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U.S. SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C. 20549



FORM 10-QSB



QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934





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



PACE Health Management Systems, Inc.

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



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



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





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



Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject of the filing requirements for at least the past 90 days.
YES xNO o



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



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



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



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

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PACEHEALTH MANAGEMENT SYSTEMS, INC.



PART I.FINANCIAL INFORMATION



|                                                                  |     
|----------------------------------------------------------------- | ----
|ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)                          | Page
|                                                                  |     
|Condensed Balance Sheets                                          |     
|June 30, 2006 and December 31, 2005                               | 3   
|                                                                  |     
|Condensed Statements of Operations                                |     
|Three Months and Six Months Ended June 30, 2006 and 2005          | 4   
|                                                                  |     
|Condensed Statements of Cash Flows                                |     
|Six Months Ended June 30, 2006 and 2005                           | 5   
|                                                                  |     
|Notes to Condensed Financial Statements                           | 6   
|                                                                  |     
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION | 7   
|                                                                  |     
|ITEM 3. CONTROLS AND PROCEDURES                                   | 8   
|                                                                  |     

PART II.OTHER INFORMATION

|                 |  
|---------------- | -
|ITEM 6. EXHIBITS | 9

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PART  1. FINANCIAL INFORMATION



ITEM  1. FINANCIAL STATEMENTS



PACE HEALTH MANAGEMENT SYSTEMS, INC.

CONDENSED BALANCE SHEETS (UNAUDITED)



|                                                                 |   | June 30, 2006 |   | December 31, 2005
|---------------------------------------------------------------- | - | ------------- | - | -----------------
|Assets                                                           |   |               |   |                  
|Current Assets                                                   |   |               |   |                  
|Cash and cash equivalents                                        | $ | 1,627,440     | $ | 1,738,958        
|Interest receivable                                              |   | 659           |   | 12,386           
|Prepaid expenses                                                 |   | 33,217        |   | 6,257            
|Total current assets                                             | $ | 1,661,316     | $ | 1,757,601        
|                                                                 |   |               |   |                  
|Other Assets                                                     |   | 149,240       |   | -                
|Total Assets                                                     | $ | 1,810,556     | $ | 1,757,601        
|                                                                 |   |               |   |                  
|                                                                 |   |               |   |                  
|Liabilities and shareholders equity                             |   |               |   |                  
|Current Liabilities                                              |   |               |   |                  
|Accounts payable                                                 | $ | 120,181       | $ | 3,523            
|Total current liabilities                                        |   | 120,181       |   | 3,523            
|                                                                 |   |               |   |                  
|Shareholders equity                                             |   |               |   |                  
|Preferred stock, no par value, authorized 1,000,000 shares:      |   |               |   |                  
|issued none                                                      |   | -             |   | -                
|Convertible participating preferred stock, Series A, no par      |   |               |   |                  
|value; authorized 4,000,000 shares; issued and outstanding       |   |               |   |                  
|2,875,000 shares                                                 |   | 2,875,000     |   | 2,875,000        
|Common stock, no par value; authorized 20,000,000 shares; issued |   |               |   |                  
|and outstanding 5,716,074 shares                                 |   | 17,065,136    |   | 17,065,136       
|Additional paid-in capital                                       |   | 683,486       |   | 683,486          
|Accumulated deficit                                              |   | (18,933,247)  |   | (18,869,544)     
|Total stockholders equity                                       |   | 1,690,375     |   | 1,754,078        
|Total liabilities and stockholders equity                       | $ | 1,810,556     | $ | 1,757,601        
|                                                                 |   |               |   |                  
|See Notes to Condensed Financial Statements                      |   |               |   |                  

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PACE HEALTH MANAGEMENT SYSTEMS, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                             | Three monthsendedJune 30, |           | Six months ended June 30,
|-------------------------------------------- | ------------------------- | --------- | -------------------------
|                                             |                           | 2006      |                          
|Net revenues                                 | $                         | -         |                          
|Costs and expenses                           |                           |           |                          
|                                            
|General and administrative                   |                           | 57,580    |                          
|(Loss) from operations                       |                           | (57,580)  |                          
|Interest income                              |                           | 19,902    |                          
|(Loss) before income taxes                   |                           | (37,678)  |                          
|Provision for income taxes                   |                           | -         |                          
|Net (loss)                                   |                           | (37,678)  |                          
|Preferred dividends in arrears               |                           | (71,875)  |                          
|Net (Loss) available to common shareholders  | $                         | (109,553) |                          
|(Loss) per share                             |                           |           |                          
|Basic                                        | $                         | (0.02)    |                          
|Fully diluted                                | $                         | (0.02)    |                          
|Weighted average number of common and common |                           |           |                          
|equivalent shares outstanding                |                           | 5,716,074 |                          





See Notes to Condensed Financial Statements

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PACE HEALTHMANAGEMENT SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)





|                                                           |   | Six months ended June 30,
|---------------------------------------------------------- | - | -------------------------
|                                                           |   |                          
|                                                           |   | 2006                     
|Cash flows from operating activities                       |   |                          
|Net (Loss)                                                 | $ | (63,703)                 
|Change in working capital components:                      |   |                          
|Increase in prepaid expenses and interest receivable       |   | (15,233)                 
|Increase in accounts payable and other current liabilities |   | 116,658                  
|Increase in other assets                                   |   | (149,240)                
|Net cash (used in) operating activities                    |   | (111,518)                
|Net (decrease) in cash                                     |   | (111,518)                
|Cash and cash equivalents                                  |   |                          
|Beginning                                                  |   | 1,738,958                
|Ending                                                     | $ | 1,627,440                
|                                                           |   |                          
|See Notes to Condensed Financial Statements                |   |                          

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PACE HEALTH MANAGEMENT SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



Note 1. Basis of presentation



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



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



Note 2. Stock-based Compensation



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



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



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



Note 3. Basic and diluted (loss) per share



On January 1, 1997 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, which requires the Company to present basic and diluted income (loss) per share amounts. Basic income (loss) per share is based on the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is based on the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of stock options and warrants (using the treasury stock method) and convertible preferred stock (using the if-converted method). The effect of stock options, warrants, and convertible preferred stock was not included in the computation because to do so would have been antidilutive. At June 30, 2006, there were approximately 750,000 shares issuable under warrant or option arrangements and
10,662,500 shares issuable under conversion of Series A convertible participating preferred stock.

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Note 4.  Related Party Transactions



Administration expenses related to Equity Dynamics, Inc., an entity wholly owned by a Director of the Company, totaled $12,500 and $12,500 for the three months ended June 30, 2006 and 2005, respectively, and totaled $25,000 and $25,000 for the six months ended June 30, 2006 and 2005, respectively.



|Note 5.  Subsequent Events
|--------------------------



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



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



The Company expects to close this transaction in the latter part of the third quarter or early fourth quarter.



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



General



Prior to October 1998, PACE developed and marketed advanced patient care management software systems that enabled healthcare providers to standardize the delivery of care, maximize resource utilization and improve clinical outcomes. On October 7, 1998, the Company completed the sale of substantially all of its assets to, and the assumption of certain of its liabilities by, Minnesota Mining and Manufacturing Company (the Transaction).



Following the Transaction, the Company has no ongoing operations and no revenues and has minimal operating expenses. The Companys June 30, 2006 balance sheet reflects current assets of $1,661,316 and current liabilities of $120,181.



The net proceeds from the Transaction will be retained by the Company pending a determination of whether to engage in a follow-on transaction. The Company has been seeking a business combination with another entity, before considering possible liquidation and distribution of its assets. The Company believes that with the cash on hand and net operating loss carryforwards, subject to the limitation of such carryforwards under the Internal Revenue Code, such a combination may be attractive to potential partners and would better serve the interests of the Companys shareholders. As of June 30, 2006, no definitive agreement has been signed for a follow-on transaction. If no suitable business combination is identified, the Company may elect to liquidate and distribute the remaining net proceeds to shareholders. If the Company liquidated total assets of $1,810,556 at the present time, only preferred
stockholders would be paid due to a liquidation preference of $5,331,250 as of June 30, 2006 (included in this figure is $2,456,250 in accrued dividends). On August 2, 2006, the Company entered into a definitive agreement. (See Part I. Note 5. Subsequent Events).

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RESULTS OF OPERATIONS



General and administrative:  General and administrative expenses include bookkeeping costs, legal fees, expenses associated with shareholder relations and SEC reporting requirements, and insurance. General and administrative expenses were $57,580 and $28,581 for the three months ended June 30, 2006 and 2005, respectively, representing an increase of 101.52%. General and administrative expenses were $102,311 and $54,870 for the six months ended June 30, 2006 and 2005, respectively, representing an increase of 86.5%, due mainly to an increase in auditing, consulting, and administrative fees.



Interest Income:  Interest income was $19,903 and $9,248 for the three months ended June 30, 2006 and 2005, respectively, representing an increase of 115.2%. Interest income was $38,609 and $15,925 for the six months ended June 30, 2006 and 2005, respectively, representing an increase of 142.4%. This increase is due mainly to an increase in money market and certificate of deposit interest rates.



Provision for income taxes:No provision for income tax benefit has been recorded due to the Company recording a valuation allowance on the deferred tax assets.



LIQUIDITY AND CAPITAL RESOURCES



Net cash used in operating activities for the three months ended June 30, 2006 and 2005 was $111,518 and $45,753, respectively. The Company has no ongoing operations and no revenues and has minimal operating expenses. The Companys June 30, 2006 balance sheet reflects current assets of $1,661,316 and current liabilities of $120,181.



The net proceeds from the transaction will be retained by the Company pending a determination of whether to engage in a follow-on transaction. The Company has been seeking a business combination with another entity, before considering possible liquidation and distribution of its assets. As of June 30, 2006, no definitive agreement has been signed for a follow-on transaction. If no suitable business combination is identified, the Company may elect to liquidate and distribute the remaining net proceeds to shareholders. If the Company liquidated total assets of $1,810,556 at the present time, only preferred stockholders would be paid due to a liquidation preference of $5,331,250 as of June 30, 2006 (included in this figure is $2,456,250 in accrued dividends). On August 2, 2006, the Company entered into a definitive agreement. (See Part I. Note 5. Subsequent Events).



ITEM 3. CONTROLS AND PROCEDURES



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



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

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PART II. OTHER INFORMATION



ITEM 6. EXHIBITS



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

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





SIGNATURES



In accordance with requirements of the Exchange
Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





|                | PACE HEALTH MANAGEMENT SYSTEMS, INC.
|--------------- | ------------------------------------
|                | (Registrant)                        
|               
|                |                                     
|August 14, 2006 |                                     
|Dated           |                                     

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