U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

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

        For the quarter ended:               Commission File Number:
             June 30, 1998                           0-27554

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

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

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


                                 (515) 222-1717
                (Issuer's telephone number, including area code)

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

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

                                               Number of Shares Outstanding
       Class                                        August 12, 1998
Common Stock, no par                                    5,321,784

Transitional Small Business Disclosure Format (Check one): YES _____ NO __X__


<PAGE>


                      PACE HEALTH MANAGEMENT SYSTEMS, INC.

                          PART I. FINANCIAL INFORMATION


<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS                                                        Page
                                                                                  --------

<S>                                                                                   <C>
            Condensed Balance Sheets                                                  1
                  June 30, 1998 and December 31, 1997

            Condensed Statements of Operations                                        2
                  Three Months and Six Months Ended June 30, 1998 and 1997

            Condensed Statements of Cash Flows                                        3
                  Six Months ended June 30, 1998 and 1997

            Notes to Condensed Financial Statements                                   5

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR
            PLAN OF OPERATION                                                       6-9


                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS                                                           10

ITEM 2.  CHANGES IN SECURITIES                                                       10

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                             10

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                         10

ITEM 5.  OTHER INFORMATION                                                           10

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                            10


</TABLE>



<PAGE>


                          PART 1. FINANCIAL INFORMATION

ITEM  1.  FINANCIAL STATEMENTS

PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              JUNE 30, 1998      DEC. 31, 1997
                                                               ------------      ------------
<S>                                                            <C>               <C>         
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents (Note 2)                        $    239,216      $    525,356
     Accounts receivable, net                                       238,846         1,087,485
     Inventories, primarily computer equipment                       74,113            70,157
     Prepaid expenses                                                60,649            28,417
                                                               ------------      ------------
               TOTAL CURRENT ASSETS                                 612,824         1,711,415
                                                               ------------      ------------

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

FURNITURE AND EQUIPMENT, at cost, net of
     accumulated depreciation 1998 $924,865; 1997 $620,550          509,755           636,992
                                                               ------------      ------------

COMPUTER SOFTWARE DEVELOPMENT COSTS,
     net of accumulated amortization                              1,137,510         1,179,082
                                                               ------------      ------------

OTHER ASSETS, net                                                    46,884            57,730
                                                               ------------      ------------
                                                               $  2,306,973      $  3,873,219
                                                               ============      ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
     Note payable-bank                                         $  2,000,000      $  2,000,000
     Current maturities of long-term obligations                     39,887            79,252
     Accounts payable, customer deposits and
        accrued expenses                                          1,309,891         1,651,839
                                                               ------------      ------------
               TOTAL CURRENT LIABILITIES                          3,349,778         3,731,091
                                                               ------------      ------------

LONG-TERM OBLIGATIONS, less current maturities                       33,944            53,888
                                                               ------------      ------------

SHAREHOLDERS' EQUITY:
     Preferred stock                                              2,875,000         2,250,000
     Common stock                                                16,910,544        16,910,544
     Additional paid-in capital                                     413,486           413,486
     Unearned debt guarantee fees                                      --            (133,142)
     Accumulated deficit                                        (21,275,779)      (19,352,648)
                                                               ------------      ------------
                                                                 (1,076,749)           88,240
                                                               ------------      ------------
                                                               $  2,306,973      $  3,873,219
                                                               ============      ============
</TABLE>

See Notes to Condensed Financial Statements


<PAGE>



PACE HEALTH MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                        JUNE 30                           JUNE 30
                                             ----------------------------      ----------------------------
                                                1998             1997             1998             1997
                                             -----------      -----------      -----------      -----------
<S>                                          <C>              <C>              <C>              <C>        
NET REVENUES
      Systems revenues                       $   175,913      $   743,499      $   265,233      $ 1,265,888
      Customer support services                  229,035          161,864          441,387          281,059
                                             -----------      -----------      -----------      -----------
                                                 404,948          905,363          706,620        1,546,947
                                             -----------      -----------      -----------      -----------

COSTS AND EXPENSES
      Cost of systems revenues                    11,411          478,459           49,467          877,218
      Client services                            237,256          348,335          621,398          627,253
      Product development                        320,726          482,590          791,374          910,601
      Purchased research and development            --            588,502             --            588,502
      Sales and marketing                        106,684          353,189          328,282          741,062
      General and administrative                 322,457          335,562          656,729          685,866
                                             -----------      -----------      -----------      -----------
                                                 998,534        2,586,637        2,447,250        4,430,502
                                             -----------      -----------      -----------      -----------

             LOSS FROM OPERATIONS               (593,586)      (1,681,274)      (1,740,630)      (2,883,555)

OTHER (EXPENSE) INCOME, NET                       (7,841)          28,563         (182,501)          30,851
                                             -----------      -----------      -----------      -----------

             LOSS BEFORE INCOME TAXES           (601,427)      (1,652,711)      (1,923,131)      (2,852,704)

PROVISION FOR INCOME TAXES                          --               --               --               --
                                             -----------      -----------      -----------      -----------
             NET LOSS                        $  (601,427)     $(1,652,711)     $(1,923,131)     $(2,852,704)
                                             ===========      ===========      ===========      ===========

LOSS PER COMMON AND COMMON
     EQUIVALENT SHARE                        $     (0.13)     $     (0.31)     $     (0.39)     $     (0.55)
                                             ===========      ===========      ===========      ===========

WEIGHTED AVERAGE NUMBER OF
     COMMON AND COMMON
     EQUIVALENT  SHARES
     OUTSTANDING                               5,321,784        5,251,246        5,321,874        5,211,491
                                             ===========      ===========      ===========      ===========

</TABLE>


See Notes to Condensed Financial Statements



<PAGE>



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

<TABLE>
<CAPTION>
                                                                        SIX MONTHS ENDED
                                                                              JUNE 30,
                                                                   ----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES                                  1998             1997
                                                                   -----------      -----------
<S>                                                                <C>              <C>         
     Net loss                                                      $(1,923,131)     $(2,852,704)
     Adjustments to reconcile net loss to net cash (used in)
        operating activities:
       Depreciation                                                    139,109          127,773
       Amortization                                                    244,776           76,096
       Purchased research and development                                 --            588,502
     Change in assets and liabilities:
       Decrease in accounts receivable                               1,136,639          224,691
       (Increase) in other current assets                              (36,188)        (156,697)
       (Decrease) increase in other current liabilities               (341,948)         147,541
                                                                   -----------      -----------
             NET CASH (USED IN) OPERATING ACTIVITIES                  (780,743)      (1,844,798)
                                                                   -----------      -----------


CASH FLOWS FROM INVESTING ACTIVITIES
     Cash paid for net assets of Healthcare Software Solutions            --            (50,000)
     Capitalized computer software development costs                   (59,216)        (285,157)
     Purchase of furniture and equipment                               (11,872)        (133,271)
                                                                   -----------      -----------
             NET CASH PROVIDED BY INVESTING ACTIVITIES                 (71,088)        (468,428)
                                                                   -----------      -----------


CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from notes payable                                          --            975,000
     Proceeds from sale of Series A preferred stock                    625,000          247,999
     Proceeds from sale of common stock                                   --              6,400
     Payments on notes payable and long term obligations               (59,309)        (508,252)
                                                                   -----------      -----------
             NET CASH (USED IN) FINANCING ACTIVITIES                   565,691          721,147
                                                                   -----------      -----------

             NET (DECREASE) IN CASH AND CASH EQUIVALENTS              (286,140)      (1,592,079)


CASH AND CASH EQUIVALENTS
     Beginning                                                         525,356        1,687,044
                                                                   -----------      -----------
     Ending                                                        $   239,216      $    94,965
                                                                   ===========      ===========


</TABLE>


                                   (Continued)


<PAGE>


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

<TABLE>
<CAPTION>
                                                                                               SIX MONTHS ENDED
                                                                                                   JUNE 30,
                                                                                   ------------------------------------
                                                                                           1998                 1997
                                                                                   --------------------     -----------
<S>                                                                                <C>                      <C>        
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
    INFORMATION
      Cash payments for interest                                                   $             70,091     $    18,298
                                                                                   ====================     ===========

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
      Subscriptions receivable for Series A preferred stock                        $               --       $ 1,250,000
                                                                                   ====================     ===========

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

</TABLE>

See Notes to Condensed Financial Statements


<PAGE>


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

NOTE 1.  BASIS OF PRESENTATION

The accompanying financial information should be read in conjunction with the
annual financial statements and notes thereto for the year ended December 31,
1997. The financial information included herein is unaudited; such information
reflects all adjustments, which, in the opinion of management, are necessary in
order to make the financial statements not misleading.

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

NOTE 2.  BASIC AND DILUTED LOSS PER SHARE

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share,
which requires the Company to present basic and diluted loss per share amounts.
Basic loss per share is based on the weighted average number of common shares
outstanding during the period. Diluted 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). Dilutive potential common shares are excluded
from the computation if their effect is anti-dilutive.




<PAGE>


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

GENERAL. PACE Health Management Systems, Inc was organized in 1987 as a computer
systems consulting firm. In 1989, the Company began to develop and market a
nursing station care plan management system built around an artificial
intelligence-based "Clinical Library." In late 1992, the Company recognized what
it believed to be a significant opportunity for software applications integrated
with the Clinical Library to address the point-of-care clinical information
systems market and began to develop the PACE Clinical Information System
("PACE/CIS"). In early 1993, the Company discontinued marketing the nursing
station care plan management system as a stand-alone product and focused on
development of PACE/CIS. As a result, no new systems were installed during 1994,
and no license fee revenues were recorded during that year. During fourth
quarter of 1995, the Company discontinued the marketing and sale of PACE/CIS,
the system from which the Company had derived substantially all of its revenues
in 1995, and introduced PACE CMS, a comprehensive care management system
representing a significant enhancement to PACE/CIS. In 1996, PACE CMS, the
system from which the Company derives substantially all of its revenues, was
enhanced through the first release of a graphical user interface (GUI) utilizing
a three-tier, client/server, open-systems architecture ("Graphical PACE CMS").

During the second quarter of 1997, the Company expanded its product line into
the ambulatory market when it purchased substantially all of the assets of
Healthcare Software Solutions, L.C. (HSS), an affiliate of Wellmark, Inc.
(formerly IASD Health Services Corp.). HSS, headquartered in Des Moines, Iowa,
was developing clinical information systems for use by physicians working in
single-practitioner offices, multi-specialty groups, and multi-site clinics.
This "MR2000 for Windows" product integrates every element of the traditional
paper chart into an electronic clinical information system that improves
practice efficiency and the quality of care. The system provides point and click
access to healthcare information that facilitates the development of treatment
protocols and enables physicians to track patients' problems, symptoms,
treatments and outcomes

Prior to April 1995, the Company financed operations with capital contributed by
private investors. In April 1995, the Company completed its initial public
offering, selling 1,300,000 shares of common stock at $5.00 per share for net
proceeds to the Company of approximately $5.5 million. Effective as of the
closing of the initial public offering, all outstanding shares of the Company's
preferred stock issued during previous rounds of private financing were
converted to common stock on a one-to-one basis. In September 1996, the Company
sold 900,000 shares of common stock at $3.25 per share for net proceeds to the
Company of approximately $2.8 million. In the third and fourth quarters of 1997,
the Company sold 2,250,000 shares of convertible participating preferred stock
at $1.00 per share representing total proceeds of $2,250,000. In the first
quarter of 1998, the Company sold an additional 625,000 shares of convertible
participating preferred stock at $1.00 per share representing proceeds of
$625,000. Each share of preferred stock is convertible into 2 shares of common
stock.

During the second quarter of 1998 the Company entered into an agreement to sell
substantially all of its assets in exchange for cash and an assumption of
certain liabilities. The sale is subject to PACE shareholder approval (see
"Liquidity and Capital Resources"). Subject to this approval, the sale is
expected to close in October 1998.

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


<PAGE>

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

RESULTS OF OPERATIONS

NET REVENUES: Net revenues include systems revenues and customer support
services. The Company's net revenues were $404,948 and $905,363 for the three
months ended June 30, 1998 and 1997, respectively, representing a decrease of
55%. For the six months ended June 30, 1998 and 1997, the Company's net revenues
were $706,620 and $1,546,947 respectively, representing a 54% decrease. Systems
revenues for the quarter ended June 30, declined $567,586, or 76%, from $743,499
in 1997 to $175,913 in 1998. For the six months ended June 30, systems revenues
declined $1,000,655, or 79%, from $1,265,888 in 1997 to $265,233 in 1998. These
decreases were the result of delays in implementation of several 1997 contracts,
combined with the impact from no new contracts during the current fiscal year
(see "Liquidity and Capital Resources"). Included in systems revenues is revenue
from software license fees, implementation fees and hardware sales. Customer
support services revenues were $229,035 and $161,864 for the three months ended
June 30, 1998 and 1997, respectively, representing an increase of 41%, and
$441,387 and $281,059 for the six months ended June 30, 1998 and 1997,
respectively, representing an increase of 57%. These changes were due to
increased support service fees as a result of the new sites installed during
1997.

COST OF SYSTEMS REVENUES: Cost of systems revenues includes hardware purchases,
third party software, commissions and royalties. Cost of systems revenues were
$11,411 and $478,459 for the three months ended June 30, 1998 and 1997,
respectively, representing a decrease of 97%. Cost of systems revenues were
$49,467 and $877,218 for the six months ended June 30, 1998 and 1997,
respectively, representing a decrease of 94%. These decreases were a direct
result of the decline in systems revenue and associated costs.

CLIENT SERVICES: Client services expenses include salaries and expenses related
to implementation, installation and customer support. Client services expenses
were $237,256 and $348,335 for the three months ended June 30, 1998 and 1997,
respectively, representing a decrease of 32%. Client services expenses were
$621,398 and $627,253 for the six months ended June 30, 1998 and 1997,
representing a decrease of 1%. The decrease in the second quarter was a result
of the corporate downsizing that occurred in February 1998 (see "Liquidity and
Capital Resources"). The Company expects these expenses will remain low,
compared to prior periods, pending the closing of the sale of substantially all
of its assets (see "Liquidity and Capital Resources").

PRODUCT DEVELOPMENT: Product development expenses include salaries and expenses
related to development and documentation of software systems, net of capitalized
software development costs. Product development expenses were $320,726 and
$482,590 for the three months ended June 30, 1998 and 1997, respectively,
representing a decrease 70%. Product development expenses $791,374 and $910,601
for the six months ended June 30, 1998 and 1997, respectively, representing a
decrease 47%. The Company capitalized no expenses in the second quarter of 1998
as compared to $137,629 in the second quarter of 1997 and amortized
approximately $50,000 in both periods. The Company capitalized $59,216 during
the first six months of 1998 compared to $285,157 during the first six months of
1997. The Company amortized $100,788 and $76,096 during the six months ended
June 30, 1998 and 


<PAGE>

1997, respectively. The decreases in product development expenses and
capitalized costs were a result of the corporate downsizing that occurred in
February 1998 (see "Liquidity and Capital Resources"). The Company expects these
expenses will remain low, compared to prior periods, pending the closing of the
sale of substantially all of its assets (see "Liquidity and Capital Resources").

PURCHASED RESEARCH AND DEVELOPMENT. During the second quarter of 1997 the
Company expensed in-process research and development costs in the amount of
$588,502 related to an acquisition completed on May 30, 1997.

SALES AND MARKETING: Sales and marketing expenses include salaries, advertising,
trade show costs and travel expenses related to the sale and marketing of the
Company's systems. Sales and marketing expenses were $106,353 and $353,189 for
the three months ended June 30, 1998 and 1997, respectively, representing a
decrease of 70%. Sales and marketing expenses were $328,282 and $741,062 for the
six months ended June 30, 1998 and 1997, respectively, representing a decrease
of 56%. The decreases in sales and marketing expenses were a result of the
corporate downsizing that occurred in February 1998 (see "Liquidity and Capital
Resources"). The Company expects these expenses will remain low, compared to
prior periods, pending the closing of the sale of substantially all of its
assets (see "Liquidity and Capital Resources").

GENERAL AND ADMINISTRATIVE: General and administrative expenses include salaries
and expenses for the corporate administration and finance, legal, insurance and
depreciation expenses. General and administrative expenses were $322,457 and
$335,562 for the three months ended June 30, 1998 and 1997, respectively,
representing a decrease of 4%. General and administrative expenses were $656,729
and $685,866 for the six months ended June 30, 1998 and 1997, respectively,
representing a decrease of 4%. These expenses remained constant, in total, with
a decline in general operating expenses offset by retention bonus's of $156,000
paid to employees on June 30, 1998. The Company expects these expenses should
decrease in the future relative to a corporate downsizing that occurred in
February 1998.

OTHER (EXPENSE) INCOME, NET: Other income, net is comprised primarily of
interest income and expenses. Other income, net was ($7,841) and $28,563 for the
three months ended June 30, 1998 and 1997, respectively and ($182,501) and
$30,851 for the six months ended June 30, 1998 and 1997, respectively. These
decreases were a result of decreased interest income caused by reduced cash
balances and increased interest expense caused by additional borrowing on the
line of credit. Included in 1998 is other expense relative to the amortization
of unearned debt guarantee fees in the amount of $133,142.`

PROVISION FOR INCOME TAXES: No provision for income tax benefit has been
recorded due to the Company recording a valuation allowance on the deferred tax
assets.

LIQUIDITY AND CAPITAL RESOURCES

Since inception in 1987, the Company's primary source of funding for working
capital needs, capital expenditures, and its operating losses has been from the
sale of common and convertible participating preferred stock. During this time,
the Company completed numerous private placements, receiving approximately $7.8
million in aggregate net proceeds. In 1995, the Company completed its initial
public offering, selling 1,300,000 shares of common stock at $5.00 per share for
net proceeds to the Company of approximately $5.5 million. In September 1996,
PACE sold 900,000 shares of common stock at $3.25 per share for net proceeds of
approximately $2.8 million. In the third and fourth quarters of 1997, the
Company sold $2,250,000 shares of convertible participating preferred stock at
$1.00 per share representing total proceeds of $2,250,000. During the first
quarter of 1998, the Company sold an additional 625,000 shares of convertible
participating preferred stock at $1.00 per share representing total proceeds of
$625,000. Each share of preferred stock is convertible into 2 shares of common
stock.

For the six month periods ended June 30, 1998 and 1997, the Company reflected
net losses of $1,923,131 and $2,852,704 respectively, resulting in net cash used
in operations for each of the periods of $780,743 and $1,844,798 respectively.
Accounts payable, customer deposits, and accrued expenses decreased $341,948 to
$1,390,891 at 


<PAGE>

June 30, 1998 from $1,651,839 at December 31, 1997. As of June 30, 1998 customer
deposits, which include deposits and amounts billed and paid under contract
terms, in excess of revenue recognition, totaled $1,053,128.

Accounts receivable decreased $1,136,639 to $238,846 at June 30, 1998 from
$1,375,485 at December 31, 1997 due to increased collections on customer
balances and significantly reduced billings in the period. The Company has
established an allowance for doubtful accounts which management believes is
adequate. Included in accounts receivable is accrued revenue which decreased
$561,001 to $100,300 at June 30, 1998 from $661,301 at December 31, 1997. The
accrued revenue receivable consists primarily of (a) revenue from site license
agreements for which the Company has delivered and installed the first of
multiple copies of a software product to be installed at various customer sites
in exchange for a fixed fee and (b) revenue from equipment delivered, but not
yet billed. Under these site license agreements, license fees are due at
specified dates or, if earlier, upon the installation and system set-up at each
site.

Net cash used in investing activities for the six months ended June 30, 1998 and
1997 was $71,088 and $468,428, respectively. Cash used in investing activities
was primarily for the purchase of computer and office equipment and capitalized
computer software costs.

Net cash provided by financing activities for the six months ended June 30, 1998
and 1997 was $565,691 and $721,147, respectively. Net cash provided by financing
activities during the six months ended June 30, 1998 was primarily related to
proceeds from the sale of convertible participating preferred stock.

As of June 30, 1998, the Company had a cash balance of $239,216. The Company
also has a $2,000,000 revolving line of credit with a financial institution that
expires October 31, 1998. The line of credit is collateralized by substantially
all assets of the Company and personal guarantees totaling $1,000,000 by two of
the Company's shareholders. Interest is payable monthly at prime (8.5% at June
31, 1998). Outstanding borrowings totaled $2,000,000 at June 30, 1998.

While short-term working capital was obtained from existing investors during the
last 12 months, the Company has been unable to secure long-term funding. The
lack of sufficient long-term capital on the Company's balance sheet,
representing financial stability to prospective customers, resulted in the
delayed implementation of several signed contracts and the delayed completion of
numerous pending contracts in which PACE had been named Vendor-of-Choice. As a
result, certain operational and financial changes were implemented subsequent to
year-end. To reduce overhead and minimize the Company's cash needs, the Company
downsized its operations in February 1998. As a part of this downsizing,
approximately 40 employees were terminated and various other cost-saving
measures are under examination. The reductions were targeted at legacy
non-graphical product areas, allowing the Company to continue directing
resources into the development, sales and implementation of the Graphical PACE
CMS products.

During the second quarter the Company signed an agreement with 3M Health
Information Systems ("3M") to sell substantially all assets to 3M. Closing is
subject to PACE shareholder approval, as well as completing certain other
closing conditions, and is expected to close in October 1998. Preferred
shareholders have already approved the sale and are expected to vote their
common stock shares in favor of the transaction also. The purchase price of the
transaction is estimated at approximately $6.1 million, including $4.75 million
in cash, plus the assumption of most liabilities. The Company's line of credit
balance is excluded from the assumption of liabilities and will be repaid from
the proceeds of the sale. Net proceeds from the sale will be retained by the
Company pending evaluation of a possible follow-on transaction with other
parties. If no such transaction can be identified within six to twelve months
management may elect to liquidate.

As indicated above, the Company's existing investors purchased $625,000 of
convertible participating preferred stock during the first quarter of 1998. The
Company believes that this capital, combined with operating cash flows, existing
cash balances, and possibly additional capital from investors, will adequately
fund operations until its pending sale is completed.



<PAGE>


PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
         N/A

ITEM 2.  CHANGES IN SECURITIES
         N/A

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
         N/A

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

ITEM 5.  OTHER INFORMATION.
         N/A

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
         (a)   Exhibits
               Exhibit 27 Financial Data Schedule
         (b) Reports on Form 8-K
                No reports on Form 8-K were filed during the quarter for which
                this report is filed.



<PAGE>

                                   SIGNATURES

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


PACE HEALTH MANAGEMENT SYSTEMS, INC.
(Registrant)

   August 14, 1998                             /s/ ROGER D. HUSEMAN
----------------------     ----------------------------------------------------
        Dated                      Vice President of Finance and Administration
                                           and Chief Financial Officer