U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

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


       For the quarter ended:                        Commission File Number:
         September 30, 1997                                  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             (IRS Employer Identification Number)
incorporation or organization)


                               1025 Ashworth Road
                            West Des Moines, IA 50265
       -------------------------------------------------------------------
              (Address and zip code of principal executive offices)


                                 (515) 222-1717
       -------------------------------------------------------------------
                (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 ___

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

                                               Number of Shares Outstanding
             Class                                   October 31, 1997
             -----                                   ----------------
     Common Stock, no par                                5,321,784


Transitional Small Business Disclosure Format (Check one): YES ___ NO _X_


<PAGE>



                      PACE HEALTH MANAGEMENT SYSTEMS, INC.

                          PART I. FINANCIAL INFORMATION

<TABLE>
<CAPTION>

ITEM 1.  FINANCIAL STATEMENTS                                                         Page
                                                                                      -----

<S>                                                                                      <C>
            Condensed Balance Sheets                                                     1
                  September 30, 1997 and December 31, 1996


            Condensed Statements of Operations                                           2
                  Three Months and Nine Months Ended September 30, 1997 and 1996


            Condensed Statements of Cash Flows                                         3-4
                  Nine Months Ended September, 1997 and 1996


            Notes to Condensed Financial Statements                                      5


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR
            PLAN OF OPERATION                                                          6-10


                           PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS                                                              11


ITEM 2.  CHANGES IN SECURITIES                                                          11


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                11


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                            11


ITEM 5.  OTHER INFORMATION                                                              11


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                               11

</TABLE>


<PAGE>



                          PART 1. FINANCIAL INFORMATION

ITEM  1.  FINANCIAL STATEMENTS

PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                          SEPTEMBER 30,      DECEMBER 31,
ASSETS                                                        1997               1996
                                                          ------------       ------------
<S>                                                       <C>                <C>         
CURRENT ASSETS:
     Cash                                                 $    171,658       $  1,687,044
     Accounts receivable, net                                1,062,476          1,013,132
     Inventories, primarily computer equipment                 109,085             46,480
     Prepaid expenses                                          188,540             49,756
                                                          ------------       ------------
               TOTAL CURRENT ASSETS                          1,531,759          2,796,412
                                                          ------------       ------------

NON-CURRENT ACCOUNTS RECEIVABLE                                288,000            288,000
                                                          ------------       ------------

FURNITURE AND EQUIPMENT, at cost, net of
     accumulated depreciation; 1997 $698,296;
       1996 $492,777                                           630,189            527,540
                                                          ------------       ------------

COMPUTER SOFTWARE DEVELOPMENT COSTS,
     net of accumulated amortization                         1,104,256            791,852
                                                          ------------       ------------

OTHER ASSETS                                                    63,153               --
                                                          ------------       ------------
                                                          $  3,617,357       $  4,403,804
                                                          ============       ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
     Note payable-bank                                    $    950,000       $    500,000
     Current maturities of long-term obligations                97,387             13,858
     Accounts payable, customer deposits and accrued         
       expenses                                              1,499,896          1,173,159
                                                          ------------       ------------
               TOTAL CURRENT LIABILITIES                     2,547,283          1,687,017
                                                          ------------       ------------

LONG-TERM OBLIGATIONS, less current maturities                  56,360             33,776
                                                          ------------       ------------

SHAREHOLDERS' EQUITY:
     Preferred stock                                         1,492,059               --
     Common stock                                           16,912,544         16,241,444
     Additional paid-in capital                                116,000            116,000
     Accumulated deficit                                   (17,506,889)       (13,674,433)
                                                          ------------       ------------
                                                             1,013,714          2,683,011
                                                          ------------       ------------
                                                          $  3,617,357       $  4,403,804
                                                          ============       ============

</TABLE>

See Notes to Condensed Financial Statements


<PAGE>



PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                 THREE MONTHS ENDED            NINE MONTHS ENDED
                                                    SEPTEMBER 30                 SEPTEMBER 30
                                           --------------------------    --------------------------
                                               1997          1996           1997           1996
                                           -----------    -----------    -----------    -----------
<S>                                        <C>            <C>            <C>            <C>        
NET REVENUES
      Systems revenues                     $   825,880    $   424,281    $ 2,091,768    $ 1,854,127
      Customer support services                187,800         99,725        468,859        312,462
                                           -----------    -----------    -----------    -----------
                                             1,013,680        524,006      2,560,627      2,166,589
                                           -----------    -----------    -----------    -----------

COSTS AND EXPENSES
      Cost of systems revenues                 344,617        314,669      1,221,835        598,275
      Client services                          420,492        265,161      1,047,745        650,287
      Product development                      471,251        572,885      1,381,852      1,336,377
      Write-off of capitalized software           --        1,270,835           --        1,270,835
      Purchased research and development          --             --          588,502           --
      Sales and marketing                      339,940        280,975      1,081,002        909,035
      General and administrative               402,369        356,290      1,088,235      1,237,284
                                           -----------    -----------    -----------    -----------
                                             1,978,669      3,060,815      6,409,171      6,002,093
                                           -----------    -----------    -----------    -----------

         LOSS FROM OPERATIONS                 (964,989)    (2,536,809)    (3,848,544)    (3,835,504)

OTHER INCOME (EXPENSE) NET                     (14,763)        10,467         16,088         48,565
                                           -----------    -----------    -----------    -----------

         LOSS BEFORE INCOME TAXES             (979,752)    (2,526,342)    (3,832,456)    (3,786,939)

PROVISION FOR INCOME TAXES                        --             --             --             --
                                           -----------    -----------    -----------    -----------
         NET LOSS                          $  (979,752)   $(2,526,342)   $(3,832,456)   $(3,786,939)
                                           ===========    ===========    ===========    ===========

LOSS PER COMMON AND 
  COMMON EQUIVALENT
  SHARES                                   $     (0.18)   $     (0.58)   $     (0.73)   $     (0.88)
                                           ===========    ===========    ===========    ===========

WEIGHTED AVERAGE 
  NUMBER OF COMMON AND
  COMMON EQUIVALENT  
  SHARES OUTSTANDING                         5,402,895      4,350,301      5,275,994      4,292,437
                                           ===========    ===========    ===========    ===========

</TABLE>

See Notes to Condensed Financial Statements



<PAGE>


PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                          NINE MONTHS ENDED
                                                                             SEPTEMBER 30
                                                                     --------------------------
CASH FLOWS FROM OPERATING ACTIVITIES                                     1997          1996
                                                                     -----------    -----------
<S>                                                                  <C>            <C>         
     Net loss                                                        $(3,832,456)   $(3,786,939)
     Adjustments to reconcile net loss to net cash (used in)
        operating activities:
       Depreciation                                                      205,519        150,287
       Amortization                                                      130,111        192,579
       Write-off of capitalized software                                    --        1,270,835
       Purchased research and development                                588,502           --
       Compensation expense recognized upon grant of stock
          options                                                           --           75,011
       Other                                                              61,516           --
     Change in assets and liabilities:
       (Increase) decrease in accounts receivable                        (26,167)      (207,137)
       (Increase) decrease in other current assets                      (175,405)       (82,737)
       Increase in other current liabilities                             326,737        501,348
                                                                     -----------    -----------
             NET CASH (USED IN) OPERATING ACTIVITIES                  (2,721,643)    (1,886,753)
                                                                     -----------    -----------

 CASH FLOWS FROM INVESTING ACTIVITIES
     Cash paid for net assets of Healthcare Software Solutions           (50,000)          --
     Capitalized computer software development costs                    (435,284)      (283,560)
     Purchase of furniture and equipment                                (215,531)      (288,942)
                                                                     -----------    -----------
             NET CASH (USED IN) INVESTING ACTIVITIES                    (700,815)      (572,502)
                                                                     -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from notes payable                                       1,930,000        450,000
     Proceeds from sale of Series A preferred stock                    1,492,059           --
     Proceeds from sale of common stock                                    6,400      2,942,963
     Payments on notes payable and long term obligations              (1,521,387)    (1,207,889)
                                                                     -----------    -----------
             NET CASH PROVIDED BY FINANCING ACTIVITIES
                                                                       1,907,072      2,185,074
                                                                     -----------    -----------

             NET (DECREASE) IN CASH AND CASH EQUIVALENTS              (1,515,386)      (274,181)

CASH AND CASH EQUIVALENTS
     Beginning                                                         1,687,044      2,831,658
                                                                     -----------    -----------
     Ending                                                          $   171,658    $ 2,557,477
                                                                     ===========    ===========

</TABLE>


                                   (Continued)


<PAGE>



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

<TABLE>
<CAPTION>

<S>                                                                  <C>            <C>         
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
    INFORMATION
      Cash payments for interest                                     $    49,837    $     3,620
                                                                     ===========    ===========

SUPPLEMENTAL SCHEDULE OF NON-CASH
  INVESTING AND FINANCING ACTIVITIES
      Purchase of net assets of Healthcare Software Solutions
           Assets acquired:
                In-process research and development                  $   588,502    $      --
                Accounts receivable                                       23,177           --
                Property & equipment, primarily computer equipment        92,637           --
                Intangible assets                                         70,384           --
           Liabilities assumed                                           (60,000)          --
                                                                     -----------    -----------
                                                                         714,700           --
           Issuance of common stock                                     (664,700)          --
                                                                     -----------    -----------
           Cash paid                                                      50,000           --
                                                                     ===========    ===========

</TABLE>

See Notes to Condensed Financial Statements


<PAGE>



PACE HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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,
1996. 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 nine months are not necessarily indicative of
the results to be expected for the entire fiscal year.

NOTE 2. LOSS PER COMMON SHARE AND COMMON EQUIVALENT SHARE

Loss per common and common equivalent share is based on the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of stock options and warrants (using the
treasury stock method). Common equivalent shares are excluded from the
computation if their effect is anti-dilutive, except that, pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, stock
options and warrants granted with exercise prices below the initial public
offering price during the twelve month period preceding the date of the initial
filing of the Registration Statement have been included in the computation as if
they were outstanding for all periods presented.

NOTE 3. RECLASSIFICATION

Certain costs and expenses on the Statements of Operations for the three and
nine month period ended September 30, 1996 have been reclassified with no effect
on income.


<PAGE>



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

GENERAL. PACE Health Management Systems, Inc. ("PACE" or the "Company") was
organized in 1987 as a computer systems consulting firm. In 1989, the Company
began to develop and market a nursing station care plan management system built
around an artificial intelligence-based "Clinical Library." This library was the
culmination of twenty years of research at Carnegie-Mellon and Creighton
Universities. In late 1992, the Company recognized what it believed to be a
significant opportunity for software applications integrated with the Clinical
Library to address the point-of-care clinical information systems market and
began to develop the PACE Clinical Information System ("PACE/CIS") for the
hospital acute care setting. In early 1993, the Company discontinued marketing
the nursing station care plan management system as a stand-alone product and
focused on development of PACE/CIS. In 1995, the Company introduced PACE CMS, a
modular suite of advanced software applications that provides hospitals and
integrated delivery systems a comprehensive system for interdisciplinary
documentation, nursing care planning, clinical pathway management and
enterprise-wide order management, all at the point of care. During 1996, PACE
CMS, the system from which the Company derives substantially all of its
revenues, was further enhanced through the first release of a graphical user
interface (GUI) utilizing an object-oriented open three-tier, client/server
architecture ("Graphical PACE CMS"). The Company's open-systems architecture and
object orientation allow PACE CMS to be integrated with a healthcare provider's
existing information systems, including financial management, admissions,
pharmacy, laboratory and other ancillary systems.

On May 30, 1997, the Company expanded its product line into the ambulatory
market when it purchased substantially all of the assets of Healthcare Software
Solutions, L.C. (HSS), an affiliate of Wellmark, Inc. (formerly IASD Health
Services Corp.). HSS, headquartered in Des Moines, Iowa, was developing clinical
information systems to physicians working in single practitioner offices,
multi-specialty groups, and multi-site clinics. The HSS "MR2000 for Windows"
product integrates every element of the traditional paper chart into an
electronic clinical information system that improves practice efficiency and the
quality of care. The system provides point and click access to healthcare
information that facilitates the development of treatment protocols and enables
physicians to track patients' problems, symptoms, treatments and outcomes. Total
consideration for the acquisition included cash in the amount of $50,000,
230,000 shares of PACE common stock with a market value of $2.89 per share as of
May 30, 1997, and a royalty payment on all MR2000 software licensed between May
30, 1997 and May 30, 2000. This transaction is accounted for under the purchase
method of accounting. The purchase price of HSS has been allocated to the
identifiable tangible and intangible assets acquired based on their estimated
fair values. The acquired, in-process research and development was immediately
charged to operations as required under generally accepted accounting
principles. The intangible assets have estimated remaining lives of two to five
years.

The Company derives substantially all of its revenues from the sale of PACE
systems including (a) software license fees, (b) software implementation and
installation services and (c) hardware sales. Revenue from software license fees
is recognized upon delivery of the software provided that collectibility is
probable and the Company has no significant obligations remaining under the
software licensing agreement. The estimated costs of any insignificant remaining
obligations are accrued and charged to costs and expenses at the time of revenue
recognition. Revenue from software license fee agreements that require
significant customization is accounted for over the length of the implementation
period using the percentage-of-completion method of accounting. Revenue from
implementation and installation services is accounted for separately from the
software license fees and recognized when the services are performed.


<PAGE>



Revenue from hardware sales is recognized upon shipment or upon completion of
significant staging and configuration obligations. Customer support services,
which include system updates, are recognized over the period the services are
performed.

The Company capitalizes software development costs that relate primarily to
either the development of new software or significant enhancements to existing
software. Software costs are capitalized in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," which requires
capitalization of expenses following determination of technical feasibility and
until the software is ready for general release. The capitalized costs are
amortized by the greater of (a) the ratio that current gross revenues for
software sales bear to the total of current and anticipated future gross
revenues for such software sales, or (b) the straight-line method over the
estimated economic life of the software, usually three to seven years. At each
balance sheet date, the unamortized capitalized costs of a computer software
product are compared to the net realizable value of the product and the amount
by which the unamortized capitalized costs exceed the net realizable value is
written off. The net realizable value is the estimated future gross revenues
from a product, reduced by the estimated future costs of completing and
disposing of that product.

RESULTS OF OPERATIONS

NET REVENUES: Net revenues include systems revenues and customer support
services. The Company's net revenues were $1,013,680 and $524,006 for the three
months ended September 30, 1997 and 1996, respectively, representing an increase
of 93%. Included in systems revenues is revenue from software license fees
totaling $146,700 and $89,570, implementation fees totaling $181,248 and
$45,946, and revenue from hardware sales totaling $497,932 and $288,765 for the
three months ended September 30, 1997 and 1996, respectively. For the nine
months ended September 30, 1997 and 1996, the Company's net revenues were
$2,560,627 and $2,166,589 respectively, representing an increase of 18%.
Included in systems revenues for the nine months ended September 30, 1997 and
1996, is revenue from software license fees totaling $448,475 and $1,122,060,
implementation fees totaling $400,189 and $224,111, and revenue from hardware
sales totaling $1,243,104 and $507,956, respectively. Customer support services
revenues were $187,800 and $99,725 for the three months ended September 30, 1997
and 1996, respectively, representing an increase of 88%, and $468,859 and
$312,462 for the nine months ended September 30, 1997 and 1996, respectively,
representing an increase of 50%. This increase was due to the number and size of
additional maintenance contracts resulting from continued growth in the
Company's installed client base.

COST OF SYSTEMS REVENUES: Cost of systems revenues includes hardware purchases,
third party software, commissions and royalties. Cost of systems revenues were
$344,617 and $314,669 for the three months ended September 30, 1997 and 1996,
respectively, representing an increase of 10%. Cost of systems revenues were
$1,221,835 and $598,275 for the nine months ended September 30, 1997 and 1996,
respectively, representing an increase of 104%. This increase is a result of
costs associated with increased hardware sales. Cost of systems revenues totaled
34% and 60% of total net revenues for the three months ended September 30, 1997
and 1996, respectively and 48% and 28% of total net revenues for the nine months
ended September 30, 1997 and 1996, respectively. Total cost of systems revenues
as a percentage of total net revenues will continue to fluctuate in the future
depending on the product mixes of revenues.


<PAGE>



CLIENT SERVICES: Client services expenses include salaries and expenses related
to implementation, installation and customer support. Client services expenses
were $420,492 and $265,161 for the three months ended September 30, 1997 and
1996, respectively, representing an increase of 59%. Client services expenses
were $1,047,745 and $650,287 for the nine months ended September 30, 1997 and
1996, respectively, representing an increase of 61%. These increases were
primarily due to increases in personnel and payroll related expenses as client
services were expanded to provide implementation services and customer support
for the additional sites. The Company expects these expenses will increase
significantly in the future due to new sales and growth in the Company's
installed client base.

PRODUCT DEVELOPMENT: Product development expenses include salaries and expenses
related to development and documentation of software systems, net of capitalized
software development costs. Product development expenses were $471,251 and
$572,885 for the three months ended September 30, 1997 and 1996, respectively,
representing a decrease of 18%. This decrease was due to a reduction in the use
of outside services. Product development expenses were $1,381,852 and $1,336,377
for the nine months ended September 30, 1997 and 1996, respectively,
representing an increase of 3%. This increase was primarily due to increases in
personnel and payroll related expenses as the Company continued its efforts on
its Graphical User Interface (GUI) project. The Company capitalized $150,127 and
$79,460 of product development costs and amortized $54,015 and $72,290 in the
three months ended September 30, 1997 and 1996, respectively. The Company
capitalized $435,284 and $283,560 of product development costs and amortized
$130,111 and $192,579 in the nine months ended September 30, 1997 and 1996,
respectively. The increased efforts associated with the GUI project accounted
for the increases in capitalized expenses in the periods presented. The
decreases in amortization expense for the periods presented were due to the
write-off of capitalized software in the period ended September 30, 1996.

WRITE-OFF OF CAPITALIZED SOFTWARE: Write-off of capitalized software reflects a
one-time adjustment of $1,270,835 during the three months ended September 30,
1996. This write-off reflected the unamortized costs of developing the Company's
original text-based version of CMS. This version of the product is no longer
offered for sale, and as a result, any net realizable value to the Company for
that product is minimal. This adjustment was made following the Company's
delivery and implementation of its new three-tier Graphical User Interface
Solution (GUI) during the third quarter of 1996.

PURCHASED RESEARCH AND DEVELOPMENT: As a result of the HSS acquisition on May
30, 1997, the Company expensed in-process research and development in the amount
of $588,502.

SALES AND MARKETING: Sales and marketing expenses include salaries, advertising,
trade show costs and travel expenses related to the sale and marketing of the
Company's systems. Sales and marketing expenses were $339,940 and $280,975 for
the three months ended September 30, 1997 and 1996, respectively, representing
an increase of 21%. Sales and marketing expenses were $1,081,002 and $909,035
for the nine months ended September 30, 1997 and 1996, respectively,
representing an increase of 19%. This increase was primarily due to increases in
personnel and payroll related expenses as the Company expanded its sales force
efforts and its product management team.

GENERAL AND ADMINISTRATIVE: General and administrative expenses include salaries
and expenses for corporate administration and finance, legal, insurance and
depreciation expenses. General and administrative expenses were $402,369 and
$356,290 for the three months ended September 30, 1997 and 1996, respectively,
representing an increase of 13%. General and administrative expenses were


<PAGE>



$1,088,235 and $1,237,284 for the nine months ended September 30, 1997 and 1996,
respectively, representing a decrease of 12%. This decrease was primarily a
result of costs incurred from placement and relocation of senior management
during the nine months ended September 30, 1996.

OTHER INCOME (EXPENSE), NET: Other income (expense), net is comprised of
interest income and expenses. Other income (expense), net was ($14,763) and
$10,467 for the three months ended September 30, 1997 and 1996, respectively,
representing a change of $25,230. This change was a result of increased interest
expense caused by additional borrowing on the line of credit. Other income
(expense), net was $16,088 and $48,565 for the nine months ended September 30,
1997 and 1996, respectively, representing a decrease of 67%. This decrease was a
result of decreased interest income caused by reduced cash balances and
investment amounts and an increase in interest expense during the nine months
ended September 30, 1997.

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

Since inception in 1987, the Company's primary source of funding for working
capital needs, capital expenditures, and its operating losses has been from the
sale of common and convertible preferred stock. During this time, the Company
completed numerous private placements, receiving approximately $7.8 million in
aggregate net proceeds. In 1995, the Company completed its initial public
offering, selling 1,300,000 shares of common stock at $5.00 per share for net
proceeds to the Company of approximately $5.5 million. Additionally, in
September 1996, PACE sold 900,000 shares of common stock at $3.25 per share for
net proceeds of approximately $2.8 million. In June 1997, the Company received
commitments for 1,142,856 shares of convertible preferred stock at $1.75 per
share representing total proceeds of approximately $2 million. As of September
30, 1997, the Company had received gross proceeds of $1,500,000 from those
commitments.

For the nine month periods ended September 30, 1997 and 1996, the Company
experienced net losses of $3,832,456 and $3,786,939 respectively, resulting in
net cash used in operations for each of the periods of $2,721,643 and $1,886,753
respectively. Net cash used in operations included $588,502 of purchased
research and development in the period ended September 30, 1997, and $1,270,835
of capitalized software write-off in the period ended September 30, 1996.

Accounts payable, customer deposits and accrued expenses increased $326,737 to
$1,499,896 at September 30, 1997 from $1,173,159 at December 31, 1996. This
increase was primarily due to an increase in customer deposits received by the
Company in advance of revenue recognition.

Accounts receivable increased $49,344 to $1,350,476 at September 30, 1997 from
$1,301,132 at December 31, 1996. Included in accounts receivable is accrued
revenue receivable which increased $113,279 to $937,921 at September 30, 1997
from $824,642 at December 31, 1996. The accrued revenue receivable consists
primarily of (a) revenue on site license agreements for which the Company has
delivered and installed the first of multiple copies of a software product to be
installed at various customer sites in exchange for a fixed fee and (b) revenue
on equipment delivered, but not yet billed. Under these site license agreements,
license fees are due at specified dates or, if earlier, upon the installation
and 


<PAGE>



system set-up at each site. The change in accounts receivable for the nine
months ended September 30, 1997 is due to increased accrued revenue receivable
on equipment delivered, but not yet billed according to the terms of the
contract.

Net cash used in investing activities for the nine months ended September 30,
1997 and 1996 was $700,815 and $572,502, respectively. Cash used in investing
activities was primarily for the purchase of computer and office equipment and
capitalized software costs. Additionally, on May 30, 1997, the Company used cash
in the amount of $50,000 as consideration in the asset purchase of HSS.

Net cash used in financing activities consisted primarily of repayment of
long-term obligations in the amount of $41,387, net proceeds from the sale of
preferred stock in the amount of $1,492,059, and net proceeds from the line of
credit in the amount of $450,000. At December 31, 1996, outstanding borrowings
on the line of credit was $500,000. During the nine months ended September 30,
1997, the Company reduced the outstanding line of credit balance to zero and
subsequently borrowed $950,000 under the line of credit.

The Company occupies approximately 12,260 square feet of office space at its
headquarters in West Des Moines, Iowa and approximately 1,200 square feet in
Charlotte, North Carolina. The lease for its headquarters in West Des Moines,
Iowa expires in May 1998. The lease in Charlotte, North Carolina expires in
August 1999. To better accommodate staffing requirements, the Company entered
into a lease agreement for 5,500 square feet in Huntersville, North Carolina.
This lease commenced on October 15, 1997 and will expire in October 1998.

As of September 30, 1997, the Company had a cash balance of $171,658. At that
date, the Company did not have material long-term obligations or commitments for
capital expenditures. In the third quarter of 1997, the Company increased its
revolving line of credit with a financial institution. The line of credit is
collateralized by substantially all assets of the Company and it expires
February 1998. Interest is payable at prime (8.25% as of September 30, 1997).
Outstanding borrowings totaled $950,000 at September 30, 1997.

The Company intends to continue its research and development activities and the
expansion of its sales efforts. To the extent possible, the Company will fund
such activities from borrowings under working capital generated by operations
and from its bank line of credit. However, the Company expects that additional
equity investments will be required, and it may from time to time engage in
private placement transactions with selected investors. As disclosed in the
Company's Form 8-K filed August 11, 1997, the Company is currently conducting a
private placement of up to an additional $5 million of convertible preferred
stock, ($7,000,000 in total proceeds) although there can be no assurance that
the offering will be successful.


<PAGE>



                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
          N/A

ITEM 2.  CHANGES IN SECURITIES
          N/A

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
         N/A

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

ITEM 5.  OTHER INFORMATION
         N/A

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
         (a)   Exhibits
                Exhibit  27      Financial Data Schedule

         (b)   Reports on Form 8-K
                None


<PAGE>



                                   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)

November 10,1997                           /s/ ROGER D. HUSEMAN
-------------------------    ---------------------------------------------------
         Dated                 Vice President of Finance and Administration
                                     and Chief Financial Officer