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 June 30, 2010OR ̈
            
            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 registrant’s classes of common
stock, as of the latest practicable date:





Number
      of Shares OutstandingClass
                  
                  August 16, 2010Common
      Stock, $0.0001 par value per share
                  
                  12,632,593





CONMED
HEALTHCARE MANAGEMENT, INC.





TABLE
OF CONTENTS





PART I. FINANCIAL
INFORMATION





PageITEM
      1. FINANCIAL STATEMENTS (UNAUDITED)Consolidated
      Balance Sheets
                    June
      30, 2010 and December 31, 2009
                  1Consolidated
      Statements of Operations
                    For
      the three and six months ended June 30, 2010 and 2009
                  2Consolidated
      Statements of Cash Flows
                    For
      the six months ended June 30, 2010 and 2009
                  3Consolidated
      Statements of Shareholders’ Equity
                    For
      the six months ended June 30, 2010
                  4Notes
      to Consolidated Financial Statements
                  5ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                  10ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                  18ITEM
      4(T). CONTROLS AND PROCEDURES
                  18PART II. OTHER
      INFORMATIONITEM
      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. RESERVED
                  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





June 30, 2010
                        (unaudited)
                      
                      
                      December 31,
                        2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                      
                      $
                      12,068,889
                      
                      
                      $
                      11,056,143Accounts
      receivable
                      
                      
                      2,490,069
                      
                      
                      
                      2,278,074Prepaid
      expenses
                      
                      
                      517,936
                      
                      
                      
                      865,261Deferred
      taxes
                      
                      
                      111,000
                      
                      
                      
                      102,000Total
      current assets
                      
                      
                      15,187,894
                      
                      
                      
                      14,301,478PROPERTY
      AND EQUIPMENT, NET
                      
                      
                      626,950
                      
                      
                      
                      605,578DEFERRED
      TAXES
                      
                      
                      1,377,000
                      
                      
                      
                      1,381,000OTHER
      ASSETSService
      contracts acquired, net
                      
                      
                      709,000
                      
                      
                      
                      984,000Non-compete
      agreements, net
                      
                      
                      355,228
                      
                      
                      
                      436,667Goodwill
                      
                      
                      6,263,705
                      
                      
                      
                      6,263,705Deposits
                      
                      
                      11,549
                      
                      
                      
                      11,549Total
      other assets
                      
                      
                      7,339,482
                      
                      
                      
                      7,695,921$
                      24,531,326
                      
                      
                      $
                      23,983,977LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                      
                      $
                      2,709,100
                      
                      
                      $
                      1,489,498Accrued
      expenses
                      
                      
                      3,535,433
                      
                      
                      
                      4,146,940Taxes
      payable
                      
                      
                      313,103
                      
                      
                      
                      550,000Deferred
      revenue
                      
                      
                      215,476
                      
                      
                      
                      1,018,645Total
      current liabilities
                      
                      
                      6,773,112
                      
                      
                      
                      7,205,083DERIVATIVE
      FINANCIAL INSTRUMENTS
                      
                      
                      1,346,829
                      
                      
                      
                      1,299,450SHAREHOLDERS’
      EQUITYPreferred
      stock, no par value; authorized 5,000,000 shares; issued and outstanding
      zero shares as of June 30, 2010 and December 31, 2009
                      
                      
                      —
                      
                      
                      
                      —Common
      stock, $0.0001 par value, authorized 40,000,000 shares; issued and
      outstanding 12,630,822 and 12,629,572 shares as of June 30, 2010 and
      December 31, 2009, respectively
                      
                      
                      1,263
                      
                      
                      
                      1,263Additional
      paid-in capital
                      
                      
                      38,136,149
                      
                      
                      
                      37,829,900Accumulated
      deficit
                      
                      
                      (21,726,027
                      )
                      
                      
                      (22,351,719
                      )Total
      shareholders' equity
                      
                      
                      16,411,385
                      
                      
                      
                      15,479,444$
                      24,531,326
                      
                      
                      $
                      23,983,977


See
Notes to Unaudited Financial Statements




Page - 1
-




CONMED HEALTHCARE MANAGEMENT,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)





For the Six
                  Months Ended
                  June 30, 2010
                
                
                For the Six
                  Months Ended
                  June 30, 2009
                
                
                For the Three
                  Months Ended
                  June 30, 2010
                
                
                For the Three
                  Months Ended
                  June 30, 2009Service
      contract revenue
                
                $
                29,490,123
                
                
                $
                25,131,993
                
                
                $
                14,738,152
                
                
                $
                12,712,751HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                
                
                16,705,809
                
                
                
                14,238,095
                
                
                
                8,490,509
                
                
                
                7,250,241Medical
      expenses
                
                
                6,011,743
                
                
                
                4,763,396
                
                
                
                2,872,001
                
                
                
                2,381,463Other
      operating expenses
                
                
                941,528
                
                
                
                863,830
                
                
                
                446,815
                
                
                
                479,625Total
      healthcare expenses
                
                
                23,659,080
                
                
                
                19,865,321
                
                
                
                11,809,325
                
                
                
                10,111,329Gross
      profit
                
                
                5,831,043
                
                
                
                5,266,672
                
                
                
                2,928,827
                
                
                
                2,601,422Selling
      and administrative expenses
                
                
                3,990,333
                
                
                
                3,759,723
                
                
                
                1,987,202
                
                
                
                1,944,196Depreciation
      and amortization
                
                
                599,699
                
                
                
                1,240,559
                
                
                
                280,170
                
                
                
                605,738Total
      operating expenses
                
                
                4,590,032
                
                
                
                5,000,282
                
                
                
                2,267,372
                
                
                
                2,549,934Operating
      income
                
                
                1,241,011
                
                
                
                266,390
                
                
                
                661,455
                
                
                
                51,488OTHER
      INCOME (EXPENSE)Interest
      income
                
                
                45,360
                
                
                
                44,580
                
                
                
                27,291
                
                
                
                15,952Interest
      (expense)
                
                
                —
                
                
                
                (7,173
                )
                
                
                —
                
                
                
                (1,967
                )(Loss)
      on fair value of derivatives
                
                
                (47,379
                )
                
                
                (2,444,273
                )
                
                
                (3,695
                )
                
                
                (2,445,139
                )Total
      other income (expense)
                
                
                (2,019
                )
                
                
                (2,406,866
                )
                
                
                23,596
                
                
                
                (2,431,154
                )Income
      (loss) before income taxes
                
                
                1,238,992
                
                
                
                (2,140,476
                )
                
                
                685,051
                
                
                
                (2,379,666
                )Income
      tax expense
                
                
                613,300
                
                
                
                153,000
                
                
                
                343,000
                
                
                
                32,000Net
      income (loss)
                
                $
                625,692
                
                
                $
                (2,293,476
                )
                
                $
                342,051
                
                
                $
                (2,411,666
                )EARNINGS
      (LOSS) PER COMMON SHAREBasic
                
                $
                0.05
                
                
                $
                (0.18
                )
                
                $
                0.03
                
                
                $
                (0.19
                )Diluted
                
                $
                0.04
                
                
                $
                (0.18
                )
                
                $
                0.02
                
                
                $
                (0.19
                )WEIGHTED-AVERAGE
      SHARES OUTSTANDINGBasic
                
                
                12,630,115
                
                
                
                12,516,285
                
                
                
                12,630,657
                
                
                
                12,560,155Diluted
                
                
                14,242,733
                
                
                
                12,516,285
                
                
                
                14,280,367
                
                
                
                12,560,155


See
Notes to Unaudited Financial Statements




Page - 2
-




CONMED HEALTHCARE
MANAGEMENT, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)





For the Six
                  Months Ended
                  June 30, 2010
                
                
                For the Six
                  Months Ended
                  June 30, 2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                
                $
                625,692
                
                
                $
                (2,293,476
                )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activitiesDepreciation
                
                
                140,920
                
                
                
                90,559Amortization
                
                
                458,779
                
                
                
                1,150,000Stock-based
      compensation
                
                
                303,937
                
                
                
                324,269Loss
      on fair value of derivatives
                
                
                47,379
                
                
                
                2,444,273Deferred
      income taxes
                
                
                (5,000
                )
                
                
                —Changes
      in working capital components(Increase)
      decrease in accounts receivable
                
                
                (211,995
                )
                
                
                518,196(Increase)
      decrease in prepaid expenses
                
                
                347,325
                
                
                
                (82,225
                )Increase
      in accounts payable
                
                
                1,219,602
                
                
                
                560,167(Decrease)
      in accrued expenses
                
                
                (611,507
                )
                
                
                (212,988
                )(Decrease)
      in income taxes payable
                
                
                (236,897
                )
                
                
                (360,140
                )(Decrease)
      in deferred revenue
                
                
                (803,169
                )
                
                
                (346,228
                )Net
      cash provided by operating activities
                
                
                1,275,066
                
                
                
                1,792,407CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                
                
                (117,364
                )
                
                
                (210,117
                )Stock
      Purchase of CMHS, LLC
                
                
                —
                
                
                
                (9,161
                )Asset
      purchase
                
                
                (147,268
                )
                
                
                —Net
      cash (used in) investing activities
                
                
                (264,632
                )
                
                
                (219,278
                )CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on line of credit
                
                
                —
                
                
                
                (100,000
                )Payments
      on loans
                
                
                —
                
                
                
                (36,186
                )Proceeds
      from exercise of stock options
                
                
                2,312
                
                
                
                12,000Net
      cash provided by (used in) financing activities
                
                
                2,312
                
                
                
                (124,186
                )Net
      increase in cash and cash equivalents
                
                
                1,012,746
                
                
                
                1,448,943CASH
      AND CASH EQUIVALENTSBeginning
                
                
                11,056,143
                
                
                
                7,472,140Ending
                
                $
                12,068,889
                
                
                $
                8,921,083SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      payments for interest
                
                $
                —
                
                
                $
                7,173Income
      taxes paid
                
                
                855,197
                
                
                
                513,140





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, 2009
                  
                  $
                  —
                  
                  
                  $
                  1,263
                  
                  
                  $
                  37,829,900
                  
                  
                  $
                  (22,351,719
                  )
                  
                  $
                  15,479,444Net
      Income
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  625,692
                  
                  
                  
                  625,692Stock
      option expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  303,937
                  
                  
                  
                  —
                  
                  
                  
                  303,937Exercise
      of stock options
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,312
                  
                  
                  
                  —
                  
                  
                  
                  2,312Balance
      at June 30, 2010
                  
                  $
                  —
                  
                  
                  $
                  1,263
                  
                  
                  $
                  38,136,149
                  
                  
                  $
                  (21,726,027
                  )
                  
                  $
                  16,411,385


See
Notes to Unaudited Financial Statements




Page - 4
-




CONMED
HEALTHCARE MANAGEMENT, INC.




NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




NOTE
      1.
            Basis
      of Presentation




The
accompanying unaudited consolidated financial statements of Conmed Healthcare
Management, Inc. (together with its consolidated subsidiaries, “Conmed”, the
“Company”, “we”, “us”, or “our”, unless otherwise specified or the context
otherwise requires) contained herein have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (the “SEC”) 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, 2009, filed with the SEC on March 25,
2010.





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 and six months ended June 30, 2010
are not necessarily indicative of the results of operations to be expected for a
full year.





In
January 2010, we purchased approximately $45,000 and $102,000 of fixed assets
and intangible assets, respectively, from a small mobile imaging company to
expand the base of services that we provide to our customers, as such services
were previously subcontracted.  This acquisition did not have a
material impact on our financial position or results of operations and therefore
additional proforma information has not been presented.




NOTE
      2.
            New
      Accounting Standards




In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value
Measurements.  The update provides amendments to FASB Accounting
Standards Codification 820-10, Fair Value, which requires
entities to disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers.  In addition, the update requires entities to present
separately information about purchases, sales, issuances and settlements in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3).  The disclosures related to Level 1 and Level 2 fair value
measurements became effective for us in 2010 and the disclosures related to
Level 3 fair value measurements are effective for us in 2011.  The
update requires new disclosures and will have no impact on our consolidated
financial position, results of operations or cash flows.




NOTE
      3.
            Common
      Stock Options




The Board
of Directors has adopted, and our stockholders have approved, the 2007 Stock
Option Plan, as amended (the “2007 Plan”). On May 25, 2010, the 2007 Plan was
amended to increase the total number of shares available from 2,350,000 to
3,100,000.  The 2007 Plan provides for the grant of incentive stock
options, nonqualified stock options and restricted stock units. The 2007 Plan is
administered by the independent members of 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 six months ended June 30, 2010 and 2009, we recorded stock-based
compensation expense net of reversals for forfeited options totaling $303,937
and $324,269, respectively, and during the three months ended June 30, 2010 and
2009, we recorded stock-based compensation expense net of reversals for
forfeited options totaling $144,506 and $165,000, respectively.





During
the six months ended June 30, 2010, options were granted to purchase 116,000
shares of common stock at an average exercise price of $3.18 per share and an
average grant date fair value of $2.14 per share.  Additionally,
during the six months ended June 30, 2010, options to purchase 26,479 shares of
common stock were forfeited, options to purchase 1,250 shares of common stock
were cancelled, options to purchase 1,250 shares of common stock were exercised
at an average exercise price of $1.85 per share and, as of June 30, 2010,
992,562 shares remain available for grant.


Page - 5
-


As of
June 30, 2010, stock-based compensation expense not yet recognized in income
totaled $760,681, which is expected to be recognized over a weighted-average
remaining period of 1.13 years.




NOTE
      4.
            Common
      Stock Warrants




Pre-Acquisition
Warrants


In
connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued
warrants to purchase an aggregate of 250,000 shares of common stock to warrant
holders of the Company’s predecessor exercisable at $0.30 per
share.  The warrants vested immediately and expire October 23,
2010.





Investor
Warrants


In
connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued
to investors warrants to purchase an aggregate of 1,500,000 shares of common
stock, exercisable at $0.30 per share and warrants to purchase an aggregate of
500,000 shares of common stock, exercisable at $2.50 per share.  The
warrants vested immediately and expire March 13, 2012.





Placement
Agent Warrants


In
connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued
to Maxim Group LLC, our exclusive placement agent, a warrant to purchase 300,000
shares of common stock, exercisable at $2.75 per share.  The warrants
vested immediately and expire January 26, 2012.





Consultant
Warrants


In
connection with the purchase of all of the assets of Emergency Medicine
Documentation Consultants, P.C., a provider of medical services in northwest
Oregon, in 2008, we issued warrants to two consultants to purchase an aggregate
of 80,000 shares of common stock at an exercise price of $1.85 per share. The
warrants vested immediately and expire February 28, 2013.





Summary


The
following table summarizes the warrant activity for the six months ended June
30, 2010:





Pre-
                      Acquisition
                      Warrants
                    
                    
                    Investor
                      Warrants
                      @ $0.30
                      per share
                    
                    
                    Investor
                      Warrants
                      @ $2.50
                      per share
                    
                    
                    Placement
                      Agent
                      Warrants
                    
                    
                    Consultant
                      Warrants
                    
                    
                    TotalExercise
      price
                    
                    $
                    0.30
                    
                    
                    $
                    0.30
                    
                    
                    $
                    2.50
                    
                    
                    $
                    2.75
                    
                    
                    $
                    1.85
                    
                    
                    $
                    1.32Warrants
      outstanding as of December 31, 2009
                    
                    
                    223,000
                    
                    
                    
                    813,000
                    
                    
                    
                    496,667
                    
                    
                    
                    300,000
                    
                    
                    
                    80,000
                    
                    
                    
                    1,912,667Warrants
      exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Warrants
      outstanding as of June 30, 2010
                    
                    
                    223,000
                    
                    
                    
                    813,000
                    
                    
                    
                    496,667
                    
                    
                    
                    300,000
                    
                    
                    
                    80,000
                    
                    
                    
                    1,912,667





The
following table summarizes the warrant activity for the six months ended June
30, 2009:





Pre-
                      Acquisition
                      Warrants
                    
                    
                    Investor
                      Warrants
                      @ $0.30
                      per share
                    
                    
                    Investor
                      Warrants
                      @ $2.50
                      per share
                    
                    
                    Placement
                      Agent
                      Warrants
                    
                    
                    Consultant
                      Warrants
                    
                    
                    TotalExercise
      price
                    
                    $
                    0.30
                    
                    
                    $
                    0.30
                    
                    
                    $
                    2.50
                    
                    
                    $
                    2.75
                    
                    
                    $
                    1.85
                    
                    
                    $
                    1.25Warrants
      outstanding as of December 31, 2008
                    
                    
                    225,000
                    
                    
                    
                    980,000
                    
                    
                    
                    500,000
                    
                    
                    
                    300,000
                    
                    
                    
                    80,000
                    
                    
                    
                    2,085,000Warrants
      exercised
                    
                    
                    —
                    
                    
                    
                    157,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    157,000Warrants
      outstanding as of June 30, 2009
                    
                    
                    225,000
                    
                    
                    
                    823,000
                    
                    
                    
                    500,000
                    
                    
                    
                    300,000
                    
                    
                    
                    80,000
                    
                    
                    
                    1,928,000




Page - 6
-




NOTE
      5.
            Fair
      Value of Warrants




As a
result of adopting derivative accounting for warrants, effective January 1,
2009, 1,705,000 of our then issued and outstanding common stock purchase
warrants previously treated as equity 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 are recognized currently in earnings until such
time as the warrants are exercised, amended or expire.





Investor
Warrants @ $0.30 per share





Black-Scholes assumptions
                        
                        June 30, 2010
                        
                        
                        December 31, 2009Expected
      life (years)
                        
                        
                        1.5
                        
                        
                        
                        1.5Expected
      volatility
                        
                        
                        64.32
                        %
                        
                        
                        79.59
                        %Risk-free
      interest rate
                        
                        
                        1.2
                        %
                        
                        
                        1.4
                        %Expected
      dividend yield
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %





Investor
Warrants @ $2.50 per share





Black-Scholes assumptions
                    
                    June 30, 2010
                    
                    
                    December 31, 2009Expected
      life (years)
                    
                    
                    1.5
                    
                    
                    
                    1.5Expected
      volatility
                    
                    
                    64.32
                    %
                    
                    
                    79.59
                    %Risk-free
      interest rate
                    
                    
                    1.2
                    %
                    
                    
                    1.4
                    %Expected
      dividend yield
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %





The
following tables summarize the warrant activity subject to fair value accounting
for the six months ended June 30, 2010:





Investor
                    Warrants@
                    $0.30per
                    share
                  
                  
                  Investor
                    Warrants@
                    $2.50per
                    share
                  
                  
                  TotalWarrants
      outstanding subject to fair value accounting as of December 31,
      2009
                  
                  
                  221,430
                  
                  
                  
                  496,667
                  
                  
                  
                  718,097Warrants
      exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Warrants
      amended
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Warrants
      outstanding subject to fair value accounting as of June 30,
      2010
                  
                  
                  221,430
                  
                  
                  
                  496,667
                  
                  
                  
                  718,097





Investor
                    Warrants @
                    $0.30 per
                    share
                  
                  
                  Investor
                    Warrants @
                    $2.50 per
                    share
                  
                  
                  TotalFair
      value of warrants outstanding as of December 31, 2009
                  
                  $
                  615,280
                  
                  
                  $
                  684,170
                  
                  
                  $
                  1,299,450Realized
      loss on warrants
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Unrealized
      (gain) loss on warrants
                  
                  
                  50,250
                  
                  
                  
                  (2,871
                  )
                  
                  
                  47,379Fair
      value of warrants transferred to equity upon amendment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Fair
      value of warrants exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Fair
      value of warrants outstanding as of June 30, 2010
                  
                  $
                  665,530
                  
                  
                  $
                  681,299
                  
                  
                  $
                  1,346,829





Page - 7
-




The
following tables summarize the warrant activity subject to fair value accounting
for the three months ended June 30, 2010:




Investor
                      Warrants @
                      $0.30 per
                      share
                    
                    
                    Investor
                      Warrants @
                      $2.50 per
                      share
                    
                    
                    TotalWarrants
      outstanding subject to fair value accounting as of March 31,
      2010
                    
                    
                    221,430
                    
                    
                    
                    496,667
                    
                    
                    
                    718,097Warrants
      exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Warrants
      amended
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Warrants
      outstanding subject to fair value accounting as of June 30,
      2010
                    
                    
                    221,430
                    
                    
                    
                    496,667
                    
                    
                    
                    718,097





Investor
                      Warrants @
                      $0.30 per
                      share
                    
                    
                    Investor
                      Warrants @
                      $2.50 per
                      share
                    
                    
                    TotalFair
      value of warrants outstanding as of March 31, 2010
                    
                    $
                    643,787
                    
                    
                    $
                    699,347
                    
                    
                    $
                    1,343,134Realized
      loss on warrants
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Unrealized
      (gain) loss on warrants
                    
                    
                    21,743
                    
                    
                    
                    (18,048
                    )
                    
                    
                    3,695Fair
      value of warrants transferred to equity upon amendment
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Fair
      value of warrants exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Fair
      value of warrants outstanding as of June 30, 2010
                    
                    $
                    665,530
                    
                    
                    $
                    681,299
                    
                    
                    $
                    1,346,829





As of
June 30, 2010, we had outstanding warrants to purchase an aggregate of 1,912,667
shares of common stock, of which warrants to purchase 718,097 shares of common
stock were subject to derivative accounting for warrants, at an average exercise
price of $1.82, and we have reserved shares of our common stock for issuance in
connection with the potential exercise thereof.




NOTE
      6.
            Fair
      Value Measurements




The
Company is required to disclose the fair value measurements required by the fair
value measurement guidance.  The derivative financial instruments
recorded at fair value in the balance sheets as of June 30, 2010 and December
31, 2009 are categorized based upon the level of judgment associated with the
inputs used to measure their fair value.





The
following tables summarize the financial liabilities measured at fair value on a
recurring basis segregated by the level of valuation inputs within the fair
value hierarchy utilized to measure fair value:





As of June 30, 2010Total
                  
                  
                  Quoted prices in
                    active markets for
                    identical assets
                    (Level 1)
                  
                  
                  Significant other
                    observable inputs
                    (Level 2)
                  
                  
                  Significant
                    unobservable
                    inputs
                    (Level 3)Derivative
      financial instruments
                  
                  $
                  1,346,829
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,346,829





As of December 31, 2009Total
                  
                  
                  Quoted prices in
                    active markets for
                    identical assets
                    (Level 1)
                  
                  
                  Significant other
                    observable inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    inputs
                    (Level 3)Derivative
      financial instruments
                  
                  $
                  1,299,450
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,299,450


Page - 8
-




Equity-linked
financial instruments consist of stock warrants issued by the Company that
contain a strike price adjustment feature.  In accordance with
derivative accounting for warrants, 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 six months
ended June 30, 2010 and 2009, we recognized a $47,379 and a $2,352,625
unrealized loss, respectively, related to the change in fair value of the
financial instruments which is included in Other Income (Expense) on the
Statement of Operations.





The
following table reflects the activity for liabilities measured at fair value
using Level 3 inputs for the six months ended June 30:





2010
                  
                  
                  2009Balance
      as of January 1
                  
                  $
                  1,299,450
                  
                  
                  $
                  2,766,150Transfers
      into level 3
                  
                  
                  —
                  
                  
                  
                  —Transfers
      out of level 3
                  
                  
                  —
                  
                  
                  
                  —Sales
      of equity-linked financial instruments
                  
                  
                  —
                  
                  
                  
                  (393,321
                  )Realized
      loss related to the change in fair value
                  
                  
                  —
                  
                  
                  
                  91,648Unrealized
      loss related to the change in fair value
                  
                  
                  47,379
                  
                  
                  
                  2,352,625Balance
      as of June 30
                  
                  $
                  1,346,829
                  
                  
                  $
                  4,817,102




NOTE
      7.
            Earnings
      Per Share




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





For the Six
                    Months Ended
                    June 30, 2010
                  
                  
                  For the Six
                    Months Ended
                    June 30, 2009
                  
                  
                  For the Three
                    Months Ended
                    June 30, 2010
                  
                  
                  For the Three
                    Months Ended
                    June 30, 2009Numerator
      for basic and diluted earnings per share:Net
      income (loss)
                  
                  $
                  625,692
                  
                  
                  $
                  (2,293,476
                  )
                  
                  $
                  342,051
                  
                  
                  $
                  (2,411,666
                  )Denominator:Weighted-average
      basic shares outstanding
                  
                  
                  12,630,115
                  
                  
                  
                  12,516,285
                  
                  
                  
                  12,630,657
                  
                  
                  
                  12,560,155Assumed
      conversion of dilutive securitiesStock
      options
                  
                  
                  472,405
                  
                  
                  
                  —
                  
                  
                  
                  502,486
                  
                  
                  
                  —Warrants
                  
                  
                  1,140,213
                  
                  
                  
                  —
                  
                  
                  
                  1,147,224
                  
                  
                  
                  —Potentially
      dilutive common shares
                  
                  
                  1,612,618
                  
                  
                  
                  —
                  
                  
                  
                  1,649,710
                  
                  
                  
                  —Denominator
      for diluted earnings per share – Adjusted weighted average
      shares
                  
                  
                  14,242,733
                  
                  
                  
                  12,516,285
                  
                  
                  
                  14,280,367
                  
                  
                  
                  12,560,155Earnings
      (loss) per common share:Basic
                  
                  $
                  0.05
                  
                  
                  $
                  (0.18
                  )
                  
                  $
                  0.03
                  
                  
                  $
                  (0.19
                  )Diluted
                  
                  $
                  0.04
                  
                  
                  $
                  (0.18
                  )
                  
                  $
                  0.02
                  
                  
                  $
                  (0.19
                  )





Common
stock warrants and options outstanding totaling 224,000 and 3,974,167 shares,
respectively, are not included in diluted earnings per common share for the six
months ended June 30, 2010 and 2009, respectively, as they would have an
antidilutive effect on earnings per common share.




NOTE
      8.
            Income
      Tax Matters




Our
effective tax rate was 49.5% during the six months ended June 30, 2010, which
differs from the expected tax rate of 39.0% primarily due to permanent
differences related to stock-based compensation and derivatives related to
warrants.  The change in our effective tax rate from prior periods is
primarily due to the relation of our taxable income relative to pre-tax
income.  We recorded income tax expense of $613,300 and $153,000 for
the six months ended June 30, 2010 and 2009, respectively.  We
recorded income tax expense of $343,000 and $32,000 for the three months ended
June 30, 2010 and 2009, respectively.


Page - 9
-




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 Conmed
Healthcare Management, Inc. (together with its consolidated subsidiaries, the
“Company”, “we”, “us”, or “our” unless otherwise specified or the context
otherwise requires) 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. These forward-looking statements involve certain risks and
uncertainties that are subject to change based on various factors (many of which
are beyond the Company's control) including, without limitation, the Company's
ability to increase revenue and to continue to obtain new contracts; the
incurrence of start-up costs associated with new contracts; contract renewals
and extensions; inflation exceeding the Company’s projection of the inflation
rate of cost of services under multi-year contracts; the ability to obtain
bonds; decreases in occupancy levels or disturbances at detention centers;
malpractice litigation; the ability to utilize third party administrators for
out-of-facility care; compliance with laws and government regulations, including
those relating to healthcare; investigation and auditing of our contracts by
government agencies; competition; termination of contracts due to lack of
government appropriations; material adverse changes in economic and industry
conditions in the healthcare market; negative publicity regarding the provision
of correctional healthcare services; dependence on key personnel and the ability
to hire skilled personnel; influence of certain stockholders; increases in
healthcare costs; insurance; completion and integration of future acquisitions;
public company obligations; limited liability of directors and officers; the
Company’s ability to meet the NYSE Amex continued listing standards; and stock
price volatility. 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 for the year
ended December 31, 2009, filed with the SEC on March 25, 2010. Investors and
security holders are urged to read this document free of charge on the SEC's web
site at www.sec.gov.




General




We
provide healthcare services to county and municipal detention centers across the
United States. As a result of the Supreme Court decision in Estelle v. Gamble
(1976), all individuals held against their will are required to be provided with
community standard healthcare. Under this requirement, correctional institutions
are required to provide healthcare services for their inmates. We are a
specialist in the provision of these services, having provided correctional
healthcare services since 1984.  We began providing correctional
healthcare services in the State of Maryland, and currently serve county and
municipal correctional facilities in thirty-eight counties in seven
states:  Arizona, Kansas, Maryland, Oklahoma, Oregon, Virginia and
Washington. Our services have expanded to include mental health, pharmacy and
out-of-facility healthcare services.




Critical
Accounting Policies




The
discussion and analysis of our financial condition and results of operations are
based upon our condensed consolidated financial statements. These condensed
consolidated 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 consolidated 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 Annual Report on Form 10-K for the year ended
December 31, 2009, filed with the SEC on March 25, 2010. There have been no
material changes to our critical accounting policies and estimates from the
information provided in our Form 10-K for the year ended December 31,
2009.


Page - 10
-




Recently
Adopted Accounting Standards




In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value
Measurements.  The update provides amendments to FASB Accounting
Standards Codification 820-10, Fair Value, which requires
entities to disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers.  In addition, the update requires entities to present
separately information about purchases, sales, issuances and settlements in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3).  The disclosures related to Level 1 and Level 2 fair value
measurements became effective for us in 2010 and the disclosures related to
Level 3 fair value measurements are effective for us in 2011.  The
update requires new disclosures and will have no impact on our consolidated
financial position, results of operations or cash flows.




Results
of Operations




Three
Months Ended June 30, 2010 compared to Three Months Ended June 30,
2009


The
following discussion of financial results is derived from unaudited financial
statements for the three months ended June 30, 2010 and 2009.





Three Months Ended
                  June 30, 2010
                
                
                Three Months Ended
                  June 30, 2009Amount
                
                
                % of
                  Revenue
                
                
                Amount
                
                
                % of
                  RevenueService
      contract revenue
                
                $
                14,738,152
                
                
                
                100.0
                %
                
                $
                12,712,751
                
                
                
                100.0
                %HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                
                
                8,490,509
                
                
                
                57.6
                %
                
                
                7,250,241
                
                
                
                57.0
                %Medical
      expenses
                
                
                2,872,001
                
                
                
                19.5
                %
                
                
                2,381,463
                
                
                
                18.7
                %Other
      operating expenses
                
                
                446,815
                
                
                
                3.0
                %
                
                
                479,625
                
                
                
                3.8
                %Total
      healthcare expenses
                
                
                11,809,325
                
                
                
                80.1
                %
                
                
                10,111,329
                
                
                
                79.5
                %Gross
      profit
                
                
                2,928,827
                
                
                
                19.9
                %
                
                
                2,601,422
                
                
                
                20.5
                %OPERATING
      EXPENSES:Selling
      and administrative expenses
                
                
                1,987,202
                
                
                
                13.5
                %
                
                
                1,944,196
                
                
                
                15.3
                %Depreciation
      and amortization
                
                
                280,170
                
                
                
                1.9
                %
                
                
                605,738
                
                
                
                4.8
                %Total
      operating expenses
                
                
                2,267,372
                
                
                
                15.4
                %
                
                
                2,549,934
                
                
                
                20.1
                %Operating
      income
                
                
                661,455
                
                
                
                4.5
                %
                
                
                51,488
                
                
                
                0.4
                %OTHER
      INCOME (EXPENSE)Interest
      income
                
                
                27,291
                
                
                
                0.2
                %
                
                
                15,952
                
                
                
                0.1
                %Interest
      expense
                
                
                —
                
                
                
                0.0
                %
                
                
                (1,967
                )
                
                
                0.0
                %(Loss)
      on fair value of derivatives
                
                
                (3,695
                )
                
                
                (0.0
                )%
                
                
                (2,445,139
                )
                
                
                (19.2
                )%Total
      other income (expense)
                
                
                23,596
                
                
                
                0.2
                %
                
                
                (2,431,154
                )
                
                
                (19.1
                )%Income
      (loss) before income taxes
                
                
                685,051
                
                
                
                4.6
                %
                
                
                (2,379,666
                )
                
                
                (18.7
                )%Income
      tax expense
                
                
                343,000
                
                
                
                2.3
                %
                
                
                32,000
                
                
                
                0.3
                %Net
      income (loss)
                
                $
                342,051
                
                
                
                2.3
                %
                
                $
                (2,411,666
                )
                
                
                (19.0
                )%


Page - 11
-





Summary


Net
revenue from medical services provided primarily to correctional institutions
for the three months ended June 30, 2010 and 2009, was $14,738,152 and
$12,712,751, respectively, which represents an increase of $2,025,401 or 15.9%.
Net income was $342,051 or 2.3% of revenue compared to a net loss of $2,411,666
or (19.0)% of revenue for the three months ended June 30, 2010 and 2009,
respectively, which represented an increase in net income of
$2,753,717.





Revenue


The
addition of service contracts signed with new jurisdictions since April 1, 2009
accounted for $1,597,509 or 78.9% of the increase in revenue for the three
months ended June 30, 2010 compared to the same period for the prior year. These
jurisdictions are as follows: Clark County, WA; Coos County, OR; Creek County,
OK; Garrett County, MD; Kittitas County, WA; Pima County (Juvenile), AZ; and
Washington County, MD. Revenue improvement totaling $328,369, or 16.2% 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
April 1, 2009. Price increases related to existing service requirements totaled
$277,937 or 13.7% of the revenue increase. The increase in revenue was partially
offset by $(178,414), or (8.8)% of revenue, which was the result of decreases in
other volume related activities, primarily associated with lower inmate
populations at certain facilities partially offset by an increase in stop/loss
reimbursements due to higher out of facility medical expenditures in excess of
stop/loss limits which are billed back to the client.


Healthcare
Expenses


Salaries
and employee benefits


Salaries
and employee benefits for healthcare employees were $8,490,509 or 57.6% of
revenue for the three months ended June 30, 2010, compared to $7,250,241 or
57.0% of revenue for the three months ended June 30, 2009. The increase in
spending for salaries and employee benefits of $1,240,268 or 17.1% is due
primarily to the addition of new healthcare employees resulting from new
business. Approximately 81.2% of the increase is related to new healthcare
employees required to support the staffing requirements for our new medical
service contracts as detailed above. Additional services related to previously
existing medical service contracts, as well as cost-of-living and wage and
benefit adjustments for existing employees accounted for the remainder of the
increase. The increase in salaries and employee benefits as a percentage of
revenue is due to a change in the mix of expense for salaries and benefits.
Several of our new medical service contracts have a higher proportion of
staffing services compared to our previously existing contracts and as a result
these new contracts increased the mix of salaries and employee benefits as a
percentage of total revenue.





Medical
expenses


Medical expenses for the three months
ended June 30, 2010 and 2009 were $2,872,001, or 19.5% of revenue, and
$2,381,463, or 18.7% of revenue, respectively, which represented an increase of
$490,538 or 20.6%. The increase in spending for medical expenses in absolute
dollars primarily reflects increases related to new contracts for medical
services. The increase in spending as a percentage of revenue results, in part,
from increases in pharmacy expenses and out of facility hospital expenses which
were higher than the prior year due to an increase in inmate hospitalization
days in the second quarter of 2010 compared to the second quarter of 2009.


Other
operating expenses


Other
operating expenses were $446,815, or 3.0% of revenue, for the three months ended
June 30, 2010, compared to $479,625, or 3.8% of revenue, for the three months
ended June 30, 2009. The decrease of $32,810 in spending is primarily related to
a decrease in spending for employment advertising, recruiting expense, and legal
fees, which was partially offset by an increase in professional liability
insurance expense as a result of the new service contracts.





Operating
Expenses


Selling
and administrative expenses


Selling
and administrative expenses for the three months ended June 30, 2010 and 2009
were $1,987,202, or 13.5% of revenue, and $1,944,196, or 15.3% of revenue,
respectively. The increased expenditure of $43,006 primarily reflects an
increased investment in additional management and administrative personnel
required to support new contracts and services added since April 1, 2009, as
well as increases in consulting fees, recruiting expense and travel expenses,
which were partially offset by decreases in accounting fees, legal fees, rent
expense and stock-based compensation.  The reduction in spending as a
percentage of revenue resulted from improved economies of scale as selling and
administrative expenses continue to grow at a slower pace than
revenue.  Stock-based compensation for the three months ended June 30,
2010 and 2009 was $144,506 and $165,000, respectively.


Page - 12
-





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 Emergency Medicine Documentation Consultants,
P.C. (“EMDC”) in February 2008 and the acquisition of Correctional Mental Health
Services, LLC (“CMHS”) in November 2008. Amortization of service contracts
acquired was $139,000, or 0.9% of revenue, for the three months ended June 30,
2010, compared to $463,000, or 3.6% of revenue, for the three months ended June
30, 2009. The decrease primarily reflects a decrease in amortization expense as
certain individual service contracts acquired have become fully
amortized.  Amortization of non-compete agreements was $69,668, or
0.5% of revenue, for the three months ended June 30, 2010, compared to $96,000,
or 0.8% of revenue, for the three months ended June 30, 2009. Depreciation
expense increased to $71,502 for the three months ended June 30, 2010 compared
to $46,738 for the prior year period due primarily to capital expenditures
associated with purchases of vehicles, medical equipment and computers at
various facilities.





Interest
income


Interest
income was $27,291 for the three months ended June 30, 2010 compared to $15,952
for the same period in 2009. Higher average cash balances and increased
short-term interest rates during the three months ended June 30, 2010 account
for the increased interest income compared to the same period in
2009.





Interest
expense


Interest
expense for the three months ended June 30, 2010 decreased to $0 compared to
$1,967 in the same period in 2009.





(Loss)
on fair value of derivatives


As a
result of adopting derivative accounting for warrants effective January 1, 2009,
1,705,000 of our then issued and outstanding common stock purchase warrants
previously treated as equity were no longer afforded equity treatment and as a
result they are now recorded as a liability based on fair value
estimates.  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, amended or expire.





During
the three months ended June 30, 2010 and 2009, we recognized a $3,695 and a
$2,353,993 unrealized loss, respectively.  The decreased expense of
$2,350,298 was primarily the result of our stock price increasing $0.10 during
the three months ended June 30, 2010 compared to a $1.65 increase in stock price
during the three months ended June 30, 2009.  Additionally, there were
829,903 fewer warrants subject to fair value accounting during the three months
ended June 30, 2010 compared to the three months ended June 30, 2009, primarily
due to the amendment of certain warrant agreements to remove the provisions that
resulted in liability treatment subsequent to June 30, 2009.





During
the three months ended June 30, 2010, no warrants were exercised.  As
of June 30, 2010, we had outstanding warrants subject to derivative accounting
to purchase an aggregate of 718,097 shares of common stock.  During
the three months ended June 30, 2009, warrants to purchase 20,000 shares of
common stock were exercised generating $6,000 of net proceeds and warrants to
purchase 117,000 shares of common stock were exercised by cashless exercise and
as a result, a total of 123,890 shares of common stock were
issued.  As of June 30, 2009, we had outstanding warrants subject to
derivative accounting to purchase an aggregate of 1,548,000 shares of common
stock.





The
following table summarizes the change in fair value for the three months ended
June 30:





2010
                  
                  
                  2009Fair
      value of warrants outstanding as of March 31
                  
                  $
                  1,343,134
                  
                  
                  $
                  2,726,360Realized
      loss on warrants
                  
                  
                  —
                  
                  
                  
                  91,146Unrealized
      loss on warrants
                  
                  
                  3,695
                  
                  
                  
                  2,353,993Fair
      value of warrants exercised
                  
                  
                  —
                  
                  
                  
                  (354,397
                  )Fair
      value of warrants outstanding as of June 30
                  
                  $
                  1,346,829
                  
                  
                  $
                  4,817,102





See Note
5, “Fair Value of Warrants”, for additional information on the warrant activity
subject to fair value accounting for the three months ended June 30,
2010.





Income
tax expense


Our
effective tax rate was 50.1% during the three months ended June 30, 2010 which
differs from the expected tax rate of 39.0% primarily due to permanent
differences related to stock-based compensation and derivatives related to
warrants.  The change in our effective tax rate from prior periods is
primarily due to the relation of our taxable income relative to pre-tax
income.  We recorded income tax expense of $343,000 and $32,000 for
the three months ended June 30, 2010 and 2009, respectively.





Page - 13
-




Six
Months Ended June 30, 2010 compared to Six Months Ended June 30,
2009


The
following discussion of financial results is derived from unaudited financial
statements for the six months ended June 30, 2010 and 2009.





Six Months Ended
                  June 30, 2010
                
                
                Six Months Ended
                  June 30, 2009Amount
                
                
                %
      of
                  Revenue
                
                
                Amount
                
                
                %
      of
                  RevenueService
      contract revenue
                
                $
                29,490,123
                
                
                
                100.0
                %
                
                $
                25,131,993
                
                
                
                100.0
                %HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                
                
                16,705,809
                
                
                
                56.6
                %
                
                
                14,238,095
                
                
                
                56.7
                %Medical
      expenses
                
                
                6,011,743
                
                
                
                20.4
                %
                
                
                4,763,396
                
                
                
                19.0
                %Other
      operating expenses
                
                
                941,528
                
                
                
                3.2
                %
                
                
                863,830
                
                
                
                3.4
                %Total
      healthcare expenses
                
                
                23,659,080
                
                
                
                80.2
                %
                
                
                19,865,321
                
                
                
                79.0
                %Gross
      profit
                
                
                5,831,043
                
                
                
                19.8
                %
                
                
                5,266,672
                
                
                
                21.0
                %OPERATING
      EXPENSES:Selling
      and administrative expenses
                
                
                3,990,333
                
                
                
                13.5
                %
                
                
                3,759,723
                
                
                
                15.0
                %Depreciation
      and amortization
                
                
                599,699
                
                
                
                2.0
                %
                
                
                1,240,559
                
                
                
                4.9
                %Total
      operating expenses
                
                
                4,590,032
                
                
                
                15.6
                %
                
                
                5,000,282
                
                
                
                19.9
                %Operating
      income
                
                
                1,241,011
                
                
                
                4.2
                %
                
                
                266,390
                
                
                
                1.1
                %OTHER
      INCOME (EXPENSE)Interest
      income
                
                
                45,360
                
                
                
                0.2
                %
                
                
                44,580
                
                
                
                0.2
                %Interest
      expense
                
                
                —
                
                
                
                0.0
                %
                
                
                (7,173
                )
                
                
                (0.0
                )%(Loss)
      on fair value of derivatives
                
                
                (47,379
                )
                
                
                (0.2
                )%
                
                
                (2,444,273
                )
                
                
                (9.7
                )%Total
      other income (expense)
                
                
                (2,019
                )
                
                
                (0.0
                )%
                
                
                (2,406,866
                )
                
                
                (9.6
                )%Income
      (loss) before income taxes
                
                
                1,238,992
                
                
                
                4.2
                %
                
                
                (2,140,476
                )
                
                
                (8.5
                )%Income
      tax expense
                
                
                613,300
                
                
                
                2.1
                %
                
                
                153,000
                
                
                
                0.6
                %Net
      income (loss)
                
                $
                625,692
                
                
                
                2.1
                %
                
                $
                (2,293,476
                )
                
                
                (9.1
                )%





Summary


Net
revenue from medical services provided primarily to correctional institutions
for the six months ended June 30, 2010 and 2009, was $29,490,123 and
$25,131,993, respectively, which represents an increase of $4,358,130 or 17.3%.
Net income was $625,692 or 2.1% of revenue compared to a net loss of $2,293,476
or (9.1)% of revenue for the six months ended June 30, 2010 and 2009,
respectively, which represented an increase in net income of
$2,919,168.


Page - 14
-





Revenue


The addition of service contracts
signed with new jurisdictions since January 1, 2009 accounted for $3,125,353, or
71.7% of the increase in revenue, for the six months ended June 30, 2010
compared to the same period for the prior year. These jurisdictions are as
follows: Clark County, WA; Coos County, OR; Creek County, OK; Garrett County,
MD; Kittitas County, WA; Pima County (Juvenile), AZ; Washington County, MD; and
Western Virginia Regional Jail, VA. Revenue improvement totaling $757,328, or
17.4% 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 January 1, 2009. Price increases related to existing service
requirements totaled $623,804, or 14.3% of the revenue increase. The increase in
revenue was partially offset by $(148,355), or (3.4)% of revenue, which was the
result of decreases in other volume related activities, primarily associated
with lower inmate populations at certain facilities partially offset by an
increase in stop/loss reimbursements due to higher out of facility medical
expenditures in excess of stop/loss limits which are billed back to
clients.


Healthcare
Expenses


Salaries
and employee benefits


Salaries
and employee benefits for healthcare employees were $16,705,809, or 56.6% of
revenue, for the six months ended June 30, 2010, compared to $14,238,095, or
56.7% of revenue, for the six months ended June 30, 2009. The increase in
spending for salaries and employee benefits of $2,467,714, or 17.3%, is due
primarily to the addition of new healthcare employees resulting from new
business. Approximately 78.5% of the increase related to new healthcare
employees required to support the staffing requirements for our new medical
service contracts as detailed above. Additional services related to previously
existing medical service contracts, as well as cost-of-living and wage and
benefit adjustments for existing employees accounted for the remainder of the
increase.





Medical
expenses


Medical
expenses for the six months ended June 30, 2010 and 2009 were $6,011,743, or
20.4% of revenue, and $4,763,396, or 19.0% of revenue, respectively, which
represented an increase of $1,248,347, or 26.2%. The increase in spending for
medical expenses in absolute dollars primarily reflects increased medical and
pharmacy services related to new contracts. The increase in spending as a
percentage of revenue results, in part, from increases in pharmacy expenses and
out of facility hospital expenses which were higher than the prior year as a
result of an increase in hospitalization days in the first six months of
2010.


Other
operating expenses


Other
operating expenses were $941,528, or 3.2% of revenue, for the six months ended
June 30, 2010, compared to $863,830, or 3.4% of revenue, for the six months
ended June 30, 2009. The increase of $77,698 in spending is primarily related to
the increase in the number of inmates served as a result of the new service
contracts and reflects increased spending for consulting fees, professional
liability insurance, office supplies and travel expenses partially offset by a
reduction in employment advertising.





Operating
Expenses


Selling
and administrative expenses


Selling and administrative expenses for
the six months ended June 30, 2010 and 2009 were $3,990,333, or 13.5% of
revenue, and $3,759,723, or 15.0% of revenue, respectively. The increased
expenditure of $230,610 primarily reflects an increased investment in additional
management and administrative personnel required to support new contracts and
services added since January 1, 2009, as well as increases in consulting fees,
recruiting expense and travel expenses, which were partially offset by decreases
in accounting fees, legal fees, rent expense and stock-based compensation. The
reduction in spending as a percentage of revenue reflects improved economies of
scale as selling and administrative expenses continue to grow at a slower pace
than revenue. Stock-based compensation for the six months ended June 30, 2010
and 2009 was $303,937 and $324,269, 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 $292,000, or
1.0% of revenue, for the six months ended June 30, 2010, compared to $957,000,
or 3.8% of revenue, for the six months ended June 30, 2009. The decrease
primarily reflects a decrease in amortization expense as certain individual
service contracts acquired have become fully amortized.  Amortization
of non-compete agreements was $166,779, or 0.6% of revenue, for the six months
ended June 30, 2010, compared to $193,000, or 0.8% of revenue, for the six
months ended June 30, 2009. Depreciation expense increased to $140,920 for the
six months ended June 30, 2010 compared to $90,559 for the prior year period due
primarily to capital expenditures associated with vehicle purchases as well as
purchases of medical equipment and computers at various
facilities.


Page - 15
-





Interest
income


Interest
income was $45,360 for the six months ended June 30, 2010 compared to $44,580
for the same period in 2009. Average cash balances were higher during the six
months ended June 30, 2010 compared to the six months ended June 30, 2009,
however the marginally higher interest income in 2010 reflects reduced
short-term interest rates during the period.





Interest
expense


Interest
expense for the six months ended June 30, 2010 decreased to $0 compared to
$7,173 in the same period in 2009.





(Loss)
on fair value of derivatives


As a
result of adopting derivative accounting for warrants effective January 1, 2009,
1,705,000 of our then issued and outstanding common stock purchase warrants
previously treated as equity were no longer afforded equity treatment and as a
result they are now recorded as a liability based on fair value
estimates.  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, amended or expire.





During
the six months ended June 30, 2010 and 2009, we recognized a $47,379 and a
$2,352,625 unrealized loss, respectively.  The decreased expense of
$2,305,246 was primarily the result of our stock price increasing $0.23 during
the six months ended June 30, 2010 compared to a $1.65 stock price increase
during the six months ended June 30, 2009.  Additionally, there were
829,903 fewer warrants subject to fair value accounting during the six months
ended June 30, 2010 compared to the six months ended June 30, 2009, primarily
due to the amendment of certain warrant agreements to remove the provisions that
resulted in liability treatment subsequent to June 30, 2009.





During
the six months ended June 30, 2010, no warrants were exercised.  As of
June 30, 2010, we had outstanding warrants subject to derivative accounting to
purchase an aggregate of 718,097 shares of common stock.  During the
six months ended June 30, 2009, warrants to purchase 40,000 shares of common
stock were exercised generating $12,000 of net proceeds and warrants to purchase
117,000 shares of common stock were exercised by cashless exercise and as a
result, a total of 143,890 shares of common stock were issued.  As of
June 30, 2009, we had outstanding warrants subject to derivative accounting to
purchase an aggregate of 1,548,000 shares of common stock.





The
following table summarizes the change in fair value for the six months ended
June 30:





2010
                  
                  
                  2009Fair
      value of warrants outstanding as of January 1
                  
                  $
                  1,299,450
                  
                  
                  $
                  2,766,150Realized
      loss on warrants
                  
                  
                  —
                  
                  
                  
                  91,648Unrealized
      loss on warrants
                  
                  
                  47,379
                  
                  
                  
                  2,352,625Fair
      value of warrants exercised
                  
                  
                  —
                  
                  
                  
                  (393,321
                  )Fair
      value of warrants outstanding as of June 30
                  
                  $
                  1,346,829
                  
                  
                  $
                  4,817,102





See Note
5, “Fair Value of Warrants”, for additional information on the warrant activity
subject to fair value accounting for the six months ended June 30,
2010.





Income
tax expense


Our
effective tax rate was 49.5% during the six months ended June 30, 2010 which
differs from the expected tax rate of 39.0% primarily due to permanent
differences related to stock-based compensation and derivatives related to
warrants.  The change in our effective tax rate from prior periods is
primarily due to the relation of our taxable income relative to pre-tax
income.  We recorded income tax expense of $613,300 and $153,000 for
the six months ended June 30, 2010 and 2009, respectively.


Page - 16
-




Liquidity
and Capital Resources




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





Cash
Flow for the six months ended June 30, 2010 compared to the six months ended
June 30, 2009


Cash as
of June 30, 2010 and June 30, 2009 was $12,068,889 and $8,921,083,
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
Flows from Operating Activities


Cash flow
from operations for the six months ended June 30, 2010 totaled $1,275,066,
reflecting a net income of $625,692 plus $946,015 in adjustments for non-cash
expenses such as amortization of $458,779, stock-based compensation of $303,937
and other non-cash expenses of $183,299.  Changes in working capital
components used $296,641, reflective of an increase in accounts receivable of
$211,995 and decreases in accrued expenses of $611,057, deferred revenue of
$803,169 and income taxes payable of $236,897 partially offset by an increase in
accounts payable of $1,219,602 and a decrease in prepaid expenses of
$347,325.  The increase in accounts receivable resulted primarily from
new medical service contracts added in 2010.  The decrease in accrued
expenses resulted primarily from the receipt of medical expense invoices that
are now recorded in accounts payable, a decrease in accrued wages covering one
less day as compared to the six months ended December 31, 2009 and a reduction
in corporate accrued expenses.  Deferred revenue decreased primarily
as a result of a reduction in advance customer payments due to their fiscal year
ending June 30, 2010 which prohibits them from making advance payments for
services pertaining to the next fiscal year.  The decrease in income
taxes payable resulted primarily from the payment of scheduled estimated taxes
partially offset by accruals of estimated taxes payable.  The increase
in accounts payable was primarily from the receipt of medical expense invoices
previously recorded in accrued expenses as well as the timing of vendor payments
in relation to quarter end.  The decrease in prepaid expenses resulted
primarily from a reduction in prepaid professional liability
insurance.  We prepaid our primary annual professional liability
insurance policy in October 2009 and we expense the prepaid amounts ratably from
the annual policy period of October through September.





Cash flow
from operations for the six months ended June 30, 2009 totaled
$1,792,407.  The net loss of $2,293,476 was offset by $4,009,101 in
adjustments for non-cash expenses such as the change in fair value of
derivatives of $2,444,273, amortization of $1,150,000 and stock-based
compensation of $324,269.  Changes in working capital components
generated an additional $76,782, reflective of an increase in accounts payable
of $560,167 and a decrease in accounts receivable of $518,196 partially offset
by decreases in income taxes payable of $360,140, deferred revenue of $346,228
and accrued expenses of $212,988.  The increase in accounts payable
resulted primarily from the timing of vendor payments in relation to quarter
end.  The decrease in accounts receivable resulted primarily from the
receipt of customer payments prior to quarter end that typically are received
the following week.  The decrease in income taxes payable resulted
primarily from estimated tax payments in excess of the increase in liability as
well as the increased revenue and related expenses.  The decrease in
deferred revenue resulted primarily from a reduction in advance customer
payments due to their fiscal year ending June 30, 2009 which prohibits them from
making advance payments for services pertaining to the next fiscal
year.  The decrease in accrued expenses resulted primarily from the
decrease in medical expenses for the quarter ended June 30, 2009.





Cash
Flows from Investing Activities


Cash flow
from investing activities for the six months ended June 30, 2010 used
$264,632.  Purchases of property and equipment used $117,364 primarily
for purchases of vehicles, computers and medical equipment.  The
purchase of all of the assets of a small mobile imaging company used
$147,268.





Cash flow
from investing activities for the six months ended June 30, 2009 used $219,278,
primarily for purchases of vehicles, computers and medical
equipment.





Cash
Flows from Financing Activities


Cash flow
from financing activities for the six months ended June 30, 2010 generated cash
of $2,312 related to the proceeds from the exercise of stock
options.





Cash flow
from financing activities for the six months ended June 30, 2009 used cash of
$124,186.  Payments on the line of credit were $100,000 and payments
on loans were $36,186 which was partially offset by proceeds from warrant
exercises of $12,000.





Loans


As of
June 30, 2010, we had no outstanding loans.


Page - 17
-





Off
Balance Sheet Arrangements


We are
required to provide performance and payment guarantee bonds to county
governments under certain contracts. As of June 30, 2010, we have three
performance bonds totaling $8,112,680 and two payment bonds for $2,855,537,
totaling $10,968,217. 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 June 30, 2010:





Total
                    
                    
                    Current
                    
                    
                    2
      – 3
                      Years
                    
                    
                    4
      – 5 Years
                    
                    
                    ThereafterEquipment
      Leases
                    
                    $
                    132,379
                    
                    
                    $
                    53,881
                    
                    
                    $
                    67,112
                    
                    
                    $
                    11,386
                    
                    
                    $
                    —Automobile
      Leases
                    
                    
                    25,187
                    
                    
                    
                    22,792
                    
                    
                    
                    2,395
                    
                    
                    
                    —
                    
                    
                    
                    —Office
      Space Leased
                    
                    
                    382,886
                    
                    
                    
                    150,719
                    
                    
                    
                    232,167
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      Contractual Cash Obligations
                    
                    $
                    540,452
                    
                    
                    $
                    227,392
                    
                    
                    $
                    301,674
                    
                    
                    $
                    11,386
                    
                    
                    $
                    —





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
June 30, 2010, we have entered into 61 agreements with county governments to
provide medical and healthcare services primarily to county and municipal
correctional facilities. 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
and mental healthcare service contracts have potential future service contract
revenue of $182 million as of June 30, 2010, with a weighted-average term of 3.8
years, of which approximately $58 million relates to the initial contract period
and approximately $124 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.





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.
            RESERVED






ITEM
      5.
            OTHER
      INFORMATION




None




ITEM
      6.
            EXHIBITS


31.1
              Section
      302 Certification of Principal Executive
Officer
 31.2
              Section
      302 Certification of Principal Financial
Officer
 32.1
              Section
      906 Certification of Principal Executive
Officer
 32.2
              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.August
      16, 2010By /s/ Richard W. TurnerRichard
      W. Turner, Ph.D.Chairman
      and Chief Executive Officer(principal
      executive officer)





August
      16, 2010By /s/ Thomas W. FryThomas
      W. FryChief
      Financial Officer and Secretary(principal
      financial officer and principal accounting
  officer)


Page - 20
-