Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C. 20549



FORM 10-QSB



QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934





|For the quarter ended: |  | Commission File Number:
|---------------------- |  | -----------------------
|September 30, 2006     |  | 0-27554                



PACE Health Management Systems, Inc.

(Exact name of small business issuer as specified in its charter)



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



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





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



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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject of the filing requirements for at least the past 90 days.
YES xNO o



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



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



|                     | Number of Shares Outstanding
|-------------------- | ----------------------------
|Class                | November 14, 2006           
|Common Stock, no par | 5,716,074                   



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

---

PACEHEALTH MANAGEMENT SYSTEMS, INC.



PART I.FINANCIAL INFORMATION



|                                                                  |     
|----------------------------------------------------------------- | ----
|ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)                          | Page
|                                                                  |     
|Condensed Balance Sheets                                          |     
|September 30, 2006 and December 31, 2005                          | 3   
|                                                                  |     
|Condensed Statements of Operations                                |     
|Three Months and Nine Months Ended September 30, 2006 and 2005    | 4   
|                                                                  |     
|Condensed Statements of Cash Flows                                |     
|Nine Months Ended September 30, 2006 and 2005                     | 5   
|                                                                  |     
|Notes to Condensed Financial Statements                           | 6   
|                                                                  |     
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION | 7   
|                                                                  |     
|ITEM 3. CONTROLS AND PROCEDURES                                   | 9   
|                                                                  |     

PART II.OTHER INFORMATION

|                                                            |  
|----------------------------------------------------------- | -
|ITEM 1. LEGAL PROCEEDINGS                                   | 9
|                                                            |  
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES             | 9
|                                                            |  
|ITEM 3. DEFAULT UPON SENIOR SECURITIES                      | 9
|                                                            |  
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 9
|                                                            |  
|ITEM 5. OTHER INFORMATION                                   | 9
|                                                            |  
|ITEM 6. EXHIBITS                                            | 9

2

---

Table of Contents

PART 1.   FINANCIAL INFORMATION



ITEM  1.   FINANCIAL STATEMENTS



PACE HEALTH MANAGEMENT SYSTEMS, INC.

CONDENSED BALANCE SHEETS (UNAUDITED)



|                                                                 | September 30, 2006 |  | December 31, 2005
|---------------------------------------------------------------- | ------------------ |  | -----------------
|Assets                                                           |                    |  |                  
|Current Assets                                                   |                    | 
|Cash and cash equivalents                                        |                    |  | $                
|Interest receivable                                              |                    |  |                  
|Prepaid expenses                                                 |                    |  |                  
|Cash held in escrow                                              |                    |  |                  
|                                                                 |                    |  |                  
|Total current assets                                             |                    |  | $                
|                                                                 |                    |  |                  
|                                                                
|Other Assets                                                     |                    |  |                  
|                                                                 |                    |  |                  
|Total Assets                                                     |                    |  | $                
|                                                                 |                    |  |                  
|                                                                
|Liabilities and shareholders equity                             |                    | 
|Current Liabilities                                              |                    | 
|Accounts payable                                                 |                    |  | $                
|                                                                 |                    |  |                  
|Total current liabilities                                        |                    |  |                  
|                                                                 |                    |  |                  
|                                                                
|Shareholders equity                                             |                    | 
|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                                                 |                    |  |                  
|                                                                 |                    |  |                  
|Common stock, no par value; authorized 20,000,000 shares; issued
|and outstanding 5,716,074 shares                                 |                    |  |                  
|Additional paid-in capital                                       |                    |  |                  
|                                                                
|Accumulated deficit                                              |                    |  |                  
|                                                                 |                    |  |                  
|Total stockholders' equity                                       |                    |  |                  
|                                                                 |                    |  |                  
|Total liabilities and stockholders' equity                       |                    |  | $                
|                                                                 |                    |  |                  

See Notes to Condensed Financial Statements

3

---

Table of Contents

PACE HEALTH MANAGEMENT SYSTEMS, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                             | Three months endedSeptember 30, |  | Nine months endedSeptember 30,
|-------------------------------------------- | ------------------------------- |  | ------------------------------
|
|Net revenues                                 |                                 |  | $                             
|                                             |                                 |  |                               
|Costs and expenses                           |                                 | 
|General and administrative                   |                                 |  |                               
|                                             |                                 |  |                               
|(Loss) from operations                       |                                 |  |                               
|                                            
|Interest income                              |                                 |  |                               
|                                             |                                 |  |                               
|(Loss) before income taxes                   |                                 |  |                               
|                                             |                                 |  |                               
|                                            
|Provision for income taxes                   |                                 |  |                               
|                                             |                                 |  |                               
|Net (loss)                                   |                                 |  |                               
|Preferred dividends in arrears               |                                 |  |                               
|                                             |                                 |  |                               
|Net (Loss) available to common shareholders  |                                 |  | $                             
|                                             |                                 |  |                               
|                                            
|(Loss) per share                             |                                 | 
|Basic                                        |                                 |  | $                             
|                                             |                                 |  |                               
|Fully diluted                                |                                 |  | $                             
|                                             |                                 |  |                               
|Weighted average number of common and common |                                 | 
|equivalent shares outstanding                |                                 |  |                               
|                                             |                                 |  |                               

See Notes to Condensed Financial Statements

4

---

Table of Contents

PACE HEALTHMANAGEMENT SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)





|                                                           | Nine months ended September 30,
|---------------------------------------------------------- | -------------------------------
|
|Cash flows from operating activities                       |                                
|                                                          
|Net (Loss)                                                 |                                
|Change in working capital components:                      |                                
|                                                          
|Increase in prepaid expenses and interest receivable       |                                
|Increase in accounts payable and other current liabilities |                                
|                                                          
|Increase in other assets                                   |                                
|                                                           |                                
|                                                          
|Net cash (used in) operating activities                    |                                
|                                                           |                                
|                                                          
|Cash flows from investing activities                       |                                
|                                                          
|Cash held in escrow                                        |                                
|                                                           |                                
|                                                          
|Net increase (decrease) in cash                            |                                
|                                                          
|Cash and cash equivalents                                  |                                
|Beginning                                                  |                                
|                                                           |                                
|Ending                                                     |                                
|                                                           |                                

See Notes to Condensed Financial Statements

5

---

Table of Contents

PACE HEALTH MANAGEMENT SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



Note 1.   Basis of presentation



The accompanying financial information should be
read in conjunction with the annual financial statements and notes thereto for the year ended December 31, 2005. The financial
information included herein is unaudited; such information reflects all adjustments, which, in the opinion of management, are
necessary in order to make the financial statements not misleading.



The results of operations for the three months are
not necessarily indicative of the results to be expected for the entire fiscal year.



Note 2.   Accounting
Policy



Cash held in escrow:  Cash is being held in escrow for purposes of the proposed acquisition of ConMed, Inc. See discussion of transaction in Note 6.



Note 3.   Stock-based Compensation



Effective January 1, 2006, the Company adopted the
provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard
(SFAS) No. 123 (revised), Share-Based Payment (SFAS 123R) using a modified version of
prospective application. Prior to the adoption of SFAS 123R, the Company accounted for share-based payments to employees using the
intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees(APB 25). Under the provisions of APB 25, restricted stock awards were accounted for using variable
plan accounting whereby compensation expense or benefit was recorded each period from the date of grant to the measurement date
based on the fair value of the Companys common stock at the end of each period. Stock option awards were accounted for using
fixed plan accounting whereby the Company recognized no compensation expense for stock option awards because the exercise price of
options granted was equal to the fair value of the common stock at the date of grant.



Under the modified prospective application, the
provisions of SFAS 123R apply to new awards and to awards outstanding on January 1, 2006 and subsequently modified, repurchased or
cancelled. Under the modified prospective approach, compensation expense recognized in the second quarter of 2006 includes
compensation costs for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of
SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.



As a result of all stock-based compensation being
fully vested as of December 31, 2005, there is no effect on income before taxes, net income and basic and diluted earnings per
share for the three months ended September 30, 2006.



6

---

Table of Contents

Note 4.   Basic and diluted
(loss) per share



On January 1, 1997 the Company 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 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). The effect of stock options, warrants, and
convertible preferred stock was not included in the computation because to do so would have been antidilutive. At September 30,
2006, there were approximately 750,000 shares issuable under warrant or option arrangements and 10,806,249 shares issuable under
conversion of Series A convertible participating preferred stock.



Note 5.   Related Party
Transactions



Administration expenses related to Equity Dynamics,
Inc., an entity wholly owned by a Director of the Company, totaled $12,500 and $12,500 for the three months ended September 30,
2006 and 2005, respectively, and totaled $37,500 and $37,500 for the nine months ended September 30, 2006 and 2005,
respectively.



Note 6.   Proposed Acquisition



On August 2, 2006, Pace Health Management Systems,
Inc., an Iowa corporation (Pace) entered into a Stock Purchase Agreement (Agreement) with ConMed, Inc., a
Maryland corporation (ConMed) and certain stockholders of ConMed (the ConMed Stockholders), pursuant to
which Pace will purchase all the issued and outstanding capital stock of ConMed from the ConMed Stockholders (the
Acquisition). Following completion of the Acquisition, ConMed will effectively become the operating public
company.



The Agreement provides that at closing, the ConMed
Stockholders will be paid consideration consisting of : (i) $8,000,000, less a $250,000 cash deposit paid on the date the
Agreement was signed (which cash deposit shall (a) be held in escrow until the consummation of the Acquisition, and (b) be
non-refundable provided, however, that in the event ConMed and/or any of the ConMed Stockholders fail to fully satisfy the closing
conditions and any other required obligations set forth in the Agreement, the cash deposit shall be returned to Pace) and (ii)
5,714 shares of a newly created series of Pace preferred stock. A portion of the purchase price will be funded from the proceeds
of a private placement financing which is expected to close in the fourth quarter.



In connection with the anticipated ConMed
Acquisition, on September 15, 2006, ConMed hired a financial consultant at an annual salary of $175,000. Pace has been reimbursing
ConMed for such payments. It is anticipated that, if the Acquisition is consummated, such individual will act as Paces chief
financial officer going forward. Such individual is entitled to certain benefits and six-months severance if Pace terminates such
relationship.



ITEM 2.   MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



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 (the
Transaction).



Following the Transaction, the Company has no
ongoing operations and no revenues and has minimal operating expenses. The Companys September 30, 2006 balance sheet
reflects current assets of $1,364,459 and current liabilities of $57,916.



7

---

Table of Contents

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 the combination of cash on hand and net operating loss carryforwards, subject to the limitation of such
carryforwards under the Internal Revenue Code, may be attractive to potential partners and would better serve the interests of the
Companys shareholders than immediate liquidation and distribution. If no suitable business combination is identified and
consummated, the Company may elect to liquidate and distribute the remaining net proceeds to shareholders. If the Company
liquidated total assets of $1,642,434 at the present time, only preferred stockholders would be paid due to a liquidation
preference of $5,403,125 as of September 30, 2006 (included in this figure is $2,528,125 in accrued dividends). On August 2,
2006, the Company entered into a definitive agreement, but as of September 30, 2006, such Agreement had not been consummated. (See
Part I. Note 6. Proposed Acquisition).



RESULTS OF OPERATIONS



General and administrative:  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 $123,000 and $27,480 for the three months ended September 30, 2006 and 2005, respectively, representing an increase of 347.60%. General and administrative expenses were $225,312 and $82,351 for the nine months ended September 30, 2006 and 2005, respectively, representing an increase of 173.60%, due mainly to an increase in auditing, consulting, and administrative fees, as well as costs and fees incurred in connection with the negotiation of the Agreement and related transactions with ConMed, Inc.



Interest Income:  Interest income was $17,143 and $14,320 for the three months ended September 30, 2006 and 2005, respectively, representing an increase of 19.71%. Interest income was $55,752 and $30,246 for the nine months ended September 30, 2006 and 2005, respectively, representing an increase of 84.33%. This increase is due mainly to an increase in money market and certificate of deposit interest rates.



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.



LIQUIDITY AND CAPITAL RESOURCES



Net cash used in operating activities for the nine
months ended September 30, 2006 and 2005 was $398,317 and $56,955, respectively. The Company has no ongoing operations and no
revenues and has minimal operating expenses. The Companys September 30, 2006 balance sheet reflects current assets of
$1,364,459 and current liabilities of $57,916.



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 the combination of cash on hand and net operating loss carryforwards, subject to the limitation of such
carryforwards under the Internal Revenue Code, may be attractive to potential partners and would better serve the interests of the
Companys shareholders than immediate liquidation and distribution. If no suitable business combination is identified and
consummated, the Company may elect to liquidate and distribute the remaining net proceeds to shareholders. If the Company
liquidated total assets of $1,642,434 at the present time, only preferred stockholders would be paid due to a liquidation
preference of $5,403,125 as of September 30, 2006 (included in this figure is $2,528,125 in accrued dividends). On August 2, 2006,
the Company entered into a definitive agreement, but as of September 30, 2006, such Agreement had not been consummated. (See Part
I. Note 6. Proposed Acquisition).

8

---

Table of Contents

ITEM 3.   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 acting 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 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.



PART II.   OTHER INFORMATION



ITEM 1.   Legal Proceedings

None




ITEM 2.   Unregistered Sales of Equity Securities

None




ITEM 3.   Default upon Senior Securities

None




ITEM 4.   Submission of Matters to a Vote of Security Holders

None




ITEM 5.   Other Information



On October 31, 2006, the Agreement with ConMed,
Inc. and its stockholders expired, and the Company forfeited its non-refundable deposit of $250,000. As of the date of this
filing, the Company is in continued negotiations with ConMed, Inc. in order to extend the Agreement. There can be no guarantee
that the Agreement will be extended, or, if extended, that it will be consummated.



ITEM 6.   EXHIBITS



31
        Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


32
        Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002






9


---

Table of Contents

SIGNATURES



In accordance with requirements 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)                        
|                 
|                  |                                     
|November 14, 2006 |                                     
|Dated             |                                     

10

---