UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q




(Mark
      One)x
                      
                      QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
      OF 1934.For
      the quarterly period ended March 31, 2010OR ̈
                      
                      TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
      OF 1934.For
      the transition period
      from                 
      to





Commission
      File Number:0-27554





Conmed
Healthcare Management, Inc.


(Exact
name of registrant as specified in its charter)





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





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





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





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


YES x     NO
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).


YES  ̈     NO
 ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      Accelerated filer  ̈
              Accelerated
      filer  ̈Non-Accelerated
      filer  ̈
              Smaller
      reporting company x


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


YES  ̈     NO
x





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date:




Number of Shares OutstandingClass
              
              May 13, 2010Common
      Stock, $0.0001 par value per share
              
              12,630,822





CONMED
HEALTHCARE MANAGEMENT, INC.





TABLE
OF CONTENTS





PagePART I. FINANCIAL
      INFORMATIONITEM
      1. FINANCIAL STATEMENTS (UNAUDITED)Consolidated
      Balance SheetsMarch
      31, 2010 and December 31, 2009
                                1Consolidated
      Statements of OperationsFor
      the three months ended March 31, 2010 and 2009
                                2Consolidated
      Statements of Cash FlowsFor
      the three months ended March 31, 2010 and 2009
                                3Consolidated
      Statements of Shareholders’ EquityFor
      the three months ended March 31, 2010
                                4Notes
      to Consolidated Financial Statements
                                5ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                                10ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                                15ITEM
      4(T). CONTROLS AND PROCEDURES
                                15PART
      II. OTHER
      INFORMATIONITEM
      1. LEGAL PROCEEDINGS
                                16ITEM
      1A. RISK FACTORS
                                16ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
    PROCEEDS
                                16ITEM
      3. DEFAULTS UPON SENIOR SECURITIES
                                16ITEM
      4. RESERVED
                                16ITEM
      5. OTHER INFORMATION
                                16ITEM
      6. EXHIBITS
                                16SIGNATURES
                                17


i




PART
1.  FINANCIAL INFORMATION




ITEM
      1.
            FINANCIAL
      STATEMENTS





CONMED
HEALTHCARE MANAGEMENT, INC.


CONSOLIDATED
BALANCE SHEETS





March 31, 2010
                  (unaudited)
                
                
                December 31,
                  2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                
                $
                11,691,498
                
                
                $
                11,056,143Accounts
      receivable
                
                
                2,871,873
                
                
                
                2,278,074Prepaid
      expenses
                
                
                617,393
                
                
                
                865,261Deferred
      taxes
                
                
                111,000
                
                
                
                102,000Total
      current assets
                
                
                15,291,764
                
                
                
                14,301,478PROPERTY
      AND EQUIPMENT, NET
                
                
                646,329
                
                
                
                605,578DEFERRED
      TAXES
                
                
                1,377,000
                
                
                
                1,381,000OTHER
      ASSETSService
      contracts acquired, net
                
                
                848,000
                
                
                
                984,000Non-compete
      agreements, net
                
                
                424,895
                
                
                
                436,667Goodwill
                
                
                6,263,705
                
                
                
                6,263,705Deposits
                
                
                11,549
                
                
                
                11,549Total
      other assets
                
                
                7,548,149
                
                
                
                7,695,921$
                24,863,242
                
                
                $
                23,983,977LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                
                $
                1,705,625
                
                
                $
                1,489,498Accrued
      expenses
                
                
                4,751,365
                
                
                
                4,146,940Taxes
      payable
                
                
                209,783
                
                
                
                550,000Deferred
      revenue
                
                
                930,819
                
                
                
                1,018,645Total
      current liabilities
                
                
                7,597,592
                
                
                
                7,205,083DERIVATIVE
      FINANCIAL INSTRUMENTS
                
                
                1,343,134
                
                
                
                1,299,450SHAREHOLDERS’
      EQUITYPreferred
      stock, no par value; authorized 5,000,000 shares; issued and outstanding
      zero shares as of March 31, 2010 and December 31, 2009
                
                
                —
                
                
                
                —Common
      stock, $0.0001 par value, authorized 40,000,000 shares; issued and
      outstanding 12,629,572 shares as of March 31, 2010 and December 31,
      2009
                
                
                1,263
                
                
                
                1,263Additional
      paid-in capital
                
                
                37,989,331
                
                
                
                37,829,900Accumulated
      deficit
                
                
                (22,068,078
                )
                
                
                (22,351,719
                )Total
      shareholders' equity
                
                
                15,922,516
                
                
                
                15,479,444$
                24,863,242
                
                
                $
                23,983,977


See
Notes to Unaudited Financial Statements


Page - 1
-


CONMED HEALTHCARE MANAGEMENT,
INC.


CONSOLIDATED
      STATEMENTS OF OPERATIONS
(UNAUDITED)





For the Three
                  Months Ended
                  March 31, 2010
                
                
                For the Three
                  Months Ended
                  March 31, 2009Service
      contract revenue
                
                $
                14,751,971
                
                
                $
                12,419,241HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                
                
                8,215,300
                
                
                
                6,987,854Medical
      expenses
                
                
                3,139,742
                
                
                
                2,381,933Other
      operating expenses
                
                
                494,713
                
                
                
                384,205Total
      healthcare expenses
                
                
                11,849,755
                
                
                
                9,753,992Gross
      profit
                
                
                2,902,216
                
                
                
                2,665,249Selling
      and administrative expenses
                
                
                2,003,131
                
                
                
                1,815,527Depreciation
      and amortization
                
                
                319,529
                
                
                
                634,821Total
      operating expenses
                
                
                2,322,660
                
                
                
                2,450,348Operating
      income
                
                
                579,556
                
                
                
                214,901OTHER
      INCOME (EXPENSE)Interest
      income
                
                
                18,069
                
                
                
                28,628Interest
      (expense)
                
                
                —
                
                
                
                (5,205
                )Gain
      (loss) on fair value of derivatives
                
                
                (43,684
                )
                
                
                866Total
      other income (expense)
                
                
                (25,615
                )
                
                
                24,289Income
      before income taxes
                
                
                553,941
                
                
                
                239,190Income
      tax expense
                
                
                270,300
                
                
                
                121,000Net
      income
                
                $
                283,641
                
                
                $
                118,190EARNINGS
      PER COMMON SHAREBasic
                
                $
                0.02
                
                
                $
                0.01Diluted
                
                $
                0.02
                
                
                $
                0.01WEIGHTED-AVERAGE
      SHARES OUTSTANDINGBasic
                
                
                12,629,572
                
                
                
                12,471,928Diluted
                
                
                14,205,098
                
                
                
                13,529,197


See
Notes to Unaudited Financial Statements


Page - 2
-




CONMED HEALTHCARE
MANAGEMENT, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS
(UNAUDITED)





For the Three
                      Months Ended
                      March 31, 2010
                    
                    
                    For the Three
                      Months Ended
                      March 31, 2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                    
                    $
                    283,641
                    
                    
                    $
                    118,190Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
                    
                    
                    69,418
                    
                    
                    
                    43,821Amortization
                    
                    
                    250,111
                    
                    
                    
                    591,000Stock-based
      compensation
                    
                    
                    159,431
                    
                    
                    
                    159,269(Gain)
      loss on fair value of derivatives
                    
                    
                    43,684
                    
                    
                    
                    (866
                    )Deferred
      income taxes
                    
                    
                    (5,000
                    )
                    
                    
                    —Changes
      in working capital components(Increase)
      in accounts receivable
                    
                    
                    (593,799
                    )
                    
                    
                    (550,009
                    )Decrease
      in prepaid expenses
                    
                    
                    247,868
                    
                    
                    
                    152,578Increase
      in accounts payable
                    
                    
                    216,127
                    
                    
                    
                    272,945Increase
      in accrued expenses
                    
                    
                    604,425
                    
                    
                    
                    338,422(Decrease)
      in income taxes payable
                    
                    
                    (340,217
                    )
                    
                    
                    (253,097
                    )Increase
      (decrease) in deferred revenue
                    
                    
                    (87,826
                    )
                    
                    
                    78,561Net
      cash provided by operating activities
                    
                    
                    847,863
                    
                    
                    
                    950,814CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                    
                    
                    (65,240
                    )
                    
                    
                    (25,813
                    )Asset
      purchase
                    
                    
                    (147,268
                    )
                    
                    
                    —Net
      cash (used in) investing activities
                    
                    
                    (212,508
                    )
                    
                    
                    (25,813
                    )CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on line of credit
                    
                    
                    —
                    
                    
                    
                    (100,000
                    )Payments
      on loans
                    
                    
                    —
                    
                    
                    
                    (18,015
                    )Proceeds
      from exercise of warrants
                    
                    
                    —
                    
                    
                    
                    6,000Net
      cash (used in) financing activities
                    
                    
                    —
                    
                    
                    
                    (112,015
                    )Net
      increase in cash and cash equivalents
                    
                    
                    635,355
                    
                    
                    
                    812,986CASH
      AND CASH EQUIVALENTSBeginning
                    
                    
                    11,056,143
                    
                    
                    
                    7,472,140Ending
                    
                    $
                    11,691,498
                    
                    
                    $
                    8,285,126SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      payments for interest
                    
                    $
                    —
                    
                    
                    $
                    5,205Income
      taxes paid
                    
                    
                    615,837
                    
                    
                    
                    374,097


See
Notes to Unaudited Financial Statements


Page - 3
-


CONMED HEALTHCARE MANAGEMENT,
INC.


CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)





Preferred
                    Stock
                  
                  
                  Common
                    Stock
                  
                  
                  Additional Paid-
                    in Capital
                  
                  
                  Accumulated
                    Deficit
                  
                  
                  TotalBalance
      at December 31, 2009
                  
                  $
                  —
                  
                  
                  $
                  1,263
                  
                  
                  $
                  37,829,900
                  
                  
                  $
                  (22,351,719
                  )
                  
                  $
                  15,479,444Net
      Income
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  283,641
                  
                  
                  
                  283,641Stock
      option expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  159,431
                  
                  
                  
                  —
                  
                  
                  
                  159,431Balance
      at March 31, 2010
                  
                  $
                  —
                  
                  
                  $
                  1,263
                  
                  
                  $
                  37,989,331
                  
                  
                  $
                  (22,068,078
                  )
                  
                  $
                  15,922,516


See
Notes to Unaudited Financial Statements


Page - 4
-


CONMED
HEALTHCARE MANAGEMENT, INC.




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




NOTE
      1.
            Basis
      of Presentation




The
accompanying unaudited consolidated financial statements of Conmed Healthcare
Management, Inc. (together with its consolidated subsidiaries, “Conmed”, the
“Company”, “we”, “us”, or “our”, unless otherwise specified or the context
otherwise requires) contained herein have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (the “SEC”) for
interim reporting requirements of Form 10-Q and Rule 8-03 of Regulation S-X.
Accordingly, the financial information and disclosures normally included in the
financial statements prepared annually in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) have been condensed
or omitted. Readers of this report should, therefore, refer to the consolidated
financial statements and notes included in our Annual Report on Form 10-K for
the year ended December 31, 2009, filed with the SEC on March 25,
2010.





In the
opinion of management, all adjustments (consisting of normal and recurring
adjustments) which are considered necessary to fairly present our financial
position and our results of operations as of and for these periods have been
made.





Our
interim results of operations for the three months ended March 31, 2010 are not
necessarily indicative of the results of operations to be expected for a full
year.





In
January 2010, we purchased approximately $45,000 and $102,000 of fixed assets
and intangible assets, respectively, from a small mobile imaging company to
expand the base of services that we provide to our customers, as such services
were previously subcontracted.  This acquisition did not have a
material impact on our financial position or results of operations and therefore
additional proforma information has not been presented.




NOTE
      2.
            New
      Accounting Standards




In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value
Measurements.  The update provides amendments to FASB Accounting
Standards Codification 820-10, Fair Value, which requires
entities to disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers.  In addition, the update requires entities to present
separately information about purchases, sales, issuances and settlements in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3).  The disclosures related to Level 1 and Level 2 fair value
measurements became effective for us in 2010 and the disclosures related to
Level 3 fair value measurements are effective for us in 2011.  The
update requires new disclosures and will have no impact on our consolidated
financial position, results of operations or cash flows.




NOTE
      3.
            Common
      Stock Options




The Board
of Directors has adopted, and our stockholders have approved, the 2007 Stock
Option Plan, as amended (the “2007 Plan”). The 2007 Plan provides for the grant
of up to 2,350,000 incentive stock options, nonqualified stock options and
restricted stock units. The 2007 Plan is administered by the independent members
of the Board of Directors, which has the authority and discretion to determine:
the persons to whom the options will be granted; when the options will be
granted; the number of shares subject to each option; the price at which the
shares subject to each option may be purchased; and when each option will become
exercisable. The options generally vest over three to four years and expire no
later than ten years from the date of grant.





During
the three months ended March 31, 2010 and 2009, we recorded stock-based
compensation expense net of reversals for forfeited options totaling $159,431
and $159,269, respectively.





During
the three months ended March 31, 2010, options were granted to purchase 76,000
shares of common stock at an average exercise price of $3.13 per share and an
average grant date fair value of $2.15 per share.  Additionally,
during the three months ended March 31, 2010, options to purchase 3,750 shares
of common stock were forfeited, options to purchase 1,000 shares of common stock
were cancelled and, as of March 31, 2010, 259,583 shares remain available for
grant.





As of
March 31, 2010, stock based compensation expense not yet recognized in income
totaled $845,920, which is expected to be recognized over a weighted-average
remaining period of 1.03 years.


Page - 5
-




NOTE
      4.
            Common
      Stock Warrants




Pre-Acquisition
Warrants


In
connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued
warrants to purchase an aggregate of 250,000 shares of common stock to warrant
holders of the Company’s predecessor exercisable at $0.30 per
share.  The warrants vested immediately and expire October 23,
2010.





Investor
Warrants


In
connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued
to investors warrants to purchase an aggregate of 1,500,000 shares of common
stock, exercisable at $0.30 per share and warrants to purchase an aggregate of
500,000 shares of common stock, exercisable at $2.50 per share.  The
warrants vested immediately and expire March 13, 2012.





Placement
Agent Warrants


In
connection with the acquisition of Conmed, Inc. on January 26, 2007, we issued
to Maxim Group LLC, our exclusive placement agent, a warrant to purchase 300,000
shares of common stock, exercisable at $2.75 per share.  The warrants
vested immediately and expire January 26, 2012.





Consultant
Warrants


In
connection with the purchase of all of the assets of Emergency Medicine
Documentation Consultants, P.C., a provider of medical services in northwest
Oregon, in 2008, we issued warrants to two consultants to purchase an aggregate
of 80,000 shares of common stock at an exercise price of $1.85 per share. The
warrants vested immediately and expire February 28, 2013.





Summary




The
following table summarizes the warrant activity for the three months ended March
31, 2010:





Pre-
                    Acquisition
                    Warrants
                  
                  
                  Investor
                    Warrants
                    @ $0.30
                    per share
                  
                  
                  Investor
                    Warrants
                    @ $2.50
                    per share
                  
                  
                  Placement
                    Agent
                    Warrants
                  
                  
                  Consultant
                    Warrants
                  
                  
                  TotalExercise
      price
                  
                  $
                  0.30
                  
                  
                  $
                  0.30
                  
                  
                  $
                  2.50
                  
                  
                  $
                  2.75
                  
                  
                  $
                  1.85
                  
                  
                  $
                  1.32Warrants
      outstanding as of December 31, 2009
                  
                  
                  223,000
                  
                  
                  
                  813,000
                  
                  
                  
                  496,667
                  
                  
                  
                  300,000
                  
                  
                  
                  80,000
                  
                  
                  
                  1,912,667Warrants
      exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Warrants
      outstanding as of March 31, 2010
                  
                  
                  223,000
                  
                  
                  
                  813,000
                  
                  
                  
                  496,667
                  
                  
                  
                  300,000
                  
                  
                  
                  80,000
                  
                  
                  
                  1,912,667





The
following table summarizes the warrant activity for the three months ended March
31, 2009:





Pre-
                    Acquisition
                    Warrants
                  
                  
                  Investor
                    Warrants
                    @$0.30
                    pershare
                  
                  
                  Investor
                    Warrants
                    @$2.50
                    pershare
                  
                  
                  Placement
                    Agent
                    Warrants
                  
                  
                  Consultant
                    Warrants
                  
                  
                  TotalExercise
      price
                  
                  $
                  0.30
                  
                  
                  $
                  0.30
                  
                  
                  $
                  2.50
                  
                  
                  $
                  2.75
                  
                  
                  $
                  1.85
                  
                  
                  $
                  1.25Warrants
      outstanding as of December 31, 2008
                  
                  
                  225,000
                  
                  
                  
                  980,000
                  
                  
                  
                  500,000
                  
                  
                  
                  300,000
                  
                  
                  
                  80,000
                  
                  
                  
                  2,085,000Warrants
      exercised
                  
                  
                  —
                  
                  
                  
                  20,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  20,000Warrants
      outstanding as of March 31, 2009
                  
                  
                  225,000
                  
                  
                  
                  960,000
                  
                  
                  
                  500,000
                  
                  
                  
                  300,000
                  
                  
                  
                  80,000
                  
                  
                  
                  2,065,000


Page - 6
-




NOTE
      5.
            Fair
      Value of Warrants




As a
result of adopting derivative accounting for warrants, effective January 1,
2009, 1,705,000 of our issued and outstanding common stock purchase warrants
previously treated as equity were no longer afforded equity
treatment.  These common stock purchase warrants do not trade in an
active securities market, and as such, we estimate the fair value of these
warrants using the Black-Scholes option pricing model and all changes in the
fair value of these warrants are recognized currently in earnings until such
time as the warrants are exercised, amended or expire.





Investor
Warrants @ $0.30 per share





Black-Scholes assumptions
                  
                  March 31, 2010
                  
                  
                  December 31, 2009Expected
      life (years)
                  
                  
                  1.4
                  
                  
                  
                  1.5Expected
      volatility
                  
                  
                  76.77
                  %
                  
                  
                  79.59
                  %Risk-free
      interest rate
                  
                  
                  1.5
                  %
                  
                  
                  1.4
                  %Expected
      dividend yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %





Investor
Warrants @ $2.50 per share





Black-Scholes assumptions
                  
                  March 31, 2010
                  
                  
                  December 31, 2009Expected
      life (years)
                  
                  
                  1.4
                  
                  
                  
                  1.5Expected
      volatility
                  
                  
                  76.77
                  %
                  
                  
                  79.59
                  %Risk-free
      interest rate
                  
                  
                  1.5
                  %
                  
                  
                  1.4
                  %Expected
      dividend yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %





The
following tables summarize the warrant activity subject to fair value accounting
for the three months ended March 31, 2010:




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





Investor
                    Warrants@
                    $0.30per
                    share
                  
                  
                  Investor
                    Warrants@
                    $2.50per
                    share
                  
                  
                  TotalFair
      value of warrants outstanding as of December 31, 2009
                  
                  $
                  615,280
                  
                  
                  $
                  684,170
                  
                  
                  $
                  1,299,450Realized
      loss on warrants
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Unrealized
      loss on warrants
                  
                  
                  28,507
                  
                  
                  
                  15,177
                  
                  
                  
                  43,684Fair
      value of warrants transferred to equity upon amendment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Fair
      value of warrants exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Fair
      value of warrants outstanding as of March 31, 2010
                  
                  $
                  643,787
                  
                  
                  $
                  699,347
                  
                  
                  $
                  1,343,134





As of
March 31, 2010, we had outstanding warrants to purchase an aggregate of
1,912,667 shares of common stock, of which warrants to purchase 718,097 shares
of common stock were subject to derivative accounting for warrants, at an
average exercise price of $1.82, and we have reserved shares of our common stock
for issuance in connection with the potential exercise thereof.


Page - 7
-




NOTE
      6.
            Fair
      Value Measurements




The
Company is required to disclose the fair value measurements required by the fair
value measurement guidance.  The derivative financial instruments
recorded at fair value in the balance sheets as of March 31, 2010 and December
31, 2009 are categorized based upon the level of judgment associated with the
inputs used to measure their fair value.





The
following tables summarize the financial liabilities measured at fair value on a
recurring basis segregated by the level of valuation inputs within the fair
value hierarchy utilized to measure fair value:





As of March 31, 2010Total
                  
                  
                  Quoted prices in
                    active markets for
                    identical assets
                    (Level 1)
                  
                  
                  Significant other
                    observable inputs
                    (Level 2)
                  
                  
                  Significant
                    unobservable
                    inputs
                    (Level 3)Derivative
      financial instruments
                  
                  $
                  1,343,134
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,343,134





As of December 31, 2009Total
                  
                  
                  Quoted prices in
                    active markets for
                    identical assets
                    (Level 1)
                  
                  
                  Significant other
                    observable inputs
                    (Level 2)
                  
                  
                  Significant
                    unobservable
                    inputs
                    (Level 3)Derivative
      financial instruments
                  
                  $
                  1,299,450
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,299,450





Equity-linked
financial instruments consist of stock warrants issued by the Company that
contain a strike price adjustment feature.  In accordance with
derivative accounting for warrants, we calculated the fair value of warrants
using the Black-Scholes option pricing model and the assumptions used are
described in Note 5, “Fair Value of Warrants”.  During the three
months ended March 31, 2010 and 2009, we recognized a $43,684 unrealized loss
and an $866 unrealized gain, respectively, related to the change in fair value
of the financial instruments which is included in Other Income on the Statement
of Operations.


Page - 8
-





The
following table reflects the activity for liabilities measured at fair value
using Level 3 inputs for the three months ended March 31:





2010
                    
                    
                    2009Balance
      as of January 1
                    
                    $
                    1,299,450
                    
                    
                    $
                    2,766,150Transfers
      into level 3
                    
                    
                    —
                    
                    
                    
                    —Transfers
      out of level 3
                    
                    
                    —
                    
                    
                    
                    —Sales
      of equity-linked financial instruments
                    
                    
                    —
                    
                    
                    
                    (38,924
                    )Realized
      loss related to the change in fair value
                    
                    
                    —
                    
                    
                    
                    —Unrealized
      (gain) loss related to the change in fair value
                    
                    
                    43,684
                    
                    
                    
                    (866
                    )Balance
      as of March 31
                    
                    $
                    1,343,134
                    
                    
                    $
                    2,726,360




NOTE
      7.
            Earnings
      Per Share




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





For the Three
                      Months Ended
                      March 31, 2010
                    
                    
                    For the Three
                      Months Ended
                      March 31, 2009Numerator:Net
      income for basic earnings per share
                    
                    $
                    283,641
                    
                    
                    $
                    118,190Subtractions:Gain
      on fair value of derivatives
                    
                    
                    —
                    
                    
                    
                    866Net
      income for diluted earnings per share
                    
                    $
                    283,641
                    
                    
                    $
                    117,324Denominator:Weighted-average
      basic shares outstanding
                    
                    
                    12,629,572
                    
                    
                    
                    12,471,928Assumed
      conversion of dilutive securitiesStock
      options
                    
                    
                    442,324
                    
                    
                    
                    32,904Warrants
                    
                    
                    1,133,202
                    
                    
                    
                    1,024,365Potentially
      dilutive common shares
                    
                    
                    1,575,526
                    
                    
                    
                    1,057,269Denominator
      for diluted earnings per share – Adjusted weighted average
      shares
                    
                    
                    14,205,098
                    
                    
                    
                    13,529,197Earnings
      (loss) per common share:Basic
                    
                    $
                    0.02
                    
                    
                    $
                    0.01Diluted
                    
                    $
                    0.02
                    
                    
                    $
                    0.01





Common
stock warrants and options outstanding totaling 343,750 and 3,049,898 shares,
respectively, are not included in diluted earnings per common share for the
three months ended March 31, 2010 and 2009, respectively, as they would have an
antidilutive effect on earnings per common share.




NOTE
      8.
            Income
      Tax Matters




Our
effective tax rates were 48.8% and 50.6% during the three months ended March 31,
2010 and 2009, respectively, which differs from the expected tax rate of 39.0%
primarily due to permanent differences related to stock-based compensation and
derivatives related to warrants.  For the three months ended March 31,
2010, we recorded income tax expense of $270,300 and for the three months ended
March 31, 2009, we recorded income tax expense of $121,000.


Page - 9
-




ITEM
      2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




Information included in this section
and elsewhere in this Quarterly Report on Form 10-Q contains forward-looking
statements regarding the business, operations and financial condition of Conmed
Healthcare Management, Inc. (together with its consolidated subsidiaries, the
“Company”, “we”, “us”, or “our” unless otherwise specified or the context
otherwise requires) within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from our future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, and other statements that are not
historical facts, are generally identifiable by use of the words "may," "will,"
"should," "expect," "anticipate," "estimate," "believe," "intend," “plan,”
“potential” or "project" or the negative of these words or other variations on
these words or comparable terminology. These forward-looking statements are
based on assumptions that may be incorrect, and there can be no assurance that
these projections included in these forward-looking statements will come to
pass. Our actual results could differ materially from those expressed or implied
by the forward-looking statements as a result of various factors. We caution you
not to place undue reliance on these forward-looking statements. Such
forward-looking statements relate only to events as of the date on which the
statements are made. These forward-looking statements involve certain risks and
uncertainties that are subject to change based on various factors (many of which
are beyond the Company's control) including, without limitation, the Company's
ability to increase revenue and to continue to obtain new contracts; the
incurrence of start-up costs associated with new contracts;contract
renewals and extensions; inflation exceeding the Company’s projection of the
inflation rate of cost of services under multi-year contracts; the ability to
obtain bonds; decreases in occupancy levels or disturbances at detention
centers; malpractice litigation; the ability to utilize third party
administrators for out-of-facility care; compliance with laws and government
regulations, including those relating to healthcare; investigation
and auditing of our contracts by government agencies; competition;
termination of contracts due to lack of government appropriations; material
adverse changes in economic and industry conditions in the healthcare market;
negative publicity regarding the provision of correctional healthcare services;
dependence on key personnel and the ability to hire skilled personnel; influence
of certain stockholders; increases in healthcare costs; insurance;
completion and integration of future acquisitions; public company obligations;
limited liability of directors and officers; the Company’s ability to meet
the NYSE Amex continued listing standards; and stock price volatility. We
undertake no obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise, even if experience or
future changes make it clear that any projected results or events expressed or
implied therein will not be realized. You are advised, however, to consult any
further disclosures we make in future public statements and press releases.More detailed information about us
and the risk factors that may affect the realization of forward-looking
statements is set forth in our filings with the Securities and Exchange
Commission (the “SEC”), including our Annual Report on Form 10-K for the year
ended December 31, 2009, filed with the SEC on March 25, 2010. Investors and
security holders are urged to read this document free of charge on the SEC's web
site at www.sec.gov.




General




We
provide healthcare services to county and municipal detention centers across the
United States. As a result of the Supreme Court decision in Estelle v. Gamble
(1976), all individuals held against their will are required to be provided with
community standard healthcare. Under this requirement, correctional institutions
are required to provide healthcare services for their inmates. We are a
specialist in the provision of these services, having provided correctional
healthcare services since 1984.  We began providing correctional
healthcare services in the State of Maryland, and currently serve county and
municipal correctional facilities in thirty-eight counties in seven
states:  Arizona, Kansas, Maryland, Oklahoma, Oregon, Virginia and
Washington. Our services have expanded to include mental health, pharmacy and
out-of-facility healthcare services.




Critical
      Accounting Policies




The
discussion and analysis of our financial condition and results of operations are
based upon our condensed consolidated financial statements. These condensed
consolidated financial statements have been prepared following the requirements
of accounting principles generally accepted in the United States (“GAAP”) for
interim periods and require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition and
related medical expense accruals and amortization and potential impairment of
intangible assets and goodwill and stock-based compensation expense. As these
are condensed consolidated financial statements, one should also read expanded
information about our critical accounting policies and estimates provided in
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations”, included in our Annual Report on Form 10-K for the year ended
December 31, 2009, filed with the SEC on March 25, 2010. There have been no
material changes to our critical accounting policies and estimates from the
information provided in our Form 10-K for the year ended December 31,
2009.


Page - 10
-




Recently
      Adopted Accounting Standards




In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value
Measurements.  The update provides amendments to FASB Accounting
Standards Codification 820-10, Fair Value, which requires
entities to disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers.  In addition, the update requires entities to present
separately information about purchases, sales, issuances and settlements in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3).  The disclosures related to Level 1 and Level 2 fair value
measurements became effective for us in 2010 and the disclosures related to
Level 3 fair value measurements are effective for us in 2011.  The
update requires new disclosures and will have no impact on our consolidated
financial position, results of operations or cash flows.




Results
      of Operations




Three
Months Ended March 31, 2010 compared to Three Months Ended March 31,
2009


The
following discussion of financial results below is derived from unaudited
financial statements for the three months ended March 31, 2010 and
2009.





Three Months Ended
                  March 31, 2010
                
                
                Three Months Ended
                  March 31, 2009Amount
                
                
                % of
                  Revenue
                
                
                Amount
                
                
                % of
                  RevenueService
      contract revenue
                
                $
                14,751,971
                
                
                
                100.0
                %
                
                $
                12,419,241
                
                
                
                100.0
                %HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                
                
                8,215,300
                
                
                
                55.7
                %
                
                
                6,987,854
                
                
                
                56.3
                %Medical
      expenses
                
                
                3,139,742
                
                
                
                21.3
                %
                
                
                2,381,933
                
                
                
                19.2
                %Other
      operating expenses
                
                
                494,713
                
                
                
                3.4
                %
                
                
                384,205
                
                
                
                3.1
                %Total
      healthcare expenses
                
                
                11,849,755
                
                
                
                80.3
                %
                
                
                9,753,992
                
                
                
                78.5
                %Gross
      profit
                
                
                2,902,216
                
                
                
                19.7
                %
                
                
                2,665,249
                
                
                
                21.5
                %OPERATING
      EXPENSES:Selling
      and administrative expenses
                
                
                2,003,131
                
                
                
                13.6
                %
                
                
                1,815,527
                
                
                
                14.6
                %Depreciation
      and amortization
                
                
                319,529
                
                
                
                2.2
                %
                
                
                634,821
                
                
                
                5.1
                %Total
      operating expenses
                
                
                2,322,660
                
                
                
                15.7
                %
                
                
                2,450,348
                
                
                
                19.7
                %Operating
      income
                
                
                579,556
                
                
                
                3.9
                %
                
                
                214,901
                
                
                
                1.7
                %OTHER
      INCOME (EXPENSE)Interest
      income
                
                
                18,069
                
                
                
                0.1
                %
                
                
                28,628
                
                
                
                0.2
                %Interest
      expense
                
                
                —
                
                
                
                0.0
                %
                
                
                (5,205
                )
                
                
                0.0
                %Gain
      (loss) on fair value of derivatives
                
                
                (43,684
                )
                
                
                (0.3
                )%
                
                
                866
                
                
                
                0.0
                %Total
      other income (expense)
                
                
                (25,615
                )
                
                
                (0.2
                )%
                
                
                24,289
                
                
                
                0.2
                %Income
      before income taxes
                
                
                553,941
                
                
                
                3.8
                %
                
                
                239,190
                
                
                
                1.9
                %Income
      tax expense
                
                
                270,300
                
                
                
                1.8
                %
                
                
                121,000
                
                
                
                1.0
                %Net
      income
                
                $
                283,641
                
                
                
                1.9
                %
                
                $
                118,190
                
                
                
                1.0
                %





Summary


Net
revenue from medical services provided primarily to correctional institutions
for the three months ended March 31, 2010 and 2009, was $14,751,971 and
$12,419,241, respectively, which represents an increase of $2,332,730 or 18.8%.
Net income was $283,641 or 1.9% of revenue compared to a net income of $118,190
or 1.0% of revenue for the three months ended March 31, 2010 and 2009,
respectively, which represented increased income of $165,451.


Page - 11
-





Revenue


The
addition of service contracts signed with new jurisdictions since January 1,
2009 accounted for $1,527,844 or 65.5% of the increase in revenue for the three
months ended March 31, 2010 compared to the same period for the prior
year.  These jurisdictions are as follows: Clark County, WA; Coos
County, OR; Creek County, OK; Garrett County, MD; Kittitas County, WA; Pima
County (Juvenile), AZ; Washington County, MD; and Western Virginia Regional
Jail, VA.  Revenue improvement totaling $464,601, or 19.9% of the
increase, resulted primarily from expansion of the services provided under a
number of our existing contracts in which we were providing services prior to
2009. Price increases related to existing service requirements totaled $293,739
or 12.6% of the revenue increase. The remainder of revenue improvement, $46,546
or 2.0% of the increase, was the result of increases in other volume related
activities, primarily associated with an increase in stop/loss reimbursements
due to higher out of facility medical expenditures in excess of stop/loss limits
billed back to counties.





Healthcare
Expenses


Salaries
and employee benefits


Salaries
and employee benefits for healthcare employees were $8,215,300 or 55.7% of
revenue for the three months ended March 31, 2010, compared to $6,987,854 or
56.3% of revenue for the three months ended March 31, 2009. The increase in
spending for salaries and employee benefits of $1,227,446 or 17.6% is due
primarily to the addition of new healthcare employees resulting from new
business. Approximately 76.0% of the increase related to new healthcare
employees required to support the staffing requirements for our new medical
service contracts as detailed above. Additional services related to previously
existing medical service contracts, as well as cost-of-living and wage and
benefit adjustments for existing employees accounted for the remainder of the
increase. The decrease in salaries and employee benefits as a percentage of
revenue is due to a change in the mix of expense for salaries and benefits. In
addition to providing staffing services, the new service contracts primarily
include responsibility for medical services both in and out of the facility as
well as pharmacy services, resulting in a lower ratio of salaries and employee
benefits to revenue.





Medical
expenses


Medical
expenses for the three months ended March 31, 2010 and 2009 were $3,139,742 or
21.3% of revenue and $2,381,933 or 19.2% of revenue, respectively, which
represented an increase of $757,809 or 31.8%. The increase in spending for
medical expenses in absolute dollars reflects increases primarily from new
contracts for medical services both in and out of the facility plus increased
expenditures for pharmacy services. The increase in spending as a percentage of
revenue results, in part, from the new service contracts added since January 1,
2009 that are primarily full service contracts and, as a result, included a
higher proportion of medical expense when compared to existing
contracts.  In addition, out of facility hospital expenses were higher
than the prior year, reflecting a return to normal spending levels, due to lower
than normal hospitalization days in the first three months of 2009.





Other
operating expenses


Other
operating expenses were $494,713, or 3.4% of revenue, for the three months ended
March 31, 2010, compared to $384,205, or 3.1% of revenue, for the three months
ended March 31, 2009. The increase of $110,508 in spending is primarily related
to the increase in the number of inmates served as a result of the new service
contracts and reflects increased spending for consulting, professional liability
insurance, office supplies and travel expenses partially offset by a reduction
in employment advertising.





Operating
Expenses


Selling
and administrative expenses


Selling
and administrative expenses for the three months ended March 31, 2010 and 2009
were $2,003,131 or 13.6% of revenue and $1,815,527 or 14.6% of revenue,
respectively. The increased expenditure of $187,604 primarily reflects an
increased investment in additional management and administrative personnel
required to support new contracts and services added in 2009 and
2010.  The reduction in spending as a percentage of revenue resulted
from improved economies of scale.  Stock based compensation for the
three months ended March 31, 2010 and 2009 was $159,431 and $159,269,
respectively.





Depreciation
and amortization


Depreciation
and amortization primarily reflects the amortization of intangible assets
related to the acquisition of Conmed, Inc. in January 2007, the purchase of
medical service contracts from Emergency Medicine Documentation Consultants,
P.C. (“EMDC”) in February 2008 and the acquisition of CMHS in November 2008.
Amortization of service contracts acquired was $153,000, or 1.0% of revenue, for
the three months ended March 31, 2010, compared to $494,000, or 4.0% of revenue,
for the three months ended March 31, 2009. The decrease primarily reflects a
decrease in amortization expense as certain individual service contracts
acquired have become fully amortized.  Amortization of non-compete
agreements was $97,111, or 0.7% of revenue, for the three months ended March 31,
2010, compared to $97,000, or 0.8% of revenue, for the three months ended March
31, 2009. Depreciation expense increased to $69,418 for the three months ended
March 31, 2010 compared to $43,821 for the prior year period due primarily to
capital expenditures associated with vehicle purchases as well as purchases of
medical equipment and computers at various facilities.


Page - 12
-





Interest
income


Interest
income was $18,069 for the three months ended March 31, 2010 compared to $28,628
for the same period in 2009. Average cash balances in the first quarter of 2010
were higher compared to the first quarter of 2009, however the lower interest
income reflects reduced short-term interest rates during the
period.





Interest
expense


Interest
expense for the first quarter decreased to $0 in 2010 compared to $5,205 in the
same period in 2009.





Gain
(loss) on fair value of derivatives


As a
result of adopting derivative accounting for warrants effective January 1, 2009,
1,705,000 of our issued and outstanding common stock purchase warrants
previously treated as equity were no longer afforded equity treatment and as a
result they are now recorded as a liability based on fair value
estimates.  These common stock purchase warrants do not trade in an
active securities market, and as such, we estimate the fair value of these
warrants using the Black-Scholes option pricing model and all changes in the
fair value of these warrants will be recognized currently in earnings until such
time as the warrants are exercised, amended or expire.





During
the three months ended March 31, 2010 and 2009, we recognized a $43,684
unrealized loss and an $866 unrealized gain, respectively.  The
increased expense of $44,550 was the result of the increase in the estimated
fair value of the warrants primarily due to the $0.13 increase in our common
stock from December 31, 2009 to March 31, 2010 compared to no change in our
common stock price from January 1, 2009 to March 31, 2009.





During
the three months ended March 31, 2010, no warrants were exercised.  As
of March 31, 2010, we had outstanding warrants subject to derivative accounting
to purchase an aggregate of 718,097 shares of common stock.  During
the three months ended March 31, 2009, warrants to purchase 20,000 shares of
common stock were exercised generating $6,000 of net proceeds and having an
aggregate fair value of $38,924 on the exercise dates.  As of March
31, 2009, we had outstanding warrants subject to derivative accounting to
purchase an aggregate of 1,685,000 shares of common stock.





The
following table summarizes the change in fair value for the three months ended
March 31:





2010
                  
                  
                  2009Fair
      value of warrants outstanding as of January 1
                  
                  $
                  1,299,450
                  
                  
                  $
                  2,766,150Realized
      loss on warrants
                  
                  
                  —
                  
                  
                  
                  —Unrealized
      (gain) loss on warrants
                  
                  
                  43,684
                  
                  
                  
                  (866
                  )Fair
      value of warrants transferred to equity upon amendment
                  
                  
                  —
                  
                  
                  
                  —Fair
      value of warrants exercised
                  
                  
                  —
                  
                  
                  
                  (38,924
                  )Fair
      value of warrants outstanding as of March 31
                  
                  $
                  1,343,134
                  
                  
                  $
                  2,726,360





See Note
5, “Fair Value of Warrants”, for additional information on the warrant activity
subject to fair value accounting for the three months ended March 31,
2010.





Income
tax expense


Our
effective tax rates were 48.8% and 50.6% during the three months ended March 31,
2010 and 2009, respectively, which differs from the expected tax rate of 39.0%
primarily due to permanent differences related to stock-based compensation and
derivatives related to warrants.  For the three months ended March 31,
2010, we recorded income tax expense of $270,300 compared to $121,000 for the
three months ended March 31, 2009.  The increase in income tax expense
is primarily attributable to the increase in income before income
taxes.


Page - 13
-




Liquidity
      and Capital Resources




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





Cash
Flow for the three months ended March 31, 2010 compared to the three months
ended March 31, 2009


Cash as
of March 31, 2010 and March 31, 2009 was $11,691,498 and $8,285,126,
respectively.  We believe that our existing cash balances and
anticipated cash flows from future operations will be sufficient to meet our
normal operating requirements and liquidity needs for at least the next twelve
months.





Cash
Flows from Operating Activities


Cash flow
from operations for the three months ended March 31, 2010 totaled $847,863,
reflecting a net income of $283,641 plus $517,644 in adjustments for non-cash
expenses such as amortization of $250,111, stock-based compensation of $159,431
and other non-cash expenses of $108,102.  Changes in working capital
components generated an additional $46,578, reflective of increases in accounts
payable of $216,127 and accrued expenses of $604,425, as well as a decrease in
prepaid expenses of $247,868 partially offset by an increase in accounts
receivable of $593,799 and decreases in income taxes payable of $340,217 and
other working capital components of $87,826.  The increase in accounts
payable resulted primarily from the timing of vendor payments in relation to
quarter end.  The increase in accrued expenses resulted primarily from
the addition of new healthcare employees required to support the increased
staffing requirements from our new medical service contracts in addition to the
wage accrual covering one additional day as compared to the three months ended
December 31, 2009 partially offset by a reduction in accrued medical expenses
and a reduction in other corporate expense accruals.  The decrease in
income taxes payable resulted primarily from the payment of scheduled estimated
taxes partially offset by accruals of estimated taxes payable.  The
decrease in prepaid expenses resulted primarily from a reduction in prepaid
professional liability insurance.  We prepaid our primary annual
professional liability insurance policy in October 2009 and we expense the
prepaid amounts ratably from the annual policy period of October through
September.  The increase in accounts receivable resulted primarily
from new medical service contracts added in 2010 as well as an increase in
receivables for medical expenditures in excess of stop/loss limits.





Cash flow
from operations for the three months ended March 31, 2009 totaled $950,814,
reflecting a net income of $118,190 plus $793,224 in adjustments for non-cash
expenses such as amortization of $591,000 and stock-based compensation of
$159,269.  Changes in working capital components generated an
additional $39,400, reflective of increases in accrued expenses of $338,422 and
accounts payable of $272,945, as well as a decrease in prepaid expenses of
$152,578 partially offset by an increase in accounts receivable of $550,009 and
a decrease in income taxes payable of $253,097.  The increase in
accrued expenses resulted primarily from the addition of new healthcare
employees required to support the increased staffing requirements from our new
medical service contracts in addition to the wage accrual covering six
additional days as compared to the three months ended December 31, 2008
partially offset by a reduction in accrued medical expenses and a reduction in
other corporate expense accruals.  The increase in accounts payable
resulted primarily from the timing of vendor payments in relation to quarter
end.  The decrease in income taxes payable resulted primarily from the
payment of scheduled estimated taxes partially offset by accruals of estimated
taxes payable.  The increase in accounts receivable resulted primarily
from Pima County’s payment being received after March 31, 2009.  The
decrease in prepaid expenses resulted primarily from a reduction in prepaid
professional liability insurance.





Cash
Flows from Investing Activities


Cash flow
from investing activities for the three months ended March 31, 2010 used
$212,508.  Purchases of property and equipment used $65,240 primarily
for purchases of vehicles, computers and medical equipment.  The
purchase of all of the assets of a small mobile imaging company used
$147,268.





Cash flow
from investing activities for the three months ended March 31, 2009 used
$25,813, primarily for purchases of computers and medical
equipment.





Cash
Flows from Financing Activities


Cash flow
from financing activities for the three months ended March 31, 2010 used cash of
$0.





Cash flow
from financing activities for the three months ended March 31, 2009 used cash of
$112,015.  Payments on the line of credit were $100,000 and payment on
loans were $18,015 which was partially offset by proceeds from warrant exercises
of $6,000.





Loans


As of
March 31, 2010, we had no outstanding loans.


Page - 14
-


Off
Balance Sheet Arrangements


We are
required to provide performance and payment guarantee bonds to county
governments under certain contracts. As of March 31, 2010, we have three
performance bonds totaling $8,042,424 and two payment bonds for $2,855,537,
totaling $10,897,961. The surety issuing the bonds has recourse against our
assets in the event the surety is required to honor the bonds.





Contractual
Obligations


The
following table presents our expected cash requirements for contractual
obligations outstanding as of March 31, 2010:





Total
                  
                  
                  Current
                  
                  
                  2 – 3
                    Years
                  
                  
                  4 – 5 Years
                  
                  
                  ThereafterEquipment
      Leases
                  
                  $
                  109,862
                  
                  
                  $
                  47,207
                  
                  
                  $
                  58,804
                  
                  
                  $
                  3,851
                  
                  
                  $
                  —Automobile
      Leases
                  
                  
                  31,977
                  
                  
                  
                  27,158
                  
                  
                  
                  4,819
                  
                  
                  
                  —
                  
                  
                  
                  —Office
      Space Leased
                  
                  
                  426,469
                  
                  
                  
                  158,327
                  
                  
                  
                  268,142
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      Contractual Cash Obligations
                  
                  $
                  568,308
                  
                  
                  $
                  232,692
                  
                  
                  $
                  331,765
                  
                  
                  $
                  3,851
                  
                  
                  $
                  —





Effects
of Inflation


We do not
believe that inflation and changing prices over the past three years have had a
significant impact on our revenue or results of operations.





Potential
Future Service Contract Revenue


As of
March 31, 2010, we have entered into 60 agreements with county governments to
provide medical and healthcare services primarily to county and municipal
correctional facilities. Most of these contracts are for multiple years and
include option renewal periods which are, in all cases, at the county's option.
The original terms of the contracts are from one to nine years. These medical
service contracts have potential future service contract revenue of $187 million
as of March 31, 2010, with a weighted-average term of 4.1 years, of which
approximately $65 million relates to the initial contract period and
approximately $122 million relates to the option renewal periods.




ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




The
information in this Item is not required to be provided by Smaller Reporting
Companies pursuant to Regulation S-K.




ITEM
      4(T).
            CONTROLS
      AND PROCEDURES




Evaluation of Disclosure Controls
and Procedures.Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this report. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures as of the end of the
period covered by this report were effective such that the information required
to be disclosed by us in reports filed under the Exchange Act is
(i) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
disclosure.





Changes in Internal Control over
Financial Reporting.During the most recently completed fiscal quarter,
there has been no change in our internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.


Page - 15
-


PART
II.  OTHER INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS




There are
no material changes in the legal proceedings pending against us.




ITEM
      1A.
            RISK
      FACTORS




The
information in this Item is not required to be provided by Smaller Reporting
Companies.




ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




None




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES




None




ITEM
      4.
            RESERVED




ITEM
      5.
            OTHER
      INFORMATION




None




ITEM
      6.
            EXHIBITS




31.1
            Section
      302 Certification of Principal Executive Officer31.2
            Section
      302 Certification of Principal Financial Officer32.1
            Section
      906 Certification of Principal Executive Officer32.2
            Section
      906 Certification of Principal Financial
Officer


Page - 16
-




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Conmed
      Healthcare Management, Inc.May
      13, 2010By /s/ Richard W. TurnerRichard
      W. Turner, Ph.D.Chairman
      and Chief Executive Officer(principal
      executive officer)May
      13, 2010By /s/ Thomas W. FryThomas
      W. FryChief
      Financial Officer and Secretary(principal
      financial officer and principal accounting
  officer)


Page - 17
-