**UNITED
      STATES**


**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, 2007
            
            0-27554





**Conmed
      Healthcare Management, Inc** **.**


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




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




9375
                Chesapeake Street
              Suite
                203
              La
                Plata, MD 20646(Address
                and zip code of principal executive
                offices)






(301)
                609-8460(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




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




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 OutstandingClass
            November
                13, 2007Common
                Stock, $0.0001 par value per share
            11,943,141




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







**CONMED
      HEALTHCARE MANAGEMENT, INC.**





**TABLE
      OF CONTENTS**




**Page**ITEM
                  1. FINANCIAL STATEMENTS (UNAUDITED)Consolidated
                  Balance SheetsSeptember
                  30, 2007 and December 31, 2006
              1Consolidated
                  Statements of OperationsJanuary
                  26 to September 30, 2007, January 1 to January 25, 2007, the nine
                  months
                  ended September 30, 2006 and the three months ended September 30,
                  2007 and
                  2006
              2Consolidated
                  Statements of Cash FlowsJanuary
                  26 to September 30, 2007, January 1, 2007 to January 25, 2007 and
                  the nine
                  months ended September 30, 2006
              3Notes
                  to Consolidated Financial Statements
              5ITEM
                  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              20ITEM
                  3. CONTROLS AND PROCEDURES
              29
 
 **PART
        II.**  **OTHER
        INFORMATION**
  ITEM
                  1. LEGAL PROCEEDINGS
              30ITEM
                  2. UNREGISTERED SALES OF EQUITY SECURITIES
              30ITEM
                  3. DEFAULT UPON SENIOR SECURITIES
              30ITEM
                  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
              30ITEM
                  5. OTHER INFORMATION
              30ITEM
                  6. EXHIBITS
              30SIGNATURES
              31




i




**PART
      1. FINANCIAL INFORMATION**




ITEM
      1.FINANCIAL
      STATEMENTS





**CONMED
      HEALTHCARE MANAGEMENT, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**SUCCESSOR**
              
              
              **PREDECESSOR****September
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006****(unaudited)****ASSETS**CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              6,520,616
              
              $
              122,269Accounts
                  receivable
              
              
              2,121,141
              
              
              1,304,193Taxes
                  receivable
              
              
              85,000
              
              
              --Claims
                  against escrow
              
              
              370,283
              
              
              --Prepaid
                  expenses
              
              
              323,295
              
              
              226,629**Total
                  current assets**
              
              
              9,420,335
              
              
              1,653,091PROPERTY
                  AND EQUIPMENT, NET
              
              
              104,868
              
              
              45,861OTHER
                  ASSETSService
                  contracts acquired, net
              
              
              3,118,000
              
              
              --Non-compete
                  agreements, net
              
              
              816,000
              
              
              --Goodwill
              
              
              4,287,369
              
              
              --Deposits
              
              
              2,624
              
              
              2,424**Total
                  other assets**
              
              
              8,223,993
              
              
              2,424$
              17,749,196
              
              $
              1,701,376**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              1,350,354
              
              $
              580,507Accrued
                  expenses
              
              
              1,167,840
              
              
              987,979Deferred
                  revenue
              
              
              138,134
              
              
              103,673Notes
                  payable, current portion
              
              
              103,109
              
              
              7,326**Total
                  current liabilities**
              
              
              2,759,437
              
              
              1,679,485NOTES
                  PAYABLE, LONG-TERM
              
              
              7,429
              
              
              13,236SHAREHOLDERS’
                  EQUITYPreferred
                  stock no par value; authorized 5,000,000 shares; issued and outstanding
                  zero shares as of September 30, 2007
              
              
              --
              
              
              --Common
                  stock, $0.0001 par value, authorized 40,000,000 shares; issued
                  and
                  outstanding 11,943,141 shares as of September 30, 2007
              
              
              1,194
              
              
              300Additional
                  paid-in capital
              
              
              35,626,795
              
              
              --Retained
                  earnings (deficit)
              
              
              (20,645,659
              )
              
              8,355**Total
                  shareholders' equity**
              
              
              14,982,330
              
              
              8,655$
              17,749,196
              
              $
              1,701,376*See
                  Notes to Financial Statements*






Page
          - 1
          -


**CONMED
      HEALTHCARE MANAGEMENT, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS (UNAUDITED)** ****




**SUCCESSOR**
                **For
                  the 248-Day Period January****26,
                  2007 to September 30, 2007**
              
              **PREDECESSOR
                  For the 25-Day Period**
                **J****anuary
                  1,**
                **2007****to**
                **January
                  25, 2007**
              
              **PREDECESSOR
                  For the Nine Months Ended September 30, 2006**
              
              **SUCCESSOR
                  For the Three Months Ended September 30, 2006**
              
              **PREDECESSOR**
                **For
                  the Three Months Ended September 30, 2006****Service
                  Contract Revenue**
              
              $
              16,980,432
              
              $
              1,504,565
              
              $
              11,112,452
              
              $
              6,964,838
              
              $
              4,026,471HEALTHCARE
                  EXPENSES:Salaries,
                  wages and employee benefits
              
              
              8,640,886
              
              
              842,575
              
              
              5,376,098
              
              
              3,645,035
              
              
              1,907,662Medical
                  expenses
              
              
              4,530,430
              
              
              439,206
              
              
              3,197,157
              
              
              1,850,211
              
              
              1,019,595Other
                  operating expenses
              
              
              651,230
              
              
              45,552
              
              
              444,574
              
              
              239,545
              
              
              162,957**Total
                  healthcare expenses**
              
              
              13,822,546
              
              
              1,327,333
              
              
              9,017,829
              
              
              5,734,791
              
              
              3,090,214**Gross
                  Profit**
              
              
              3,157,886
              
              
              177,232
              
              
              2,094,623
              
              
              1,230,047
              
              
              936,257Selling
                  and administrative expenses
              
              
              3,150,816
              
              
              92,264
              
              
              1,708,717
              
              
              1,105,514
              
              
              602,981Depreciation
                  and amortization
              
              
              1,593,046
              
              
              1,698
              
              
              33,322
              
              
              521,394
              
              
              6,745**Total
                  operating expenses**
              
              
              4,743,862
              
              
              93,962
              
              
              1,742,039
              
              
              1,626,908
              
              
              609,726**Operating
                  income (loss)**
              
              
              (1,585,976
              )
              
              83,270
              
              
              352,584
              
              
              (396,861
              )
              
              326,531INTEREST
                  INCOME (EXPENSE)Interest
                  income
              
              
              228,628
              
              
              287
              
              
              4,599
              
              
              84,685
              
              
              2,120Interest
                  (expense)
              
              
              (3,638
              )
              
              (93
              )
              
              (6,721
              )
              
              (3,216
              )
              
              (274
              )**Total
                  interest income (expense)**
              
              
              224,990
              
              
              194
              
              
              (2,122
              )
              
              81,469
              
              
              1,846**Income
                  (loss) before income taxes**
              
              
              (1,360,986
              )
              
              83,464
              
              
              350,462
              
              
              (315,392
              )
              
              328,377Income
                  tax expense
              
              
              --
              
              
              --
              
              
              --
              
              
              291,000
              
              
              --**Net
                  income (loss)**
              
              $
              (1,360,986
              )
              $
              83,464
              
              $
              350,462
              
              $
              (606,392
              )
              
              328,377LOSS
                  PER COMMON SHAREBasic
                  and diluted
              
              $
              (0.14
              )
              
              
              
              
              
              
              $
              (0.05
              )WEIGHTED
                  AVERAGE SHARES OUTSTANDINGBasic
                  and diluted
              
              
              9,705,520
              
              
              
              
              
              
              
              
              11,937,489*See
                  Notes to Financial Statements*


Page
          - 2
          -




**CONMED
      HEALTH****CARE
      MANAGEMENT, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (UNAUDITED)**




**SUCCESSOR
                For the 248-Day Period**
              **January
                26,**
              **2007
                to September 30, 2007**
            
            **PREDECESSOR
                For the 25-Day Period January 1, 2007 to January 25,
                2007**
            
            **PREDECESSOR
                For the Nine Months Ended September 30, 2006**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income (loss)
            
            $
            (1,360,986
            )
            $
            83,464
            
            $
            350,462Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activitiesDepreciation
            
            
            27,046
            
            
            1,698
            
            
            33,322Amortization
            
            
            1,566,000
            
            
            --
            
            
            --Stock
                based compensation
            
            
            423,370
            
            
            --
            
            
            --Changes
                in working capital components(Increase)
                decrease in accounts receivable
            
            
            (1,011,502
            )
            
            197,327
            
            
            (683,377
            )(Increase)
                in taxes receivable
              (Increase)
                in claims against escrow
            
            
            (85,000
              (370,283
            )
              )
            
            --
              --
            
            
            --
              --(Increase)
                decrease in prepaid expenses
            
            
            71,924
            
            
            30,687
            
            
            (50,164
            )(Increase)
                in deposits
            
            
            (200
            )
            
            --
            
            
            --Increase
                in accounts payable
            
            
            97,292
            
            
            258,562
            
            
            526,489Increase
                (decrease) in accrued expenses
            
            
            987,664
            
            
            (469,320
            )
            
            302,809Increase
                (decrease) in deferred revenue
            
            
            63,616
            
            
            (29,155
            )
            
            (21,617
            )**Net
                cash provided by operating activities**
            
            
            408,941
            
            
            73,263
            
            
            457,924CASH
                FLOWS FROM INVESTING ACTIVITIESPurchase
                of property and equipment
            
            
            (87,751
            )
            
            --
            
            
            (20,086
            )Proceeds
                received from sale of property and equipment
            
            
            --
            
            
            --
            
            
            63,656Acquisition
                of Conmed, Inc., net of cash acquired
            
            
            (7,675,097
            )
            
            --
            
            
            --**Net
                cash provided by (used in) investing activities**
            
            
            (7,762,848
            )
            
            --
            
            
            43,570CASH
                FLOWS FROM FINANCING ACTIVITIESBorrowings
                on line of credit
            
            
            --
            
            
            --
            
            
            550,000Short-term
                borrowings
            
            
            289,368
            
            
            --
            
            
            --Payments
                on line of credit
            
            
            --
            
            
            --
            
            
            (550,000
            )Payments
                in loans payable
            
            
            (198,799
            )
            
            (594
            )
            
            (49,490
            )Net
                proceeds from Private Placement
            
            
            13,085,649
            
            
            --
            
            
            --Proceeds
                from exercise of warrants
            
            
            36,000
            
            
            --
            
            
            --Distributions
                to shareholders
            
            
            --
            
            
            --
            
            
            (375,000
            )**Net
                cash provided by (used in) financing activities**
            
            
            13,212,218
            
            
            (594
            )
            
            (424,490
            )**Net
                increase in cash and cash equivalents**
            
            
            5,858,311
            
            
            72,669
            
            
            77,004CASH
                AND CASH EQUIVALENTSBeginning
            
            
            662,305
            
            
            122,269
            
            
            487,029Ending
            
            $
            6,520,616
            
            $
            194,938
            
            $
            564,033


Page
          - 3
          -




**CONMED
      HEALTHCARE MANAGEMENT, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (UNAUDITED)**





**SUCCESSOR
                For the 248-Day Period**
              **January
                26,**
              **2007
                to September 30, 2007**
            
            **PREDECESSOR
                For the 25-Day Period**
              **January
                1,**
              **2007
                to January 25, 2007**
            
            **PREDECESSOR
                For the Nine Months Ended September 30, 2006**NON-CASH
                INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:Escrow
                payments on Acquisition in prior periods
            
            $
            500,000
            
            $
            --
            
            $
            --Acquisition
                expenses paid in prior periods
            
            
            239,935
            
            
            --
            
            
            --Private
                Placement expenses paid in prior periods
            
            
            148,652
            
            
            --
            
            
            --$
            888,587
            
            $
            --
            
            $
            --SUPPLEMENTAL
                DISCLOUSURE OF CASH FLOW INFORMATIONCash
                payments for interest
            
            $
            3,638
            
            $
            93
            
            $
            6,721Income
                taxes paid
            
            $
            85,000
            
            $
            --
            
            $
            --





*See
      Notes to Financial Statements*


Page
          - 4
          -


Conmed Healthcare Management,
      Inc.


Notes to Financial Statements




NOTE
      1.Nature
      of
      Business




*Nature
      of business:*


Prior
      to
      January 26, 2007, the Company formerly known as Pace Health Management Systems,
      Inc. traded under the symbol “PCES”, was classified as a public shell, had no
      ongoing operations, minimal operating expenses and no employees.





On
      January 26, 2007 the Company acquired Conmed, Inc. (“Conmed, Inc.”) a provider
      of correctional healthcare services (the “Acquisition”). Conmed, Inc. was formed
      as a corporation on June 10, 1987 in the State of Maryland for the purpose
      of
      providing healthcare services exclusively to county detention centers located
      in
      Maryland. As Conmed, Inc. developed, it accepted more contracts for additional
      services including pharmacy and out-of-facility healthcare expenses. In 2000,
      Conmed, Inc. served more than 50% of the county detention healthcare services
      market in Maryland. In 2003, Conmed, Inc. elected to seek contracts outside
      of
      Maryland and by the end of 2006, it had secured contracts in Kansas, Virginia
      and Washington. For the fiscal year ended December 31, 2006, Conmed, Inc had
      net
      revenues from medical services provided to correctional institutions of
      $16,776,724.





As
      a
      result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the
      Company and the business of Conmed, Inc. is now our primary business. As of
      September 30, 2007, we were in contract with, and providing services to, 21
      detention centers and facilities at the county level throughout the United
      States.





On
      March
      13, 2007, the Company changed its name to Conmed Healthcare Management,
      Inc.




*Stock
      Purchase Agreement*


On
      August
      2, 2006, the Company entered into a Stock Purchase Agreement (“Agreement”) with
      Conmed, Inc., a Maryland corporation and all of the stockholders of Conmed,
      Inc., (the “Conmed, Inc. Stockholders”), pursuant to which the Company agreed to
      purchase all the issued and outstanding capital stock of Conmed, Inc. from
      the
      Conmed, Inc. Stockholders. The Company previously reported the execution of
      the
      Agreement in a Form 8-K filed on August 8, 2006, and its extension in a Form
      8-K
      filed on January 17, 2007.





The
      Company paid to Conmed, Inc., a non-refundable cash deposit of $250,000 upon
      execution of the Agreement, which was released to the Conmed, Inc. Stockholders
      upon expiration of the original agreement on October 31, 2006. Thereafter,
      an
      amendment to the Agreement was executed on January 12, 2007 to extend the
      closing date to January 31, 2007. As a result of such extension, and upon
      execution of such amendment, the Company paid to Conmed, Inc. an additional
      non-refundable cash deposit of $250,000 (the “Additional Cash Deposit”), which
      was deducted from the $8,000,000 cash payment paid to the Conmed, Inc.
      Stockholders at the closing of the Acquisition.





On
      January 26, 2007 the Acquisition was completed and under the terms of the
      Agreement, the Company paid to the Conmed, Inc. Stockholders consideration
      consisting of: (i) $8,000,000 in cash, minus the Additional Cash Deposit and
      an
      adjustment of $80,299 representing a shortfall in the minimum equity requirement
      of Conmed, Inc. and (ii) 8,000 shares of the Company’s Series C Convertible
      Preferred Stock, which was subsequently converted into 800,000 shares of Company
      common stock effective March 14, 2007.





The
      amounts shown in the Consolidating Statements of Operations and Cash Flows
      for
      the three and nine months ended September 30, 2006 and the 25-day period from
      January 1, 2007 to January 25, 2007 are all Conmed Inc. pre-Acquisition amounts
      and hence are designated as PREDECESSOR amounts. The amounts for the 248-Day
      period from January 26, 2007 to September 30, 2007 and the three month period
      ended September 30, 2007 are after the Acquisition and reflect the combined
      activities of the Company and Conmed, Inc. from the date of Acquisition and,
      as
      a result, these amounts are designated as SUCCESSOR amounts. The September
      30,
      2007 Consolidated Balance Sheet includes the consolidated amounts of the Company
      and Conmed Inc. as of that date and, as a result, are designated as SUCCESSOR
      amounts. The comparative balance sheet amounts as of December 31, 2006 are
      for
      Conmed Inc. pre-Acquisition and are designated as PREDECESSOR amounts.




Page
          - 5
          -




Conmed
      Healthcare Management,
      Inc. Notes
        to Financial Statements


*Private
      Placement*


On
      January 26, 2007, in a transaction which closed simultaneously with the
      Acquisition, the Company completed a private placement (“Private Placement”) of
      $15,000,000 of units consisting of Series B Convertible Preferred Stock and
      warrants, of which approximately $8,000,000 was paid directly to the Conmed,
      Inc. Stockholders as consideration for the Acquisition.





In
      connection with the Private Placement, the Company sold to certain “accredited
      investors” 150
      units, each unit consisting of (i) 100 shares of its Series B Convertible
      Preferred Stock (“Series B Preferred Stock”), (ii) a common stock purchase
      warrant entitling the holder to purchase up to 10,000 shares of its common
      stock
      at an exercise price equal to $0.30 per share and (iii) a common stock purchase
      warrant entitling the holder to purchase up to 3,333 shares of its common stock
      at an exercise price equal to $2.50 per share (the “Units”), in a private
      offering pursuant to exemption from registration under Section 4(2) of the
      Securities Act of 1933, as amended and Rule 506 of Regulation D promulgated
      thereunder. Each Unit was sold for $100,000, for an aggregate purchase price
      of
      $15,000,000. The proceeds from the sale of the Units were used to purchase
      all
      the issued and outstanding capital stock of Conmed, Inc. and to provide working
      capital following such purchase.The fair
      value of the 1,500,000 and 500,000 warrants issued using the Black Scholes
      pricing model was $2,628,847 and $289,554, respectively




In
      connection with the sale of the Units, the Company retained Maxim Group LLC,
      a
      NASD member broker-dealer as its exclusive placement agent (the “Placement
      Agent”). The Placement Agent received the following compensation: (i) a cash fee
      of 10% of the gross proceeds (an aggregate of $1,500,000) and (ii) a warrant
      to
      purchase 5% of the common stock issuable upon conversion of the Units, at an
      exercise price equal to $2.75 per share of common stock (an aggregate of 300,000
      shares). In addition, the Company reimbursed the Placement Agent for its
      accountable expenses in the amount of $50,000, as well as filing fees associated
      with Blue Sky filings, in the amount of $5,000. The fair value of the 300,000
      warrants issued using the Black Scholes pricing model was $154,940.





*Plan
      of Recapitalization*


On
      March
      13, 2007, at a special shareholders meeting, the shareholders of the Company
      approved a Plan of Recapitalization the (“Plan”) and implemented the following
      effective as of the close of business on March 14, 2007:





o
            Reincorporate
                the Company in the state of Delaware.The
                Company created a subsidiary (the “Merger Sub”) under the laws of the
                State of Delaware and merged the Company into the Merger Sub. All
                of the
                liabilities and assets of the Company existing prior to the
                reincorporation were transferred, assumed and assigned to the Delaware
                entity. The certificate of incorporation and bylaws of the Delaware
                entity
                became the Company’s new Certificate of Incorporation and Bylaws, and
                reflect the Plan.





o
            Change
                in name.Changed the name of the Company from Pace Health Management Systems,
                Inc.
                to Conmed Healthcare Management,
                Inc.





o
            Reverse
                Stock Split.
                Enacted a reverse stock split on a 1 for 20 basis; thereby reducing
                the
                number of outstanding shares to 415,830 shares of common stock from
                the
                8,316,074 shares of common stock outstanding at that
                time.





o
            Change
                in authorized shares.Increased the number of authorized common shares to
                40,000,000.





o
            Conversion
                of Series A Preferred Stock.
                Converted the Series A Preferred Stock (and the waiver of all accrued
                and
                unpaid dividends and liquidation rights on the Series A Preferred
                Stock
                after conversion of 50% of such accrued and unpaid dividends into
                shares
                of common stock) into 4,584,196 shares of common stock on a post
                reverse
                split basis.




Page
          - 6
          -




Conmed
      Healthcare Management,
      Inc. Notes to Financial Statements


As
      a
      result of the approval of the Plan by the Company’s shareholders, in addition to
      the conversion of Series A Preferred Stock, the 15,000 shares of Series B
      Preferred Stock and the 8,000 shares of Series C Preferred Stock converted
      into
      6,000,000 and 800,000 shares of common stock, respectively, after giving effect
      to the reverse stock split. As a result of the reverse split and the conversion
      of all the outstanding preferred stock, the total number of shares of Conmed
      common stock outstanding was approximately 11,800,000 and no preferred shares
      remained outstanding.


.


A
      certificate of merger and articles of merger were filed with the Secretary
      of
      State of the States of Delaware and Iowa, respectively, on March 13, 2007,
      and
      each became effective as of the close of business on March 14,
      2007.





*Reclassifications* **


Certain
      reclassifications have been made to the PREDECESSOR and SUCESSOR amounts to
      conform with the current presentation of the operating statement.




NOTE
      2.Significant
      Accounting Policies




The
      accompanying unaudited consolidated financial statements contained herein have
      been prepared pursuant to the rules and regulations of the Securities and
      Exchange Commission for interim reporting requirements of Form 10-QSB and Item
      310(b) of Regulation S-B. Accordingly, the financial information and disclosures
      normally included in financial statements prepared annually in accordance with
      Generally Accepted Accounting Principals (“GAAP”) in the United States of
      America have been condensed or omitted. Readers of this report should,
      therefore, refer to the consolidated financial statements and notes included
      in
      our Annual Report of Form 10-KSB for the year ended December 31, 2006, filed
      with the Securities and Exchange Commission on April 2, 2007.





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 248-day period ended September 30, 2007
      are not necessarily indicative of the results or operations to be expected
      for a
      full year.





A
      summary
      of the Company's significant accounting policies are as follows:





*Accounting
      estimates and assumption* s


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. The Company’s methods of revenue recognition from
      contracts are based primarily on estimates as are accrued expenses. Actual
      results could differ from those estimates.





*Acquisition*


The
      Acquisition was recorded based on Financial Accounting Standards Board (“FASB”)
      Statement No. 141, (“FAS 141”) *Business
      Combinations* ,
      using
      the purchase method. Under purchase accounting, assets acquired should be stated
      on the financial statements at “fair value” (see definition in Standard of Value
      section below). FAS 141 requires that intangible assets be recognized as assets
      apart from goodwill if they meet one of two criteria, (1) the contractual-legal
      criterion, or (2) the separability criterion. FAS 141 also requires disclosure
      of the primary reasons for business combination and the allocation of the
      purchase price paid to the assets acquired and the liabilities assumed by major
      balance sheet caption.




Page
          - 7
          -




Conmed
      Healthcare Management,
      Inc. Notes
        to Financial Statements


The
      Company employed an independent valuation firm to assist management in the
      identification of the intangible assets acquired and in estimating the fair
      value of those assets. Estimates of the fair value of the identifiable
      intangible assets acquired in the Acquisition as of January 26, 2007, are as
      follows:





**Asset**
            
            **Fair
                Value**Service
                contracts acquired
            
            $
            4,500,000Non-compete
                agreements
            
            
            1,000,000Goodwill
            
            
            4,287,369**Total**
            
            $
            9,787,369





*Service
      Contracts Acquired*


There
      are
      material costs in obtaining a customer list, especially customers with recurring
      revenue streams. As part of the Acquisition, the Company has gained access
      to
      Conmed, Inc.’s customers, thereby avoiding the cost of obtaining them directly.
      The value of the contract list is represented by the future revenue streams
      from
      existing contracts. Therefore, the Income Approach is the most applicable fair
      value measurement approach to value this asset. The operating income streams
      of
      the service contracts were calculated based on net present value of estimated
      earnings at an interest rate of 20%. Operating income streams were estimated
      on
      a contract by contract basis and an overall cost factor was used to estimate
      management expenses. Total future contracted operating income totaled
      $6,083,000. After discounting for the time value of money using a 20% rate,
      the
      net present value of future revenues is $4,500,000. Service contracts acquired
      are amortized over the life of each individual contract ranging approximately
      from one to four years.





The
      following table details the projected amortization of service contracts for
      the
      next five years:





**For
                the Twelve Months**
              **Ended
                December 31,**
            
            **Amortization**2007
            
            $
            1,801,0002008
            
            
            1,459,0002009
            
            
            869,0002010
            
            
            277,0002011
            
            
            94,000$
            4,500,000





Accumulated
      amortization of service contracts as of September 30, 2007 and December 31,
      2006
      was $1,382,000 and zero, respectively.





*Non-Compete
      Agreements*


Non-compete
      agreements were acquired as part of the Agreement with Conmed, Inc. Key
      considerations in estimating the value of such agreements include consideration
      of the potential losses resulting from such competition, the enforceability
      of
      the terms of the agreement, and the likelihood of competition in the absence
      of
      the agreement. Given the potential loss from competition and the probability
      of
      competition, $1,000,000 was identified to allocate to these agreements.
      Non-compete agreements are amortized over the lives of the agreements,
      approximately three to four years.




Page
          - 8
          -




Conmed
      Healthcare Management,
      Inc. Notes to Financial Statements


The
      following table details the projected amortization of non-compete agreements
      for
      the next four years:





**For
                the Twelve Months**
              **Ended
                December 31,**
            
            **Amortization**2007
            
            $
            251,0002008
            
            
            268,0002009
            
            
            269,0002010
            
            
            200,0002011
            
            
            12,000$
            1,000,000





Accumulated
      amortization of non-compete agreements as of September 30, 2007 and December
      31,
      2006 was $184,000 and zero, respectively.





*Goodwill:*


The
      Company records as goodwill the excess of purchase price over the fair value
      of
      the identifiable net assets acquired. Statement of Financial Accounting
      Standards (“SFAS”) No. 142, *Goodwill
      and Other Intangible Assets* (“SFAS
      142”), prescribes a two-step process for impairment testing of goodwill, which
      is performed annually, as well as when an event triggering impairment may have
      occurred. The first step tests for impairment, while the second step, if
      necessary, measures the impairment. Since creation of the goodwill there have
      been no indicators of impairment. The
      Company has elected to perform its annual analysis during the fourth quarter
      of
      each fiscal year.





*Cash
      and cash equivalents*


The
      Company considers all highly liquid debt instruments purchased with a maturity
      of three months or less to be cash equivalents. At September 30, 2007 and
      December 31, 2006, cash equivalents consisted of an interest-bearing money
      market account and a certificate of deposit at a commercial bank.





*Concentration
      of credit risk*


The
      Company maintains cash in bank deposit accounts that at times may exceed
      federally insured limits. The Company has not experienced any losses in such
      accounts.





*Fair
      value of financial instruments*


Financial
      instruments include cash, receivables, accounts payable, accrued expenses,
      deferred revenue and long-term debt. Management believes the fair value of
      each
      of these instruments approximates their carrying value in the balance sheet
      as
      of the balance sheet date. The fair value of current assets and current
      liabilities is estimated to approximate carrying value due to the short-term
      nature of these instruments. The fair value of the long-term debt is estimated
      based on anticipated interest rates which management believes would currently
      be
      available to the Company for similar issues of debt, taking into account the
      current credit risk of the Company and the other market factors.





*Principles
      of consolidation:*


The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiary, Conmed, Inc. All significant intercompany balances
      and
      transactions have been eliminated in consolidation.





*Revenue
      recognition*


Conmed’s
      principal source of revenue is contracts to provide medical assistance to state
      and local correctional facilities. Deferred revenue represents amounts that
      may
      be billed in advance of delivery under these contracts.





Most
      of
      the Company’s contracts call for a fixed monthly fee. In addition, most
      contracts have incremental charges based on the average daily population (“ADP”)
      of the correctional facility or a contractual fee adjustment based on the ADP.
      Revenues from contracts are recognized ratably for fixed fees, or monthly for
      contracts with variable charges based on ADP. The Company has one contract
      that
      partially operates on cost plus basis. The timing of each payment varies per
      contract. Credit terms are not more than 30 days from the date of invoice.




Page
          - 9
          -




Conmed
      Healthcare Management,
      Inc. Notes to Financial Statements


Certain
      contracts include “stop/loss” limits, which create a ceiling to our financial
      responsibility for an individual inmate’s care or a maximum amount in the
      aggregate for certain categories of medical expenses, whereby the Company is
      protected from catastrophic medical losses. In circumstances where a stop/loss
      is reached, the Company is reimbursed for any costs incurred over the
      predetermined stop/loss amount. Any reimbursement received by the Company is
      recorded as revenue. During the 248-day period ended September 30, 2007, the
      25-day period ended January 25, 2007, and the nine-month period ended September
      30, 2006 the Company received stop/loss reimbursements of approximately
      $276,000, $15,000 and $69,000, respectively, which were included in revenue
      and
      during the three months ended September 30, 2007 and 2006 the Company received
      stop/loss reimbursements of approximately $113,000, and $69,000,
      respectively.





*Accounts
      receivables*


Receivables
      are carried at original invoice amount less payment received and an estimate
      made for doubtful receivables based on a review of all outstanding amounts
      on a
      monthly basis. Receivables are generally considered past due 30 days after
      invoice date. Management determines the allowance for doubtful amounts by
      regularly evaluating individual receivables and considering a creditor’s
      financial condition, credit history and current economic conditions. Receivables
      are written off when deemed uncollectible. Recoveries of receivables previously
      written off are recorded when received. As of September 30, 2007 and December
      31, 2006, there was no allowance for doubtful receivables. Bad debt expense
      was
      none for the 248-day period ended September 30, 2007, the 25-day period ended
      January 25, 2007, the nine months ended September 30, 2006 and the three months
      ended September 30, 2007 and 2006.





*Property
      and equipment*


Property
      and equipment are recorded at cost. Depreciation is provided using the
      straight-line and accelerated methods of depreciation over the estimated useful
      lives of three to seven years. It is the policy of the Company to capitalize
      purchases of equipment and fixtures that benefit future periods. Repairs and
      maintenance costs are expensed when incurred.





*Stock
      compensation*


Effective
      January 1, 2006, the Company adopted SFAS No. 123(R), *Shared-Based
      Payments* (“SFAS
      123R”), using the modified prospective transition method. Prior to that date the
      Company accounted for stock option awards under Accounting Principles Board
      Opinion No. 25. In accordance with SFAS 123R, compensation expense for
      stock-based awards is recorded over the vesting period at the fair value of
      the
      award at the time of grant. The recording of such compensation began on January
      1, 2006 for shares not yet vested as of that date and for all new grants
      subsequent to that date. At December 31, 2006 all stock options were either
      exercised or expired. The exercise price of options granted under the Company’s
      incentive plans is equal to the fair market value of the underlying stock at
      the
      grant date. The Company assumes no projected forfeitures on its stock-based
      compensation, since actual historical forfeiture rates on its stock-based
      incentive awards have been negligible.





*Income
      taxes*


Deferred
      taxes are provided on a liability method whereby deferred tax assets are
      recognized for deductible temporary differences and operating loss carryforwards
      and deferred tax liabilities are recognized for taxable temporary differences.
      Temporary differences are the differences between the reported amounts of assets
      and liabilities and their tax basis. Deferred tax assets are reduced by a
      valuation allowance when, in the opinion of management, it is more likely than
      not that some portion or all of the deferred tax assets will not be realized.





*Basic
      and diluted loss per share*


The
      Company has adopted SFAS No. 128, Earnings per Share (“SFAS 128”), 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).




Page
          - 10
          -




Conmed
      Healthcare Management,
      Inc. Notes
        to Financial Statements


*Recently
      adopted accounting standards:*


The
      Company adopted the provisions of FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN
      48”) ,
      effective January 1, 2007 *.* The Interpretation provides clarification on accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with FASB SFAS No. 109, *Accounting
      for Income Taxes.* The Interpretation prescribes a recognition threshold and measurement attribute
      for the financial statement recognition and measurement of a tax position taken
      or expected to be taken in a tax return. As a result of the Company’s evaluation
      of the implementation of FIN 48, no significant income tax uncertainties were
      identified. Therefore, the Company recognized no adjustment for unrecognized
      income tax benefits during the nine months ended September 30, 2007. Corporate
      tax returns for the years 2004 through 2006 remain open to examination by taxing
      authorities.





*New
      Accounting Pronouncements*


In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* .
      This
      statement defines fair value, establishes a framework for measuring fair value,
      and expands disclosures about fair value measurements. It clarifies that fair
      value is the price that would be received to sell an asset or paid to transfer
      a
      liability in an orderly transaction between market participants in the market
      in
      which the reporting entity transacts. This statement does not require any new
      fair value measurements, but rather, it provides enhanced guidance to other
      pronouncements that require or permit assets or liabilities to be measured
      at
      fair value. This statement is effective for fiscal years beginning after
      November 15, 2007, with earlier adoption permitted. The Company is currently
      evaluating the impact that the adoption of this statement will have on its
      financial position, results of operations and cash flows.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment of FASB Statement No. 115* (“SFAS
      159”) *,* which
      provides all entities, including not-for-profit organizations, with an option
      to
      report selected financial assets and liabilities at fair value. The objective
      of
      the Statement is to improve financial reporting by providing entities with
      the
      opportunity to mitigate volatility in earnings caused by measuring related
      assets and liabilities differently without having to apply the complex
      provisions of hedge accounting. Certain specified items are eligible for the
      irrevocable fair value measurement option as established by SFAS 159. SFAS
      159
      is effective as of the beginning of an entity’s first fiscal year beginning
      after November 15, 2007. Early adoption is permitted as of the beginning of
      a
      fiscal year that begins on or before November 15, 2007 provided the entity
      also
      elects to apply the provisions of SFAS 157. The Company is currently evaluating
      the impact that the adoption of this statement will have on its financial
      position, results of operations and cash flows.





*Presentation
      of share and per share information*


All
      common stock shares and per share information has been adjusted to reflect
      the 1
      for 20 reverse stock split effective on March 14, 2007.




**NOTE
      3.**  **Business
      Combination**




The
      Acquisition was recorded using purchase accounting in accordance with FAS 141.
      The cost of Conmed, Inc. to the consolidated assets and liabilities of the
      Company is based on their fair value as of that date. The fair value of Conmed,
      Inc.’s intangible assets was determined by valuations performed by an
      independent appraiser. The purchase price exceeded the fair value of Conmed,
      Inc.’s net assets acquired with the excess amount recorded as goodwill. The
      purchase price allocation has not been finalized and will be adjusted over
      the
      year as final information becomes known.





The
      purchase price, including related acquisition costs, totaled $10,217,971. This
      purchase was financed with funds obtained in the Private Placement discussed
      in
      Note 4.




Page
          - 11
          -




Conmed
      Healthcare Management,
      Inc. Notes
        to Financial Statements




The
      following table details the net assets of Conmed, Inc., acquired:





**Conmed,
                Inc, net assets acquired**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            194,938Accounts
                receivable
            
            
            1,106,866Prepaid
                expenses
            
            
            195,943**Total
                current assets**
            
            
            1,497,747PROPERTY
                AND EQUIPMENT, NET
            
            
            44,163OTHER
                ASSETSService
                contracts acquired
            
            
            4,500,000Non-compete
                agreements acquired
            
            
            1,000,000Deposits
            
            
            2,424**Total
                other assets**
            
            
            5,502,424**Total
                assets**
            
            
            7,044,334CURRENT
                LIABILITIESAccounts
                payable
            
            
            839,070Accrued
                expenses
            
            
            180,176Deferred
                revenue
            
            
            74,518Notes
                payable, current portion
            
            
            7,362**Total
                current liabilities**
            
            
            1,101,126NOTES
                PAYABLE, LONG-TERM
            
            
            12,606**Total
                liabilities**
            
            
            1,113,732**Conmed,
                Inc. net assets acquired**
            
            
            5,930,602**Goodwill**
            
            $
            4,287,369





The
      following table details the purchase price of Conmed, Inc:





**Conmed,
                Inc. purchase price**Cash
                purchase price
            
            $
            8,000,000Equity
                adjustment at closing
            
            
            30,602Escrow
                deposit forfeited
            
            
            250,000Deal
                expenses
            
            
            329,369Less:
                Conmed, Inc. cash acquired
            
            
            (194,938
            )**Net,
                cash purchase price**
            
            
            8,415,033Addback:
                Conmed, Inc. cash acquired
            
            
            194,938Common
                stock issued to Conmed, Inc.’s shareholders
            
            
            1,608,000**Total
                purchase price**
            
            $
            10,217,971





The
      goodwill amount includes the original escrow deposit of $250,000 which was
      forfeited when the Acquisition did not close by October 31, 2006, an estimated
      $329,369 in third party acquisition costs, and 800,000 shares of common stock
      valued at $1,608,000 at the time of the closing of the Acquisition. An equity
      adjustment of $30,602 at the time of closing resulting from the minimum
      contractual equity requirement of $400,000 at the time closing. In addition,
      as
      of September 30, 2007 the Company had identified $333,373 in projected
      adjustments to the closing financial statements. This amount has been recorded
      as an asset on the balance sheet as a claim against the common stock in the
      escrow account that was established at the time of closing as an offset against
      certain future adjustments to the purchase price as determined at closing.
      Any
      adjustment to the purchase price will be made by a cancellation of common
      shares.




Page
          - 12
          -




Conmed
      Healthcare Management,
      Inc.


Notes
      to Financial
      Statements




During
      the three months ended September 30, 2007, the Company became aware that the
      former shareholders of ConMed were going to file an IRS 338 (h) (10) election
      to
      treat the sale as an asset purchase for tax purposes. This election creates
      additional tax basis in the intangible assets; accordingly the original deferred
      tax liability of $1,458,000 recorded was reversed against goodwill during the
      three months ended September 30, 2007, in addition, as of September 30, 2007,
      the purchase price allocation had not yet been finalized due to certain other
      final information which was not yet available. When the final amounts are
      determined in 2007, goodwill and other balances will be adjusted
      accordingly.




**NOTE
      4.**  **Private
      Placement**




The
      following table details the net cash received from the Private Placement after
      the payment of fees and related expenses.





**Acquisition
                financed by:**Cash
                received from sale of preferred stock
            
            $
            15,000,000Deal
                costs and expenses
            
            
            (2,217,943
            )Net
                proceeds from sales of preferred stock
            
            
            12,782,057Add-back
                non-cash banker warrant expense
            
            
            154,940Net
                cash received from sale of securities
            
            $
            12,936,997




**NOTE
      5.**  **Changes
      in Equity**




The
      following table details the changes in the Company’s shares outstanding from
      December 31, 2006 to September 30, 2007 as a result of the consummation of
      the
      Acquisition and the Plan of Recapitalization:





**Preferred
                Stock**
            
            **Common
                Stock**Balance
                at December 31, 2006
            
            
            2,875,000
            
            
            285,830
                (1
            )Conversion
                of 50% of Series A preferred stock accrued dividends
            
            
            --
            
            
            130,000
                (1
            )Issuance
                of Series B redeemable convertible preferred stock and warrants,
                net of
                costs
            
            
            15,000
            
            
            --Issuance
                of Series C convertible preferred stock, net of costs
            
            
            8,000
            
            
            --Conversion
                of Series A convertible preferred stock
            
            
            (2,875,000
            )
            
            4,584,196Conversion
                of Series B convertible preferred stock
            
            
            (15,000
            )
            
            6,000,000Conversion
                of Series C convertible preferred stock
            
            
            (8,000
            )
            
            800,000Issuance
                of common shares following the exercise of warrants
            
            
            --
            
            
            143,115Balance
                at September 30, 2007
            
            
            --
            
            
            11,943,141


*(1)
      As adjusted for the 1 for 20 reverse stock split*




**NOTE
      6.**  **Common
      Stock Warrants and Options**




*Common
      stock warrants*





Existing
      Warrants @ $0.30 per share


On
      October 24, 2005, Pace issued 37,500 warrants to purchase common stock, as
      adjusted for the 1 for 20 reverse stock split. Of these warrants, 30,000 were
      issued to John Pappajohn, Pace’s sole director and acting chairman, and the
      remaining 7,500 warrants were issued to his designees. The warrants were issued
      as compensation for past services rendered and all warrants were immediately
      vested. The warrants had an exercise price of $10.00, which exceeded the market
      price of Pace’s common stock at the time of issuance. The value of the warrants
      was separately estimated at $0.20 per share or $10,000 based on the
      Black-Scholes valuation of the call option associated with a five year warrant.
      As part of the Private Placement, Mr. Pappajohn relinquished the 30,000 warrants
      that were issued to him, and the remaining 7,500 warrants issued to his
      designees were adjusted to 250,000 warrants (post-Plan of Recapitalization)
      to
      purchase common stock exercisable at $0.30 per share, expiring October 23,
      2010.




Page
          - 13
          -




Conmed
      Healthcare Management,
      Inc. Notes to Financial Statements


During
      the 248-day period ended September 30, 2007, 25,000 warrants were exercised
      using the cashless exercise function and as a result 23,115 shares of common
      stock were issued. As of September 30, 2007, 225,000 warrants remain
      outstanding.





Investor
      Warrants @ $0.30 per share


In
      connection with the Private Placement, each investor received a warrant to
      purchase up to a number of shares of common stock equal to 25% of such
      investor’s subscription amount divided by the conversion price of the Series B
      Preferred Stock, with an exercise price equal to $0.30. As a result, the Company
      issued to investors warrants to purchase an aggregate of 1,500,000 shares of
      common stock, exercisable at $0.30 per share, expiring March 13,
      2012.





During
      the 248-day period ended September 30, 2007, 120,000 warrants were exercised
      generating net proceeds of $36,000. As of September 30, 2007, 1,380,000 warrants
      remain outstanding.





Investor
      Warrants @ $2.50 per share


In
      connection with the Private Placement, each investor received a warrant to
      purchase up to a number of shares of common stock equal to 8.3% of such
      investor’s subscription amount divided by the conversion price of the Series B
      Preferred Stock, with an exercise price equal to $2.50 per share. As a result,
      the Company issued to investors warrants to purchase an aggregate of 500,000
      shares of common stock, exercisable at $2.50 per share, expiring March 13,
      2012.





As
      of
      September 30, 2007, no warrants have been exercised and 500,000 warrants remain
      outstanding.





Placement
      Agent Warrants @ $2.75 per share


In
      connection with the Private Placement, the Company issued to the Maxim Group
      LLC, a warrant to purchase 300,000 shares of common stock, or 5% of the common
      stock issuable upon conversion of the Series B Preferred Stock, at an exercise
      price equal to $2.75 per share and expiring January 26, 2012.





As
      of
      September 30, 2007, no warrants have been exercised and 300,000 warrants remain
      outstanding.





Summary


As
      of
      September 30, 2007, the Company has outstanding warrants to purchase an
      aggregate of 2,405,000 shares of common stock at an average exercise price
      of
      $1.06 and has reserved shares of its common stock for issuance in connection
      with the potential exercise thereof. During the 248-day period ended September
      30, 2007, 145,000 warrants were exercised resulting in the issuance of 143,115
      common shares of stock and generating net proceeds of $36,000.





*Common
      stock options*


The
      Board
      of Directors has adopted, and the Company’s stockholders have approved, the 2007
      Stock Option Plan (the “2007 Plan”). The 2007 Plan provides for the grant of
      1,600,000 (post Plan of Recapitalization) incentive stock options, nonqualified
      stock options, restricted stock, stock bonuses and stock appreciation rights.
      The 2007 Plan is administered by 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.




Page
          - 14
          -




Conmed
      Healthcare Management,
      Inc. Notes
        to Financial Statements


The
      table
      below reflects option activity for the period indicated:





**Number
                of Shares**
            
            **Weighted
                Average Exercise Price per Share**
            
            **Weighted
                Average Remaining Contractual Term (Years)**
            
            **Aggregate
                Intrinsic Value**Outstanding,
                December 31, 2006
            
            
            --
            
            
            --
            
            
            --
            
            
            --Granted
            
            
            1,737,000
            
            $
            2.15Forfeited
            
            
            (138,333
            )
            
            2.01Exercised
            
            
            --
            
            
            --Outstanding,
                September 30, 2007
            
            
            1,598,667
            
            $
            2.16
            
            
            9.4
            
            $
            1,982,062Exercisable
                at September 30, 2007
            
            
            100,000
            
            $
            2.01
            
            
            9.4
            
            $
            139,000Remaining
                shares available for grant
            
            
            1,333





During
      the 248-day period ended September 30, 2007, the 25-day period ended January
      25,
      2007, and the nine-month period ended September 30, 2006, the Company recorded
      stock-based compensation expense net of reversals for forfeited options totaling
      $423,370, zero and zero, respectively.




As
      of
      September 30, 2007, stock-based compensation expense not yet recognized in
      income totaled $1,602,119, which is expected to be recognized over a
      weighted-average remaining period of 3.0 years.





During
      the three months ended September 30, 2007, the Board of Directors authorized
      a
      stock option grant to purchase 40,000 shares of common stock at $3.10 per share.
      This grant was in excess of the total shares available under the 2007 Plan.
      An
      increase in the number of shares available to grant has not been approved by
      the
      shareholders. The Company has determined under SFAS 123R that the grant date
      has
      not yet occurred for these options. Therefore, no compensation expense has
      been
      recognized and these options are not reflected in any of the above tables as
      outstanding.





For
      purposes of estimating the fair value of each option on the date of grant,
      the
      Company utilizes the Black-Scholes option-pricing model. The Black-Scholes
      option valuation model was developed for use in estimating the fair value of
      traded options, which have no vesting restrictions and are fully transferable.
      In addition, option valuation models require the input of highly subjective
      assumptions including the expected stock price volatility. Because the Company's
      employee stock options have characteristics significantly different from those
      of traded options and because changes in the subjective input assumptions can
      materially affect the fair value estimate, in management's opinion, the existing
      models do not necessarily provide a reliable single measure of the fair value
      of
      its employee stock options.




Equity
      instruments issued to non-employees in exchange for goods, fees and services
      are
      accounted for under the fair value-based method of SFAS 123.




The
      fair value of the Company's stock-based awards was estimated assuming no
      expected dividends and the following weighted-average assumptions for the
      248-day period ended September 30, 2007:




Expected
                life (years)
            
            
            6.0Expected
                volatility
            
            
            57.15
            %Risk-free
                interest rate
            
            
            5.0
            %Expected
                dividend yield
            
            
            0.0
            %Weighted
                average fair value of options granted during the period
            
            $
            1.39




Page
          - 15
          -




Conmed
      Healthcare Management,
      Inc. Notes to Financial
        Statements




NOTE
      7.Property
      and Equipment




A
      summary
      of property and equipment is as follows:





**SUCCESSOR
                September 30, 2007**
            
            **PREDECESSOR
                December 31, 2006**Furniture
            
            $
            15,648
            
            $
            13,900Equipment
            
            
            30,693
            
            
            21,475Computers
            
            
            118,937
            
            
            42,152Vehicles
            
            
            36,087
            
            
            36,087**Tota**l
            
            
            201,365
            
            
            113,614Accumulated
                depreciation and amortization
            
            
            (96,497
            )
            
            (67,753
            )**Property
                and equipment, net**
            
            $
            104,868
            
            $
            45,861




NOTE
      8.Notes
      Payable




The
      Company has a note payable for $15,088 and $20,562 at September 30, 2007 and
      December, 31, 2006, respectively. The note requires monthly payments of $695
      including interest at 5.9%. The note is collateralized by a vehicle.





In
      addition, the Company has a short-term loan used to purchase an insurance
      policy. This loan is payable for $95,450 at September 30, 2007, and requires
      monthly payments of $32,823, including interest at 7.5%.




**NOTE
      9.****Earnings
      Per Share**




The
      following table sets forth the computation of basic and diluted (loss)
      per-share:




**Numerator**
            
            **Denominator**
            
            **Per-Share
                Amount Net (loss)****Three
                months ended September 30, 2007**Net
                (loss)
            
            $
            (606,392
            )
            
            11,937,489
            
            $
            (0.05
            )**248
                days ended September 30, 2007**Net
                (loss)
            
            $
            (1,360,986
            )
            
            9,705,520
            
            $
            (0.14
            )





Earnings
      (loss) per share and weighted shares outstanding were not calculated for the
      25-day period ended January 25, 2007 and the three and nine-month periods ended
      September 30, 2006 since these periods reflect activity of the PREDECESSOR and
      are
      not applicable to this presentation.





Common
      stock warrants and options outstanding totaling 4,003,667 shares are not
      included in diluted earnings per common share as they would have an antidilutive
      effect upon earnings per common share.




NOTE
      10.401(k)
      Plan




The
      Company has a 401(k) plan for the benefit of substantially all the employees.
      The contributions to the plan include employee voluntary salary reductions,
      which can be no greater than the maximum deduction allowable for federal income
      tax reporting purposes. The Company offers a safe harbor matching contribution
      of each participant’s contribution up to 4% of eligible compensation. The
      Company also can provide a profit sharing contribution at its discretion.
      Expenses related to this plan totaled approximately $72,000, $6,000 and $58,000
      for the 248-day period ended September 30, 2007, the 25-day period ended January
      25, 2007 and the nine-month period ended September 30, 2006, respectively plus
      approximately $24,000 and $20,000 for the three month period ended September
      30,
      2007 and 2006, respectively.




Page
          - 16
          -




Conmed
      Healthcare Management,
      Inc. Notes to Financial
        Statements




NOTE
      11 **Operating
      Leases**




The
      Company has a lease for office space expiring November 29, 2009. The office
      lease includes annual escalation clauses and an allocation of operating expenses
      related to the leased property. Office rent expense totaled approximately
      $29,000, $2,000 and $29,000, for the 248-day period ended September 30, 2007,
      the 25-day period ended January 25, 2007 and the nine-month period ended
      September 30, 2006, respectively, plus approximately $10,000 for the three
      month
      period ended September 30, 2007 and 2006, respectively.





The
      Company has a vehicle lease that requires monthly payments of $614 and expires
      in April 2008. The Company also entered into a second vehicle lease in March
      2007 that expires February 2010. Lease expense was approximately $9,000, $1,000
      and $3,000 for the 248-day period ended September 30, 2007, the 25-day period
      ended January 25, 2007 and the nine-month period ended September 30, 2006,
      respectively plus approximately $4,000 and $2,000 for the three month periods
      ended September 30, 2007 and 2006, respectively.





The
      approximate future minimum lease obligations as of September 30, 2007 are as
      follows:





**Twelve
                months ending September 30,**2008
            
            $
            43,0002009
            
            
            40,0002010
            
            
            9,000**Total**
            
            $
            92,000




NOTE
      12 **Major
      Customers and Commitments**




During
      the 248-day period ended September 30, 2007, the 25-day period ended January
      25,
      2007 and the nine months ended September 30, 2006, the Company had approximate
      sales with major customers and related approximate receivables as
      follows:





**SUCCESSOR
                For the Period January 26, 2007 to September 30,
                2007**
            
            **PREDECESSOR
                For the Period January 1, 2007 to January 25,
                2007**
            
            **PREDECESSOR
                For the Nine Months Ended September 30, 2006****Revenue**
            
            **Accounts
                Receivable**
            
            **Revenue**
            
            **Accounts
                Receivable**
            
            **Revenue**
            
            **Accounts
                Receivable**Company
                A
            
            $
            3,963,000
            
            $
            18,000
            
            $
            374,000
            
            $
            26,000
            
            $
            254,000
            
            $
            254,000Company
                B
            
            
            2,412,000
            
            
            596,000
            
            
            240,000
            
            
            --
            
            
            2,584,000
            
            
            293,000Company
                C
            
            
            1,378,000
            
            
            167,000
            
            
            135,000
            
            
            173,000
            
            
            1,381,000
            
            
            163,000Company
                D
            
            
            1,238,000
            
            
            217,000
            
            
            103,000
            
            
            127,000
            
            
            127,000
            
            
            127,000Company
                E
            
            
            1,073,000
            
            
            --
            
            
            101,000
            
            
            --
            
            
            1,097,000
            
            
            --




Page
          - 17
          -




Conmed
      Healthcare Management,
      Inc.


Notes
      to Financial
      Statements




During
      the three months ended September 30, 2007 and 2006 the Company had approximate
      sales with major customers and related approximate receivables as
      follows:





**SUCCESSOR**
              **For
                the Three Months Ended**
              **September
                30, 2007**
            
            **PREDECESSOR**
              **For
                the Three Months Ended**
              **September
                30, 2006****Revenue**
            
            **Accounts
                Receivable**
            
            **Revenue**
            
            **Accounts
                Receivable**Company
                A
            
            $
            1,415,000
            
            $
            18,000
            
            $
            254,000
            
            $
            254,000Company
                B
            
            
            880,000
            
            
            596,000
            
            
            866,000
            
            
            293,000Company
                C
            
            
            511,000
            
            
            167,000
            
            
            495,000
            
            
            163,000Company
                D
            
            
            550,000
            
            
            217,000
            
            
            127,000
            
            
            127,000Company
                E
            
            
            395,000
            
            
            --
            
            $
            376,000
            
            
            --





In
      connection with its normal contract activities, the Company is required to
      acquire performance and payment bonds for certain service contracts. The surety
      issuing the bonds has recourse against certain of the Company’s assets in the
      event the surety is required to honor the bonds. The lengths of the Company’s
      bond contracts vary. Most contracts are one year or less, but periodically
      contracts are obtained which exceed one year. At September 30, 2007, the Company
      had $12,660,663 in outstanding bonds.




NOTE
      13 **Income
      Tax Matters**




Approximate
      deferred taxes consist of the following components:





**As
                of September 30, 2007****Deferred
                tax asset**Net
                operating loss carryforwards
            
            $
            6,686,000Intangible
                assets
            
            
            515,0007,201,000Less:
                valuation allowance
            
            
            (7,083,000
            )**Net
                deferred tax asset**
            
            
            118,000**Deferred
              tax
              liability**Goodwill
            
            
            118,000**Deferred
                taxes**
            
            $
            --





The
      Company recorded a valuation allowance of $7,083,000 and $6,957,000, against
      deferred tax assets at September 30, 2007 and December 31, 2006, respectively,
      to reduce the total to an amount that management believes will ultimately be
      realized. Management applied a full valuation allowance against the deferred
      tax
      asset because of a limited history of taxable income, the long-term nature
      of
      the deferred tax asset and certain limitations regarding the utilization of
      the
      net operating loss carryforwards. Realization of deferred tax assets is
      dependent upon sufficient future taxable income during the period that
      deductible temporary differences and carryforwards are expected to be available
      to reduce taxable income.




Page
          - 18
          -




Conmed
      Healthcare Management,
      Inc. Notes to Financial Statements


The
      provision for income taxes differs from the approximate amount of income tax
      benefit determined by applying the U.S. Federal income tax rate to pretax loss,
      due to the following:





**For
                248-Day Period Ended September 30, 2007**Computed
                federal income benefit
            
            $
            (463,000
            )Other,
                primarily computed state income tax benefit
            
            
            (57,000
            )Permanent
                difference related to stock options
            
            
            3,000Change
                in valuation allowance
            
            
            517,000Income
                tax expense
            
            $
            --





At
      September 30, 2007, the Company has approximately $17,144,000 of net operating
      loss carryforwards subject to Internal Revenue Service (“IRS”) change of control
      limitations to offset future federal taxable income.





Sec.
      338 election





No
      amounts have been presented for 2006 as the Predecessor was an S-corporation
      and
      as such not subject to corporate level income taxes.




NOTE
      14.RELATED
      PARTY TRANSACTIONS




During
      2007 and 2006, the Company accrued $4,167 on a monthly basis, plus direct
      expenses, to Equity Dynamics, Inc., an entity wholly owned by John Pappajohn,
      Chairman of the Company, for administrative services that include; accounting,
      investor relations, SEC reporting and other consulting services. In addition
      to
      these administrative expenses, the Company also reimbursed Equity Dynamics,
      Inc.
      for expenses related to the negotiation and consummation of the Acquisition
      and
      Plan of Recapitalization.





On
      October 24, 2005, the Company issued 37,500 warrants to purchase common stock.
      Of these warrants, 30,000 were issued to John Pappajohn and the remaining 7,500
      warrants were issued to his designees. The warrants were issued as compensation
      for past services rendered and all warrants were immediately vested. The
      warrants had an exercise price of $10.00, which exceeded the market price of
      the
      Company’s common stock at the time of issuance. The value of the warrants was
      separately estimated at $0.20 per share or $10,000 based on the Black-Scholes
      valuation of the call option associated with a five year warrant. As part of
      the
      Private Placement, Mr. Pappajohn relinquished the 30,000 warrants that were
      issued to him, and the remaining 7,500 warrants issued to his designees were
      adjusted to 250,000 warrants (post-Plan of Recapitalization and as adjusted
      to
      reflect the 1 for 20 reverse stock split effective as of March 13, 2007) to
      purchase common stock exercisable at $0.30 per share, expiring October 23,
      2010.


Page
            - 19
            -




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




*Information
      included in this section contains forward-looking statements regarding the
      business, operations and financial condition of both the Company and Conmed,
      Inc. 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 the Company’s 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
      the Company’s future plans, strategies and expectations, 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. The Company’s actual results
      could differ materially from those expressed or implied by the forward-looking
      statements as a result of various factors. The Company cautions 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. The Company undertakes 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 the Company makes in future public
      statements and press releases.*





**General**




Prior
      to
      January 26, 2007, the Company was classified as a public shell and had no
      ongoing operations, minimal operating expenses, no employees and operated under
      the name Pace Healthcare Management Systems, Inc. (“Pace”).





On
      January 26, 2007 the Company acquired Conmed, Inc. (“Conmed Inc.”) a provider of
      correctional healthcare services since 1984. Conmed Inc. was formed as a
      corporation on June 10, 1987 in the State of Maryland for the purpose of
      providing healthcare services exclusively to county detention centers located
      in
      Maryland. As Conmed Inc. developed, it accepted more contracts for additional
      services including pharmacy and out-of-facility healthcare expenses. In 2000,
      Conmed, Inc. served more than 50% of the county detention healthcare services
      market in Maryland. In 2003, Conmed, Inc. elected to seek contracts outside
      of
      Maryland and by June 2007 it had secured contracts in Kansas, Oregon Virginia
      and Washington. Currently, Conmed, Inc. is in contract with and services 21
      detention centers and facilities at the county level in the United States.
      As a
      result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the
      Company and the business of Conmed, Inc. is now our primary
      business.




**Critical
      Accounting Policies**




The
      accompanying unaudited consolidated financial statements contained herein have
      been prepared pursuant to the rules and regulations of the Securities and
      Exchange Commission for interim reporting requirements of Form 10-QSB and Item
      310(b) of Regulation S-B. Accordingly, the financial information and disclosures
      normally included in financial statements prepared annually in accordance with
      Generally Accepted Accounting Principals (GAAP) in the United States have been
      condensed or omitted. Readers of this report should, therefore, refer to the
      consolidated financial statements and notes included in our Annual Report of
      Form 10-KSB for the year ended December 31, 2006, filed with the Securities
      and
      Exchange Commission on April 2, 2007.





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 248-day period ended September 30, 2007
      are not necessarily indicative of the results or operations to be expected
      for a
      full year.





A
      summary
      of the Company's significant accounting policies is as follows:




Page
          - 20
          -




*Accounting
      estimates and assumption* s


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. The Company’s methods of revenue recognition from
      contracts are based primarily on estimates as are accrued expenses. Actual
      results could differ from those estimates.





*Acquisition*


The
      Acquisition was recorded based on Financial Accounting Standards Board (“FASB”)
      Statement No. 141, (“FAS 141”) *Business
      Combinations* ,
      using
      the purchase method. Under purchase accounting, assets acquired should be stated
      on the financial statements at “fair value” (see definition in Standard of Value
      section below). FAS 141 requires that intangible assets be recognized as assets
      apart from goodwill if they meet one of two criteria, (1) the contractual-legal
      criterion, or (2) the separability criterion. FAS 141 also requires disclosure
      of the primary reasons for business combination and the allocation of the
      purchase price paid to the assets acquired and the liabilities assumed by major
      balance sheet caption.





The
      Company employed an independent valuation firm to assist management in the
      identification of the intangible assets acquired and in estimating the fair
      value of those assets.





*Service
      Contracts Acquired*


There
      are
      material costs in obtaining a customer list, especially customers with recurring
      revenue streams. As part of the Acquisition, the Company has gained access
      to
      Conmed, Inc.’s customers, thereby avoiding the cost of obtaining them directly.
      The value of the contract list is represented by the future revenue streams
      from
      existing contracts. Therefore, the Income Approach is the most applicable fair
      value measurement approach to value this asset. The operating income streams
      of
      the service contracts was calculated based on net present value of estimated
      earnings at an interest rate of 20%. Operating income streams were estimated
      on
      a contract by contract basis and an overall cost factor was used to estimate
      management expenses. Total future contracted operating income totaled
      $6,083,000. After discounting for the time value of money using a 20% rate,
      the
      net present value of future revenues is $4,500,000. Service contracts acquired
      are amortized over the life of each individual contract ranging from
      approximately one to four years.





*Non-Compete
      Agreements*


Non-compete
      agreements were acquired as part of the stock purchase agreement with Conmed,
      Inc. Key considerations in estimating the value of such agreements include
      consideration of the potential losses resulting from such competition, the
      enforceability of the terms of the agreement, and the likelihood of competition
      in the absence of the agreement. Given the potential loss from competition
      and
      the probability of competition, $1,000,000 was identified to allocate to these
      agreements. Non-compete agreements are amortized over the lives of the
      agreements, approximately three to four years.





*Goodwill*


The
      Company records as goodwill the excess of purchase price over the fair value
      of
      the identifiable net assets acquired. SFAS No. 142, *Goodwill
      and Other Intangible Assets* ,
      prescribes a two-step process for impairment testing of goodwill, which is
      performed annually, as well as when an event triggering impairment may have
      occurred. The first step tests for impairment, while the second step, if
      necessary, measures the impairment. Since creation of the goodwill there have
      been no indicators of impairment. The
      Company has elected to perform its annual analysis during the fourth quarter
      of
      each fiscal year.





*Revenue
      recognition*


Conmed’s
      principal source of revenue is contracts to provide medical assistance to county
      correctional facilities. Deferred revenue represents amounts that may be paid
      in
      advance of delivery under these contracts.





Most
      of
      the Company’s contracts call for a fixed monthly fee. In addition, most
      contracts have incremental charges based on the average daily population (“ADP”)
      of the correctional facility or a contractual fee adjustment based on the ADP.
      Revenues from contracts are recognized ratably for fixed fees, or monthly for
      contracts with variable charges based on ADP. The Company has one contract
      that
      partially operates on cost plus basis. The timing of each payment varies per
      contract. Credit terms are not more than 30 days from the date of invoice.




Page
          - 21
          -




Certain
      contracts include “stop/loss” limits, which create a ceiling to our financial
      responsibility for an individual inmate’s care or a maximum amount in the
      aggregate for certain categories of medical expenses, whereby the Company is
      protected from catastrophic medical losses. In circumstances where a stop/loss
      is reached, the Company is reimbursed for any costs incurred over the
      predetermined stop/loss amount. Any reimbursement received by the Company is
      recorded as revenue. During the 248-day period ended September 30, 2007, the
      25-day period ended January 25, 2007 and the nine month period ended September
      30, 2006 the Company received stop/loss reimbursements of approximately
      $276,000, $15,000 and $69,000, respectively, which were included in revenue
      and
      during the three months ended September 30, 2007 and 2006 the Company received
      stop/loss reimbursements of approximately $113,000, and $69,000,
      respectively.





*Stock
      compensation*


Effective
      January 1, 2006, the Company adopted SFAS No. 123(R), *Shared-Based
      Payments* ,
      using
      the modified prospective transition method. Prior to that date the Company
      accounted for stock option awards under APB Opinion No. 25. In accordance with
      SFAS No. 123(R), compensation expense for stock-based awards is recorded over
      the vesting period at the fair value of the award at the time of grant. The
      recording of such compensation began on January 1, 2006 for shares not yet
      vested as of that date and for all new grants subsequent to that date. At
      December 31, 2006 and 2005 all stock options were either exercised or expired.
      The exercise price of options granted under the Company’s incentive plans is
      equal to the fair market value of the underlying stock at the grant date. The
      Company assumes no projected forfeitures on its stock-based compensation, since
      actual historical forfeiture rates on its stock-based incentive awards have
      been
      negligible.





*Income
      taxes*


Deferred
      taxes are provided on a liability method whereby deferred tax assets are
      recognized for deductible temporary differences and operating loss carryforwards
      and deferred tax liabilities are recognized for taxable temporary differences.
      Temporary differences are the differences between the reported amounts of assets
      and liabilities and their tax basis. Deferred tax assets are reduced by a
      valuation allowance when, in the opinion of management, it is more likely than
      not that some portion or all of the deferred tax assets will not be realized.





**Recently
      adopted accounting standards**





The
      Company adopted the provisions of Financial Accounting Standards Board (FASB)
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* ,
      effective January 1, 2007 *.* The Interpretation provides clarification on accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with FASB Statement of Financial Accounting Standard (SFAS) No. 109, *Accounting
      for Income Taxes.* The Interpretation prescribes a recognition threshold and measurement attribute
      for the financial statement recognition and measurement of a tax position taken
      or expected to be taken in a tax return. As a result of the Company’s evaluation
      of the implementation of FIN 48, no significant income tax uncertainties were
      identified. Therefore, the Company recognized no adjustment for unrecognized
      income tax benefits during the nine months ended September 30, 2007. Corporate
      tax returns for the years 2004 through 2006 remain open to examination by taxing
      authorities.





**New
      Accounting Pronouncements**





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* .
      This
      statement defines fair value, establishes a framework for measuring fair value,
      and expands disclosures about fair value measurements. It clarifies that fair
      value is the price that would be received to sell an asset or paid to transfer
      a
      liability in an orderly transaction between market participants in the market
      in
      which the reporting entity transacts. This statement does not require any new
      fair value measurements, but rather, it provides enhanced guidance to other
      pronouncements that require or permit assets or liabilities to be measured
      at
      fair value. This statement is effective for fiscal years beginning after
      November 15, 2007, with earlier adoption permitted. The Company is currently
      evaluating the impact that the adoption of this statement will have on its
      financial position, results of operation and cash flows.




Page
          - 22
          -




In
      February 2007, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment of FASB Statement No. 115,* which
      provides all entities, including not-for-profit organizations, with an option
      to
      report selected financial assets and liabilities at fair value. The objective
      of
      the Statement is to improve financial reporting by providing entities with
      the
      opportunity to mitigate volatility in earnings caused by measuring related
      assets and liabilities differently without having to apply the complex
      provisions of hedge accounting. Certain specified items are eligible for the
      irrevocable fair value measurement option as established by Statement No. 159.
      Statement No. 159 is effective as of the beginning of an entity’s first fiscal
      year beginning after November 15, 2007. Early adoption is permitted as of the
      beginning of a fiscal year that begins on or before November 15, 2007 provided
      the entity also elects to apply the provisions of Statement No. 157, *Fair
      Value Measurements* .
      The
      Company is currently evaluating the impact that the adoption of this Statement
      will have on its financial position, results of operation and cash
      flows.





**Presentation
      of share and per share information**





All
      common stock share and per share information has been adjusted to reflect the
      1
      for 20 reverse stock split effective on March 14, 2007.





**Results
      of Operations**





*Three-Months
      Ended September 30, 2007 compared to September 30, 2006*


The
      following discussion of financial results below is derived from proforma
      unaudited financial statements for the three months ended September 30, 2006
      prepared on the bases that the Acquisition was completed on December 31, 2005.
      The proforma adjustments were based on available information and on assumptions
      that we believe are reasonable under the circumstances. The unaudited proforma
      financial information is presented for informational purposes and is based
      on
      management’s estimates. The unaudited proforma statements of operations do not
      purport to represent what results of operations actually would have been if
      the
      transactions set forth above had occurred on the dates indicated or what results
      of operations will be for future periods. Proforma adjustments include
      consolidation of the Company and Conmed, Inc. for the full three-month period
      plus adjustments to reflect the amortization of intangible assets and a proforma
      estimated income tax expense. The adjustment to reflect the amortization of
      intangible assets increased depreciation and amortization on the proforma
      unaudited financial statements by $509,000 while the adjustment for estimated
      income tax expense increased income tax expense by $166,000. The adjustment
      for
      income tax expense resulted in an expense due to the Company filing a Sec.338
      election which increases the basis in the assets acquired in the Acquisition
      as
      more fully described in Note 13 to the consolidated financial
      statements.




Page
          - 23
          -




**Three
                Months Ended**
              **September
                30, 2007**
            
            **Three
                Months Ended**
              **September
                30, 2006****Amount**
            
            **%
                of Revenue**
            
            **PROFORMA
                Amount**
            
            **%
                of Revenue**Service
                contract revenue
            
            $
            6,964,838
            
            
            100.0
            %
            $
            4,026,471
            
            
            100.0
            %HEALTHCARE
                EXPENSES:Salaries,
                wages and employee benefits
            
            
            3,645,035
            
            
            52.3
            %
            
            1,907,662
            
            
            47.4
            %Medical
                expenses
            
            
            1,850,211
            
            
            26.6
            %
            
            1,019,595
            
            
            25.3
            %Other
                operating expenses
            
            
            239,545
            
            
            3.4
            %
            
            162,957
            
            
            4.0
            %Total
                healthcare expenses
            
            
            5,734,791
            
            
            82.3
            %
            
            3,090,214
            
            
            76.7
            %Gross
                profit
            
            
            1,230,047
            
            
            17.7
            %
            
            936,257
            
            
            23.3
            %OPERATING
                EXPENSES:Selling,
                general & administrative expenses
            
            
            1,105,514
            
            
            15.9
            %
            
            602,981
            
            
            15.0
            %Depreciation
                and amortization
            
            
            521,394
            
            
            7.5
            %
            
            515,745
            
            
            12.8
            %Total
                operating expenses
            
            
            1,626,908
            
            
            23.4
            %
            
            1,118,726
            
            
            27.8
            %Operating
                loss
            
            
            (396,861
            )
            
            (5.7
            )%
            
            (182,469
            )
            
            (4.5
            )%Net
                interest income and (expense)
            
            
            81,469
            
            
            1.2
            %
            
            1,846
            
            
            0.0
            %Loss
                before income taxes
            
            
            (315,392
            )
            
            (4.5
            )%
            
            (180,623
            )
            
            (4.5
            )%Income
                tax expense
            
            
            291,000
            
            
            4.2
            %
            
            166,000
            
            
            4.1
            %Net
                (loss)
            
            $
            (606,392
            )
            
            (8.7
            )%
            $
            (347,623
            )
            
            (8.6
            )%





Net
      revenue, as defined earlier, from medical services provided primarily to
      correctional institutions for the three months ended September 30, 2007 and
      2006, was $6,964,838 and $4,026,471, respectively, which represents an increase
      of $2,938,367 or 73.0%. The net loss was $606,392 or 8.7% of revenue and
      $347,623 or 8.6% of revenue for the three months ended September 30, 2007 and
      2006, respectively. Improvement resulting from the increase in service contract
      revenue and gross profit margin was offset by increased operating
      expenses.




*Revenues*


The
      improvement in revenue for the three months ended September 30, 2007 compared
      to
      the same period for the prior year resulted from the addition of new contracts
      with Yakima County, Washington, and Baltimore County, Maryland, in September
      of
      2006, which together accounted for $1,571,500 or 53.5% of the increase in
      revenue for the period. Additionally, new contracts with Jackson County, Oregon
      and Henrico County, Virginia, which were initiated in May 2007, added $950,807
      or 32.4% of the increase. A new contract with Kitsap, Washington, which was
      initiated in September 2007, added $73,289 or 2.5% of the increase. Revenue
      improvement totaling approximately $221,111 or 7.5% of the increase resulted
      primarily from expansion of the services provided to a number of our existing
      contracts initiated in prior years. Price increases related to existing service
      requirements totaled approximately $121,659 or 4.1% of the
      increase.




*Healthcare
      Expenses*


*Salaries
      and employee benefits*


Salaries
      and employee benefits were $3,645,035 or 52.3% of revenue for the three month
      period ended September 30, 2007, compared to $1,907,662 or 47.4% of revenue
      for
      the three months ended September 30, 2006. The increase in spending for salaries
      and employee benefits of $1,737,373 or 91.1% is due to the addition of new
      healthcare employees required to support the increased staffing requirements
      resulting from our new medical service contracts. The primary factors causing
      the increase as a percentage of revenue was the addition of new service
      contracts with Yakima County, WA, which provided staffing and pharmacy services,
      plus Henrico County, VA, and Kitsap County, WA, which provided only staffing
      services. As a result, these three contracts increased the mix of salaries
      and
      employee benefits as a percentage of total revenue.




Page
          - 24
          -




*Medical
      expenses*


Medical
      expenses for the three months ended September 30, 2007 and 2006 were $1,850,211
      or 26.6% of revenue and $1,019,595 or 25.3% of revenue, respectively, which
      represented an increase of $830,616 or 81.5%. The increase in spending for
      medical expenses reflects increases for medical services both in and out of
      the
      facility plus increased expenditures for pharmacy and radiology services. In
      absolute dollars, the increased spending is primarily due to the higher revenue
      and the increased number of inmates covered by our services under the new
      service contracts. The reduction in spending as a percentage of revenue results
      primarily from higher expenditures for hospitalization and related
      out-of-facility costs at two correctional institutions.





*Other
      operating expenses*


Other
      operating expenses were $239,545 or 3.4% of revenue for the three months ended
      September 30, 2007, compared to $162,957 or 4.0% of revenue for the three-month
      period ended September 30, 2006. The increase of $76,588 in spending is directly
      related to the increase in the number of inmates served as a result of the
      new
      service contracts and reflects increased spending for employment advertising,
      professional liability insurance performance and payment bonds.





*Operating
      Expenses*


*Selling,
      general and administrative expenses*


Selling,
      general and administrative expenses for the three months ended September 30,
      2007 and 2006 were $1,105,514 or 15.9% of revenue and $602,981 or 15.0% of
      revenue, respectively. The increased expenditures reflect higher salaries and
      benefits in marketing and administrative personnel, plus increased spending
      on
      travel and entertainment and information systems, as well as other professional
      fees. In addition, stock based compensation for the three month period ended
      September 30, 2007 and 2006 was $123,921 and zero, respectively, reflecting
      stock options awards issued in 2007





*Depreciation
      and amortization*


Depreciation
      and amortization primarily reflects the amortization of intangible assets
      related to the Acquisition reflected in both periods. Amortization of service
      contracts acquired was $441,000 and amortization of non-compete agreements
      was
      $68,000 and is reflected as an expense for both periods on a proforma basis.
      Depreciation expense increased $5,649 due to additional capital equipment.





*Interest
      income*


Interest
      income was $84,685 for the third quarter ended September 30, 2007 compared
      to
      $2,120 for the same period in 2006, reflecting an increase in cash on hand
      as a
      result of the Private Placement in January 2007.





*Interest
      expense*


Interest
      expense increased $2,942 due to a short-term installment loan for the purchase
      of an insurance policy in the quarter ended September 30, 2007.





*Income
      tax expense*


The
      income tax expense for the three-month period ended September 30, 2007 was
      $291,000. The proforma tax expense for the three-month period ended September
      30, 2006 was $167,000 on a proforma basis. In 2006, Conmed, Inc. was an
      S-corporation and as such not subject to corporate level income taxes.




*Nine
      Months Ended September 30, 2007 compared to September 30, 2006*


The
      following discussion of financial results below is derived from proforma
      unaudited financial statements prepared on the bases that the Acquisition was
      completed on December 31, 2006 and 2005, respectively. The proforma adjustments
      were based on available information and on assumptions that we believe are
      reasonable under the circumstances. The unaudited proforma financial information
      is presented for informational purposes and is based on management’s estimates.
      The unaudited proforma statements of operations do not purport to represent
      what
      results of operations actually would have been if the transactions set forth
      above had occurred on the dates indicated or what results of operations will
      be
      for future periods. Proforma adjustments for the nine months ended September
      30,
      2007 reflect the results of the 248-day period ended September 30, 2007, the
      consolidated 25-day period ended January 25, 2007 the Company and Conmed Inc.
      Proforma adjustments for the nine month period ended September 30, 2006 include
      consolidation of the Company and Conmed Inc. for the full nine month period
      plus
      adjustments to reflect the amortization of intangible assets which increased
      depreciation and amortization by $1,742,000.




Page
          - 25
          -




**Nine
                Months Ended**
              **September
                30, 2007**
            
            **Nine
                Months Ended**
              **September
                30, 2006****PROFORMA
                Amount**
            
            **%
                of Revenue**
            
            **PROFORMA
                Amount**
            
            **%
                of Revenue**Service
                contract revenue
            
            $
            18,484,997
            
            
            100.0
            %
            $
            11,112,452
            
            
            100.0
            %HEALTHCARE
                EXPENSES:Salaries,
                wages and employee benefits
            
            
            9,483,499
            
            
            51.3
            %
            
            5,376,098
            
            
            48.4
            %Medical
                expenses
            
            
            4,929,637
            
            
            26.6
            %
            
            3,197,157
            
            
            28.8
            %Other
                operating expenses
            
            
            696,781
            
            
            3.8
            %
            
            444,574
            
            
            4.0
            %Total
                healthcare expenses
            
            
            15,109,917
            
            
            81.7
            %
            
            9,017,829
            
            
            81.2
            %Gross
                profit
            
            
            3,375,080
            
            
            18.3
            %
            
            2,094,623
            
            
            18.8
            %OPERATING
                EXPENSES:Selling,
                general & administrative expenses
            
            
            3,258,714
            
            
            17.6
            %
            
            1,708,717
            
            
            15.4
            %Depreciation
                and amortization
            
            
            1,770,744
            
            
            9.6
            %
            
            1,775,322
            
            
            16.0
            %Total
                operating expenses
            
            
            5,029,458
            
            
            27.2
            %
            
            3,484,039
            
            
            31.4
            %Operating
                loss
            
            
            (1,654,378
            )
            
            (8.9
            )%
            
            (1,389,416
            )
            
            (12.5
            )%Net
                interest income and (expense)
            
            
            225,183
            
            
            1.2
            %
            
            (2,122
            )
            
            0.0
            %Loss
                before income taxes
            
            
            (1,429,195
            )
            
            (7.7
            )%
            
            (1,391,538
            )
            
            (12.5
            )%Income
                tax expense
            
            
            --
            
            
            --
            
            
            --
            
            
            --Loss
                before income taxes
            
            $
            (1,429,195
            )
            
            (7.7
            )%
            $
            (1,391,538
            )
            
            (12.5
            )%





Net
      revenue, as defined earlier, from medical services provided to correctional
      institutions for the nine months ended September 30, 2007 and 2006, was
      $18,484,997 and $11,112,452, respectively, which represents an increase of
      $7,372,545 or 66.3%. The net loss was $1,429,195 or 7.7% of revenue and
      $1,391,538 or 12.5% of revenue for the nine months ended September 30, 2007
      and
      2006, respectively. Improvement resulting from the increase in service contract
      revenue was partially offset by increased operating expenses and lower gross
      profit margin.





*Revenues*


The
      improvement in revenue for the nine months ended September 30, 2007 compared
      to
      the same period for the prior year resulted from the addition of a new contract
      with Yakima County, Washington and a new transition contract with Baltimore
      County, Maryland, in September of 2006, which together accounted for $5,159,322
      or 70.0% of the increase in revenue for the period. Additionally, new contracts
      with Jackson County, Oregon, and Henrico County, Virginia, which were initiated
      in May 2007, added $1,298,284 or 17.6% of the increase. A new contract with
      Kitsap, Washington, which was initiated in September 2007, added $73,289 or
      1.0%
      of the increase. Revenue improvement totaling approximately $541,503 or 7.3%
      of
      the increase resulted primarily from expansion of the services provided to
      a
      number of our existing contracts initiated in prior years. Price increases
      related to existing service requirements totaled approximately $300,147 or
      4.1%
      of the increase.




Page
          - 26
          -




*Healthcare
      Expenses*


*Salaries
      and employee benefits*


Salaries
      and employee benefits were $9,483,499 or 51.3% of revenue for the nine month
      period ended September 30, 2007, compared to $5,376,098 or 48.4% of revenue
      for
      the nine months ended September 30, 2006. The increase in spending for salaries
      and employee benefits of $4,107,401 or 76.4% is due to the addition of new
      healthcare employees required to support the increased staffing requirements
      resulting from our new medical service contracts. The increase as a percentage
      of revenue reflects the addition of new service contracts with Yakima County,
      WA, Henrico County, VA, and Kitsap County, WA. As a result, these three
      contracts increased the mix of salaries and employee benefits as a percentage
      of
      total revenue.




*Medical
      expenses*


Medical
      expenses for the nine months ended September 30, 2007 and 2006 were $4,929,637
      or 26.6% of revenue and $3,197,157 or 28.8% of revenue, respectively, which
      represented an increase of $1,732,480 or 54.2%. The increase in spending for
      medical expenses reflects increases for in-facility and out-facility medical
      services plus increased expenditures for pharmacy and radiology services as
      well
      as medical supplies. In absolute dollars, the increased spending is primarily
      due to the higher revenue and the increased number of inmates covered under
      the
      new medical service contracts. The reduction in spending as a percentage of
      revenue results primarily from lower hospital expenditures, which was partially
      offset by increased expenditures for the delivery of in-facility medical
      services. In the first half of 2006, the Company absorbed unusually high medical
      expenses at one facility due to a number of costly procedures performed on
      several inmates that were not repeated in 2007.





*Other
      operating expenses*


Other
      operating expenses were $696,781 or 3.8% of revenue for the nine months ended
      September 30, 2007, compared to $444,574 or 4.0% of revenue for the nine month
      period September 30, 2006. The increase in spending is primarily related to
      the
      increase in the number of inmates served as a result of the new medical service
      contracts and reflects increased spending for employment advertising,
      professional liability insurance, performance and payment bonds and
      supplies.





*Operating
      expenses*


*Selling,
      general and administrative expenses*


Selling,
      general and administrative expenses for the nine months ended September 30,
      2007
      and 2006 were $3,258,714 or 17.6% of revenue and $1,708,717 or 15.4% of revenue,
      respectively. The increased expenditures reflect higher salaries and benefits
      for marketing and administrative personnel following the Acquisition, plus
      increased travel and entertainment, employee search fees as well as information
      systems and other professional fees following the Acquisition. In addition,
      stock based compensation for the nine month period ended September 30, 2007
      and
      2006 was $423,370 and zero, respectively, reflecting stock options awards issued
      in 2007.





*Depreciation
      and amortization*


Depreciation
      and amortization primarily reflects the amortization of intangibles assets
      related to the Acquisition. Amortization of service contracts acquired was
      $1,539,000 and amortization of non-compete agreements was $200,000 and is
      reflected as an expense for both periods on a proforma basis. Depreciation
      expense declined $4,579 due to fewer company owned vehicles.





*Interest
      income*


Interest
      income was $228,914 for the nine months ended September 30, 2007 compared to
      $4,599 for the same period in 2006 reflecting an increase in cash on hand as
      a
      result of the Private Placement in January 2007.





*Interest
      expense*


Interest
      expense declined $2,990 due to a reduction in outstanding automobile loans
      and
      the absence of borrowing on the line of credit in nine month period ended
      September 30, 2007.





Page
          - 27
          -





**LIQUIDITY
      AND CAPITAL RESOURCES**




Financing
      is generally provided by funds generated from our operating activities. Current
      working capital balances and funds used to acquire Conmed, Inc. were provided
      by
      the Private Placement.





*Cash
      flow for the 248-day period from January 26, 2007 to September 30,
      2007.*


Cash
      as
      of September 30, 2007 and January 25, 2007 was $6,520,616 and $662,305,
      respectively.





Cash
      flows from operations totaled $408,941 reflecting $1,931,416 in adjustments
      to
      reconcile net loss to net cash provided by working activities partially offset
      by $161,489 in changes in working capital components and by the net loss of
      $1,360,986.





Investing
      activities used $7,762,848. The Acquisition used $7,675,097 and purchases of
      computer and office equipment used $87,751.





Financing
      activities provided cash of $13,212,218. Net cash proceeds from the Private
      Placement were $13,085,649 and a short-term loan to finance the purchase of
      and
      insurance policy added $289,368 partially offset by payments on an automobile
      loan and a short term loan of $198,799. Proceeds from the exercise of 120,000
      warrants totaled $36,000.





*Liquidity*


Conmed,
      Inc. maintained a $1,000,000 line of credit which expired in December 2006.
      Interest was paid monthly at the prime rate as listed in the Wall Street Journal
      plus 5% per annum.




*Loans*


As
      of
      September 30, 2007, we had a note outstanding for a vehicle in the amount of
      $15,088 and a short-term loan used to purchase an insurance policy in the amount
      of $95,450.




*Off
      Balance Sheet Arrangements*


The
      Company is required to provide performance and payment guarantee bonds to county
      governments under certain contracts. As of September 30, 2007, the Company
      has
      three performance bonds totaling $9,965,535 and two payment bonds for
      $2,695,128, totaling $12,660,663. The surety issuing the bonds has recourse
      against the Company’s assets in the event the surety is required to honor the
      bonds.





*Contractual
      Obligations*


The
      following table presents the Company’s expected cash requirements for
      contractual obligations outstanding as of September 30, 2007:




**Total**
              
              **Due
                  as of 9/30/08**
              
              **Due
                  as of**
                **9/30/09
                  and 9/30/10**
              
              **Due
                  as of**
                **9/30/11
                  and 9/30/12**
              
              **Due**
                **Thereafter**Automobile
                  Loan
              
              $
              15,088
              
              $
              7,659
              
              $
              7,429
              
              $
              --
              
              $
              --Short-term
                  loan
              
              
              95,450
              
              
              95,450
              
              
              --
              
              
              --
              
              
              --Automobile
                  Leases
              
              
              22,139
              
              
              11,684
              
              
              10,455
              
              
              --
              
              
              --Office
                  Space Leased
              
              
              69,667
              
              
              31,631
              
              
              38,036
              
              
              --
              
              
              --Total
                  Contractual Cash Obligations
              
              $
              202,344
              
              $
              146,424
              
              $
              55,920
              
              $
              --
              
              $
              --




*Effects
      of Inflation*


The
      Company believes that inflation and changing prices over the past three years
      have not had a significant impact on its revenue or results of
      operations.




Page
          - 28
          -




*Potential
      Future Service Contract Revenue*


As
      of
      September 30, 2007 the Company had entered into 24 agreements with county
      governments to provided medical and healthcare services to county correctional
      institutions. Most of these contracts are for multiple years and include option
      renewal periods which are, in all cases, at the county’s option. The terms of
      the contracts are from one to nine years. These medical service contracts have
      potential future service contract revenue of $131 million as of September 30,
      2007, with a weighted average term of 5.9 years, of which approximately $113
      million relates to the option renewal periods.




**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 chief executive and chief financial officers have each
      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, they have
      concluded that, as of the Evaluation Date, the Company’s disclosure controls and
      procedures are effective in bringing to their attention on timely basis material
      information relating to the Company required to be included in the Company’s
      periodic filings under the Exchange Act.




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




Page
          - 29
          -


**PART
      II.  OTHER INFORMATION**





**ITEM
      1.LEGAL
      PROCEEDINGS**




None




**ITEM
      2.UNREGISTERED
      SALES OF EQUITY SECURITIES**




During
      the three months ended September 30, 2007, 10,000
      previously issued warrants were exercised for an exercise price of $0.30 per
      share, and, as a result, the Company issued 10,000 shares of registered common
      stock. No commissions were paid in connection with the exercise of any of
      the above warrants. T he
      proceeds of such sale were added to the Company’s general working
      capital.




**ITEM
      3.DEFAULT
      UPON SENIOR SECURITIES**




None




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




None




**ITEM
      5.OTHER
      INFORMATION**




None




**ITEM
      6.EXHIBITS**




10.1
            Amendment
                to Medical Services Agreement, by and among Conmed, Inc. and Yakima
                County, Washington, dated April 3, 200710.2
            Contract
              Renewal Agreement, by and among Conmed, Inc. and Yakima County,
              Washington, dated September 4, 200710.3
            Amendment
                to Medical Services Agreement, by and among Conmed, Inc. and Yakima
                County, Washington, dated September 4, 200710.4
            First Amendment to
Services
              Agreement, by and among Conmed, Inc. and Sedgwick County, Kansas, dated
              June 1, 200710.5
            Medical
                Services Agreement, by and among Conmed, Inc. and Yakima County,
                Washington, dated October 2, 200731.1
            Certifications
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                200231.2
            Certifications
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                200232.1
            Certifications
                Pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            Certifications
                Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002





Page
          - 30
          -




**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





**Conmed
      Healthcare Management, Inc.**




November
              14, 2007By /s/ Richard W. TurnerRichard W. TurnerPresident and Chief Executive
              Officer




November
                14, 2007By /s/ Thomas W. FryThomas W. FryChief Financial Officer and
                Secretary




Page
          - 31
          -