# 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, 2004     | 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 | (IRS Employer Identification Number)
|incorporation or organization) 

| | 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.
Yesü
No

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 12, 2004           
|Common Stock, no par | 5,716,074                   

Transitional Small Business Disclosure Format (Check one):     Yes

No
ü
.

1

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# PACE HEALTH MANAGEMENT SYSTEMS, INC.

# PART I. FINANCIAL INFORMATION

|ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)                           | Page
|------------------------------------------------------------------- | ----
|                                                                    |     
|Condensed Balance Sheets                                           
|September 30, 2004 and December 31, 2003                            | 3   
|Condensed Statements of Operations                                 
|Three Months and Nine Months Ended September 30, 2004 and 2003      | 4   
|Condensed Statements of Cash Flows                                 
|Nine Months Ended September 30, 2004 and 2003                       | 5   
|Notes to Condensed Financial Statements                             | 6   
|ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION   | 7   
|ITEM 3. CONTROLS AND PROCEDURES                                     | 8   
|PART II. OTHER INFORMATION                                         
|ITEM 1. LEGAL PROCEEDINGS                                           | 8   
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 8   
|ITEM 3. DEFAULTS 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

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# PART 1. FINANCIAL INFORMATION

# ITEM 1. FINANCIAL STATEMENTS

# PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)

---

|                                                                 | September 30,2004 |  | December 31,2003
|---------------------------------------------------------------- | ----------------- |  | ----------------
|                                                                 |                   |  |                 
|ASSETS                                                           |                   |  |                 
|CURRENT ASSETS:                                                  |                   | 
|Cash and cash equivalents                                        |                   |  | $               
|Accounts receivable                                              |                   |  |                 
|Prepaid expenses                                                 |                   |  |                 
|                                                                 |                   |  |                 
|                                                                 |                   |  | $               
|                                                                 |                   |  |                 
|                                                                 |                   | 
|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                                              |                   |  |                 
|                                                                 |                   |  |                 
|                                                                 |                   |  |                 
|                                                                 |                   |  |                 
|                                                                 |                   |  | $               
|                                                                 |                   |  |                 

See Notes to Condensed Financial Statements.

3

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# 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

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# PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

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|                                                        | Nine months endedSeptember 30,
|------------------------------------------------------- | ------------------------------
|                                                        |                               
|CASH FLOWS FROM OPERATING ACTIVITIES                    |                               
|                                                        |                               
|Net (Loss)                                              |                               
|Change in working capital components:                   |                               
|(Increase) in prepaid expenses and other current assets |                               
|Increase (decrease) in accounts payable                 |                               
|                                                        |                               
|Net cash (used in) operating activities                 |                               
|                                                        |                               
|                                                        |                               
|CASH FLOWS FROM INVESTING ACTIVITIES                    |                               
|Maturity of certificate of deposit                      |                               
|                                                        |                               
|                                                        |                               
|Net increase (decrease) in cash and cash equivalents    |                               
|                                                        |                               
|CASH AND CASH EQUIVALENTS                               |                               
|Beginning                                               |                               
|                                                        |                               
|Ending                                                  |                               
|                                                        |                               

See Notes to Condensed Financial Statements.

5

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# PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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# 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, 2003. 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
nine months are not necessarily indicative of the results to be expected for the entire
fiscal year.

# Note 2. Stock-based Compensation

On January 1, 1996, the Company
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.

# Note 3. 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, 2004, there are approximately 70,000 shares issuable under warrant or option
arrangements and 9,656,250 shares issuable under conversion of Series A convertible
participating preferred stock.

# Note 4. Related Party Transactions

Administration expenses paid to
Equity Dynamics, Inc., an entity wholly owned by a Director of the Company, totaled
$13,250 and $12,500 for the three months ended September 30, 2004 and 2003, respectively,
and totaled $41,750 and $38,000 for the nine months ended September 30, 2004 and 2003,
respectively.

6

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# 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. The Companys enterprise-wide, client/server
applications automated charting, clinical workflow processes and clinical pathways. The
Companys core system, PACE CMS, was a modular suite of advanced software
applications that provided hospitals, physicians offices, and integrated delivery
systems a comprehensive system for interdisciplinary documentation, nursing care
planning, clinical pathway management and enterprise-wide order management, all at the
point of care.

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. 3M offered positions to most of the Companys
employees and assumed full support of the Companys customers. 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 June 30, 2004 balance sheet
reflects cash and cash equivalents of approximately $1.8 million and no material
liabilities.

The net proceeds from the sale 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-QSB, no definitive agreement has been signed
for a follow-on transaction. If no suitable business combination is identified within a
reasonable period of time, 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.

# 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 $27,693 and $26,962 for the three months ended
September 30, 2004 and 2003, respectively, representing an increase of 2.7%. General and
administrative expenses were $86,830 and $82,258 for the nine months ended
September 30, 2004 and 2003, respectively, representing an increase of 5.6%, due mainly
to an increase in audit and administrative fees.

7

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Interest Income: Interest
income was $4,713 and $4,789 for the three months ended September 30, 2004 and 2003,
respectively, representing a decrease of 1.6%. Interest income was $13,913 and $20,214
for the nine months ended September 30, 2004 and 2003, respectively, representing a
decrease of 31.2%. These decreases are due mainly to a decrease in the total cash, cash
equivalents and certificate of deposits from the prior year.

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, 2004 and 2003 was $70,515 and $72,531,
respectively. Following the Transaction, the Company has no ongoing operations and no
revenues and has minimal operating expenses. The Companys September 30, 2004
balance sheet reflects cash and cash equivalents of approximately $1.8 million and no
material liabilities.

The net proceeds from the sale 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. As of the date of
this Form 10-QSB, 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 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 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.

# PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
      N/A

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
      N/A

8

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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
      N/A

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
      N/A

ITEM 5. OTHER INFORMATION.
      N/A

ITEM 6.  EXHIBITS
      Exhibits
                  31.1  Section 302 Certification by Director and Acting Principal Executive Officer
                  31.2  Section 302 Certification by Director and Acting Principal Financial Officer
                  32.1  Section 906 Certification by Director and Acting Principal Executive Officer
                  32.2  Section 906 Certification by Director and Acting Principal Financial Officer

# 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 12, 2004 |  | /s/ John Pappajohn      
|----------------- |  | ------------------------
|                  |  |                         
|Dated             |  | John Pappajohn, Director

9

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