|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:
|---------------------- | -----------------------
|March 31, 2004         | 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) 

| | 2116 Financial Center
666 Walnut
Des Moines, IA 50309
| | -----------------------------------------------------
| |                                                      
| | (Address and zip code of principal executive offices)
| | (515) 244-5746                                       
| |                                                      
| | (Issuers telephone number, including area code)     

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

|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                | May 12, 2004                
|Common Stock, no par | 5,716,074                   

|Transitional Small Business
Disclosure Format (Check one):     Yes No ü.



1
|-----------------------------------------------------------------------------

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# PACE HEALTH MANAGEMENT
SYSTEMS, INC.

# PART I. FINANCIAL
INFORMATION

|ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)                                               | Page
|--------------------------------------------------------------------------------------- | ----
|                                                                                        |     
|Condensed Balance Sheets                                                               
|March 31, 2004 and December 31, 2003                                                    | 3   
|Condensed Statements of Operations                                                     
|Three Months Ended March 31, 2004 and 2003                                              | 4   
|Condensed Statements of Cash Flows                                                     
|Three Months Ended March 31, 2004 and 2003                                              | 5   
|Notes to Condensed Financial Statements                                                 | 6   
|ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                      | 7   
|ITEM 3.  CONTROLS AND PROCEDURES                                                        | 8   
|PART II. OTHER INFORMATION                                                             
|ITEM 1.  LEGAL PROCEEDINGS                                                              | 8   
|ITEM 2.  CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES | 8   
|ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                | 8   
|ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                            | 9   
|ITEM 5.  OTHER INFORMATION                                                              | 9   
|ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                               | 9   

2

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# PART 1. FINANCIAL INFORMATION

# ITEM 1. FINANCIAL
STATEMENTS

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

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|                                                                 | March 31,2004 |  | December 31,2003
|---------------------------------------------------------------- | ------------- |  | ----------------
|                                                                 |               |  |                 
|ASSETS                                                           |               |  |                 
|CURRENT ASSETS:                                                  |               | 
|Cash and cash equivalents                                        |               |  | $               
|Accounts receivable                                              |               |  |                 
|Prepaid expenses                                                 |               |  |                 
|                                                                 |               |  |                 
|                                                                 |               |  | $               
|                                                                 |               |  |                 
|LIABILITIES AND SHAREHOLDERS' EQUITY                             |               | 
|CURRENT LIABILITIES:                                             |               | 
|Accounts payable                                                 |               |  | $               
|                                                                 |               |  |                 
|Total current liabilities                                        |               |  |                 
|                                                                 |               |  |                 
|SHAREHOLDERS' EQUITY:                                            |               | 
|Preferred stock, no par value, authorized 1,000,000 shares;      |               |  |                 
|issued none                                                      |               |  |                 
|Convertible participating preferred stock, Series A, no par      |               | 
|value; authorized 4,000,000 shares; issued and outstanding       |               | 
|2,875,000 shares                                                 |               |  |                 
|Common stock, no par value; authorized 20,000,000 shares; issued |               |  |                 
|and outstanding 5,716,074 shares                                 |               |  |                 
|Additional paid-in capital                                       |               |  |                 
|Accumulated deficit                                              |               |  |                 
|                                                                 |               |  |                 
|                                                                 |               |  |                 
|                                                                 |               |  |                 
|                                                                 |               |  | $               
|                                                                 |               |  |                 

See
Notes to Condensed Financial Statements.

3

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

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|                                             | Three months ended
March 31,
|-------------------------------------------- | ----------------------------
|
|                                             |                             
|NET REVENUES                                 |                             
|                                             |                             
|                                            
|COSTS AND EXPENSES                           |                             
|General and administrative                   |                             
|                                             |                             
|                                             |                             
|                                             |                             
|(Loss) from operations                       |                             
|                                            
|INTEREST INCOME                              |                             
|                                             |                             
|(Loss) before income taxes                   |                             
|                                            
|PROVISION FOR INCOME TAXES                   |                             
|                                             |                             
|Net (Loss)                                   |                             
|PREFERRED DIVIDENDS IN ARREARS               |                             
|                                             |                             
|Net (Loss) available to common               |                             
|shareholders                                 |                             
|                                             |                             
|                                            
|(LOSS) PER SHARE                             |                             
|Basic                                        |                             
|                                             |                             
|Fully diluted                                |                             
|                                             |                             
|                                            
|WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON |                             
|EQUIVALENT SHARES OUTSTANDING                |                             
|                                             |                             

See Notes to Condensed
Financial Statements.

4

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

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|                                                      | Three months ended
March 31,
|----------------------------------------------------- | ----------------------------
|                                                      |                             
|CASH FLOWS FROM OPERATING ACTIVITIES                  | 2004                        
|                                                      |                             
|Net (Loss)                                            |                             
|Change in working capital components:                 |                             
|Decrease in prepaid expenses and other current assets |                             
|Increase in accounts payable                          |                             
|                                                      |                             
|Net cash (used in) operating activities               |                             
|                                                      |                             
|Net (decrease) in cash and cash equivalents           |                             
|                                                     
|CASH AND CASH EQUIVALENTS                             |                             
|Beginning                                             |                             
|                                                      |                             
|Ending                                                |                             
|                                                      |                             

See Notes to Condensed
Financial Statements.

5

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

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# 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, 2003. 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 three months are not necessarily indicative of the results to be
expected for the entire fiscal year.

# Note 2. Stock-based
Compensation

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

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

On January 1, 1997 the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share, which requires the Company to present basic and diluted income (loss) per share
amounts. Basic income (loss) per share is based on the weighted average number of common
shares outstanding during the period. Diluted income (loss) per share is based on the
weighted average number of common shares and dilutive potential common shares outstanding
during the period. Dilutive potential common shares consist of stock options and warrants
(using the treasury stock method) and convertible preferred stock (using the if-converted
method). The effect of stock options, warrants, and convertible preferred stock was not
included in the computation because to do so would have been antidilutive. At March 31,
2004, there are approximately 70,000 shares issuable under warrant or option arrangements
and 9,368,750 shares issuable under conversion of Series A convertible participating
preferred stock.

# Note 4. Related Party
Transactions

Administration expenses
paid to Equity Dynamics, Inc., an entity wholly owned by a Director of the Company,
totaled $16,000 and $12,500 for the three months ended March 31, 2004 and 2003,
respectively.

6

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

# General

Prior to October 1998,
PACE developed and marketed advanced patient care management software systems that enabled
healthcare providers to standardize the delivery of care, maximize resource utilization
and improve clinical outcomes. The Companys enterprise-wide, client/server
applications automated charting, clinical workflow processes and clinical pathways. The
Companys core system, PACE CMS, was a modular suite of advanced software
applications that provided hospitals, physicians offices, and integrated delivery
systems a comprehensive system for interdisciplinary documentation, nursing care planning,
clinical pathway management and enterprise-wide order management, all at the point of
care.

On October 7, 1998, the
Company completed the sale of substantially all of its assets to, and the assumption of
certain of its liabilities by, Minnesota Mining and Manufacturing Company (3M)
(the Transaction). The sale was made pursuant to an Asset Purchase Agreement
dated June 30, 1998, as amended, as described in Companys definitive proxy statement
dated September 14, 1998. The Transaction was approved by the holders of both the common
stock and the preferred stock at a special meeting of shareholders held on October 7,
1998.

The purchase price of
the Transaction was approximately $5.9 million, including $4.75 million in cash, of which
$750,000 was originally placed in escrow to secure the Companys indemnification
obligations under the Asset Purchase Agreement, plus the assumption of substantially all
of the Companys liabilities other than $2.1 million in line of credit balances,
which were paid off from proceeds at closing. 3M offered positions to most of the
Companys employees and assumed full support of the Companys customers.
Subsequent to the closing of the Transaction, the Company agreed that $25,000 of the
amount in escrow could be paid to 3M as part of a purchase price adjustment contemplated
by the Asset Purchase Agreement, leaving an escrow balance of $725,000.

In July 1999, the
Company received proceeds from the restricted escrow account totaling approximately
$525,000. In December 2000, the Company received final proceeds from the restricted escrow
account totaling $104,953. A like amount was also paid to 3M in final settlement and as an
adjustment to the purchase price.

Following the
Transaction, the Company has no ongoing operations and no revenues and has minimal
operating expenses. The Company presently has no employees. The Companys March 31,
2004 balance sheet reflects cash and cash equivalents of approximately $1.9 million and no
material liabilities.

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

# RESULTS OF OPERATIONS

General and
administrative: General and administrative expenses include bookkeeping costs, legal
fees, expenses associated with shareholder relations and SEC reporting requirements, and
insurance. General and administrative expenses were $34,728 and $27,949 for the three
months ended March 31, 2004 and 2003, respectively, representing an increase of 24.3%, due
mainly to an increase in audit fees and administrative fees.

7

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Interest Income:
Interest income was $4,633 and $8,293 for the three months ended March 31, 2004 and 2003,
respectively, representing a decrease of 44.1%, due mainly to a decrease in the interest
rates from the prior year.

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

# LIQUIDITY AND CAPITAL
RESOURCES

Net cash used in
operating activities for the three months ended March 31, 2004 and 2003 was $5,027 and
$6,325, respectively. Following the Transaction, the Company has no ongoing operations and
no revenues and has minimal operating expenses. The Companys March 31, 2004 balance
sheet reflects cash and cash equivalents of approximately $1.9 million and no material
liabilities.

The net proceeds from
the sale will be retained by the Company pending a determination of whether to engage in a
follow-on transaction. The Company has been seeking a business combination with another
entity, before considering possible liquidation and distribution of its assets. As of the
date of this Form 10-QSB, no definitive agreement has been signed for a follow-on
transaction. If no suitable business combination is identified, the Company may elect to
liquidate and distribute the remaining net proceeds to shareholders. If the Company
liquidated at the present time, all of the net assets of the Company would be paid to
holders of the Companys preferred stock.

# ITEM 3. CONTROLS AND
PROCEDURES

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

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

# PART II. OTHER
INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

N/A

ITEM 2.  CHANGES IN SECURITIES AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

N/A

ITEM 3.  DEFAULTS UPON SENIOR
SECURITIES

N/A

8

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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
                  31.1  Section 302 Certification by Director and Acting Chief Executive Officer
                  31.2  Section 302 Certification by Director and Acting Chief Financial Officer
                  32.1  Section 906 Certification by Director and Acting Chief Executive Officer
                  32.2  Section 906 Certification by Director and Acting Chief Financial Officer
      (b)  Reports on Form 8-K
                  No reports on Form 8-K were filed during the quarter for which this report is filed.

# 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)

|May 12, 2004 |  | /s/ John Pappajohn      
|------------ |  | ------------------------
|             |  |                         
|Dated        |  | John Pappajohn, Director

9

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