998, by Board action, the exercise price for
all current, non-qualified stock options to executive officers was changed to $0.50. Options expire on the second anniversary of
the date the employee ceased employment with the Company. At December 31, 2005 and 2004, all options to purchase shares were
either exercised or expired, and there were 594,300 shares available for grant.

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# NOTE 3.   EARNINGS PER SHARE

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

|                                                           |  |  | Per-Share Amount
|---------------------------------------------------------- |  |  | ----------------
|
|
|Net (loss)                                                 |  |  | $               
|Dividends in arrears included in the calculation           |  |  |                 
|                                                           |  | 
|Basic earnings per share, available to common stockholders |  |  | $               
|                                                           |  |  |                 
|                                                          
|
|Net (loss)                                                 |  |  | $               
|Dividends in arrears included in the calculation           |  |  |                 
|                                                           |  | 
|Basic earnings per share, available to common stockholders |  |  | $               
|                                                           |  |  |                 

The following contingently issuable shares were not included in diluted
earnings per common share as they would have an antidilutive effect upon earnings per common share:

|                                            | 2005 |  | 2004
|------------------------------------------- | ---- |  | ----
|Shares issuable upon conversion of Series A |      |  |     
|convertible participating preferred stock   |      |  |     
|Common stock warrants outstanding           |      |  |     

# NOTE 4.   INCOME TAX MATTERS

Approximate deferred taxes consist of the following components as of December
31, 2005 and 2004:

|                                              | 2005 |  | 2004
|--------------------------------------------- | ---- |  | ----
|Deferred tax assets:                          |      |  |     
|Net operating loss carryforwards              |      |  | $   
|Research and development credit carryforwards |      |  |     
|Warrants                                      |      |  |     
|                                              |      |  |     
|                                              |      |  |     
|Less valuation allowance                      |      |  |     
|                                              |      |  |     
|                                              |      |  | $   
|                                              |      |  |     

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The Company recorded a valuation allowance of $6,957,000 and $7,133,000,
against deferred tax assets at December 31, 2005 and 2004, respectively, to reduce the total to an amount that management believes
will ultimately be realized. 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. The net
change in the valuation allowance for deferred tax assets was an increase(decrease) of $(176,000) and $35,000 during 2005 and
2004, respectively.

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 pretax loss for the years ended December 31, 2005 and 2004,
due to the following:

|                                                     | 2005 |   | 2004
|---------------------------------------------------- | ---- | - | ----
|Computed federal income tax (benefit)                |      |   | $   
|Other, primarily computed state income tax benefit   |      |   |     
|Permanent difference related to expired warrants and
|expiration of operating loss carryforwards           |      |   |     
|Change in the valuation allowance                    |      |   |     
|                                                     |      |   |     
|                                                     | $    |  |     
|                                                     |      |   |     

At December 31, 2005, the Company has approximately $16,826,000 of net
operating loss carryforwards to offset future federal taxable income. This net operating loss carryforward will, if unused, expire
in the years 2006 through 2025.

# NOTE 5.   CONCENTRATION OF CREDIT RISK

The Company maintains cash in bank deposit accounts that, at times, may
exceed federally insured limits. The Company has not experienced any losses in such accounts.

# NOTE 6.   CONVERTIBLE PARTICIPATING PREFERRED STOCK AND VOTING
RIGHTS

The Convertible Participating Preferred Stock must be converted into fully
paid and non-assessable shares of Common Stock by the Company upon the earlier of (i) the closing of a Qualified Public Offering,
or (ii) the affirmative vote of the holders of a majority of the outstanding Convertible Participating Preferred Stock for a
mandatory conversion. A Qualified Public Offering is a public offering of the shares of the Company in which (a) a
minimum of $10 million is raised in such offering by the Company, or (b) the per share purchase price is at least $4.00 and (c)
the offering is underwritten on a firm basis by a recognized underwriter.

Each share of Convertible Participating Preferred Stock shall be convertible
into fully paid and nonassessable shares of Common Stock at a rate of two shares of Common Stock for each share of Convertible
Participating Preferred Stock, subject to adjustment when Common Stock has been proportionately adjusted. The initial
Conversion Price shall be equal to $1.00 per share divided by the Conversion Rate. Upon conversion, all accumulated
and unpaid dividends to the conversion date on the Convertible Participating Preferred Stock so converted shall also be converted
into fully paid and nonassessable shares of Common Stock at the rate of $0.50 of accumulated and unpaid dividends for each share
of Common Stock.

The holders of the Convertible Participating Preferred Stock are entitled to
an annual $0.10 cumulative dividend per share payable in cash and shall become due and payable when, as and if declared by the
Board of Directors or the conversion of the Convertible Preferred Stock. Accumulated undeclared dividends in arrears were
approximately $2,312,500 and $2,025,000 at December 31, 2005 and 2004, respectively and $0.80 and $0.70 per share respectively.

Convertible Participating Preferred Stock is entitled to two votes per share
(reflecting its 2-for-1 conversion feature), and Common Stock is entitled to one vote per share.

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# NOTE 7.   RELATED PARTY TRANSACTIONS

Administration expenses paid to Equity Dynamics, Inc., an entity wholly owned
by a Director of the Company, totaled $50,500 and $55,750 in 2005 and 2004, respectively.

On October 24, 2005, the Company issued 750,000 warrants to purchase common
stock.  Of these warrants, 600,000 were issued to John Pappajohn and the remaining 150,000 warrants were issued to his
designees.  The warrants were issued as compensation for past services rendered and all warrants were immediately
vested.  The warrants have an exercise price of $0.50, 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 $0.01 per share or $10,000 based on the
Black-Scholes valuation of the call option associated with a five year warrant.

# ITEM 8.   CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE

None

# ITEM 8A.   CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure
that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed,
summarized and reported on a timely basis. The Companys director and acting chief executive and financial officer has
reviewed and evaluated the Companys disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report (the
Evaluation Date). Based on such evaluation, he has concluded that, as of the Evaluation Date, the Companys
disclosure controls and procedures are effective in bringing to his attention on a timely basis material information relating to
the Company required to be included in the Companys periodic filings under the Exchange Act.

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

# ITEM 8B.   OTHER INFORMATION

None

# PART III.

# ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                  SECTION 16(a) OF THE EXCHANGE ACT

# DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following sets forth information concerning the current directors of the
Company:

John Pappajohn, age 77, has been a director of the Company since January
1994, Mr. Pappajohn has served as Acting Chief Executive Officer and Chief Financial Officer of the Company since 1999. Since
1969, Mr. Pappajohn has been the sole owner of Pappajohn Capital Resources, a venture capital fund, and President of Equity
Dynamics, Inc., a financial consulting firm, both located in Des Moines, Iowa. Mr. Pappajohn also serves as a director of the
following public companies: MC Informatics, Inc.; Allion Healthcare, Inc.; Patient Infosystems, Inc.; American CareSource
Holdings, Inc.; and Chairman of the Board of Healthcare Acquisition Corp.

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# CORPORATE GOVERNANCE

The Board of Directors has established an Audit Committee to advise the Board
of Directors on questions, policies and general matters of accounting, financing and operating controls, to review the audit of
the Companys financial statements, and to select auditors subject to the approval of the full Board and ratification by the
shareholders. Mr. Pappajohn is the sole member....

The Company does not currently have an audit committee financial expert, nor
has it adopted a code of ethics, the reason being it has no ongoing business activities. In the future if it ever does have
ongoing business activities it will consider at that time appointing an audit committee financial expert and adopting a code of
ethics.

The Board of Directors as a whole acts as a nominating committee for
candidates for the Board of Directors. Directors are selected without regard to race, creed, color, sex or national origin, and
must have demonstrated outstanding business and civic accomplishments. The Board of Directors will consider all candidates
recommended by shareholders in accordance with the procedure to be established in the Companys Bylaws, which require
recommendations to be submitted in writing ninety days in advance of the annual meeting of shareholders. Such recommendations
should include the name and address of the shareholder and the candidate pursuant to which the recommendation is being made, such
other information about the candidate pursuant to which the recommendation is being made, such other information about the
candidate as required to be included in the Companys proxy statement and the consent of the candidate to serve as a director
if elected. Recommendations should be sent to the Secretary, PACE Health Management Systems, Inc., 2116 Financial Center, Des
Moines, Iowa 50309.

The Board of Directors of the Company held five meetings during 2005.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 requires the
Companys executive officers and directors, and persons who own more than ten percent of a registered class of the
Companys equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange
Commission (the SEC). Executive officers, directors and greater than 10% shareholders are required by SEC regulation
to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms
received by it, the Company believes that, during fiscal year 2005, all executive officers, directors and greater than ten-percent
beneficial owners complied with the applicable filing requirements.

# ITEM 10.   EXECUTIVE COMPENSATION

# DIRECTOR COMPENSATION

Directors receive no compensation for serving on the Board of Directors other
than reimbursement of reasonable expenses incurred in attending meetings. Nonemployee directors who are not affiliated with
principal shareholders and who began service as directors prior to February 1995 received nonqualified warrants to purchase Common
Stock. All warrants issued to nonemployee directors prior to February 1995 have expired and are no longer outstanding.

On October 24, 2005, the Company issued 750,000 warrants to purchase common
stock.  Of these warrants, 600,000 were issued to John Pappajohn, and 150,000 were issued to his designees.  The
warrants were issued as compensation for past services rendered and all warrants were immediately vested.

Subsequent to February 10, 1995, under the 1995 Stock Compensation Plan, new
non-employee directors receive a nondiscretionary grant of nonqualified stock options for 21,820 shares upon their election or
appointment to the Board. The Plan provides for automatic grants of nonqualified stock options to new non-employee directors at an
exercise price equal to 100% of the fair market value of the shares on the date of grant. One-fifth of such options vest over each
of five years from the date of election or appointment of the new non-employee director. The non-employee director options are
exercisable for ten years from the date of grant. The Compensation Committee has no discretion regarding the grant or terms of
non-employee director options. During 2005, no options were granted to any board members.

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# EXECUTIVE COMPENSATION

The Companys Chief Executive Officer did not receive any compensation
during the years ended December 31, 2004 through December 31, 2005. In addition, there were no other persons who served as
executive officers of the Company during the year ended December 31, 2005 whose total annual salary and bonus for the year
exceeded $100,000.

See Item 12 for a discussion of payments made to a company owned by the
Companys Chief Executive Officer and Director Compensation above for a discussion of warrants issued to Mr.
Pappajohn and his designees.

# STOCK OPTIONS/SARS/LTIPS

There were no stock options, stock appreciation rights or restricted stock
units granted to the Chief Executive Officer during the year ended December 31, 2005. There were no payments made on any long-term
incentive plans during the year ended December 31, 2005. The Chief Executive Officer did not exercise any options during fiscal
2005 and did not hold any options as of December 31, 2005.

# ITEM 11.   SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND
                   MANAGEMENT AND RELATED SHAREHOLDER MATTERS

# SHARE OWNERSHIP

The following tables set forth, as of March 28, 2006, based on the
information available to the Company, the number and percentages of shares of the Common Stock and Preferred Stock beneficially
owned by each current director, by the Chief Executive Officer of the Company by all directors and such executive officers as a
group, and by each person known to the Company to be the beneficial owner of more than 5% of the outstanding shares of the
Companys Common Stock and Preferred Stock. The table setting forth information with respect to holders of Common Stock
includes (i) shares of Common Stock issuable upon the exercise of options and warrants exercisable within 60 days and (ii) shares
of Common Stock issuable upon conversion of Preferred Stock, which is convertible into Common Stock on a 2-for-1 basis. The
Company is aware of no stockholder, other than those listed below, claiming to hold more than five percent of any class of the
Companys outstanding voting securities.

|NAME AND ADDRESSOF BENEFICIAL OWNER (3)   | NO. OF SHARESBENEFICIALLY OWNED (1)(2) |  | PERCENT OF CLASSOUTSTANDING (2)
|----------------------------------------- | -------------------------------------- |  | -------------------------------
|COMMON STOCK:                             |                                        |  |                                
|                                         
|DIRECTORS AND OFFICERS:                   |                                        | 
|John Pappajohn (4)                        |                                        |  |                                
|All present directors and named executive |                                        | 
|officers as a group (1 person) (4)        |                                        |  |                                
|                                         
|OTHER FIVE PERCENT OR MORE SHAREHOLDERS: 
|Simon Casady                              |                                        |  |                                
|Edgewater Private Equity Fund, L.P. (5)   |                                        |  |                                
|Gainesborough, LLC (6)                    |                                        |  |                                
|                                         
|PREFERRED STOCK:                         
|                                         
|DIRECTORS AND OFFICERS:                   |                                        | 
|John Pappajohn                            |                                        |  |                                
|                                         
|OTHER FIVE PERCENT OR MORE SHAREHOLDERS:  |                                        | 
|Gainesborough, LLC                        |                                        |  |                                
|Edgewater Private Equity Fund, L.P.       |                                        |  |                                

|_________________
|-----------------
|(1)              

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|(2) | Pursuant to such SEC Rules, shares deemed
beneficially owned by virtue of an individuals right to acquire them are also treated as outstanding and when calculating
the percent of the class owned by such individual and when determining the percent owned by any group in which the individual is
included.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Except as noted, the address of each director and
executive officer of the Company is 2116 Financial Center, Des Moines, Iowa 50309.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 100,000 common stock shares held by Halkis,
Ltd. and 109,917 common shares held by the John & Mary Pappajohn Scholarship Foundation, both affiliates of Mr. Pappajohn,
765,301 common stock shares, 1,500,000 preferred stock shares convertible into 3,000,000 common stock shares, cumulative dividends
convertible into 2,413,043 common stock shares and 600,000 exercisable warrants for common stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 517,090 common shares and 1,000,000 common
shares issuable upon conversion of 500,000 preferred shares, and 804,348 common shares issuable upon conversion of preferred
cumulative dividends as of December 31, 2005 held by Edgewater Private Equity Fund, L.P., 900 N. Michigan Ave., 14th
Floor, Chicago, IL 60611.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes 444,887 common shares, 1,062,742 common
shares issuable upon conversion of 531,731 preferred shares, and 854,814 common shares issuable upon conversion of preferred
cumulative dividends as of December 31, 2005 held by Gainsborough, LLC, 420 Bedford Street, Suite 110, Lexington, MA 02420.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

_________________

Information concerning the
Companys compensation plans is found in Note 2 to the financial statements set forth
in Item 7. All compensation plans were approved by the Companys shareholders.

# ITEM 12.   CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS

During 2005 and 2004, the Company paid $4,167 on a monthly basis, plus direct
expenses, to Equity Dynamics, Inc., an entity wholly owned by John Pappajohn, a Director of the Company, for administrative
services that include among other things; accounting, investor relations, and SEC reporting. Total payments received during 2005
and 2004 were $50,500 and $55,750, respectively.

# ITEM 13.   EXHIBITS

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

| | 3. |  | Articles of Incorporation and Bylaws
| | -- |  | ------------------------------------

| | 3.1 |  | Restated Articles of Incorporation, as amended (1)
| | --- |  | --------------------------------------------------

| | 3.2 |  | Restated Bylaws (1)
| | --- |  | -------------------

| | 4. |  | Instruments defining the rights of shareholders
| | -- |  | -----------------------------------------------

| | 4.1 |  | Form of Common Stock Certificate (2)
| | --- |  | ------------------------------------

| | 4.2 |  | Restated Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1)
| | --- |  | -----------------------------------------------------------------------------------------

| | 4.3 |  | Restated Bylaws (Incorporated by reference to Exhibit 3.2)
| | --- |  | ----------------------------------------------------------

| | 10. |  | 1995 Stock Compensation Plan, effective February 10, 1995 (2)
| | --- |  | -------------------------------------------------------------

| | 10.1 |  | Form of Incentive Stock Option Agreement (2)
| | ---- |  | --------------------------------------------

| | 10.2 |  | Form of Non-Qualified Stock Option Agreement (2)
| | ---- |  | ------------------------------------------------

| | 10.3 |  | Form of Non-Employee Director Non-Qualified Stock Option Agreement (2)
| | ---- |  | ----------------------------------------------------------------------

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| | 10.4 |  | Non-Qualified Executive Stock Option Plan adopted March 25, 1996 (3)
| | ---- |  | --------------------------------------------------------------------

| | 10.5 |  | Form of October 2005 Stock Purchase Warrant
| | ---- |  | -------------------------------------------

| | 31.1 |  | Section 302 Certification by Acting Chief Executive Officer and Acting Chief Financial Officer
| | ---- |  | ----------------------------------------------------------------------------------------------

| | 32.1 |  | Section 906 Certification by Acting Chief Executive Officer and Acting Chief Financial Officer
| | ---- |  | ----------------------------------------------------------------------------------------------

|_________________
|-----------------
|(1)              

|(2) | Incorporated by reference to the Companys
Registration Statement on Form SB-2, Registration No. 33-90408-C, effective April 27, 1995.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the Companys Form
10-QSB for the quarter ended March 31, 1996.
|--- | --------------------------------------------------------------------------------------------

# ITEM 14.   PRINCIPAL ACCOUNTANT FEESAND SERVICES

During the period covering the fiscal years ended December 31, 2005 and 2004,
McGladrey & Pullen, LLP and its affiliate, RSM McGladrey, Inc. performed the following professional services:

|DESCRIPTION    |  |  | 2005 |        | 2004
|-------------- |  |  | ---- | ------ | ----
|Audit Fees (1) |  |  | $    | 26,000 |     
|Tax Fees (2)   |  |  | $    | 660    |     
|All Other Fees |  |  | $    |       |     

|_________________
|-----------------
|(1)              

|(2) | Tax fees consist of compliance fees for the
preparation of federal and state tax returns.
|--- | -----------------------------------------------------------------------------------------

Fees for professional services rendered by the Companys principal
accountants are pre-approved by the Companys Director and majority shareholder.

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# 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.

|PACE HEALTH MANAGEMENT SYSTEMS, INC. (Registrant)
|-------------------------------------------------
|                                                 
|March 31, 2006                                   
|                                                 
|                                                 

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, 2006 | By | /s/   John Pappajohn                                                                                                                                                 
|-------------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |    | John Pappajohn, Acting Chief Executive Officer,Acting Chief Financial Officer and Director(principal executive officer and principalfinancial and accounting officer)
|              

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

EXHIBIT INDEX TO FORM 10-KSB

|For the fiscal year ended December 31, 2005 |  |  |  | Commission File No. 0-27554 | 
|------------------------------------------- |  |  |  | --------------------------- | 

_________________

PACE HEALTH MANAGEMENT SYSTEMS, INC.

_________________

|ExhibitNumber |  | Item
|------------- |  | ----

|10.5 |  | Form
of October 2005 Stock Purchase Warrant
|---- |  | -------------------------------------------

|31.1 |  | Section
302 Certification by Acting Chief Executive Officer and Acting Chief Financial Officer
|---- |  | ----------------------------------------------------------------------------------------------

|32.1 |  | Section
906 Certification by Acting Chief Executive Officer and Acting Chief Financial Officer
|---- |  | ----------------------------------------------------------------------------------------------

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