UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q


(Mark
One)




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
      EXCHANGE ACT OF 1934.





For the
quarterly period ended March 31, 2009





OR





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
      EXCHANGE ACT OF 1934.





For the
transition period
from                 
to




Commission
File Number:


0-27554




Conmed
Healthcare Management, Inc.


(Exact
name of registrant as specified in its charter)




Delaware
                
                42-1297992(State
      or other jurisdiction of incorporation or organization)
                
                (I.R.S.
      Employer Identification
No.)




7250
      Parkway Dr., Suite 400
                  Hanover,
      MD
                
                21076(Address
      of principal executive offices)
                
                (Zip
      Code)





(410)
      567-5520(Registrant’s
      telephone number, including area
code)




Indicate
by check mark whether the registrant (1) has 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 to such filing requirements for
the past 90 days.


YES x
    NO  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).


YES  ̈
    NO  ̈




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





Large
      Accelerated filer  ̈
            Accelerated
      filer  ̈Non-Accelerated
      filer  ̈
            Smaller
      reporting company x(Do
      not check if a smaller reporting company)





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


YES  ̈
    NO x




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




Number
      of Shares OutstandingClass
                    
                    May 14, 2009Common
      Stock, $0.0001 par value per share
                    
                    12,596,834







CONMED
HEALTHCARE MANAGEMENT, INC.





TABLE
OF CONTENTS




PagePART I. FINANCIAL
      INFORMATIONITEM
      1. FINANCIAL STATEMENTS (UNAUDITED)Consolidated
      Balance SheetsMarch
      31, 2009 and December 31, 2008
                                                        1Consolidated
      Statements of OperationsFor the three months ended March 31, 2009 and
      2008
                                                        2Consolidated
      Statements of Cash FlowsFor the three months ended March 31, 2009 and
      2008
                                                        3Consolidated
      Statements of Shareholders’ EquityFor the three months ended March 31,
      2009
                                                        4Notes to Consolidated Financial Statements
                                                        5ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                                                        12ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                                                        17ITEM
      4(T). CONTROLS AND PROCEDURES
                                                        17PART II. OTHER
      INFORMATION
 ITEM
      1. LEGAL PROCEEDINGS
                              19ITEM
      1A. RISK FACTORS
                              19ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
    PROCEEDS
                              19ITEM
      3. DEFAULTS UPON SENIOR
      SECURITIES
                              19ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                              19ITEM
      5. OTHER INFORMATION
                              19ITEM
      6. EXHIBITS
                              19SIGNATURES
                              20




i




PART
1.  FINANCIAL INFORMATION




ITEM
      1.
            FINANCIAL
      STATEMENTS




CONMED
HEALTHCARE MANAGEMENT, INC.


CONSOLIDATED
BALANCE SHEETS





March 31, 2009
                            (unaudited)
                          
                          
                          December 31,
                            2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                          
                          $
                          8,285,126
                          
                          
                          $
                          7,472,140Accounts
      receivable
                          
                          
                          2,925,592
                          
                          
                          
                          2,375,583Prepaid
      expenses
                          
                          
                          139,021
                          
                          
                          
                          291,599Total
      current assets
                          
                          
                          11,349,739
                          
                          
                          
                          10,139,322PROPERTY
      AND EQUIPMENT, NET
                          
                          
                          511,296
                          
                          
                          
                          529,304DEFERRED
      TAXES
                          
                          
                          645,000
                          
                          
                          
                          645,000OTHER
      ASSETSService
      contracts acquired, net
                          
                          
                          1,510,000
                          
                          
                          
                          2,004,000Non-compete
      agreements, net
                          
                          
                          724,667
                          
                          
                          
                          821,667Goodwill
                          
                          
                          6,254,544
                          
                          
                          
                          6,254,544Deposits
                          
                          
                          15,408
                          
                          
                          
                          15,408Total
      other assets
                          
                          
                          8,504,619
                          
                          
                          
                          9,095,619$
                          21,010,654
                          
                          
                          $
                          20,409,245LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                          
                          $
                          1,353,204
                          
                          
                          $
                          1,080,259Accrued
      expenses
                          
                          
                          3,549,171
                          
                          
                          
                          3,210,749Taxes
      payable
                          
                          
                          179,283
                          
                          
                          
                          432,380Deferred
      revenue
                          
                          
                          640,295
                          
                          
                          
                          561,734Notes
      payable, current portion
                          
                          
                          52,213
                          
                          
                          
                          170,228Total
      current liabilities
                          
                          
                          5,774,166
                          
                          
                          
                          5,455,350NOTES
      PAYABLE, LONG-TERM
                          
                          
                          35,000
                          
                          
                          
                          35,000DERIVATIVE
      FINANCIAL INSTRUMENTS
                          
                          
                          2,726,360
                          
                          
                          
                          —SHAREHOLDERS’
      EQUITYPreferred
      stock, no par value; authorized 5,000,000 shares; issued and outstanding
      zero shares as of March 31, 2009 and December 31, 2008
                          
                          
                          —
                          
                          
                          
                          —Common
      stock, $0.0001 par value, authorized 40,000,000 shares; issued and
      outstanding 12,477,539 and 12,457,539 shares as of March 31, 2009 and
      December 31, 2008, respectively
                          
                          
                          1,248
                          
                          
                          
                          1,246Additional
      paid-in capital
                          
                          
                          34,680,263
                          
                          
                          
                          36,875,610Retained
      (deficit)
                          
                          
                          (22,206,383
                          )
                          
                          
                          (21,957,961
                          )Total
      shareholders' equity
                          
                          
                          12,475,128
                          
                          
                          
                          14,918,895$
                          21,010,654
                          
                          
                          $
                          20,409,245





See
Notes to unaudited Financial Statements


Page - 1
-


CONMED
HEALTHCARE MANAGEMENT, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)




For the Three
                            Months Ended
                            March 31, 2009
                          
                          
                          For the Three
                            Months Ended
                            March 31, 2008Service
      contract revenue
                          
                          $
                          12,419,241
                          
                          
                          $
                          7,836,250HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                          
                          
                          6,987,854
                          
                          
                          
                          4,114,027Medical
      expenses
                          
                          
                          2,381,933
                          
                          
                          
                          2,016,588Other
      operating expenses
                          
                          
                          384,205
                          
                          
                          
                          233,436Total
      healthcare expenses
                          
                          
                          9,753,992
                          
                          
                          
                          6,364,051Gross
      profit
                          
                          $
                          2,665,249
                          
                          
                          $
                          1,472,199Selling
      and administrative expenses
                          
                          
                          1,815,527
                          
                          
                          
                          1,589,012Depreciation
      and amortization
                          
                          
                          634,821
                          
                          
                          
                          499,450Total
      operating expenses
                          
                          
                          2,450,348
                          
                          
                          
                          2,088,462Operating
      income (loss)
                          
                          
                          214,901
                          
                          
                          
                          (616,263
                          )OTHER
      INCOME (EXPENSE)Interest
      income
                          
                          
                          28,628
                          
                          
                          
                          65,898Interest
      (expense)
                          
                          
                          (5,205
                          )
                          
                          
                          (1,689
                          )Change
      in fair value of derivatives
                          
                          
                          866
                          
                          
                          
                          —Total
      other income
                          
                          
                          24,289
                          
                          
                          
                          64,209Income
      (loss) before income taxes
                          
                          
                          239,190
                          
                          
                          
                          (552,054
                          )Income
      tax (expense)
                          
                          
                          (121,000
                          )
                          
                          
                          —Net
      income (loss)
                          
                          $
                          118,190
                          
                          
                          $
                          (552,054
                          )INCOME
      (LOSS) PER COMMON SHAREBasic
                          
                          $
                          0.01
                          
                          
                          $
                          (0.05
                          )Diluted
                          
                          $
                          0.01
                          
                          
                          $
                          (0.05
                          )WEIGHTED-AVERAGE
      SHARES OUTSTANDINGBasic
                          
                          
                          12,471,928
                          
                          
                          
                          11,989,473Diluted
                          
                          
                          13,529,197
                          
                          
                          
                          11,989,473


See
Notes to unaudited Financial Statements




Page - 2
-


CONMED
HEALTHCARE MANAGEMENT, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)




For the Three
                            Months Ended
                            March 31, 2009
                          
                          
                          For the Three
                            Months Ended
                            March 31, 2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                          
                          $
                          118,190
                          
                          
                          $
                          (552,054
                          )Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
                          
                          
                          43,821
                          
                          
                          
                          13,450Amortization
                          
                          
                          591,000
                          
                          
                          
                          486,000Stock-based
      compensation
                          
                          
                          159,269
                          
                          
                          
                          120,055Change
      in fair value of derivatives
                          
                          
                          (866
                          )
                          
                          
                          —Changes
      in working capital components(Increase)
      in accounts receivable
                          
                          
                          (550,009
                          )
                          
                          
                          (686,526
                          )Decrease
      in prepaid expenses
                          
                          
                          152,578
                          
                          
                          
                          151,064Decrease
      in deposits
                          
                          
                          —
                          
                          
                          
                          45,000Increase
      in accounts payable
                          
                          
                          272,945
                          
                          
                          
                          260,191Increase
      in accrued expenses
                          
                          
                          338,422
                          
                          
                          
                          766,839(Decrease)
      in income taxes payable
                          
                          
                          (253,097
                          )
                          
                          
                          —Increase
      (decrease) in deferred revenue
                          
                          
                          78,561
                          
                          
                          
                          (164,038
                          )Net
      cash provided by operating activities
                          
                          
                          950,814
                          
                          
                          
                          439,981CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                          
                          
                          (25,813
                          )
                          
                          
                          (186,301
                          )Asset
      Purchase from EMDC, P.C.
                          
                          
                          —
                          
                          
                          
                          (245,711
                          )Net
      cash used in investing activities
                          
                          
                          (25,813
                          )
                          
                          
                          (432,012
                          )CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on line of credit
                          
                          
                          (100,000
                          )
                          
                          
                          —Payments
      on loans
                          
                          
                          (18,015
                          )
                          
                          
                          (1,901
                          )Proceeds
      from exercise of warrants
                          
                          
                          6,000
                          
                          
                          
                          —Net
      cash used in financing activities
                          
                          
                          (112,015
                          )
                          
                          
                          (1,901
                          )Net
      increase in cash and cash equivalents
                          
                          
                          812,986
                          
                          
                          
                          6,068CASH
      AND CASH EQUIVALENTSBeginning
                          
                          
                          7,472,140
                          
                          
                          
                          7,136,720Ending
                          
                          $
                          8,285,126
                          
                          
                          $
                          7,142,788NON-CASH
      INVESTING AND FINANCING ACTIVITIES WERE
                            AS
      FOLLOWS:Stock
      (81,081 Shares) for Asset Purchase from EMDC, P.C.
                          
                          
                          —
                          
                          
                          
                          150,000Promissory
      Note payable to EMDC, P.C. for Asset Purchase
                          
                          
                          —
                          
                          
                          
                          132,275Warrants
      (80,000 Shares) for Asset Purchase from EMDC
                          
                          
                          —
                          
                          
                          
                          50,013$
                          —
                          
                          
                          $
                          332,288SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      payments for interest
                          
                          $
                          5,205
                          
                          
                          $
                          1,689Income
      taxes paid
                          
                          
                          374,097
                          
                          
                          
                          —





See
Notes to unaudited Financial Statements




Page - 3
-




CONMED
HEALTHCARE MANAGEMENT, INC.


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)




Preferred
                  Stock
                
                
                Common
                  Stock
                
                
                Additional Paid-
                  in Capital
                
                
                Accumulated
                  Deficit
                
                
                TotalBalance
      at December 31, 2008
                
                $
                —
                
                
                $
                1,246
                
                
                $
                36,875,610
                
                
                $
                (21,957,961
                )
                
                $
                14,918,895Cumulative
      effect of change in accounting principleJanuary
      1, 2009 reclassification of embedded feature of equity-linked financial
      instrument to derivative liability
                
                
                —
                
                
                
                —
                
                
                
                (2,399,538
                )
                
                
                (366,612
                )
                
                
                (2,766,150
                )Net
      Income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                118,190
                
                
                
                118,190Stock
      option expense
                
                
                —
                
                
                
                —
                
                
                
                159,269
                
                
                
                —
                
                
                
                159,269Exercise
      of warrants
                
                
                —
                
                
                
                2
                
                
                
                44,922
                
                
                
                —
                
                
                
                44,924Balance
      at March 31, 2009
                
                $
                —
                
                
                $
                1,248
                
                
                $
                34,680,263
                
                
                $
                (22,206,383
                )
                
                $
                12,475,128


See
Notes to unaudited Financial Statements




Page - 4
-


CONMED
HEALTHCARE MANAGEMENT, INC.




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




NOTE
      1.
            Nature
      of Business


Nature
of Business


Prior to
January 26, 2007, Conmed Healthcare Management, Inc. (together with its
consolidated subsidiaries, “we”, “us”, “our” or the Company, unless otherwise
specified or the context otherwise requires) formerly known as Pace Health
Management Systems, Inc. (“Pace”) traded under the symbol “PCES”, was classified
as a public shell, had no ongoing operations, minimal operating expenses and no
employees.





On
January 26, 2007, the Company acquired Conmed, Inc. (“Conmed, Inc.”) a provider
of correctional healthcare services (the “Acquisition”). Conmed, Inc. was formed
as a corporation on June 10, 1987 in the State of Maryland for the purpose of
providing healthcare services exclusively to county detention centers located in
Maryland. As Conmed, Inc. developed, it accepted more contracts for additional
services including mental health, pharmacy and out-of-facility healthcare
expenses. In 2000, Conmed, Inc. served more than 50% of the county detention
healthcare services market in Maryland. In 2003, Conmed, Inc. elected to seek
contracts outside of Maryland.





As a
result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the
Company and the business of Conmed, Inc. is now our primary business. On March
13, 2007, the Company changed its name to Conmed Healthcare Management, Inc. As
of March 31, 2009, we were in contract with, and currently providing medical
services in thirty-three counties in six states including:  Arizona,
Kansas, Maryland, Oregon, Virginia and Washington.




NOTE
      2.
            Significant
      Accounting Policies




The
accompanying unaudited consolidated financial statements contained herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for interim reporting requirements of Form 10-Q and Rule
8-03 of Regulation S-X. Accordingly, the financial information and disclosures
normally included in the financial statements prepared annually in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) have been condensed or omitted. Readers of this report should,
therefore, refer to the consolidated financial statements and notes included in
our Annual Report on Form 10-K for the year ended December 31, 2008, filed with
the Securities and Exchange Commission on March 26, 2009.





In the
opinion of management, all adjustments (consisting of normal and recurring
adjustments) which are considered necessary to fairly present our financial
position and our results of operations as of and for these periods have been
made.





Our
interim results of operations for the three months ended March 31, 2009 are not
necessarily indicative of the results of operations to be expected for a full
year.





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





Acquisitions


Acquisitions
are recorded based on Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“SFAS”) No. 141(Revised), Business Combinations (“SFAS
141R”), using the purchase method. Under purchase accounting, assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree
should be stated on the financial statements at “fair value” (see definition in
Fair Value of Financial Instruments section below), with limited exceptions, as
of the acquisition date.  SFAS 141R requires that intangible assets be
recognized as assets apart from goodwill if they meet one of two criteria, (1)
the contractual-legal criterion, or (2) the separability
criterion.  SFAS 141R also requires disclosure of the primary reasons
for business combination and the allocation of the purchase price paid to the
assets acquired and the liabilities assumed by major balance sheet caption.
Goodwill is to be recognized as a residual. If the acquisition-date fair value
exceeds the consideration transferred, a gain is to be recognized. The statement
generally requires that acquisition costs be expensed as incurred. SFAS 141R is
effective for business combinations for which the acquisition date is on or
after January 1, 2009.




Page - 5
-




Service
Contracts Acquired


There are
material costs in obtaining a customer list, especially customers with recurring
revenue streams. The value of service contracts acquired is represented by the
future revenue streams, therefore, the income approach is the most applicable
fair value measurement approach to value these assets. The operating income
streams of service contracts acquired are calculated based on the net present
value of estimated earnings. Operating income streams are estimated on a
contract by contract basis and an overall cost factor is used to estimate
management expenses.  Service contracts acquired are amortized over
the life of each individual contract.





Non-Compete
Agreements


Non-compete
agreements are generally acquired as part of our acquisition
agreements.  Key considerations in estimating the value of non-compete
agreements include consideration of the potential losses resulting from such
competition, the enforceability of the terms of the agreement, and the
likelihood of competition in the absence of the agreement. Non-compete
agreements are amortized over the lives of the agreements.





Goodwill


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





Fair
Value of Financial Instruments


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





Effective
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements
(“SFAS 157”). In February 2008, the FASB issued FASB Staff Position No. FAS
157-2, Effective Date of FASB
Statement No. 157, which provides a one year deferral of the effective
date of SFAS 157 for non-financial assets and non-financial liabilities, except
those that are recognized or disclosed in the financial statements at fair value
at least annually. Therefore, we have adopted the provisions of SFAS 157 with
respect to its financial assets and liabilities only. SFAS 157 defines fair
value, establishes a framework for measuring fair value under generally accepted
accounting principles and enhances disclosures about fair value measurements.
Fair value is defined under SFAS 157 as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation
techniques used to measure fair value under SFAS 157 must maximize the use of
observable inputs and minimize the use of unobservable inputs. The standard
describes a fair value hierarchy based on three levels of inputs, of which the
first two are considered observable and the last unobservable, that may be used
to measure fair value, which are the following:




·
            Level
      1 – Quoted prices in active markets for identical assets or
      liabilities.




·
            Level
      2 – Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.




·
            Level
      3 – Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities.





The
adoption of SFAS 157 did not have a material impact on our financial
statements.  Details related to our adoption of this standard are
discussed in Note 6, “Fair Value Measurements”.





Revenue
Recognition


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





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




Page - 6
-





Certain
contracts provide for monthly fee adjustments to reflect any missed hours of
work required under terms of the contract. In addition, we may incur liquidated
damages related to specific performance measurements required under the contract
that we have failed to meet. Reductions in monthly fees resulting from staffing
adjustments and liquidated damages are recorded by us as reductions to
revenue.





Certain
contracts include “stop/loss” limits, which create a ceiling to our financial
responsibility for an individual inmate's care or a maximum amount in the
aggregate for certain categories of medical expenses, whereby we are protected
from catastrophic medical losses. In circumstances where a stop/loss is reached,
we are reimbursed for any costs incurred over the predetermined stop/loss
amount. Any reimbursement received by us is recorded as revenue.





Accrued
Medical Claims Liability


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





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





Stock
Compensation


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





Fair
Value of Derivative Financial Instruments


Effective
January 1, 2009, we adopted Emerging Issues Task Force (“EITF”) Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock (“EITF 07-5”). Details related to our adoption of this
standard and its impact on our financial position and results of operations are
discussed in Note 5, “Fair Value of Warrants”. EITF 07-5 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early application is not
permitted. Paragraph 11(a) of SFAS No. 133, Accounting for Derivatives and
Hedging Activities (“SFAS 133”) specifies that a contract that would otherwise
meet the definition of a derivative but is both (a) indexed to the
Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument. EITF 07-5 provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed to an issuer’s
own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope
exception.





Income
Taxes


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




Page - 7
-





New
Accounting Pronouncements


None.




NOTE
      3.
            Common
      Stock Options




The Board
of Directors has adopted, and our stockholders have approved, the 2007 Stock
Option Plan (the “2007 Plan”). The 2007 Plan provides for the grant of up to
2,350,000 incentive stock options, nonqualified stock options, restricted stock,
stock bonuses and stock appreciation rights. The 2007 Plan is administered by
the Board of Directors, which has the authority and discretion to determine: the
persons to whom the options will be granted; when the options will be granted;
the number of shares subject to each option; the price at which the shares
subject to each option may be purchased; and when each option will become
exercisable. The options generally vest over three to four years and expire no
later than ten years from the date of grant.





During
the three months ended March 31, 2009 and 2008, we recorded stock-based
compensation expense net of reversals for forfeited options totaling $159,269
and $118,452, respectively.





During
the three months ended March 31, 2009, the Board of Directors authorized options
to purchase 29,000 shares of common stock at an average exercise price of $2.35
per share.  Additionally, during the three months ended March 31,
2009, no options were forfeited and as of March 31, 2009, 307,833 shares remain
available for grant.




NOTE
      4.
            Earnings
      Per Share




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





For the Three
                    Months Ended
                    March 31, 2009
                  
                  
                  For the Three
                    Months Ended
                    March 31, 2008Numerator
      for basic and diluted earnings per share:Net
      income (loss)
                  
                  $
                  118,190
                  
                  
                  $
                  (552,054
                  )Denominator:Weighted-average
      basic shares outstanding
                  
                  
                  12,471,928
                  
                  
                  
                  11,989,473Assumed
      conversion of dilutive securities:Stock
      options
                  
                  
                  32,904
                  
                  
                  
                  —Warrants
                  
                  
                  1,024,365
                  
                  
                  
                  —Potentially
      dilutive common shares
                  
                  
                  1,057,269
                  
                  
                  
                  —Denominator
      for diluted earnings per share – Adjusted weighted average
      shares
                  
                  
                  13,529,197
                  
                  
                  
                  11,989,473Earnings
      (loss) per common share:Basic
                  
                  $
                  0.01
                  
                  
                  $
                  (0.05
                  )Diluted
                  
                  $
                  0.01
                  
                  
                  $
                  (0.05
                  )





Common
stock warrants and options outstanding totaling 3,049,898 and 4,161,167
shares, respectively, are not included in diluted earnings per common share for
the three months ended March 31, 2009 and 2008, respectively, as they would have
an antidilutive effect upon earnings per common share.




Page - 8
-




NOTE
      5.
            Fair
      Value of Warrants




As a
result of adopting EITF 07-5 effective January 1, 2009, 1,705,000 of our issued
and outstanding common stock purchase warrants previously treated as equity
pursuant to the derivative treatment exemption were no longer afforded equity
treatment as follows.  These common stock purchase warrants do not
trade in an active securities market, and as such, we estimate the fair value of
these warrants using the Black-Scholes option pricing model and all changes in
the fair value of these warrants will be recognized currently in earnings until
such time as the warrants are exercised or expire.





Pre-Acquisition
Warrants @ $0.30 per share


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





Black-Scholes
      assumptions
                  
                  March
      31, 2009
                  
                  
                  January
      1, 2009Expected
      life (years)
                  
                  
                  0.8
                  
                  
                  
                  0.9Expected
      volatility
                  
                  
                  84.56
                  %
                  
                  
                  82.51
                  %Risk-free
      interest rate
                  
                  
                  0.9
                  %
                  
                  
                  0.8
                  %Expected
      dividend yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %





As of
January 1, 2009, we had outstanding warrants to purchase an aggregate of 225,000
shares of common stock.  During the three months ended March 31, 2009,
no warrants were exercised and as of March 31, 2009, we had outstanding warrants
to purchase an aggregate of 225,000 shares of common stock.





Investor
Warrants @ $0.30 per share


In
connection with the private placement of $15,000,000 of units of Series B
Convertible Preferred Stock and warrants completed on January 26, 2007 (the
“Private Placement”), each investor received a warrant to purchase up to a
number of shares of common stock equal to 25% of such investor's subscription
amount, divided by the conversion price of the Series B Preferred Stock, with an
exercise price equal to $0.30. As a result, we issued to investors warrants to
purchase an aggregate of 1,500,000 shares of common stock, exercisable at $0.30
per share, expiring March 13, 2012.





Black-Scholes
      assumptions
                  
                  March
      31, 2009
                  
                  
                  January
      1, 2009Expected
      life (years)
                  
                  
                  1.9
                  
                  
                  
                  2.0Expected
      volatility
                  
                  
                  84.56
                  %
                  
                  
                  82.51
                  %Risk-free
      interest rate
                  
                  
                  1.3
                  %
                  
                  
                  1.1
                  %Expected
      dividend yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %





As of
January 1, 2009, we had outstanding warrants to purchase an aggregate of 980,000
shares of common stock.  During the three months ended March 31, 2009,
warrants to purchase 20,000 shares of common stock were exercised with an
aggregate fair value of $38,422 on the exercise dates resulting in the Company
recognizing a loss of $502 from the change in fair value. As of March 31, 2009,
we had outstanding warrants to purchase an aggregate of 960,000 shares of common
stock.





Investor
Warrants @ $2.50 per share


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




Page - 9
-





Black-Scholes
      assumptions
                  
                  March
      31, 2009
                  
                  
                  January
      1, 2009Expected
      life (years)
                  
                  
                  1.9
                  
                  
                  
                  2.0Expected
      volatility
                  
                  
                  84.56
                  %
                  
                  
                  82.51
                  %Risk-free
      interest rate
                  
                  
                  1.3
                  %
                  
                  
                  1.1
                  %Expected
      dividend yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %





As of
January 1, 2009, we had outstanding warrants to purchase an aggregate of 500,000
shares of common stock.  During the three months ended March 31, 2009,
no warrants were exercised and as of March 31, 2009, we had outstanding warrants
to purchase an aggregate of 500,000 shares of common stock.





Summary


On
January 1, 2009, in connection with our adoption of EITF 07-5, we reclassified
from additional paid-in capital, as a cumulative effect adjustment, $366,612 to
beginning retained earnings and $2,399,538 to a long-term warrant liability to
recognize the fair value of such warrants on such date.  During the
three months ended March 31, 2009, warrants to purchase 20,000 shares of common
stock were exercised generating $6,000 of net proceeds and having an aggregate
fair value of $38,924 on the exercise dates resulting in the Company recognizing
a loss of $502 from the change in fair value.  The fair value of the
outstanding common stock purchase warrants as of March 31, 2009 decreased $1,368
to $2,726,360.  As such, we recognized an $866 unrealized gain from
the change in fair value of these warrants for the three months ended March 31,
2009.





As of
March 31, 2009, we have outstanding warrants to purchase an aggregate of
2,065,000 shares of common stock at an average exercise price of $1.25 and have
reserved shares of our common stock for issuance in connection with the
potential exercise thereof.




NOTE
      6.
            Fair
      Value Measurements




As a
result of the adoption of EITF 07-5, the Company is also required to disclose
the fair value measurements required by SFAS 157.  The derivative
financial instruments recorded at fair value in the balance sheet as of March
31, 2009 are categorized based upon the level of judgment associated with the
inputs used to measure their fair value.





The
following table summarizes the financial liabilities measured at fair value on a
recurring basis as of March 31, 2009, segregated by the level of valuation
inputs within the fair value hierarchy utilized to measure fair
value:





Total
                  
                  
                  Quoted prices in
                    active markets for
                    identical assets
                    (Level 1)
                  
                  
                  Significant other
                    observable inputs
                    (Level 2)
                  
                  
                  Significant
                    unobservable
                    inputs
                    (Level 3)Derivative
      financial instruments
                  
                  $
                  2,726,360
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  2,726,360





Equity-linked
financial instruments consist of stock warrants issued by the Company that
contain a strike price adjustment feature.  In accordance with EITF
07-5, we calculated the fair value of warrants using the Black-Scholes option
pricing model and the assumptions used are described in Note 5, “Fair Value of
Warrants”.  During the three months ended March 31, 2009, we
recognized an $866 unrealized gain related to the change in fair value of the
financial instruments which is included in Other Income on the Statement of
Operations.





The
following table reflects the activity for liabilities measured at fair value
using Level 3 inputs for the three months ended March 31, 2009:





Initial
      recognition of equity-linked financial instruments as of January 1,
      2009
                          
                          $
                          2,766,150Transfers
      into level 3
                          
                          
                          —Transfers
      out of level 3
                          
                          
                          —Sales
      of equity-linked financial instruments
                          
                          
                          (38,924
                          )Unrealized
      gains related to the change in fair value
                          
                          
                          (866
                          )Balance
      as of March 31, 2009
                          
                          $
                          2,726,360




Page - 10
-




NOTE
      7.
            Income
      Tax Matters




Our
effective tax rate was 50.6%, which differs from the expected tax rate of 39.0%
primarily due to permanent differences related to stock-based
compensation.  The change in our effective tax rate from prior periods
is primarily due to the increase in our pre-tax income relative to prior periods
and the ability to effectively determine our annualized effective tax
rate.  For the three months ended March 31, 2009, we recorded income
tax expense of $121,000.  Management continues to apply a valuation
allowance against certain deferred tax assets because of a limited history of
taxable income, the long-term nature of the deferred tax asset and certain
limitations regarding the utilization of the net operating loss carryforwards.
The Company’s ability to utilize its net operating loss carryforwards and
research and development credit is currently limited due to limitations on
change of control under Section 382 (“Section 382”) of the IRC. Accordingly, we
have fully reserved for the net operating loss carryforwards and research and
development credit as we do not expect to derive any future benefit from
them.


Page - 11
-




ITEM
      2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




Information included in this section
and elsewhere in this Quarterly Report on Form 10-Q contains forward-looking
statements regarding the business, operations and financial condition of both
Conmed Healthcare Management, Inc. (together with its consolidated subsidiaries,
the “Company”, “we”, “us”, or “our” unless otherwise specified or the context
otherwise requires) and Conmed, Inc. (“Conmed, Inc.”) within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). This
information may involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be materially
different from our future results, performance or achievements expressed or
implied by any forward-looking statements. Forward-looking statements, which
involve assumptions and describe our future plans, strategies and expectations,
and other statements that are not historical facts, are generally identifiable
by use of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend," “plan,” “potential” or "project" or the negative of these
words or other variations on these words or comparable terminology. These
forward-looking statements are based on assumptions that may be incorrect, and
there can be no assurance that these projections included in these
forward-looking statements will come to pass. Our actual results could differ
materially from those expressed or implied by the forward-looking statements as
a result of various factors. We caution you not to place undue reliance on these
forward-looking statements. Such forward-looking statements relate only to
events as of the date on which the statements are made. We undertake no
obligation to update any forward-looking statements, whether as a result of new
information, future events or otherwise, even if experience or future changes
make it clear that any projected results or events expressed or implied therein
will not be realized. You are advised, however, to consult any further
disclosures we make in future public statements and press releases.More detailed information about us
and the risk factors that may affect the realization of forward-looking
statements is set forth in our filings with the Securities and Exchange
Commission (the “SEC”), including our Annual Report on Form 10-K filed with the
SEC for the fiscal year ended December 31, 2008. Investors and security holders
are urged to read this document free of charge on the SEC's web site at
www.sec.gov.




General


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





On
January 26, 2007, we acquired Conmed, Inc., a provider of correctional
healthcare services since 1984 (the “Acquisition”). Conmed, Inc. was formed as a
corporation on June 10, 1987 in the State of Maryland for the purpose of
providing healthcare services exclusively to county detention centers located in
Maryland. As Conmed, Inc. developed, it accepted more contracts for additional
services including pharmacy and out-of-facility healthcare expenses. In 2000,
Conmed, Inc. served more than 50% of the county detention healthcare services
market in Maryland. In 2003, Conmed, Inc. elected to seek contracts outside of
Maryland and by December 2006, it had secured contracts in four (4) states. In
January 2007, Conmed, Inc. was in contract with and serviced 18 detention
centers and facilities at the county level in the United States. As a result of
the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the Company and
the business of Conmed, Inc. is now our primary business. As of March 31, 2009
the Company was servicing detention facilities in thirty-three (33) counties and
six (6) states. Our services have expanded to include the mental health
offerings of our new wholly-owned subsidiary Correctional Mental Health
Services, LLC (“CMHS”).




Critical
Accounting Policies


The
discussion and analysis of our financial condition and results of operations are
based upon our condensed financial statements. These condensed financial
statements have been prepared following the requirements of accounting
principles generally accepted in the United States (“GAAP”) for interim periods
and require us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to revenue recognition and related medical
expense accruals and amortization and potential impairment of intangible assets
and goodwill and stock-based compensation expense. As these are condensed
financial statements, one should also read expanded information about our
critical accounting policies and estimates provided in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”,
included in our Form 10-K for the year ended December 31, 2008. There have been
no material changes to our critical accounting policies and estimates from the
information provided in our 10-K for the year ended December 31,
2008.




Page - 12
-




Recently
Adopted Accounting Standards


Effective
January 1, 2009, we adopted Statement of Financial Accounting Standards (“SFAS”)
No. 141(Revised), Business
Combinations (“SFAS 141R”) and it did not have a material impact on our
financial position or results of operations. SFAS 141R replaces the original
SFAS No. 141. This statement applies to all transactions in which an entity
obtains control of one or more businesses. SFAS 141R requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at their fair values, with limited exceptions, as of
the acquisition date. Goodwill is to be recognized as a residual. If the
acquisition-date fair value exceeds the consideration transferred, a gain is to
be recognized. The statement generally requires that acquisition costs be
expensed. SFAS 141R is effective for business combinations for which the
acquisition date is on or after January 1, 2009.





Effective
January 1, 2009, we adopted SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements(“SFAS 160”) and it did not have a
material impact on our financial position or results of operations. SFAS 160
requires companies to report ownership interest in subsidiaries held by other
parties (minority interest) to be clearly identified, labeled and presented in
the consolidated statement of financial condition separately within the equity
section. The amount of consolidated net income attributable to the parent
company and to the noncontrolling interest is to be clearly identified and
presented on the face of the consolidated statement of income. SFAS 160 is
effective beginning January 1, 2009.





Effective
January 1, 2009 we adopted Emerging Issues Task Force (“EITF”) Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock (“EITF 07-5”).  Details related to our adoption of
this standard and its impact on our financial position and results of operations
are discussed in more detail elsewhere in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations and in the
accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.




New
Accounting Pronouncements


None.




Page - 13
-


Results
of Operations


Three-Months
Ended March 31, 2009 compared to Three Months Ended March 31, 2008


The
following discussion of financial results below is derived from unaudited
financial statements for the three months ended March 31, 2009 and
2008.





Three Months Ended
                                    March 31, 2009
                                  
                                  
                                  Three Months Ended
                                    March 31, 2008Amount
                                  
                                  
                                  % of
                                    Revenue
                                  
                                  
                                  Amount
                                  
                                  
                                  % of
                                    RevenueService
      contract revenue
                                  
                                  $
                                  12,419,241
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  7,836,250
                                  
                                  
                                  
                                  100.0
                                  %HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                                  
                                  
                                  6,987,854
                                  
                                  
                                  
                                  56.3
                                  %
                                  
                                  
                                  4,114,027
                                  
                                  
                                  
                                  52.5
                                  %Medical
      expenses
                                  
                                  
                                  2,381,933
                                  
                                  
                                  
                                  19.2
                                  %
                                  
                                  
                                  2,016,588
                                  
                                  
                                  
                                  25.7
                                  %Other
      operating expenses
                                  
                                  
                                  384,205
                                  
                                  
                                  
                                  3.1
                                  %
                                  
                                  
                                  233,436
                                  
                                  
                                  
                                  3.0
                                  %Total
      healthcare expenses
                                  
                                  
                                  9,753,992
                                  
                                  
                                  
                                  78.5
                                  %
                                  
                                  
                                  6,364,051
                                  
                                  
                                  
                                  81.2
                                  %Gross
      profit
                                  
                                  
                                  2,665,249
                                  
                                  
                                  
                                  21.5
                                  %
                                  
                                  
                                  1,472,199
                                  
                                  
                                  
                                  18.8
                                  %OPERATING
      EXPENSES:Selling,
      general & administrative expenses
                                  
                                  
                                  1,815,427
                                  
                                  
                                  
                                  14.6
                                  %
                                  
                                  
                                  1,589,012
                                  
                                  
                                  
                                  20.3
                                  %Depreciation
      and amortization
                                  
                                  
                                  634,821
                                  
                                  
                                  
                                  5.1
                                  %
                                  
                                  
                                  499,450
                                  
                                  
                                  
                                  6.4
                                  %Total
      operating expenses
                                  
                                  
                                  2,450,348
                                  
                                  
                                  
                                  19.7
                                  %
                                  
                                  
                                  2,088,462
                                  
                                  
                                  
                                  26.7
                                  %Operating
      income (loss)
                                  
                                  
                                  214,901
                                  
                                  
                                  
                                  1.7
                                  %
                                  
                                  
                                  (616,263
                                  )
                                  
                                  
                                  (7.9
                                  )%OTHER
      INCOME (EXPENSE)Interest
      income
                                  
                                  
                                  28,628
                                  
                                  
                                  
                                  0.2
                                  %
                                  
                                  
                                  65,898
                                  
                                  
                                  
                                  0.8
                                  %Interest
      expense
                                  
                                  
                                  (5,205
                                  )
                                  
                                  
                                  0.0
                                  %
                                  
                                  
                                  (1,689
                                  )
                                  
                                  
                                  0.0
                                  %Change
      in fair value of derivatives
                                  
                                  
                                  866
                                  
                                  
                                  
                                  0.0
                                  %
                                  
                                  
                                  —
                                  
                                  
                                  
                                  0.0
                                  %Total
      other income (expense)
                                  
                                  
                                  24,289
                                  
                                  
                                  
                                  0.2
                                  %
                                  
                                  
                                  64,209
                                  
                                  
                                  
                                  0.8
                                  %Income
      (loss) before income taxes
                                  
                                  
                                  239,190
                                  
                                  
                                  
                                  1.9
                                  %
                                  
                                  
                                  (552,054
                                  )
                                  
                                  
                                  (7.0
                                  )%Income
      tax expense
                                  
                                  
                                  121,000
                                  
                                  
                                  
                                  1.0
                                  %
                                  
                                  
                                  —
                                  
                                  
                                  
                                  0.0
                                  %Net
      income (loss)
                                  
                                  $
                                  118,190
                                  
                                  
                                  
                                  1.0
                                  %
                                  
                                  $
                                  (552,054
                                  )
                                  
                                  
                                  (7.0
                                  )%





Revenues


Net
revenue from medical services provided primarily to correctional institutions
for the three months ended March 31, 2009 and 2008, was $12,419,241 and
$7,836,250, respectively, which represents an increase of $4,582,991 or 58.5%.
Net income was $118,190 or 1.0% of revenue compared to a net loss of $(552,054)
or (7.0%) of revenue for the three months ended March 31, 2009 and 2008,
respectively, which represented an increased profit of $670,244.





Approximately
$4,303,192 or 93.9% of the increase in revenue for the three months ended March
31, 2009 compared to the same period for the prior year resulted from the
addition of new contracts since March 31, 2008: Caroline County, MD; Charles
County, MD; Chesapeake City, VA; Douglas County, OR; Pima County, AZ; and
Roanoke County, VA; as well as the contracts in Oregon acquired when we
purchased all of the assets of Emergency Medicine Documentation Consultants,
P.C. (“EMDC”) in February 2008 plus the revenue generated from the acquisition
of CMHS on November 4, 2008. Revenue improvement totaling approximately
$208,122, or 4.5% of the increase, resulted primarily from expansion of the
services provided under a number of our existing contracts in which we were
providing services prior to 2008. Price increases related to existing service
requirements totaled approximately $312,253 or 6.8% of the increase. Partially
offsetting the above were decreases in other volume related activities totaling
$(240,576), or (5.2%) of revenue, primarily associated with a decrease in
stop/loss reimbursements due to reduced out of facility medical expenditures in
excess of stop/loss limits billed back to counties.




Page - 14
-





Healthcare
Expenses


Salaries
and employee benefits


Salaries
and employee benefits for healthcare employees were $6,987,854 or 56.3% of
revenue for the three month period ended March 31, 2009, compared to $4,114,027
or 52.5% of revenue for the three months ended March 31, 2008. The increase in
spending for salaries and employee benefits of $2,873,827 or 69.9% is due to the
addition of new healthcare employees required to support the increased staffing
requirements resulting primarily from our new medical service contracts and
expansions in some of our existing agreements. The primary factors causing the
increase in salaries and employee benefits as a percentage of revenue was the
addition of new service contracts with Caroline County, MD and Pima County, AZ,
which primarily provide staffing services. As a result, these contracts
increased the mix of salaries and employee benefits as a percentage of total
revenue.





Medical
expenses


Medical
expenses for the three months ended March 31, 2009 and 2008 were $2,381,933 or
19.2% of revenue and $2,016,588 or 25.7% of revenue, respectively, which
represented an increase of $365,345 or 18.1%. The increase in spending for
medical expenses in absolute dollars reflects increases for medical services
both in and out of the facility plus increased expenditures for pharmacy and
radiology services. The reduction in spending as a percentage of revenue results
from the favorable mix factor generated from the new primarily staffing services
contracts in 2008 in Caroline County, MD and Pima County, AZ, and decreased
spending for hospitalization and other out of facility inmate medical visits
primarily in Baltimore County, MD, Loudoun County, VA and Frederick County, MD,
partially offset by the addition of pharmacy services in Calvert County, MD,
Douglas County, OR and Pima County, AZ.





Other
operating expenses


Other
operating expenses were $384,205, or 3.1% of revenue, for the three months ended
March 31, 2009, compared to $233,436, or 3.0% of revenue, for the three months
ended March 31, 2008. The increase of $150,769 in spending is directly related
to the increase in the number of inmates served as a result of the new service
contracts and reflects increased spending for employment advertising,
professional liability insurance, and performance and payment
bonds.





Operating
Expenses


Selling,
general and administrative expenses


Selling,
general and administrative expenses for the three months ended March 31, 2009
and 2008 were $1,815,527 or 14.6% of revenue and $1,589,012 or 20.3% of revenue,
respectively. The increased expenditures of $226,515 reflects an investment in
additional management and administrative personnel required to support
additional new contracts and services added in 2008, as well as to sustain the
Company during anticipated future growth. Stock based compensation for the three
months ended March 31, 2009 and 2008 was $159,269 and $120,055,
respectively.





Depreciation
and amortization


Depreciation
and amortization primarily reflects the amortization of intangible assets
related to the acquisition of Conmed, Inc. in January 2007, the purchase of
medical service contracts from EMDC in February 2008 and the acquisition of CMHS
in November 2008. Amortization of service contracts acquired was $494,000, or
4.0% of revenue, for the three months ended March 31, 2009, compared to
$414,000, or 5.3% of revenue, for the three months ended March 31, 2008. The
increase primarily reflects additional amortization expense for service
contracts acquired in the CMHS acquisition in November 2008 partially offset by
a decrease in amortization expense related to the Conmed, Inc. acquisition as
certain individual contracts acquired have become fully amortized. Amortization
of non-compete agreements was $97,000, or 0.8% of revenue, for the three months
ended March 31, 2009, compared to $72,000, or 0.9% of revenue, for the three
months ended March 31, 2008. The increase primarily reflects an additional
non-compete agreement related to the acquisition of CMHS. Depreciation expense
increased to $43,821 for the three months ended March 31, 2009 compared to
$13,450 for the prior year period due primarily to capital expenditures
associated with the new corporate office in Hanover, Maryland.





Interest
income


Interest
income was $28,628 for the three months ended March 31, 2009 compared to $65,898
for the same period in 2008. Cash balances in the first quarter of 2009 were
higher compared to the first quarter of 2008, however the lower interest income
reflects reduced short-term interest rates during the period.





Interest
expense


Interest
expense for the first quarter increased to $5,205 in 2009 compared to $1,689 in
the same period in 2008.




Page - 15
-





Change
in fair value of derivatives


As a
result of adopting EITF 07-5 effective January 1, 2009, 1,705,000 of our issued
and outstanding common stock purchase warrants previously treated as equity
pursuant to the derivative treatment exemption were no longer afforded equity
treatment.  These common stock purchase warrants do not trade in an
active securities market, and as such, we estimate the fair value of these
warrants using the Black-Scholes option pricing model and all changes in the
fair value of these warrants will be recognized currently in earnings until such
time as the warrants are exercised or expire.  As such, on January 1,
2009, we reclassified from additional paid-in capital, as a cumulative effect
adjustment, $366,612 to beginning retained earnings and $2,399,538 to a
long-term warrant liability to recognize the fair value of such warrants on such
date.  During the three months ended March 31, 2009, warrants to
purchase 20,000 shares of common stock were exercised generating $6,000 of net
proceeds and having an aggregate fair value of $38,924 on the exercise dates
resulting in the Company recognizing a loss of $502 from the change in fair
value.  The fair value of the outstanding common stock purchase
warrants as of March 31, 2009 decreased $1,368 to $2,726,360.  As
such, we recognized an $866 unrealized gain from the change in fair value of
these warrants for the three months ended March 31, 2009.





Income
tax expense


Our
effective tax rate was 50.6%, which differs from the expected tax rate of 39.0%
primarily due to permanent differences related to stock-based
compensation.  The change in our effective tax rate from prior periods
is primarily due to the increase in our pre-tax income relative to prior periods
and the ability to effectively determine our annualized effective tax
rate.  For the three months ended March 31, 2009, we recorded income
tax expense of $121,000.  Management continues to apply a valuation
allowance against certain deferred tax assets because of a limited history of
taxable income, the long-term nature of the deferred tax asset and certain
limitations regarding the utilization of the net operating loss carryforwards.
The Company’s ability to utilize its net operating loss carryforwards and
research and development credit is currently limited due to limitations on
change of control under Section 382 (“Section 382”) of the IRC. Accordingly, we
have fully reserved for the net operating loss carryforwards and research and
development credit as we do not expect to derive any future benefit from
them.




LIQUIDITY
AND CAPITAL RESOURCES


Financing
is generally provided by funds generated from our operating
activities.





Cash
flow for the three months ended March 31, 2009 compared to the three months
ended March 31, 2008


Cash as
of March 31, 2009 and March 31, 2008 was $8,285,126 and $7,472,140,
respectively.  We believe that our existing cash balances and
anticipated cash flows from future operations will be sufficient to meet our
normal operating requirements and liquidity needs for at least the next twelve
months.





Cash flow
from operations for the three months ended March 31, 2009 totaled $950,814,
reflecting a net income of $118,190 plus $793,224 in adjustments for non-cash
expenses such as amortization and stock-based compensation and $39,400 in
changes in working capital components because of increases in accrued expenses,
accounts payable and deferred revenue and a decrease in prepaid expenses
partially offset by an increase in accounts receivable and a decrease in income
taxes payable.  Cash flow from operations for the three months ended
March 31, 2008 totaled $439,981, reflecting a net loss of $552,054 offset by
$619,505 in adjustments for non-cash expenses such as amortization and
stock-based compensation and $372,530 in changes in working capital components
because of increases in accrued expenses and accounts payable and a decrease in
prepaid expenses partially offset by an increase in accounts receivable and a
decrease in deferred revenue.





Cash flow
from investing activities for the three months ended March 31, 2009 used $25,813
for purchases of property and equipment. Cash flow from investing activities for
the three months ended March 31, 2008 used $432,012. The asset purchase of EMDC
service contracts used $245,711 and purchases of computer and office equipment
used $186,301 primarily related to the new corporate office in Hanover,
Maryland.





Cash flow
from financing activities for the three months ended March 31, 2009 used cash of
$112,015. Payments on the line of credit were $100,000 and payment on loans were
$18,015 which was partially offset by proceeds from warrant exercises of
$6,000.  Cash flow from financing activities for the three months
ended March 31, 2008 used cash of $1,901 for payments on a loan.





Loans


As of
March 31, 2009, we had a note outstanding for a vehicle in the amount of $3,381
and two short-term notes payable for $33,831 and $50,000,
respectively.




Page - 16
-




Off
Balance Sheet Arrangements


We are
required to provide performance and payment guarantee bonds to county
governments under certain contracts. As of March 31, 2009, we have three
performance bonds totaling $7,845,325 and two payment bonds for $2,785,281,
totaling $10,630,606. The surety issuing the bonds has recourse against our
assets in the event the surety is required to honor the bonds.





Contractual
Obligations


The
following table presents our expected cash requirements for contractual
obligations outstanding as of March 31, 2009:





Total
                    
                    
                    Due as of
                      3/31/10
                    
                    
                    Due as of
                      3/31/11
                      and
                      3/31/12
                    
                    
                    Due as of
                      3/31/13
                      And
                      3/31/14
                    
                    
                    Due
                      ThereafterAutomobile
      Loan
                    
                    $
                    3,381
                    
                    
                    $
                    3,381
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Note
      Payable
                    
                    
                    84,683
                    
                    
                    
                    54,683
                    
                    
                    
                    30,000
                    
                    
                    
                    —
                    
                    
                    
                    —Equipment
      Leases
                    
                    
                    156,192
                    
                    
                    
                    58,158
                    
                    
                    
                    77,640
                    
                    
                    
                    20,394
                    
                    
                    
                    —Automobile
      Leases
                    
                    
                    65,900
                    
                    
                    
                    33,923
                    
                    
                    
                    31,977
                    
                    
                    
                    —
                    
                    
                    
                    —Office
      Space Leased
                    
                    
                    633,711
                    
                    
                    
                    217,459
                    
                    
                    
                    292,734
                    
                    
                    
                    123,518
                    
                    
                    
                    —Total
      Contractual Cash Obligations
                    
                    $
                    943,867
                    
                    
                    $
                    367,604
                    
                    
                    $
                    432,351
                    
                    
                    $
                    143,912
                    
                    
                    $
                    —





Effects
of Inflation


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





Potential
Future Service Contract Revenue


As of
March 31, 2009, we have entered into 49 agreements with county governments to
provide medical and healthcare services primarily to county correctional
institutions. Most of these contracts are for multiple years and include option
renewal periods which are, in all cases, at the county's option. The original
terms of the contracts are from one to nine years. These medical service
contracts have potential future service contract revenue of $154 million as of
March 31, 2009, with a weighted-average term of 4.3 years, of which
approximately $29 million relates to the initial contract period and
approximately $125 million relates to the option renewal periods.




ITEM 3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




The
information in this Item is not required to be provided by Smaller Reporting
Companies pursuant to Regulation S-K.




ITEM 4(T).
              CONTROLS
      AND PROCEDURES




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





Our
internal control over financial reporting is a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of our financial statements for external purposes in accordance
with generally accepted accounting principles. Internal control over financial
reporting includes policies and procedures that pertain to the maintenance of
records that in reasonable detail accurately reflect the transactions and
dispositions of our assets; provide reasonable assurance that transactions are
recorded as necessary to permit preparation of our financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with the authorization of our
board of directors and management; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.




Page - 17
-





Changes in Internal Control over
Financial Reporting.During the most recently completed fiscal quarter,
there has been no change in our internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.




Page - 18
-


PART
II.  OTHER INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS


There are
no material changes in the legal proceedings pending against us.




ITEM 1A.
            RISK
      FACTORS


The
information in this Item is not required to be provided by Smaller Reporting
Companies.




ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS


None




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES


None




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


None




ITEM
      5.
            OTHER
      INFORMATION


None




ITEM
      6.
            EXHIBITS


10.1
            Inmate
      Health Services Agreement, effective as of February 1, 2009, by and
      between Conmed, Inc. and the Western Virginia Regional Jail
      Authority31.1
            Section
      302 Certification of Principal Executive Officer31.2
            Section
      302 Certification of Principal Financial Officer32.1
            Section
      906 Certification of Principal Executive Officer32.2
            Section
      906 Certification of Principal Financial
Officer




Page - 19
-




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Conmed
      Healthcare Management, Inc.May
      14, 2009By /s/ Richard W. TurnerRichard
      W. Turner, Ph.D.Chairman
      and Chief Executive Officer(principal
      executive officer)May
      14, 2009By /s/ Thomas W. FryThomas
      W. FryChief
      Financial Officer and Secretary(principal
      financial officer and principal accounting
  officer)




Page - 20
-