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 September 30, 2010





OR





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





For the
transition period
from                 
to





Commission
File Number:


0-27554





Conmed
Healthcare Management, Inc.


(Exact
name of registrant as specified in its charter)





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





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





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





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


YES x     NO
o





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 o     NO
o




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 o
              Accelerated
      filer oNon-Accelerated
      filer o
              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 o     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
                November 11, 2010Common
      Stock, $0.0001 par value per share
                12,835,319





CONMED
HEALTHCARE MANAGEMENT, INC.





TABLE
OF CONTENTS





PagePART
      I. FINANCIAL
      INFORMATIONITEM
      1. FINANCIAL STATEMENTS (UNAUDITED)
                                      
                                      1Consolidated
      Balance SheetsSeptember
      30, 2010 and December 31, 2009
                                      
                                      1Consolidated
      Statements of OperationsFor
      the three and nine months ended September 30, 2010 and
2009
                                      
                                      2Consolidated
      Statements of Cash FlowsFor
      the nine months ended September 30, 2010 and 2009
                                      
                                      3Consolidated
      Statements of Shareholders’ EquityFor
      the nine months ended September 30, 2010
                                      
                                      4Notes
      to Consolidated Financial Statements
                                      
                                      5ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                                      
                                      11ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                                      
                                      19ITEM
      4(T). CONTROLS AND PROCEDURES
                                      
                                      19PART
      II. OTHER
      INFORMATIONITEM
      1. LEGAL PROCEEDINGS
                                      
                                      20ITEM
      1A. RISK FACTORS
                                      
                                      20ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
    PROCEEDS
                                      
                                      20ITEM
      3. DEFAULTS UPON SENIOR SECURITIES
                                      
                                      20ITEM
      4. RESERVED
                                      
                                      20ITEM
      5. OTHER INFORMATION
                                      
                                      20ITEM
      6. EXHIBITS
                                      
                                      20SIGNATURES
                                      
                                      21


i




PART
1.  FINANCIAL INFORMATION




ITEM
      1.
            FINANCIAL
      STATEMENTS




CONMED
HEALTHCARE MANAGEMENT, INC.


CONSOLIDATED
BALANCE SHEETS





September 30,
                      2010
                      (unaudited)
                    
                    
                    December 31,
                      2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                    
                    $
                    13,008,470
                    
                    
                    $
                    11,056,143Accounts
      receivable
                    
                    
                    2,960,259
                    
                    
                    
                    2,278,074Prepaid
      expenses
                    
                    
                    226,638
                    
                    
                    
                    865,261Deferred
      taxes
                    
                    
                    111,000
                    
                    
                    
                    102,000Total
      current assets
                    
                    
                    16,306,367
                    
                    
                    
                    14,301,478PROPERTY
      AND EQUIPMENT, NET
                    
                    
                    594,814
                    
                    
                    
                    605,578DEFERRED
      TAXES
                    
                    
                    1,377,000
                    
                    
                    
                    1,381,000OTHER
      ASSETSService
      contracts acquired, net
                    
                    
                    585,250
                    
                    
                    
                    984,000Non-compete
      agreements, net
                    
                    
                    286,560
                    
                    
                    
                    436,667Goodwill
                    
                    
                    6,263,705
                    
                    
                    
                    6,263,705Deposits
                    
                    
                    11,549
                    
                    
                    
                    11,549Total
      other assets
                    
                    
                    7,147,064
                    
                    
                    
                    7,695,921$
                    25,425,245
                    
                    
                    $
                    23,983,977LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                    
                    $
                    2,231,517
                    
                    
                    $
                    1,489,498Accrued
      expenses
                    
                    
                    3,866,770
                    
                    
                    
                    4,146,940Taxes
      payable
                    
                    
                    434,383
                    
                    
                    
                    550,000Deferred
      revenue
                    
                    
                    827,637
                    
                    
                    
                    1,018,645Total
      current liabilities
                    
                    
                    7,360,307
                    
                    
                    
                    7,205,083DERIVATIVE
      FINANCIAL INSTRUMENTS
                    
                    
                    658,147
                    
                    
                    
                    1,299,450SHAREHOLDERS’
      EQUITYPreferred
      stock, no par value; authorized 5,000,000 shares; issued and outstanding
      zero shares as of September 30, 2010 and December 31, 2009
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, $0.0001 par value, authorized 40,000,000 shares; issued and
      outstanding 12,632,593 and 12,629,572 shares as of September 30, 2010 and
      December 31, 2009, respectively
                    
                    
                    1,263
                    
                    
                    
                    1,263Additional
      paid-in capital
                    
                    
                    38,584,383
                    
                    
                    
                    37,829,900Accumulated
      deficit
                    
                    
                    (21,178,855
                    )
                    
                    
                    (22,351,719
                    )Total
      shareholders' equity
                    
                    
                    17,406,791
                    
                    
                    
                    15,479,444$
                    25,425,245
                    
                    
                    $
                    23,983,977


See
Notes to Unaudited Financial Statements


Page - 1
-


CONMED
HEALTHCARE MANAGEMENT, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)





For the Nine
                  Months Ended
                  September 30,
                  2010
                
                
                For the Nine
                  Months Ended
                  September 30,
                  2009
                
                
                For the Three
                  Months Ended
                  September 30,
                  2010
                
                
                For the Three
                  Months Ended
                  September 30,
                  2009Service
      contract revenue
                
                $
                44,881,099
                
                
                $
                38,775,309
                
                
                $
                15,390,976
                
                
                $
                13,643,317HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                
                
                25,435,552
                
                
                
                22,138,330
                
                
                
                8,729,743
                
                
                
                7,900,235Medical
      expenses
                
                
                9,301,119
                
                
                
                7,248,420
                
                
                
                3,289,376
                
                
                
                2,485,024Other
      operating expenses
                
                
                1,540,391
                
                
                
                1,388,780
                
                
                
                598,863
                
                
                
                524,950Total
      healthcare expenses
                
                
                36,277,062
                
                
                
                30,775,530
                
                
                
                12,617,982
                
                
                
                10,910,209Gross
      profit
                
                
                8,604,037
                
                
                
                7,999,779
                
                
                
                2,772,994
                
                
                
                2,733,108Selling
      and administrative expenses
                
                
                6,067,251
                
                
                
                5,774,101
                
                
                
                2,076,918
                
                
                
                2,014,378Depreciation
      and amortization
                
                
                814,940
                
                
                
                1,627,951
                
                
                
                215,241
                
                
                
                387,392Total
      operating expenses
                
                
                6,882,191
                
                
                
                7,402,052
                
                
                
                2,292,159
                
                
                
                2,401,770Operating
      income
                
                
                1,721,846
                
                
                
                597,727
                
                
                
                480,835
                
                
                
                331,338OTHER
      INCOME (EXPENSE)Interest
      income
                
                
                72,385
                
                
                
                61,127
                
                
                
                27,025
                
                
                
                16,547Interest
      (expense)
                
                
                —
                
                
                
                (7,991
                )
                
                
                —
                
                
                
                (819
                )Gain
      (loss) on fair value of derivatives
                
                
                358,633
                
                
                
                (1,688,623
                )
                
                
                406,012
                
                
                
                755,650Total
      other income (expense)
                
                
                431,018
                
                
                
                (1,635,487
                )
                
                
                433,037
                
                
                
                771,378Income
      (loss) before income taxes
                
                
                2,152,864
                
                
                
                (1,037,760
                )
                
                
                913,872
                
                
                
                1,102,716Income
      tax expense
                
                
                980,000
                
                
                
                402,000
                
                
                
                366,700
                
                
                
                249,000Net
      income (loss)
                
                $
                1,172,864
                
                
                $
                (1,439,760
                )
                
                $
                547,172
                
                
                $
                853,716EARNINGS
      (LOSS) PER COMMON SHAREBasic
                
                $
                0.09
                
                
                $
                (0.11
                )
                
                $
                0.04
                
                
                $
                0.07Diluted
                
                $
                0.06
                
                
                $
                (0.11
                )
                
                $
                0.01
                
                
                $
                0.01WEIGHTED-AVERAGE
      SHARES OUTSTANDINGBasic
                
                
                12,630,716
                
                
                
                12,546,754
                
                
                
                12,631,919
                
                
                
                12,606,699Diluted
                
                
                14,246,996
                
                
                
                12,546,754
                
                
                
                14,255,523
                
                
                
                14,183,486


See
Notes to Unaudited Financial Statements


Page - 2
-




CONMED
HEALTHCARE MANAGEMENT, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)





For the Nine
                      Months Ended
                      September 30,
                      2010
                    
                    
                    For the Nine
                      Months Ended
                      September 30,
                      2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                    
                    $
                    1,172,864
                    
                    
                    $
                    (1,439,760
                    )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activitiesDepreciation
                    
                    
                    207,493
                    
                    
                    
                    151,951Amortization
                    
                    
                    607,447
                    
                    
                    
                    1,476,000Amortization
      of long-term customer agreement
                    
                    
                    43,750
                    
                    
                    
                    —Stock-based
      compensation
                    
                    
                    465,516
                    
                    
                    
                    475,597(Gain)
      loss on fair value of derivatives
                    
                    
                    (358,633
                    )
                    
                    
                    1,688,623Deferred
      income taxes
                    
                    
                    (5,000
                    )
                    
                    
                    (377,000
                    )Changes
      in working capital components(Increase)
      in accounts receivable
                    
                    
                    (682,185
                    )
                    
                    
                    (462,016
                    )Decrease
      in prepaid expenses
                    
                    
                    638,623
                    
                    
                    
                    114,820(Increase)
      in deposits
                    
                    
                    —
                    
                    
                    
                    (275
                    )Increase
      in accounts payable
                    
                    
                    742,019
                    
                    
                    
                    120,886Increase
      (decrease) in accrued expenses
                    
                    
                    (280,170
                    )
                    
                    
                    766,590Increase
      (decrease) in income taxes payable
                    
                    
                    (115,617
                    )
                    
                    
                    220,860Increase
      (decrease) in deferred revenue
                    
                    
                    (191,008
                    )
                    
                    
                    374,888Net
      cash provided by operating activities
                    
                    
                    2,245,099
                    
                    
                    
                    3,111,164CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                    
                    
                    (151,801
                    )
                    
                    
                    (273,178
                    )Stock
      Purchase of CMHS, LLC
                    
                    
                    —
                    
                    
                    
                    (9,161
                    )Asset
      purchase
                    
                    
                    (147,268
                    )
                    
                    
                    —Net
      cash (used in) investing activities
                    
                    
                    (299,069
                    )
                    
                    
                    (282,339
                    )CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on line of credit
                    
                    
                    —
                    
                    
                    
                    (100,000
                    )Payments
      on loans
                    
                    
                    —
                    
                    
                    
                    (93,782
                    )Proceeds
      from exercise of stock options
                    
                    
                    6,297
                    
                    
                    
                    12,000Net
      cash provided by (used in) financing activities
                    
                    
                    6,297
                    
                    
                    
                    (181,782
                    )Net
      increase in cash and cash equivalents
                    
                    
                    1,952,327
                    
                    
                    
                    2,647,043CASH
      AND CASH EQUIVALENTSBeginning
                    
                    
                    11,056,143
                    
                    
                    
                    7,472,140Ending
                    
                    $
                    13,008,470
                    
                    
                    $
                    10,119,183SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      payments for interest
                    
                    $
                    —
                    
                    
                    $
                    7,991Income
      taxes paid
                    
                    
                    1,100,617
                    
                    
                    
                    558,140





See
Notes to Unaudited Financial Statements


Page - 3
-




CONMED
HEALTHCARE MANAGEMENT, INC.


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)





Preferred
                  Stock
                
                
                Common
                  Stock
                
                
                AdditionalPaid-
                  in Capital
                
                
                Accumulated
                  Deficit
                
                
                TotalBalance
      at December 31, 2009
                
                $
                —
                
                
                $
                1,263
                
                
                $
                37,829,900
                
                
                $
                (22,351,719
                )
                
                $
                15,479,444Net
      Income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,172,864
                
                
                
                1,172,864Stock
      option expense
                
                
                —
                
                
                
                —
                
                
                
                465,516
                
                
                
                —
                
                
                
                465,516Exercise
      of stock options
                
                
                —
                
                
                
                —
                
                
                
                6,297
                
                
                
                —
                
                
                
                6,297Amended
      warrants removing embedded feature of equity-linked financial
      instrument
                
                
                —
                
                
                
                —
                
                
                
                282,670
                
                
                
                —
                
                
                
                282,670Balance
      at September 30, 2010
                
                $
                —
                
                
                $
                1,263
                
                
                $
                38,584,383
                
                
                $
                (21,178,855
                )
                
                $
                17,406,791


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 nine months ended September 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 nine months ended September 30, 2010 and 2009, we recorded stock-based
compensation expense totaling $465,516 and $475,597, respectively, and
during the three months ended September 30, 2010 and 2009, we recorded
stock-based compensation expense totaling $161,579 and $151,328,
respectively.





During
the nine months ended September 30, 2010, options were granted to purchase
258,500 shares of common stock at an average exercise price of $3.21 per share
and an average grant date fair value of $2.07 per
share.  Additionally, during the nine months ended September 30, 2010,
options to purchase 28,083 shares of common stock were forfeited, options to
purchase 1,750 shares of common stock were cancelled, options to purchase 3,021
shares of common stock were exercised at an average exercise price of $2.08 per
share and, as of September 30, 2010, 852,166 shares remain available for
grant.


Page - 5
-





As of
September 30, 2010, stock-based compensation expense not yet recognized in
income totaled $889,795, which is expected to be recognized over a
weighted-average remaining period of 1.11 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 on October 23,
2010. These warrants were exercised on a net share basis subsequent to quarter
end and prior to expiration.





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 nine months ended
September 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 September 30, 2010
                  
                  
                  223,000
                  
                  
                  
                  813,000
                  
                  
                  
                  496,667
                  
                  
                  
                  300,000
                  
                  
                  
                  80,000
                  
                  
                  
                  1,912,667





The
following table summarizes the warrant activity for the nine months ended
September 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
                  
                  
                  2,000
                  
                  
                  
                  167,000
                  
                  
                  
                  3,333
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  172,333Warrants
      outstanding as of September 30, 2009
                  
                  
                  223,000
                  
                  
                  
                  813,000
                  
                  
                  
                  496,667
                  
                  
                  
                  300,000
                  
                  
                  
                  80,000
                  
                  
                  
                  1,912,667


Page - 6
-




NOTE
      5.
            Fair
      Value of Warrants




As a
result of adopting derivative accounting for certain warrants which contain a
strike price adjustment feature, 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
                      
                      September 30, 2010
                      
                      
                      December 31, 2009Expected
      life (years)
                      
                      
                      1.1
                      
                      
                      
                      1.5Expected
      volatility
                      
                      
                      30.80
                      %
                      
                      
                      79.59
                      %Risk-free
      interest rate
                      
                      
                      0.3
                      %
                      
                      
                      1.4
                      %Expected
      dividend yield
                      
                      
                      0.0
                      %
                      
                      
                      0.0
                      %





Investor
Warrants @ $2.50 per share





Black-Scholes assumptions
                      
                      September 30, 2010
                      
                      
                      December 31, 2009Expected
      life (years)
                      
                      
                      1.1
                      
                      
                      
                      1.5Expected
      volatility
                      
                      
                      30.80
                      %
                      
                      
                      79.59
                      %Risk-free
      interest rate
                      
                      
                      0.3
                      %
                      
                      
                      1.4
                      %Expected
      dividend yield
                      
                      
                      0.0
                      %
                      
                      
                      0.0
                      %





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





Investor
                      Warrants @
                      $0.30 per
                      share
                    
                    
                    Investor
                      Warrants @
                      $2.50 per
                      share
                    
                    
                    TotalWarrants
      outstanding subject to fair value accounting as of December 31,
      2009
                    
                    
                    221,430
                    
                    
                    
                    496,667
                    
                    
                    
                    718,097Warrants
      exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Warrants
      amended
                    
                    
                    90,000
                    
                    
                    
                    —
                    
                    
                    
                    90,000Warrants
      outstanding subject to fair value accounting as of September 30,
      2010
                    
                    
                    131,430
                    
                    
                    
                    496,667
                    
                    
                    
                    628,097





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
                    
                    
                    32,590
                    
                    
                    
                    —
                    
                    
                    
                    32,590Unrealized
      (gain) on warrants
                    
                    
                    (16,798
                    )
                    
                    
                    (374,425
                    )
                    
                    
                    (391,223
                    )Fair
      value of warrants transferred to equity upon amendment
                    
                    
                    (282,670
                    )
                    
                    
                    —
                    
                    
                    
                    (282,670
                    )Fair
      value of warrants exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Fair
      value of warrants outstanding as of September 30, 2010
                    
                    $
                    348,402
                    
                    
                    $
                    309,745
                    
                    
                    $
                    658,147


Page - 7
-





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





Investor
                      Warrants @
                      $0.30 per
                      share
                    
                    
                    Investor
                      Warrants @
                      $2.50 per
                      share
                    
                    
                    TotalWarrants
      outstanding subject to fair value accounting as of June 30,
      2010
                    
                    
                    221,430
                    
                    
                    
                    496,667
                    
                    
                    
                    718,097Warrants
      exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Warrants
      amended
                    
                    
                    90,000
                    
                    
                    
                    —
                    
                    
                    
                    90,000Warrants
      outstanding subject to fair value accounting as of September 30,
      2010
                    
                    
                    131,430
                    
                    
                    
                    496,667
                    
                    
                    
                    628,097





Investor
                      Warrants @
                      $0.30 per
                      share
                    
                    
                    Investor
                      Warrants @
                      $2.50 per
                      share
                    
                    
                    TotalFair
      value of warrants outstanding as of June 30, 2010
                    
                    $
                    665,530
                    
                    
                    $
                    681,299
                    
                    
                    $
                    1,346,829Realized
      loss on warrants
                    
                    
                    32,590
                    
                    
                    
                    —
                    
                    
                    
                    32,590Unrealized
      (gain) on warrants
                    
                    
                    (67,048
                    )
                    
                    
                    (371,554
                    )
                    
                    
                    (438,602
                    )Fair
      value of warrants transferred to equity upon amendment
                    
                    
                    (282,670
                    )
                    
                    
                    —
                    
                    
                    
                    (282,670
                    )Fair
      value of warrants exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Fair
      value of warrants outstanding as of September 30, 2010
                    
                    $
                    348,402
                    
                    
                    $
                    309,745
                    
                    
                    $
                    658,147





As of
September 30, 2010, we had outstanding warrants to purchase an aggregate of
1,912,667 shares of common stock, of which warrants to purchase 628,097 shares
of common stock were subject to derivative accounting for warrants, at an
average exercise price of $2.04, 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 September 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 September 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
                  
                  $
                  658,147
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  658,147


Page - 8
-





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





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 nine months
ended September 30, 2010, we recognized a $391,223 unrealized gain and a $32,590
realized loss, and during the nine months ended September 30, 2009, we
recognized a $1,632,695 unrealized loss and a $55,927 realized loss 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 nine months ended September 30:





2010
                    
                    
                    2009Balance
      as of January 1
                    
                    $
                    1,299,450
                    
                    
                    $
                    2,766,150Transfers
      into level 3
                    
                    
                    —
                    
                    
                    
                    —Transfers
      out of level 3
                    
                    
                    (282,670
                    )
                    
                    
                    (290,968
                    )Sales
      of equity-linked financial instruments
                    
                    
                    —
                    
                    
                    
                    (442,937
                    )Realized
      loss related to the change in fair value
                    
                    
                    32,590
                    
                    
                    
                    55,927Unrealized
      (gain) loss related to the change in fair value
                    
                    
                    (391,223
                    )
                    
                    
                    1,632,695Balance
      as of September 30
                    
                    $
                    658,147
                    
                    
                    $
                    3,720,867


Page - 9
-




NOTE
      7.
            Earnings
      Per Share




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





For the Nine
                      Months Ended
                      September 30,
                      2010
                    
                    
                    For the Nine
                      Months Ended
                      September 30,
                      2009
                    
                    
                    For the Three
                      Months Ended
                      September 30,
                      2010
                    
                    
                    For the Three
                      Months Ended
                      September 30,
                      2009Numerator:Net
      income (loss) for basic earnings per share
                    
                    $
                    1,172,864
                    
                    
                    $
                    (1,439,760
                    )
                    
                    $
                    547,172
                    
                    
                    $
                    853,716Subtractions:Change
      in fair value of derivatives
                    
                    
                    (358,633
                    )
                    
                    
                    —
                    
                    
                    
                    (406,012
                    )
                    
                    
                    (755,650
                    )Net
      income (loss) for diluted earnings per share
                    
                    $
                    814,231
                    
                    
                    $
                    (1,439,760
                    )
                    
                    $
                    141,160
                    
                    
                    $
                    98,066Denominator:Weighted-average
      basic shares outstanding
                    
                    
                    12,630,716
                    
                    
                    
                    12,546,754
                    
                    
                    
                    12,631,919
                    
                    
                    
                    12,606,699Assumed
      conversion of dilutive securitiesStock
      options
                    
                    
                    481,713
                    
                    
                    
                    —
                    
                    
                    
                    500,329
                    
                    
                    
                    418,134Warrants
                    
                    
                    1,134,567
                    
                    
                    
                    —
                    
                    
                    
                    1,123,275
                    
                    
                    
                    1,158,653Potentially
      dilutive common shares
                    
                    
                    1,616,280
                    
                    
                    
                    —
                    
                    
                    
                    1,623,604
                    
                    
                    
                    1,576,787Denominator
      for diluted earnings per share – Adjusted weighted average
      shares
                    
                    
                    14,246,996
                    
                    
                    
                    12,546,754
                    
                    
                    
                    14,255,523
                    
                    
                    
                    14,183,486Earnings
      (loss) per common share:Basic
                    
                    $
                    0.09
                    
                    
                    $
                    (0.11
                    )
                    
                    $
                    0.04
                    
                    
                    $
                    0.07Diluted
                    
                    $
                    0.06
                    
                    
                    $
                    (0.11
                    )
                    
                    $
                    0.01
                    
                    
                    $
                    0.01





Common
stock warrants and options outstanding totaling 446,500 and 3,947,938 shares are
not included in diluted earnings per common share for the nine months ended
September 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 45.5% during the nine months ended September 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 $980,000 and $402,000 for
the nine months ended September 30, 2010 and 2009, respectively.  We
recorded income tax expense of $366,700 and $249,000 for the three months ended
September 30, 2010 and 2009, respectively.


Page - 10
-




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-seven 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 - 11
-




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


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





Three Months Ended
                  September 30, 2010
                
                
                Three Months Ended
                  September 30, 2009Amount
                
                
                %
      of
                  Revenue
                
                
                Amount
                
                
                %
      of
                  RevenueService
      contract revenue
                
                $
                15,390,976
                
                
                
                100.0
                %
                
                $
                13,643,317
                
                
                
                100.0
                %HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                
                
                8,729,743
                
                
                
                56.7
                %
                
                
                7,900,235
                
                
                
                57.9
                %Medical
      expenses
                
                
                3,289,376
                
                
                
                21.4
                %
                
                
                2,485,024
                
                
                
                18.2
                %Other
      operating expenses
                
                
                598,863
                
                
                
                3.9
                %
                
                
                524,950
                
                
                
                3.8
                %Total
      healthcare expenses
                
                
                12,617,982
                
                
                
                82.0
                %
                
                
                10,910,209
                
                
                
                80.0
                %Gross
      profit
                
                
                2,772,994
                
                
                
                18.0
                %
                
                
                2,733,108
                
                
                
                20.0
                %OPERATING
      EXPENSES:Selling
      and administrative expenses
                
                
                2,076,918
                
                
                
                13.5
                %
                
                
                2,014,378
                
                
                
                14.8
                %Depreciation
      and amortization
                
                
                215,241
                
                
                
                1.4
                %
                
                
                387,392
                
                
                
                2.8
                %Total
      operating expenses
                
                
                2,292,159
                
                
                
                14.9
                %
                
                
                2,401,770
                
                
                
                17.6
                %Operating
      income
                
                
                480,835
                
                
                
                3.1
                %
                
                
                331,338
                
                
                
                2.4
                %OTHER
      INCOME (EXPENSE)Interest
      income
                
                
                27,025
                
                
                
                0.2
                %
                
                
                16,547
                
                
                
                0.1
                %Interest
      (expense)
                
                
                —
                
                
                
                0.0
                %
                
                
                (819
                )
                
                
                0.0
                %Gain
      on fair value of derivatives
                
                
                406,012
                
                
                
                2.6
                %
                
                
                755,650
                
                
                
                5.5
                %Total
      other income
                
                
                433,037
                
                
                
                2.8
                %
                
                
                771,378
                
                
                
                5.7
                %Income
      before income taxes
                
                
                913,872
                
                
                
                5.9
                %
                
                
                1,102,716
                
                
                
                8.1
                %Income
      tax expense
                
                
                366,700
                
                
                
                2.4
                %
                
                
                249,000
                
                
                
                1.8
                %Net
      income
                
                $
                547,172
                
                
                
                3.6
                %
                
                $
                853,716
                
                
                
                6.3
                %


Page - 12
-





Summary


Net
revenue from medical services provided primarily to correctional institutions
for the three months ended September 30, 2010 and 2009, was $15,390,976 and
$13,643,317, respectively, which represents an increase of $1,747,659 or 12.8%.
Net income was $547,172 or 3.6% of revenue, compared to net income of $853,716,
or 6.3% of revenue, for the three months ended September 30, 2010 and 2009,
respectively, which represented a decrease in net income of
$306,544.





Revenue


The
addition of service contracts signed with new jurisdictions since July 1, 2009
accounted for $1,438,746 or 82.3% of the increase in revenue for the three
months ended September 30, 2010 compared to the same period for the prior
year.  These jurisdictions are as follows: Clark County, WA; Garrett
County, MD; Kittitas County, WA; Pima County (Juvenile), AZ; and Roanoke City,
VA.  Revenue improvement totaling $109,479, or 6.3% 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 July 1, 2009.
Price increases related to existing service requirements totaled ($3,935), or
(0.2)% of the revenue increase, and was the result of $178,354 in price
increases offset by repricings under the two year amendment to the Pima County
contract which began on July 1, 2010. The remainder of revenue improvement,
$203,369 or 11.6% of the increase, was the result of other volume related
activities, primarily associated with 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 and was partially offset by revenue
adjustments related to lower inmate populations at certain
facilities.





Healthcare
Expenses


Salaries
and employee benefits


Salaries
and employee benefits for healthcare employees were $8,729,743 or 56.7% of
revenue for the three months ended September 30, 2010, compared to $7,900,235 or
57.9% of revenue for the three months ended September 30, 2009. The increase in
spending for salaries and employee benefits of $829,508, or 10.5%, is due
primarily to the addition of new healthcare employees required to support the
staffing requirements for our new medical service contracts as detailed above.
The decrease in salaries and employee benefits as a percentage of revenue is due
to a change in the mix of expense for salaries and benefits. In addition to
providing staffing services, the new service contracts primarily include
responsibility for medical services both in and out of the facility, as well as
pharmacy services, resulting in a lower ratio of salaries and employee benefits
to revenue.





Medical
expenses


Medical
expenses for the three months ended September 30, 2010 and 2009 were $3,289,376,
or 21.4% of revenue, and $2,485,024, or 18.2% of revenue, respectively, which
represented an increase of $804,352 or 32.4%. The increase in spending for
medical expenses in absolute dollars primarily reflects increases related to new
contracts for medical services both in and out of the facility plus higher
expenditures for pharmacy services. The increase in spending as a percentage of
revenue results, in part, from the new service contracts added since July 1,
2009 that are primarily full service contracts and, as a result, included a
higher proportion of medical expense when compared to existing
contracts.  Additionally, two of our existing service contracts
experienced higher than normal hospitalization charges which partially exceeded
stop/loss limits and these charges were billed back to those
clients.  Expenses for providing pharmacy services for existing
service contracts increased due to increases in pharmaceutical prices as well as
an increase in HIV treatment expenditures compared to the prior
period.





Other
operating expenses


Other
operating expenses were $598,863, or 3.9% of revenue, for the three months ended
September 30, 2010, compared to $524,950, or 3.8% of revenue, for the three
months ended September 30, 2009. The increase of $73,913 in spending is
primarily related to an increase in legal, consulting and business development
fees, which were partially offset by a decrease in recruiting
expense.





Operating
Expenses


Selling
and administrative expenses


Selling
and administrative expenses for the three months ended September 30, 2010 and
2009 were $2,076,918, or 13.5% of revenue, and $2,014,378, or 14.8% of revenue,
respectively. The increased expenditure of $62,540 primarily reflects an
increased investment in additional management and administrative personnel
required to support new contracts and services added since July 1, 2009, which
was partially offset by decreases in accounting fees, travel expenses, business
development fees, consulting and legal fees.  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
September 30, 2010 and 2009 was $161,579 and $151,328,
respectively.


Page - 13
-





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 $80,000, or 0.5% of revenue, for the three months ended September
30, 2010, compared to $230,000, or 1.7% of revenue, for the three months ended
September 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 $68,668, or
0.4% of revenue, for the three months ended September 30, 2010, compared to
$96,000, or 0.7% of revenue, for the three months ended September 30, 2009.
Depreciation expense increased to $66,573 for the three months ended September
30, 2010 compared to $61,392 for the prior year period due primarily to capital
expenditures associated with purchases of vehicles and medical equipment which
was partially offset by lower computer depreciation as certain assets have been
fully depreciated.





Interest
income


Interest
income was $27,025 for the three months ended September 30, 2010 compared to
$16,547 for the same period in 2009. Higher average cash balances and increased
short-term interest rates during the three months ended September 30, 2010
account for the increased interest income compared to the same period in
2009.





Interest
expense


Interest
expense for the three months ended September 30, 2010 decreased to $0 compared
to $819 in the same period in 2009.





Gain
(loss) on fair value of derivatives


As a
result of adopting derivative accounting for certain warrants which contain
a strike price adjustment feature 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 September 30, 2010 and 2009, we recognized a $438,602 and
a $719,930 unrealized gain, respectively.  The decreased gain of
$281,328 was primarily the result of our stock price decreasing $0.35 during the
three months ended September 30, 2010 compared to a $0.50 decrease in stock
price during the three months ended September 30, 2009.  Additionally,
there were 813,000 fewer warrants subject to fair value accounting during the
three months ended September 30, 2010 compared to the three months ended
September 30, 2009, primarily due to the amendment of certain warrant agreements
to remove the provisions that resulted in liability treatment subsequent to
September 30, 2009.





During
the three months ended September 30, 2010, no warrants were exercised and
warrants to purchase 90,000 shares of common stock were amended and are now
treated as equity.  As of September 30, 2010, we had outstanding
warrants subject to derivative accounting to purchase an aggregate of 628,097
shares of common stock.  During the three months ended September 30,
2009, warrants to purchase 15,333 shares of common stock were exercised by
cashless exercise and as a result, a total of 11,893 shares of common stock were
issued.  During the three months ended September 30, 2009, warrants to
purchase 91,570 shares of common stock were amended and have since been treated
as equity.  As of September 30, 2009, we had outstanding warrants
subject to derivative accounting to purchase an aggregate of 1,441,097 shares of
common stock.





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


Page - 14
-





2010
                    
                    
                    2009Fair
      value of warrants outstanding as of June 30
                    
                    $
                    1,346,829
                    
                    
                    $
                    4,817,102Realized
      (gain) loss on warrants
                    
                    
                    32,590
                    
                    
                    
                    (35,720
                    )Unrealized
      (gain) on warrants
                    
                    
                    (438,602
                    )
                    
                    
                    (719,930
                    )Fair
      value of warrants transferred to equity upon amendment
                    
                    
                    (282,670
                    )
                    
                    
                    (290,969
                    )Fair
      value of warrants exercised
                    
                    
                    —
                    
                    
                    
                    (49,616
                    )Fair
      value of warrants outstanding as of September 30
                    
                    $
                    658,147
                    
                    
                    $
                    3,720,867





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





Income
tax expense


Our
effective tax rate was 40.1% during the three months ended September 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 $366,700 and $249,000 for
the three months ended September 30, 2010 and 2009, respectively.





Nine
Months Ended September 30, 2010 compared to Nine Months Ended September 30,
2009


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





Nine Months Ended
                  September 30, 2010
                
                
                Nine Months Ended
                  September 30, 2009Amount
                
                
                %
      of
                  Revenue
                
                
                Amount
                
                
                %
      of
                  RevenueService
      contract revenue
                
                $
                44,881,099
                
                
                
                100.0
                %
                
                $
                38,775,309
                
                
                
                100.0
                %HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                
                
                25,435,552
                
                
                
                56.7
                %
                
                
                22,138,330
                
                
                
                57.1
                %Medical
      expenses
                
                
                9,301,119
                
                
                
                20.7
                %
                
                
                7,248,420
                
                
                
                18.7
                %Other
      operating expenses
                
                
                1,540,391
                
                
                
                3.4
                %
                
                
                1,388,780
                
                
                
                3.6
                %Total
      healthcare expenses
                
                
                36,277,062
                
                
                
                80.8
                %
                
                
                30,775,530
                
                
                
                79.4
                %Gross
      profit
                
                
                8,604,037
                
                
                
                19.2
                %
                
                
                7,999,779
                
                
                
                20.6
                %OPERATING
      EXPENSES:Selling
      and administrative expenses
                
                
                6,067,251
                
                
                
                13.5
                %
                
                
                5,774,101
                
                
                
                14.9
                %Depreciation
      and amortization
                
                
                814,940
                
                
                
                1.8
                %
                
                
                1,627,951
                
                
                
                4.2
                %Total
      operating expenses
                
                
                6,882,191
                
                
                
                15.3
                %
                
                
                7,402,052
                
                
                
                19.1
                %Operating
      income
                
                
                1,721,846
                
                
                
                3.8
                %
                
                
                597,727
                
                
                
                1.5
                %OTHER
      INCOME (EXPENSE)Interest
      income
                
                
                72,385
                
                
                
                0.2
                %
                
                
                61,127
                
                
                
                0.2
                %Interest
      (expense)
                
                
                —
                
                
                
                0.0
                %
                
                
                (7,991
                )
                
                
                (0.0
                )%Gain
      (loss) on fair value of derivatives
                
                
                358,633
                
                
                
                0.8
                %
                
                
                (1,688,623
                )
                
                
                (4.4
                )%Total
      other income (expense)
                
                
                431,018
                
                
                
                1.0
                %
                
                
                (1,635,487
                )
                
                
                (4.2
                )%Income
      (loss) before income taxes
                
                
                2,152,864
                
                
                
                4.8
                %
                
                
                (1,037,760
                )
                
                
                (2.7
                )%Income
      tax expense
                
                
                980,000
                
                
                
                2.2
                %
                
                
                402,000
                
                
                
                1.0
                %Net
      income (loss)
                
                $
                1,172,864
                
                
                
                2.6
                %
                
                $
                (1,439,760
                )
                
                
                (3.7
                )%


Page - 15
-





Summary


Net
revenue from medical services provided primarily to correctional institutions
for the nine months ended September 30, 2010 and 2009, was $44,881,099 and
$38,775,309, respectively, which represents an increase of $6,105,790, or 15.7%.
Net income was $1,172,864, or 2.6% of revenue, compared to a net loss of
$1,439,760, or 3.7% of revenue, for the nine months ended September 30, 2010 and
2009, respectively, which represented an increase in net income of
$2,612,624.





Revenue


The
addition of service contracts signed with new jurisdictions since January 1,
2009 accounted for $4,737,434, or 77.6% of the increase in revenue, for the nine
months ended September 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; Roanoke City, VA; Washington County, MD; and Western
Virginia Regional Jail, VA.  Revenue improvement totaling $881,291, or
14.4% 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 $506,488, or 8.3% of the revenue increase. The increase in
revenue was partially offset by $(19,423), or (0.3)% 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 $25,435,552, or 56.7% of
revenue, for the nine months ended September 30, 2010, compared to $22,138,330,
or 57.1% of revenue, for the nine months ended September 30, 2009. The increase
in spending for salaries and employee benefits of $3,297,222, or 14.9%, is due
primarily to the addition of new healthcare employees resulting from new
business. Approximately 78.6% 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 nine months ended September 30, 2010 and 2009 were $9,301,119,
or 20.7% of revenue, and $7,248,420, or 18.7% of revenue, respectively, which
represented an increase of $2,052,699, or 28.3%. The increase in spending for
medical expenses in absolute dollars primarily reflects increases related to new
contracts for medical services both in and out of the facility plus increased
expenditures for pharmacy services. The increase in spending as a percentage of
revenue results, in part, from the new service contracts added since January 1,
2009 that are primarily full service contracts and, as a result, included a
higher proportion of medical expense when compared to existing
contracts.  In addition, out of facility hospital expenses were higher
than the prior year, reflecting a return to normal spending levels, due to lower
than normal hospitalization days in the first six months of
2009.  Additionally, expenses for providing pharmacy services for
existing service contracts increased due to increases in pharmaceutical prices
as well as an increase in HIV treatment expenditures compared to the prior
period.





Other
operating expenses


Other
operating expenses were $1,540,391, or 3.4% of revenue, for the nine months
ended September 30, 2010, compared to $1,388,780, or 3.6% of revenue, for the
nine months ended September 30, 2009. The increase of $151,611 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, business development fees and travel expenses
partially offset by a reduction in employment advertising and recruiting
expense.





Operating
Expenses


Selling
and administrative expenses


Selling
and administrative expenses for the nine months ended September 30, 2010 and
2009 were $6,067,251, or 13.5% of revenue, and $5,774,101, or 14.9% of revenue,
respectively. The increased expenditure of $293,150 primarily reflects
investment in management and administrative personnel required to support new
contracts and services added since January 1, 2009, as well as increases in
consulting fees and corporate advertising which were partially offset by lower
accounting fees, legal fees, business development fees and rent
expense.  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 nine months ended September 30, 2010 and 2009 was $465,516
and $475,597, respectively.


Page - 16
-





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 $372,000, or
0.8% of revenue, for the nine months ended September 30, 2010, compared to
$1,187,000, or 3.1% of revenue, for the nine months ended September 30, 2009.
The decrease primarily reflects lower amortization expense as certain individual
service contracts acquired have become fully amortized.  Amortization
of non-compete agreements was $235,447, or 0.5% of revenue, for the nine months
ended September 30, 2010, compared to $289,000, or 0.7% of revenue, for the nine
months ended September 30, 2009. Depreciation expense increased to $207,493 for
the nine months ended September 30, 2010 compared to $151,951 for the prior year
period reflecting capital expenditures associated with vehicle purchases as well
as purchases of medical equipment at various facilities.





Interest
income


Interest
income was $72,385 for the nine months ended September 30, 2010 compared to
$61,127 for the same period in 2009. Average cash balances were higher during
the nine months ended September 30, 2010 compared to the nine months ended
September 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 nine months ended September 30, 2010 decreased to $0 compared to
$7,991 in the same period in 2009.





Gain
(loss) on fair value of derivatives


As a
result of adopting derivative accounting for certain warrants which contain a
strike price adjustment feature 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 nine months ended September 30, 2010 and 2009, we recognized a $391,223
unrealized gain and a $1,632,695 unrealized loss, respectively.  The
decreased expense of $2,023,918 was primarily the result of our stock price
decreasing $0.12 during the nine months ended September 30, 2010 compared to a
$1.15 stock price increase during the nine months ended September 30,
2009.  Additionally, there were 813,000 fewer warrants subject to fair
value accounting during the nine months ended September 30, 2010 compared to the
nine months ended September 30, 2009, primarily due to the amendment of certain
warrant agreements to remove the provisions that resulted in liability treatment
subsequent to September 30, 2009.





During
the nine months ended September 30, 2010, no warrants were exercised and
warrants to purchase 90,000 shares of common stock were amended and are now
treated as equity.  As of September 30, 2010, we had outstanding
warrants subject to derivative accounting to purchase an aggregate of 628,097
shares of common stock.  During the nine months ended September 30,
2009, warrants to purchase 40,000 shares of common stock were exercised
generating $12,000 of net proceeds and warrants to purchase 132,333 shares of
common stock were exercised by cashless exercise and as a result, a total of
155,783 shares of common stock were issued.  As of September 30, 2009,
we had outstanding warrants subject to derivative accounting to purchase an
aggregate of 1,441,097 shares of common stock.





The
following table summarizes the change in fair value for the nine months ended
September 30:





2010
                    
                    
                    2009Fair
      value of warrants outstanding as of January 1
                    
                    $
                    1,299,450
                    
                    
                    $
                    2,766,150Realized
      loss on warrants
                    
                    
                    32,590
                    
                    
                    
                    55,927Unrealized
      (gain) loss on warrants
                    
                    
                    (391,223
                    )
                    
                    
                    1,632,695Fair
      value of warrants transferred to equity upon amendment
                    
                    
                    (282,670
                    )
                    
                    
                    (290,968
                    )Fair
      value of warrants exercised
                    
                    
                    —
                    
                    
                    
                    (442,937
                    )Fair
      value of warrants outstanding as of September 30
                    
                    $
                    658,147
                    
                    
                    $
                    3,720,867


Page - 17
-





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





Income
tax expense


Our
effective tax rate was 45.5% during the nine months ended September 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 $980,000 and $402,000 for
the nine months ended September 30, 2010 and 2009, respectively.




Liquidity
and Capital Resources




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





Cash
Flow for the nine months ended September 30, 2010 compared to the nine months
ended September 30, 2009


Cash as
of September 30, 2010 and September 30, 2009 was $13,008,470 and $10,119,183,
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 nine months ended September 30, 2010 totaled $2,245,099,
reflecting a net income of $1,172,864 plus $960,573 in adjustments for non-cash
expenses such as amortization of intangible assets of $607,447, amortization of
long-term customer agreement of $43,750, stock-based compensation of $465,516,
change in fair value of warrants of ($358,633), depreciation of $207,493 and
deferred income taxes of ($5,000).  Changes in working capital
components provided $111,662, reflective of an increase in accounts payable of
$742,019 and a decrease in prepaid expenses of $638,623 partially offset by an
increase in accounts receivable of $682,185 and decreases in accrued expenses of
$280,170, deferred revenue of $191,008 and income taxes payable of
$115,617.  The increase in accounts payable was primarily from the
receipt of medical expense invoices which were previously estimated 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
annual professional liability insurance policy premium in October 2009 and we
expense the prepaid amounts ratably during the annual policy period of October
through September.  The increase in accounts receivable resulted
primarily from new medical service contracts added in 2010 as well as increased
receivables for stop/loss reimbursements due to higher out of facility medical
expenditures in excess of stop/loss limits.  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 seven
less days as compared to the accrual at December 31, 2009 and a reduction in
corporate accrued expenses which were partially offset by increases in accruals
for employee benefits for paid time off and health
insurance.  Deferred revenue decreased primarily as a result of a
reduction in advance customer payments received prior to quarter
end.  The decrease in income taxes payable resulted primarily from the
payment of scheduled estimated taxes partially offset by accruals of estimated
taxes payable.





Cash flow
from operations for the nine months ended September 30, 2009 totaled
$3,111,164.  The net loss of $1,439,760 was offset by $3,415,171 in
adjustments for non-cash expenses such as the change in fair value of
derivatives of $1,688,623, amortization of $1,476,000, stock-based compensation
of $475,597 and deferred income taxes of $377,000.  Changes in working
capital components generated an additional $1,135,753, reflective of increases
in accounts payable of $120,886, accrued expenses of $766,590, income taxes
payable of $220,860 and deferred revenue of $374,888, as well as a decrease in
prepaid expenses of $114,820 partially offset by an increase in accounts
receivable of $462,016.  The increase in accounts payable resulted
primarily from the timing of vendor payments in relation to quarter
end.  The increase in accrued expenses resulted primarily from the
addition of new healthcare employees required to support the increased staffing
requirements from our new medical service contracts in addition to the wage
accrual covering eight additional days as compared to December 31, 2008
partially offset by a reduction in accrued medical expenses.  The
increase in income taxes payable resulted primarily from our increased estimate
of taxable income, resulting in taxes payable in excess of scheduled estimated
tax payments.  The increase in deferred revenue resulted primarily
from an increase in advance customer payments for services to be provided in the
future.  The decrease in prepaid expenses resulted primarily from a
reduction in prepaid professional liability insurance as September is the end of
the primary policy period.  The increase in accounts receivable
resulted primarily from new medical service contracts added in
2009.





Cash
Flows from Investing Activities


Cash flow
used in investing activities for the nine months ended September 30, 2010 used
$299,069.  Purchases of property and equipment used $151,801 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.


Page - 18
-





Cash flow
from investing activities for the nine months ended September 30, 2009 used
$282,339, primarily for purchases of vehicles, computers and medical
equipment.





Cash
Flows from Financing Activities


Cash flow
from financing activities for the nine months ended September 30, 2010 generated
cash of $6,297 related to the proceeds from the exercise of stock
options.





Cash flow
from financing activities for the nine months ended September 30, 2009 used cash
of $181,782.  Payments on the line of credit were $100,000 and
payments on loans were $93,782 which were partially offset by proceeds from
warrant exercises of $12,000.





Loans


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





Off
Balance Sheet Arrangements


We are
required to provide performance and payment guarantee bonds to county
governments under certain contracts. As of September 30, 2010, we have three
performance bonds totaling $8,095,675 and two payment bonds for $2,891,925,
totaling $10,987,600. 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 September 30, 2010:





Total
                  
                  
                  Current
                  
                  
                  2 – 3
                    Years
                  
                  
                  4 – 5 Years
                  
                  
                  ThereafterEquipment
      Leases
                  
                  $
                  197,065
                  
                  
                  $
                  73,244
                  
                  
                  $
                  87,547
                  
                  
                  $
                  36,274
                  
                  
                  $
                  —Automobile
      Leases
                  
                  
                  18,398
                  
                  
                  
                  17,604
                  
                  
                  
                  794
                  
                  
                  
                  —
                  
                  
                  
                  —Office
      Space Leased
                  
                  
                  360,222
                  
                  
                  
                  164,032
                  
                  
                  
                  196,190
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      Contractual Cash Obligations
                  
                  $
                  575,685
                  
                  
                  $
                  254,880
                  
                  
                  $
                  284,531
                  
                  
                  $
                  36,274
                  
                  
                  $
                  —





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
September 30, 2010, we have entered into 60 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 $176 million as of September 30, 2010, with a weighted-average term
of 3.7 years including option renewal periods, of which approximately $57
million relates to the initial contract period and approximately $119 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 - 19
-


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




10.1
                  Retirement
      Agreement dated as of July 1, 2010 by and between the Company and Howard
      M. Haft, M.D. (executed on July 20, 2010) (incorporated by reference to
      the Company’s Current Report on Form 8-K filed on July 23,
      2010).31.1
                  Section
      302 Certification of Principal Executive Officer31.2
                  Section
      302 Certification of Principal Financial Officer32.1
                  Section
      906 Certification of Principal Executive Officer32.2
                  Section
      906 Certification of Principal Financial
Officer


Page - 20
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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.November
      12, 2010By /s/ Richard W. TurnerRichard
      W. Turner, Ph.D.Chairman
      and Chief Executive Officer(principal
      executive officer)





November
      12, 2010By /s/ Thomas W. FryThomas
      W. FryChief
      Financial Officer and Secretary(principal
      financial officer and principal accounting
  officer)


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