|
|

# U.S. SECURITIES AND
EXCHANGE COMMISSION

# WASHINGTON, D.C. 20549

# FORM 10-QSB

# QUARTERLY REPORT UNDER
SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934

|For the quarter ended:June 30, 2005 | Commission File Number:0-27554
|----------------------------------- | ------------------------------

PACE Health
Management Systems, Inc.(Exact name of small
business issuer as specified in its charter)

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

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

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

Check whether the issuer (1) filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject of the filing requirements for at
least the past 90 days.   YES
x
NO
o

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

|ClassCommon Stock, no par | Number of Shares OutstandingAugust 12, 20055,716,074
|------------------------- | ----------------------------------------------------

Transitional Small Business
Disclosure Format (Check one):   YES
o
NO
x
.

|
|

---

# PACE HEALTH MANAGEMENT
SYSTEMS, INC.

# PART I. FINANCIAL
INFORMATION

|Page                                                                                       
|-------------------------------------------------------------------------------------------
|                                                                                           
|Condensed Balance Sheets June 30, 2005 and December 31, 2004                               
|                                                                                           
|Condensed Statements of Operations Three Months and Six Months Ended June 30, 2005 and 2004
|                                                                                           
|Condensed Statements of Cash Flows Six Months Ended June 30, 2005 and 2004                 
|                                                                                           
|Notes to Condensed Financial Statements                                                    
|                                                                                           
|ITEM 2.   MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                        
|                                                                                           
|ITEM 3.   CONTROLS AND PROCEDURES                                                          
|                                                                                           
|PART II. OTHER INFORMATION                                                                 
|                                                                                           
|ITEM 6.   EXHIBITS                                                                         

2

---

# PART 1. FINANCIAL INFORMATION

# ITEM 1. FINANCIAL
STATEMENTS

# 

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

|                                                                                                                                                  |  | June 30, 2005 |   | December 31, 2004
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | - | -----------------
|ASSETS                                                                                                                                            |  |               |   |                  
|CURRENT ASSETS:                                                                                                                                   |  |              
|Cash and cash equivalents                                                                                                                         |  |               | $ | 1,762,806        
|Prepaid expenses                                                                                                                                  |  |               |   | 15,642           
|                                                                                                                                                  |  |               |   |                  
|                                                                                                                                                  |  |               | $ | 1,778,448        
|                                                                                                                                                  |  |               |   |                  
|                                                                                                                                                 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                              |  |              
|CURRENT LIABILITIES:                                                                                                                              |  |              
|Accounts payable                                                                                                                                  |  |               | $ | 1,884            
|                                                                                                                                                  |  |               |   |                  
|Total current liabilities                                                                                                                         |  |               |   | 1,884            
|                                                                                                                                                  |  |               |   |                  
|SHAREHOLDERS EQUITY:                                                                                                                             |  |              
|Preferred stock, no par value, authorized 1,000,000 shares; issued none                                                                           |  |               |   |                 
|Convertible participating preferred stock, Series A, no par value; authorized 4,000,000 shares;
          issued and outstanding 2,875,000 shares |  |               |   | 2,875,000        
|Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,716,074 shares                                                 |  |               |   | 17,065,136       
|Additional paid-in capital                                                                                                                        |  |               |   | 673,486          
|Accumulated (deficit)                                                                                                                             |  |               |   | (18,837,058      
|                                                                                                                                                  |  |               |   |                  
|                                                                                                                                                  |  |               |   | 1,776,564        
|                                                                                                                                                  |  |               |   |                  
|                                                                                                                                                  |  |               | $ | 1,778,448        
|                                                                                                                                                  |  |               |   |                  

See
Notes to Condensed Financial Statements.

3

---

|PACE HEALTH MANAGEMENT
SYSTEMS, INC.CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
|----------------------------------------------------------------------------------

|                                             |  | Three months ended
June 30, |   | Six months ended
June 30,
|-------------------------------------------- |  | --------------------------- | - | -------------------------
|
|NET REVENUES                                 |  |                             | $ |                         
|                                             |  |                             |   |                          
|                                            
|COSTS AND EXPENSES                           |  |                            
|General and administrative                   |  |                             |   | 28,581                   
|                                             |  |                             |   |                          
|                                             |  |                             |   | 28,581                   
|                                             |  |                             |   |                          
|(Loss) from operations                       |  |                             |   | (28,581                  
|                                            
|INTEREST INCOME                              |  |                             |   | 9,248                    
|                                             |  |                             |   |                          
|(Loss) before income taxes                   |  |                             |   | (19,333                  
|                                            
|PROVISION FOR INCOME TAXES                   |  |                             |   |                         
|                                             |  |                             |   |                          
|Net (Loss)                                   |  |                             | $ | (19,333                  
|PREFERRED DIVIDENDS IN ARREARS               |  |                             |   | (71,875                  
|                                             |  |                             |   |                          
|Net (Loss) available to common shareholders  |  |                             | $ | (91,208                  
|                                             |  |                             |   |                          
|                                            
|(LOSS) PER SHARE                             |  |                            
|Basic                                        |  |                             | $ | (0.02                    
|                                             |  |                             |   |                          
|Fully diluted                                |  |                             | $ | (0.02                    
|                                             |  |                             |   |                          
|                                            
|WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON |  |                            
|EQUIVALENT SHARES OUTSTANDING                |  |                             |   | 5,716,074                
|                                             |  |                             |   |                          

See Notes to Condensed
Financial Statements

4

---

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

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

See Notes to Condensed
Financial Statements.

5

---

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

# Note 1. Basis of
presentation

The accompanying financial
information should be read in conjunction with the annual financial statements and notes
thereto for the year ended December 31, 2004. The financial information included herein is
unaudited; such information reflects all adjustments, which, in the opinion of management,
are necessary in order to make the financial statements not misleading.

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

# Note 2. Stock-based
Compensation

On January 1, 1996, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation as amended by SFAS 148, which establishes a fair value based
method for financial accounting and reporting for stock-based employee compensation plans
and for transactions in which an entity issues its equity instruments to acquire goods and
services from non-employees. However, SFAS 123 allows employee compensation to continue to
be measured by using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion (APBO) No. 25, Accounting for Stock Issued to
Employees, but requires expanded disclosures. The Company has elected to continue to apply
the intrinsic value based method of accounting for stock-based employee compensation.
Accordingly, compensation cost for stock options issued to employees is measured as the
excess, if any, of the quoted market price of the Companys stock at the date of
grant over the amount an employee must pay to acquire the stock.

# Note 3. Basic and
diluted (loss) per share

On January 1, 1997 the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share,
which requires the Company to present basic and diluted income (loss) per share amounts.
Basic income (loss) per share is based on the weighted average number of common shares
outstanding during the period. Diluted income (loss) per share is based on the weighted
average number of common shares and dilutive potential common shares outstanding during
the period. Dilutive potential common shares consist of stock options and warrants (using
the treasury stock method) and convertible preferred stock (using the if-converted
method). The effect of stock options, warrants, and convertible preferred stock was not
included in the computation because to do so would have been antidilutive. At June 30,
2005, there are approximately 70,000 shares issuable under warrant or option arrangements
and 9,656,250 shares issuable under conversion of Series A convertible participating
preferred stock.

# Note 4. Related Party
Transactions

Administration expenses related to
Equity Dynamics, Inc., an entity wholly owned by a Director of the Company, totaled
$12,500 and $12,500 for the three months ended June 30, 2005 and 2004, respectively, and
totaled $25,000 and $28,500 for the six months ended June 30, 2005 and 2004, respectively.

6

---

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

# General

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

Following the Transaction, the
Company has no ongoing operations and no revenues and has minimal operating expenses. The
Company presently has no employees. The Companys June 30, 2005 balance sheet
reflects cash and cash equivalents of approximately $1.8 million and no material
liabilities.

The net proceeds from the Transaction
will be retained by the Company pending a determination of whether to engage in a
follow-on transaction. The Company has been seeking a business combination with another
entity, before considering possible liquidation and distribution of its assets. The
Company believes that with the cash on hand and net operating loss carryforwards, subject
to the limitation of such carryforwards under the Internal Revenue Code, such a
combination may be attractive to potential partners and would better serve the interests
of the Companys shareholders. As of the date of this Form 10-QSB, no definitive
agreement has been signed for a follow-on transaction. If no suitable business combination
is identified, the Company may elect to liquidate and distribute the remaining net
proceeds to shareholders. If the Company liquidated at the present time, all of the net
assets of the Company would be paid to holders of the Companys preferred stock.

# RESULTS OF OPERATIONS

General and administrative:
General and administrative expenses include bookkeeping costs, legal fees, expenses
associated with shareholder relations and SEC reporting requirements, and insurance.
General and administrative expenses were $28,581 and $24,409 for the three months ended
June 30, 2005 and 2004, respectively, representing an increase of 17.1%. General and
administrative expenses were $54,870 and $59,137 for the six months ended June 30, 2005
and 2004, respectively, representing a decrease of 7.2%, due mainly to a decrease in
auditing and administrative fees.

Interest Income: Interest
income was $9,248 and $4,567 for the three months ended June 30, 2005 and 2004,
respectively, representing an increase of 102.5%. Interest income was $15,925 and $9,200
for the six months ended June 30, 2005 and 2004, respectively, representing an increase of
73.1%. The increase is due mainly to an increase in money market interest rates.

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

# LIQUIDITY AND CAPITAL
RESOURCES

Net cash used in operating activities
for the six months ended June 30, 2005 and 2004 was $45,753 and $57,676, respectively. The
Company has no ongoing operations and no revenues and has minimal operating expenses. The
Companys June 30, 2005 balance sheet reflects cash and cash equivalents of
approximately $1.8 million and no material liabilities.

The net proceeds from the transaction
will be retained by the Company pending a determination of whether to engage in a
follow-on transaction. The Company has been seeking a business combination with another
entity, before considering possible liquidation and distribution of its assets. As of the
date of this Form 10-QSB, no definitive agreement has been signed for a follow-on
transaction. If no suitable business combination

7

---

is  identified,  the Company may elect to liquidate and distribute the remaining
net proceeds to shareholders. If the Company liquidated at the present time, all
of the net assets of the Company would be paid to holders of the  Companys
preferred stock.

# ITEM 3. CONTROLS AND
PROCEDURES

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

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

# PART II. OTHER
INFORMATION

ITEM 6. EXHIBITS

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

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

# SIGNATURES

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

PACE HEALTH MANAGEMENT
SYSTEMS, INC.(Registrant)

|August 12, 2005 |  | /s/ John Pappajohn                                                                 | 
|--------------- |  | ---------------------------------------------------------------------------------- | 
|Dated           |  | John Pappajohn, Director, Acting
Chief Executive and Acting ChiefFinancial Officer | 

8

---