8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 8-K

Current Report Pursuant

to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported):  February 1, 2007 (January 26, 2007)

PACE HEALTH MANAGEMENT SYSTEMS, INC.

(Exact name of Registrant as Specified in its Charter)

IOWA

(State or Other Jurisdiction of Incorporation)

0-27554	42-1297992
(Commission File Number)	(I.R.S. Employer Identification Number)

9375 Cheasapeake Street

Suite 203

La Plata, MD 20646

(Address of Principal Executive Offices, including Zip Code)

(301) 609-8460

(Registrant’s Telephone Number, including Area Code)

2116 Financial Center

666 Walnut Street

Des Moines, IA 50309

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions (see General Instruction A.2 below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425).

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12).

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17  CFR 240.14d-2(b)).

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)). 

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Item 2.01 Completion of Acquisition of Assets

Item 3.02 Unregistered Sale of Equity Securities

Item 5.01 Changes in Control of Registrant

Item 5.02	Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers
Item 5.03	Amendments to Articles of Incorporation or Bylaws; Changes in Fiscal Year

Item 5.06 Change in Shell Company Status

CONSUMMATION OF THE ACQUISITION OF CONMED, INC.

On August 2, 2006, Pace Health Management Systems, Inc., an Iowa corporation (“Pace”, the “Company”, “we” or “us”) entered into a Stock Purchase Agreement (“Agreement”) with CONMED, Inc., a Maryland corporation (“CONMED”) and all of the stockholders of CONMED (the “CONMED Stockholders”), pursuant to which Pace agreed to purchase all the issued and outstanding capital stock of CONMED from the CONMED Stockholders (the “Acquisition”). We previously reported the execution of the Agreement in a Form 8-K filed on August 8, 2006, and its extension in a Form 8-K filed on January 17, 2007. This Form 8-K has been filed to report the consummation of the Acquisition on January 26, 2007. 

Prior to October 1998, we 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. 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. Since the date of the sale of these assets, the Company has had no ongoing operations and no revenues and has minimal operating expenses. The Company’s September 30, 2006 unaudited balance sheet reflects current assets of $1,642,434 (including cash and cash equivalents of $1,090,641) and current liabilities of $57,916.

CONMED has provided correctional healthcare services since 1984 and was formed as a corporation on June 10, 1987 in the State of Maryland for the purpose of providing healthcare services exclusively to county detention centers located in Maryland. As CONMED developed, it accepted more contracts for additional services including pharmacy and out-of-facility healthcare expenses. In 2000, CONMED served more than 50% of the county detention healthcare services market in Maryland. In 2003, CONMED elected to seek contracts outside of Maryland and by 2006, it had secured contracts in Kansas, Virginia and Washington. Currently, CONMED is in contract with and services 17 detention centers and facilities at the county level in the United States. For the fiscal year ended December 31, 2005, CONMED had net revenues from medical services provided to correctional institutions of $11,669,332. For the nine months ended September 30, 2006, CONMED had net revenues from medical services provided to correctional institutions of $11,117,051. As a result of the Acquisition, CONMED is a wholly-owned subsidiary of Pace, and the business of CONMED is now our primary business.

Under the terms of the Agreement and Acquisition, we paid to the CONMED Stockholders consideration consisting of: (i) $8,000,000 in cash, minus the Additional Cash Deposit (as defined below) and (ii) 8,000 shares of Pace’s Series C Convertible Preferred Stock. In a simultaneous transaction we completed a private placement (“Private Placement”) of approximately $15,000,000 worth of units of our Series B Convertible Preferred Stock and warrants (described under “Recent Sales of Unregistered Securities” below), of which approximately $8,000,000 were paid directly to the CONMED stockholders as consideration for the sale of CONMED’s capital stock.

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

On January 15, 2007, our Board of Directors approved a plan of recapitalization (“Plan of Recapitalization”), which it expects to submit for shareholder approval. Under the proposed Plan of Recapitalization as further set forth in Item 8.01, Other Events, below, we expect, as soon as practicable, to effect some or all of the following:

·    A reverse split or exchange of 1 share for each 20 shares of common stock.

·    Conversion of the existing Series A Preferred Stock of Pace into 4,584,196 shares of common stock (immediately after the 1 for 20 exchange or reverse stock split) in exchange for conversion of and waiver of remaining accrued and unpaid dividends.

·    Reincorporation in the state of Delaware.

·    Implementing a stock option plan.

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DESCRIPTION OF THE BUSINESS OF CONMED

General

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, all counties are required to provide healthcare services for their inmates. CONMED is a specialist in the provision of these services.

County Correctional Healthcare Services

CONMED provides the following array of healthcare services for inmates in county facilities under contract with the counties served. The contracts are primarily multiple year, fixed cost contracts with annual escalations, caps on out-of-facility healthcare and catastrophic expenses, and adjustments on a per diem basis for changes in population served.

Correctional healthcare services include a broad array of services that support the care of inmates detained in county detention centers. Correctional healthcare services include but are not limited to the following categories:

·General healthcare services	·Hospital Services
·Acute care services	·Mental health services
·Surgical Services	·Pharmacy
·Laboratory Services	·Physical and Occupational Therapy
·IV therapy	·Dental services
·EKG’s
·Diagnostic Imaging/Radiology
·Dialysis Services
·Durable Medical Equipment

CONMED either directly provides these services within the detention facilities or contracts for the provision of these services within or outside the facility. CONMED makes every effort to provide the medical services within the facilities due to security and cost considerations.

Contracting

CONMED has a well developed and highly successful model for predicting healthcare costs based on 23 years of accumulated experience, external data on healthcare costs, trending, and knowledge of current and future drivers of cost. This predicative model is the basis for the cost proposals provided by CONMED in competitive bids. The model addresses and aggregates costs related to staffing, on site costs, out-of-facility costs, pharmacy, supplies, administrative costs, taxes, and contract fees. Having predictive reliability of costs assures a higher probability of sustained profits.

Staffing

CONMED provides staffing of healthcare professionals at each of the contracted facilities. The staffing patterns are obtained from the Request for Proposals (RFP) distributed by the counties. The level of staffing varies depending on the size of the facility, i.e., larger facilities typically require a larger staffing pattern. The ratio of staff members to inmates is approximately 24 full-time equivalent staff positions per 1,000 inmates. This ratio varies depending on the physical structure of the facilities and the specific desire of the administration of the individual facilities. Generally, CONMED contracts with existing staff at the facility to the greatest extent possible when entering into a new contract. The onsite staffing for any facility may include RN’s LPN’s, Medics, Medication Aides, Nursing Assistants, Physicians, Psychiatrists, Psychologists, Social Workers, Physician Assistants, Nurse Practitioners, Medical Records Clerks, Administrative and support staff.

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CONMED actual staffing expenses generally come in under budget due to the Company’s aggressive management, and its focus on employee development and reward system, as well as careful management of overtime and low employee turnover rate (approximately 3%).

Pharmacy

CONMED provides medications for inmates within its contracted detention facilities. Medications are currently provided from two national pharmacy contractors, Diamond Pharmacy and Correct RX, which specialize in the provision of these services to detention centers. CONMED has an enormous amount of accumulated management information regarding pharmacy expenses in its contracted facilities. This information is useful in the cost proposal portions of its bids and also in its ability to focus on high cost areas within the provision of pharmacy services. A few examples follow:

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Atypical Antipsychotic Medications - Approximately 20% of inmates receive medication for psychiatric illness. The costs for these medications were relatively low and stable until 2002. At that time, several new medications were introduced to the general market that became popular with psychiatrists. These medications include Seroquel, Zyprexa and Risperidal. The introduction of these new medications to correctional facilities produced a sharp spike in pharmacy costs. Little or no evidence showed efficacy of these medications in the short term setting of county detention centers. Through a process of medical education for psychiatric providers, careful feedback regarding costs, and other programs, CONMED has been able to reduce costs to levels that existed prior to the introduction of these new medications. Such medications continue to be utilized, however, only in select and appropriate cases.

2.

Methicillin Resistant Staphylococcus Aureus (“MRSA”) - In 2003, an epidemic of MRSA emerged in hospitals, locker rooms and jails. Hospital treatments of MRSA generally included very expensive intravenous medications. Initially, jails followed and used this same treatment. In an effort to prevent and limit the spread of MRSA, as well as treat this disease in the correctional facilities, CONMED engaged the services of specially trained microbiologists to develop treatment protocols. This investment proved to be quite cost effective as the microbiologists determined that the most effective treatment of MRSA within this community (jails) was an inexpensive oral antibiotic, namely Bactrim.

In-Facility Services

CONMED provides comprehensive healthcare services from the time an inmate enters the facility until the time of such inmate’s release from the facility. In some cases, the Company is responsible for providing healthcare services to an individual at the time of his or her arrest. The vast majority of such services are provided on site by our clinical staff. CONMED’s healthcare services begin at intake with a screening examination and triage. Such services are continued through the provision of daily sick calls. Most states have implemented a statutory or audit requirement for a physical examination and dental examination of each inmate, to be conducted within 14 days of admission to the facility. The initial and subsequent examinations include psychiatric screening evaluations to detect suicide potential and major psychiatric illness requiring special treatment.

The costs for services provided within the facility are generally regionally-based and easily predicted. The highest costs relate to onsite x-rays, the majority of which are chest x-rays completed to discount active tuberculosis and x-rays for minor trauma.

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Out-of-Facility Services

Inmates requiring services outside the facility fall into two broad categories: (i) emergencies and (ii) circumstances that require services beyond the capability of the facility. Out-of-Facility services are broken down into several categories, including third party administrators (“TPA”) and hospital services. All out-of-facility services are provided through the use of a local or regional contracted network using a third party administrator. In some cases we have been able to negotiate rates of payment with local hospitals or high volume providers that are less expensive than the discounted rates offered through the TPA.

1. Hospital Services - CONMED enters into service agreements with local hospitals to provide in-patient services for inmates. In many cases, we are able to utilize the hospital-based “hospitalist program” to assure the most cost effective and shortest stays. In many cases, the courts will release inmates from custody at the time of hospitalization, thus releasing (i) CONMED from financial responsibility, (ii) the county from the responsibility of providing two Officers for round-the-clock security, and (iii) the hospital from the responsibility to provide a private room. When an inmate is hospitalized, a daily report is obtained from the Medical Director for the site, and from the Health Services Manager. The site administration remains in close contact with the hospital care provider to assure early repatriation to the facility. CONMED experiences hospital bed days of less than 100 per thousand inmates.

2. Third Party Administrator - CONMED contracts with TPA’s serving each facility in which it provides healthcare services. The TPA’s provide a network of physicians, hospitals and ancillary services that are paid based on contracted fee schedules. These fee schedules typically include 40% or more discounts over the charges. The TPA is compensated based on a percent of the savings to CONMED for the repricing of claims.

Dental Services

Dental services are provided onsite for most of our contracted facilities. Such facilities maintain dental suites with equipment for conducting dental x-rays. CONMED typically provides a contract dentist at a rate of approximately 12 hours per week, per 1000 inmates, depending on the RFP requirements.

Additional Services

Value-added services that CONMED provides to its clients include the following:

·  Healthcare Services Consultations - On request from the facility administration, CONMED will provide consultations on healthcare issues such as Tuberculosis, Avian Flu, AIDS, Hepatitis, Methadone, Reentry programs and many other topics pertinent to correctional healthcare. These consultations typically relate to policy issues affecting multiple facilities. In many cases CONMED has provided expert testimony to State legislative bodies and agencies.

·  Audit Compliance programs - CONMED provides an audit compliance program as part of our core responsibility to all sites. CONMED has experts in all State and National audit processes on staff. These individuals provide guidance to the sites to assure 100% audit compliance.

·   OSHA compliance programs - Regulation 1910.1030 of the U.S. Department of Labor, Occupational Safety & Health Administration (“OSHA”), provides guidelines and universal precautions that shall be observed to prevent contact with blood or other potentially infectious materials. Such regulations are applicable to all occupational exposure to blood or other potentially infectious materials. CONMED complies with OSHA and provides to its staff members, among other things, appropriate personal protective equipment such as gloves, gowns, laboratory coats, face shields or masks and eye protection, as well as mouthpieces, resuscitation bags, pocket masks, or other ventilation devices. The purpose of such protective equipment is to prevent blood or other potentially infectious materials to pass through to or reach the employee’s clothes, undergarments, skin, eyes, mouth etc. Other procedures the Company implements in accordance with OSHA include, but are not limited to, ensuring a clean and sanitary worksite, procedures for discarding contaminated waste, and cleaning and laundering its staff’s clothing and equipment.

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·  Risk Management - CONMED promotes risk management through a process of daily monitoring of significant healthcare events, weekly and monthly review of trends and subsequent measured actions. Through attention to detail in the provision and documentation of healthcare, adherence to standards of care and monitoring of events, CONMED is able to substantially reduce the risk of poor outcomes and/ or litigation.

·  Sick call services for staff - CONMED provides limited sick call services to detention center staff for acute problems. This often allows the staff to continue at work rather than taking a sick day for a doctor’s visit. This value added service is appreciated by the facility staff and administration.

·  Emergency services for staff and visitors - CONMED believes it is imperative that its medical staff be well trained and equipped to handle emergencies. Thus, the Company ensures that its medical staff is familiar with the correctional facility and is equipped to deliver prompt emergency care anywhere in the facility. Specific equipment is maintained and restocked when necessary, within each facility in the event of an emergency, including an emergency kit capable of maintaining basic life support.

Sales and Marketing

Sales and marketing efforts for CONMED correctional healthcare services is based on the following:

1.   Market analysis - In 2004, CONMED engaged in a national market analysis and survey searching for markets with attractive opportunities. We have designated Colorado, Florida, Kansas, New Jersey, Oregon, Pennsylvania, Texas, Virginia, and Washington as early targets. The following are the Company’s prime targets:

a.   Facilities of 500 inmates or more that are currently not served by a correctional healthcare contractor;

b.   Facilities of 500 inmates or more that are served by a local hospital or healthcare provider;

c.   Facilities of 500 inmates or more that are served by a failing competitor;

d.   Facilities of 500 inmates or more that are served by a competitor that is leaving the county detention center market to focus on prisons; and

e.   Facilities of 500 inmates or more that are served by a competitor where the results of audits are known to have been sub-standard.

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2.   Word of Mouth - CONMED has a well-developed contact network through our existing contracts and through our strategic relationships with national pharmacy contractors. This network has established early indications of counties considering outsourcing healthcare services, changing their current contractors or offering bids for other reasons.

3.   Online procurement services - CONMED contracts with ONVIA, an online government contracting research service, to establish early determinations of county intentions to bid.

4.   Trade meetings - CONMED’s staff attends annual regional and national trade meetings. These meetings serve as an opportunity to meet and greet new potential clients. Our trade show booth attracts attention with a variety of marketing tools and ‘give-aways’. CONMED often sponsors special events and awards at these meetings.

5.   Cold calls - CONMED uses, to a limited extent, cold calls typically only in cases where some collateral indication of a probability of success exists.

6.   Advertising in Trade Journals.

7.   Public Speaking engagements for special topics on request.

8.   Website promotion of CONMED’s capabilities and experience.

CONMED currently utilizes its CEO, Medical Director and Vice President of Strategic Planning as well as the founders and executive vice presidents as the primary sales force. We anticipate adding a full-time Director of Marketing and Research during 2006.

Competition

CONMED is aware of four major sources of competition:

1.   National contracting companies that serve both the county and state prison systems. While CONMED is aware of several national companies that provide healthcare services to county detention centers, it appears this is not their main focus. These companies, including Prison Health Services, Inc., Correctional Medical Services, Inc., Correct Care Solutions Inc., Wexford Health Sources, Inc., Naphcare, Inc and Armor Correctional Health Services are primarily in the business of providing services to state prisons. There are a few companies that provide healthcare services to county detention centers within confined regions, such as California Forensic Medical Group Inc. in California, and Primecare Medical, Inc. in Pennsylvania. These companies are privately held and can be characterized as small to medium size businesses when compared to the major national prison healthcare companies.

2.   Local or regional companies focused on county detention centers. The Company’s main competitors include Primecare in Pennsylvania and CFMG in California. There are several small local groups in markets which we are developing at this time.

3.   Local Hospitals. We have seen several incidences of local hospital systems providing healthcare services to the county detention centers. Such incidences arose out of the absence of other interested providers. In two cases of which we are aware, Volusia County Florida and Sedgwick County Kansas, the hospital costs for these counties were extremely high, as might be expected. Counties seeking significant cost savings will seek a contractor other than the local hospital.

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4.   Local Physicians. In some cases, our competitor is a local solo physician or group of physicians. Such contractors typically provide only the onsite sick call services. They have limited expertise in the correctional healthcare services provision. Increasingly, they are unable to obtain cost effective liability insurance that will cover both their primary work, as well as their correctional healthcare services.

Intellectual Property

The Company does not currently own and has not registered any trademarks, patents, or any other intellectual property.

Government Regulation

The industries in which CONMED operates are subject to extensive federal, state and local regulations and/or orders of judicial authorities, including healthcare, pharmaceutical and safety regulations and judicial orders, decrees and judgments. Some of the regulations and orders are unique to CONMED’s industries, and the combination of regulations and orders it faces is unique. Generally, prospective providers of healthcare and pharmaceutical services to correctional facilities must be able to detail their readiness to, and must comply with, a variety of applicable state and local regulations and State and National standards. CONMED’s contracts typically include reporting requirements, supervision and on-site monitoring by representatives of the contracting governmental agencies.In addition, CONMED’s doctors, nurses, pharmacists and other healthcare professionals who provide services on its behalf are in most cases required to obtain and maintain professional licenses and are subject to state regulation regarding professional standards of conduct. CONMED’s services are also subject to operational and financial audits by the governmental agencies with which CONMED has contracts and by the courts of competent jurisdiction. Additionally, services provided to health benefit plans in certain cases are subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). CONMED may not always successfully comply with these regulations and failure to comply can result in material penalties, non-renewal or termination of contracts with correctional facilities or prohibition from proposing for new business in certain jurisdictions.

Health Insurance Portability and Accountability Act of 1996. The Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) require the use of uniform electronic data transmission standards for health care claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the health care industry. CONMED does not electronically file at present, but may do so in the future, subjecting it to all of the regulations of HIPAA. HIPAA also includes regulations on standards to protect the security and privacy of health-related information. The privacy regulations extensively regulate the use and disclosure of individually identifiable health-related information, whether communicated electronically, on paper or orally.

Corporate Practice of Medicine/Fee Splitting. Many of the states in which CONMED operates have laws that prohibit unlicensed persons or business entities, including corporations, from employing physicians or laws that prohibit certain direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of a physician's license, civil and criminal penalties and rescission of business arrangements that may violate these restrictions. These statutes vary from state to state, are often vague and seldom have been interpreted by the courts or regulatory agencies. CONMED reviews, on an ongoing basis, the applicable laws in each state in which CONMED operates and reviews its arrangements with its healthcare providers to ensure that these arrangements comply with all applicable laws. CONMED has no assurance that governmental officials responsible for enforcing these laws will not assert that CONMED, or transactions in which it is involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with CONMED’s interpretations.

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Regulation of Bid Process and Contracting. Contracts with governmental agencies are obtained primarily through a competitive bidding process, which is governed by applicable state and local statutes and ordinances. Although practices vary, typically a formal request for proposal (“RFP”) is issued by the governmental agency, stating the scope of work to be performed, length of contract, performance bonding requirements, minimum qualifications of bidders, selection criteria and the format to be followed in the bid or proposal. Usually, a committee appointed by the governmental agency reviews bids and makes an award determination. The committee may award the contract to a particular bidder or decide not to award the contract. The committees consider a number of factors, including the technical quality of the proposal, the bid price and the reputation of the bidder for providing quality care. The award of a contract may be subject to formal or informal protest by unsuccessful bidders through a governmental appeals process. If the committee does not award a contract, the correctional agency may, among various options, continue to provide healthcare services to its inmates with its own personnel or the existing provider.

Certain RFPs and contracts require the bidder to post a bid bond or performance bond. Performance bonding requirements may cover one year or up to the length of the contract. Due to circumstances related to September 11, 2001 and the collapse of certain major corporations, the surety market has sharply contracted and the cost of surety bonds has substantially increased. In order to avoid the additional costs that performance bonds add to the contracts, increasingly clients are reducing or eliminating the need for performance bonds.

CONMED’s contracts with governmental agencies often require it to comply with numerous additional requirements regarding record-keeping and accounting, non-discrimination in the hiring of personnel, safety, safeguarding confidential information, management qualifications, professional licensing requirements, emergency healthcare needs of corrections employees and other matters. If a violation of the terms of an applicable contractual or statutory provision occurs, a contractor may be debarred or suspended from obtaining future contracts for specified periods of time in the applicable location. CONMED has never been debarred or suspended from seeking procurements in any jurisdiction.

Major Contracts

Substantially all of CONMED’soperating revenue is derived from contracts with county governmental entities. CONMED’s top three clients, Sedgwick County Detention Center, Harford County Detention Center and Charles County Detention Center, generated approximately forty-six percent (46%) of its total revenues for the nine months ended September 30, 2006. Summaries of CONMED’s largest contracts follow below.

Sedgwick County Detention Center Contract. CONMED entered into a Services Agreement with the Board of County Commissioners of Sedgwick County, Kansas (“Sedgwick County”), on January 31, 2005, for a period of approximately two (2) years, and Sedgwick County, at its option, may extend the agreement annually for two (2) additional 1-year terms upon written notice to CONMED. Sedgwick County pays CONMED a base monthly fee, which may be adjusted for changes in inmate population levels. CONMED also provides, at its own expense, a performance bond for thirty-three percent (33%) of the total value of the awarded contract. CONMED may terminate the agreement upon thirty (30) days written notice. Either party may immediately terminate the agreement for a material breach of the agreement subject to certain cure provisions.

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Harford County Detention Center Contract. CONMED entered into a Health Services Agreement with the Sheriff of Harford County on March 14, 2002 to provide medical services to the inmates at the Harford County Detention Center (“HCDC”), for an initial term of one (1) year, with the HCDC having the exclusive option to renew such agreement for four (4) additional one (1) year terms. The HCDC pays CONMED a base monthly fee, which may be adjusted for changes in inmate population levels. Under the agreement, CONMED is subject to mandatory staffing requirements. CONMED may automatically terminate the agreement in the event HCDC fails to make timely payment due to CONMED. The HCDC may terminate the agreement should the HCDC determine that such termination is in the best interests of the HCDC, or if CONMED fails to fulfill its obligations under the agreement.

Charles County Detention Center Contract. Effective July 1, 2004, CONMED entered into a medical services agreement with the Sheriff’s Office of Charles County, Maryland to provide both on-site and off-site health care services to the inmates of the Charles County Detention Facility (“CCDF”). The two (2) year agreement commenced on July 1, 2004, and the agreement provides the CCDF with three (3) successive one (1) year options to extend the term of the agreement. The CCDF pays CONMED a total compensation in the amount of approximately $2.9 million, which is paid in 24 equal monthly installments. Such monthly installments are adjusted for changes in inmate population levels. Under the agreement, CONMED is subject to mandatory staffing requirements. The agreement also contains provisions that allow the CCDF to assess penalties if certain staffing criteria are not maintained. CONMED may terminate the agreement upon thirty (30) days written notice in the event the CCDF fails to make timely payment due to CONMED.

Baltimore County Detention Center. CONMED is currently providing medical services to Baltimore County Detention Center on an interim transition basis. CONMED has entered into final negotiations for a new nine year contract with an annual revenue value equal to approximately $5.6 million and an aggregate revenue value equal to approximately $54 million. If CONMED does not finalize the terms of this Baltimore County contract, and does not gain Baltimore County as one of their contracted site facilities, CONMED’s future business and financial performance may be seriously harmed.

Employees

As of December 31, 2006, Pace had one employee and one consultant, none of which belong to a union, and relations with which Pace considers to be good.

As of December 31, 2006, CONMED had approximately 181 full-time and 13 part-time employees and 118 per diem employees, and 18 physician contractors. The Company provides all full-time employees with a comprehensive benefits package including medical insurance, education stipend, dental insurance, 401-K and paid vacation. CONMED believes that its relations with its employees are good. None of its employees belong to a union.

Property

Pace does not currently have any office facilities.

LaPlata, Maryland. In November, 2004, CONMED entered into an office lease agreement for approximately 2,400 square feet of office space housing CONMED’s executive and administrative offices at an annual rental of $29,088 for 2004, increasing to $32,738 in the final year of the lease, which expires on November 30, 2009, subject to a 5 year renewal option. CONMED currently intends to expand its facilities in the near future by approximately 2,500 additional square feet. Following the Acquisition, the LaPlata, Maryland offices have also become Pace’s executive offices.

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Legal Proceedings

Pace is not currently a party to any material legal proceedings.

CONMED is currently involved in the following potential or threatened legal proceedings:

(i)Linda Courtillet, et al. v. Stephen Goldberg, MD, et al. - Linda Courtillet is bringing a wrongful death action against CONMED, among others, on behalf of her son, Logan Courtillet, an inmate at Charles County Detention Facility who committed suicide on the premises on March 1, 2005. A complaint seeking money damages is to be filed in the Circuit Court for Charles County, MD in the near future. Currently, CONMED’s insurer, National Fire and Marine, is providing a defense in this action.

(ii)Dawn R. Travenichek v. CONMED - On July 3, 2006, CONMED received its first notice of an administrative complaint alleging wrongful termination of employment which was filed by a former employee of CONMED who provided services at the Sedgwick County Detention Facility in Kansas. CONMED’s management investigated the allegations and on January8, 2007, the parties agreed to settle this dispute, for which CONMED denies any liability, for an amount equal to $5,000. A mutual release is currently being prepared.

(iii)Board of Nursing - In early 2005, the MD Board of Nursing (“BON”) commenced an investigation (which is currently ongoing as of today) regarding whether certain CONMED employees licensed by the BON, or at least subject to the jurisdiction of BON, performed work at certain detention facilities in contract with CONMED whereby such employees were not properly licensed. BON has acknowledged that it does not have jurisdiction over the actions of CONMED itself, however, the BON has threatened to take disciplinary action against 10 - 20 current or former employees of CONMED. CONMED’s management has fully cooperated with the BON and has implemented a number of changes intended to address BON’s stated concerns. To the best of CONMED’s knowledge, the BON has conducted all necessary employee interviews, and CONMED is currently awaiting BON’s next steps or actions relating to these employees.

(iv)Theresa Lynn Rhoderick, PR for the Estate of Michael Rutherford, Sr., et al. v. CONMED, Inc., Case No. 06-2379 - This matter was brought in the Circuit Court for Frederick County. Michael Rutherford, a known asthmatic inmate with a significant medical history, died of congestive heart failure with an underlying condition of mitral stenosis at John Hopkins Hospital on September 25, 2005. A wrongful death and survival action has been filed against CONMED on behalf of Mr. Rutherford. CONMED’s insurer is providing a defense of this action. Mr. Francis X. Leary has been engaged by CONMED’s insurer to serve as CONMED’s defense counsel in this matter as well.

(v)Derek L. Simms v. Steven R. Williams, et al., Civil Action No. WMN-06-2867 - this claim was brought in the United States District Court for the District of Maryland. Derek Simms filed a complaint alleging that he suffered injuries which were caused by the negligent medical care provided by CONMED while he was incarcerated in Dorchester County Detention Center. Mr. Simms alleged that he did not receive adequate analgesic medication from CONMED, as he was treated for an infectious disease. CONMED’s insurer has retained Mr. Leary to serve as CONMED’s defense counsel in this matter. On December 21, 2006, Mr. Leary filed a Motion to Dismiss, or in the alternative, Motion for Summary Judgment. The Motion was based on the failure of Mr. Simms to state a caused of action upon which relief may be granted, and the failure to state a claim for violation of his 8th and 14th Amendment rights.

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MANAGEMENT

As a result of the Acquisition, our management and Board of Directors have been reconstituted. The names, ages and positions of our directors, executive officers and certain significant employees following the Acquisition are as follows:

Name	Age	Position
Richard Turner, PH.D.	60	President, Chief Executive Officer and Director (Pace and CONMED)
Howard M. Haft, MD	57	Executive Vice President and Chief Medical Officer (Pace and CONMED)
John Pappajohn	78	Chairman of the Board of Directors and Director (PACE and CONMED)
Ronald H. Grubman	57	Executive Vice President of Mid-Atlantic Region (CONMED)
Richard P. Olson	54	Executive Vice President of Correctional Programs (CONMED)
Richard M. Aiello	61	Chief Operations Officer (CONMED)
Thomas W. Fry	62	Chief Financial Officer and Secretary (Pace and CONMED)

There are no familial relationships among our directors and/or officers. Directors hold office until the next annual meeting of stockholders or until their respective successors have been elected and qualified.

Richard Turner, Ph.D., President, Chief Executive Officer and Director of Pace and CONMED

Dr. Turner is currently our President, Chief Executive Officer and a Director. Prior to consulting for PACE in May of 2006, Dr. Turner served as President and Chief Executive officer of EyeTel Imaging since January 2004. Prior to January 2004, Dr. Turner previously served as President and Chief Executive Officer of BEI Medical Systems (“BEI Medical”), a company engaged in the development and marketing of a minimally invasive endometrial ablation system. BEI Medical was sold to Boston Scientific for approximately $95 million in 2002. Previously, President of the Healthcare Group for the Cooper Companies, Dr. Turner has held executive leadership positions in the medical industry for approximately 25 years, including President and Director of CooperLaserSonics, Inc., President of CooperVision,Inc., President and Chief Executive Officer/Director of Pancretec, Inc. (sold to Abbott Labs, Inc.) and President of Kay Laboratories (sold to Baxter, Inc.). Dr. Turner graduated from Old Dominion University with a Bachelor of Science degree, earned his M.B.A. from Pepperdine University and earned his PhD from Berne University.

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Howard Haft, MD - Executive Vice President and Chief Medical Officer of Pace and CONMED

Dr. Haft is a founder of CONMED and acted as Director and Chief Medical Officer of CONMED from 1984 to January 2007. He also serves as the President of the Maryland Healthcare Associates and Georgetown Affiliate Multispecialty Group Practice. He serves on the Board of Directors of Apollo Medical Corporation that provides practice management services to Maryland Healthcare Associates. He also serves as President of the Maryland Foundation for Quality Healthcare, a not for profit corporation providing healthcare education to the underprivileged of Maryland. Dr. Haft holds a Medical Degree from Penn State University, Residency in Internal Medicine from Brown University, a Masters in Medical Management from Tulane University, and is recognized as a Certified Physician Executive by the American College of Physician Executives. He is Board Certified in Internal Medicine and Emergency Medicine.

John Pappajohn - Chairman of the Board of Directors of PACE and CONMED

Mr. Pappajohn has been a Director of PACE Health Management Systems, Inc. since 1995. Since 1969, Mr. Pappajohn has been the President and principal stockholder of Equity Dynamics, Inc., a financial consulting firm, and the sole owner of Pappajohn Capital Resources, a venture capital firm, both located in Des Moines, Iowa. He also serves as a director for the following public companies: Allion Healthcare, Inc., American CareSource Holdings, Inc., Healthcare Acquisition Corp., MC Informatics, Inc., and Careguide, Inc. Mr. Pappajohn has been an active private equity investor in healthcare companies for more than 30 years and has served as a director of more than 40 public companies. Mr. Pappajohn received his B.S.C. from the University of Iowa.

Ronald H. Grubman, PA-C - Executive Vice President of Mid-Atlantic Region of CONMED

Mr. Grubman, along with Dr. Haft, founded CONMED in 1984 with the introduction of St. Mary’s County Detention center. Mr. Grubman was President, Chief Executive Officer and Director of CONMED from 1984 to January 2007. He graduated from Long Island University and earned his B.S. from the Brooklyn Cumberland Physician Assistant Program in 1975, and continues to provide medical services.

Richard R. Olson, PA-C - Executive Vice President of Correctional Programs of CONMED

Mr. Olson joined CONMED as a partner in 1989 and has since served as the Chief of Correctional Programs. Mr. Olson is responsible for CONMED’s correctional healthcare operations. Mr. Olson graduated from the George Washington University Physician Assistant Program in 1978. He was Board Certified in 1980 and was subsequently hired by the Federal Bureau of Prisons, as a Physician Assistant. While serving with the Bureau of Prisons, he was trained as a healthcare administrator and was named the Bureau’s Coordinator of Infectious Diseases.

Richard M. Aiello, MS, FBINA - Chief Operations Officer of CONMED

Mr. Aiello has been Chief Operations Officer of CONMED since 2005. As such, he provides leadership and management for all aspects of corporate operations for CONMED. Mr. Aiello is a 37-year veteran of public safety, with 27 years of experience in law enforcement, rising to the rank of Major, as well as 10 years of experience in corrections where he served both as an Assistant Warden and Warden of an American Correctional Association (ACA) accredited facility. He is a former Associate Professor at Harford Community College and a graduate of the F.B I. National Academy, 147^th session. Mr. Aiello graduated from the University of Maryland University College with a Bachelor of Science degree and earned his Master of Science Degree from Johns Hopkins University.

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Thomas W. Fry, Chief Financial Officer and Secretary of Pace and CONMED

Prior to joining PACE in September of 2006, Mr. Fry served as Chief Financial Officer of Vasomedical, Inc. from September 2003 to September 2006 and as Vice President, Finance and Administration of BEI Medical Systems Company, Inc. from September 1997 until December 2002. From October 1992 until November 1997, Mr. Fry was Vice President, Finance and Administration of its predecessor company of the same name, which merged into BEI Medical Systems Company, Inc. in November 1997. Mr. Fry has held various executive financial positions for approximately 27 years, including Corporate Controller of Disctronics Ltd. from 1989 to 1992, Controller and Chief Financial Officer of Cavitron, Inc./CUSA, a medical device, engineering and manufacturing company, from 1986 to 1989, and Manager of Profit Planning and Manufacturing Controller of Chesebrough-Ponds International, from 1979 to 1986. Prior to that time, Mr. Fry was employed by Chesebrough-Ponds and GTE in various accounting and financial management positions. Mr. Fry graduated from Southeast Missouri State University with a Bachelor of Science degree, and earned his M.B.A. from Pace University.

Employment Agreements and Compensation Packages

Dr. Richard Turner, President and Chief Executive Officer, has executed a consulting/employment agreement effective as of January 26, 2007. The agreement provides for an annual salary of $235,800; an annual target bonus of fifty percent of annual salary (based on Mr. Turner’s performance and certain to be determined milestones); option grant to purchase 1,000,000 shares of Common Stock; health, disability and life insurance and retirement plan; and auto gas and maintenance expenses. In the event Mr. Turner’s employment is terminated other than for good cause (as defined in the employment agreement), he will receive a payment equal to his then applicable annual salary, excluding bonus, for a period of six (6) months after termination.

Dr. Howard Haft, Executive Vice President and Chief Medical Officer, has executed an employment agreement effective as of January 26, 2007. The agreement provides for an annual salary of $250,000; an annual bonus equal to a value of up to 20% of annual salary (such amount to be approved by the Board); life insurance and retirement plan; and travel expenses. In the event Dr. Haft’s employment is terminated other than for good cause (as defined in the employment agreement), he will receive a payment equal to his then applicable annual salary, excluding bonus, for a period of six (6) months after termination.

Mr. Ronald Grubman, Executive Vice President of Mid-Atlantic Region, has executed an employment agreement effective as of January 26, 2007. The agreement provides for an annual salary of $190,000; an annual bonus equal to a maximum amount of $40,000 (from a bonus pool, based on Mr. Grubman’s ability to maintain the Company’s current business and revenues generated by all Maryland sites for the year 2007), as well as an additional bonus in the amount equal to one half (1/2) of one percent (1%) of the first twelve (12) months of gross revenue actually collected and received by the Company from any new business services generated by Mr. Grubman, excluding price escalators and cost-of-living adjustments; health and life insurance and retirement plan; and travel expenses, in addition to a monthly car allowance in the amount of $800 per month. In the event Mr. Grubman’s employment is terminated other than for good cause, he will receive a payment equal to his then applicable annual salary, excluding bonus, for a period of six (6) months after termination.

Mr. Richard Olson, Executive Vice President of Correctional Programs, has executed an employment agreement effective as of January 26, 2007, and for a period of sixty (60) days thereafter. The agreement provides for an annual salary of $120,000; life insurance and retirement plan; and travel expenses. In the event Mr. Olson’s employment is terminated other than for good cause, he will receive a payment in the amounts equal to his then applicable annual salary, excluding bonus, for a period of sixty (60) days after termination.

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Mr. Richard Aiello, Chief Operating Officer of CONMED, has executed an employment agreement effective as of July 1, 2004. The agreement provides for a five (5) year term of employment; an annual salary of $136,600; a bonus which shall be determined from time to time by the Board of Directors of CONMED in its sole discretion; retirement plan and auto gas and maintenance expenses. In the event that Mr. Aiello’s employment is terminated other than for good cause, he will receive a payment in the amounts equal to his then applicable salary, plus benefits, for a period of six (6) months after termination.

Mr. Thomas W. Fry, Chief Financial Officer of CONMED, has executed an employment letter effective as of September 15, 2006. The agreement provides for an annual salary of $175,000; bonus compensation plan will be considered by the Board of Directors of CONMED with a target of twenty percent (20%) of annual salary; stock option plan will be considered by the Board of Directors of CONMED with options to purchase up to 118,000 shares; retirement plan; travel expenses and other approved business expenses. In the event that Mr. Fry’s employment is terminated, he will receive a payment in the amounts equal to his then applicable salary for a period of six (6) months after termination.

Compensation of the Board of Directors

The Board of Directors has adopted the Company’s 2007 Stock Option Plan, subject to shareholder approval as part of the Plan of Recapitalization. The 2007 Stock Option Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, stock bonuses and stock appreciation rights to, among others, Company directors. The 2007 Stock Option Plan will be administered by the Board of Directors which has the authority and discretion to determine: (1) the persons to whom the options will be granted; when the options will be granted; 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.

Audit Committee and Compensation Committee

During fiscal 2007, the Company’s Board of Directors intends to create and establish an Audit Committee and a Compensation Committee on behalf of the Company.

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PRINCIPAL SHAREHOLDERS

Beneficial Ownership - Current

As of the date hereof, there were 8,316,074 shares of Common Stock, 2,875,000 shares of Series A Preferred Stock, 15,000 shares of Series B Preferred Stock and 8,000 shares of Series C Preferred Stock issued and outstanding. The following table sets forth the names and beneficial ownership of our Common Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock owned as of January 26, 2007 (after giving effect to the Acquisition, the Private Placement, and the conversion of 50% of the accrued but unpaid dividends on our Series A Preferred Stock but without giving effect to the Plan of Recapitalization) by: (i) each of our directors, (ii) all our directors and executive officers as a group, and, to the best of our knowledge, (iii) all holders of 5% or more of the outstanding shares of our Common Stock. Unless otherwise noted, the address of all the individuals and entities named below is care of CONMED, Inc., 9375 Chesapeake Street, Suite 203, La Plata, Maryland 20646:

Name of Beneficial Owner (1) (5)	Number of Shares (Common)		% of Class			Number of Shares (Series A)		% of Class			Number of Shares (Series B)		% of Class			Number of Shares (Series C)		% of Class
DIRECTORS AND OFFICERS:
John Pappajohn (2)		2,331,740		28.0	%		1,500,000		52.2	%		-		0.0	%		-		0.0	%
Richard Turner (3)		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%
Howard M. Haft (4)		-		0.0	%		-		0.0	%		-		0.0	%		5,333		66.7	%
Ronald H. Grubman (4)		-		0.0	%		-		0.0	%		-		0.0	%		1,333		16.7	%
Richard P. Olson (4)		-		0.0	%		-		0.0	%		-		0.0	%		1,333		16.7	%
Thomas W. Fry (5)		-		0.0	%		-		0.0	%		-		0.0	%		-		0.0	%
All directors and named executive officers as a group (1)		2,331,740		28.0	%		1,500,000		52.2	%		-		0.0	%		8,000		100.0	%
OTHER 5% OR MORE SHAREHOLDERS:
Edgewater Private Equity Fund, L.P.		969,264		11.7	%		500,000		17.4	%		-		0.0	%		-		0.0	%
Gainesborough, LLC		925,431		11.1	%		531,371		18.5	%		-		0.0	%		-		0.0	%
Lehman Brothers (6)		-		0.0	%		-		0.0	%		5,000		33.3	%		-		0.0	%
Pinnacle (6)		-		0.0	%		-		0.0	%		5,000		33.3	%		-		0.0	%
All 5% or more shareholders		1,894,695		22.8	%		1,031,371		35.9	%		10,000		66.7	%		-		0.0	%
All shareholders		8,316,074					2,875,000					15,000					8,000

_______________________________________

* Less than 1% of the Company's common stock

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(1)  Except as indicated by footnotes, beneficial ownership is determined in accordance with Rule 13d-3(a) of the Securities Exchange Act of 1934 and generally includes voting or investment power with respect to securities. Except as indicated by footnotes and subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of the common stock shown as beneficially owned by him or her.

(2) Includes 100,000 shares of common stock held by Halkis, Ltd, and 109,917 shares of common stock held by the John and Mary Pappajohn Scholarship Foundation, both affiliates of Mr. Pappajohn. Includes 2,121,823 shares of common stock, but does not include (i) 3,000,000 shares of common stock issuable on conversion of 1,500,000 shares of Series A Preferred Stock and (ii) cumulative dividends convertible into an aggregate of 1,356,521 shares of common stock, in each case issuable as part of the Plan of Recapitalization, subject to shareholder approval. Mr. Pappajohn’s address is 2116 Financial Center, Des Moines, Iowa 50309

(3)  Dr. Turner’s beneficial ownership excludes options to purchase 1,000,000 shares of common stock issued under the 2007 Stock Option Plan, subject to approval by shareholders as part of the Plan of Recapitalization that may be acquired more than 60 days after such approval.

(4)  The beneficial ownership of Dr. Haft , Mr. Grubman and Mr. Olson excludes 533,334, 133,333 and 133,333, respectively, shares of common stock issuable on conversion of Series C Preferred Stock in the Plan of Recapitalization. It also excludes options to purchase 83,333 shares of common stock issued (250,000 shares in aggregate) under the 2007 Stock Option Plan, subject to approval by shareholders as part of the Plan of Recapitalization that may be acquired more than 60 days after such approval.

(5)  Mr. Fry’s beneficial ownership excludes 118,000 shares of common stock issued under the 2007 Stock Option Plan, subject to approval by shareholders as part of the Plan of Recapitalization that may be acquired more than 60 days after such approval.

(6)  Lehman Brother's and Pinnacle's beneficial ownership each excludes (i) 2,000,000 shares of common stock issuable on conversion of shares of Series B Preferred Stock, and (ii) 500,000 warrants to purchase common stock at $0.30 per share and 166,667 warrants to purchase common stock at $2.50 per share, each only exercisable upon approval of the Plan of Recapitalization by the shareholders.

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Beneficial Ownership - Post-Plan of Recapitalization

The following table sets forth the names and beneficial ownership of our Common Stock owned as of January 26, 2007, and after giving effect to the Plan of Recapitalization, by: (i) each of our directors, (ii) all our directors and executive officers as a group, and, to the best of our knowledge, (iii) all holders of 5% or more of the outstanding shares of our Common Stock. Unless otherwise noted, the address of all the individuals and entities named below is care of CONMED, Inc., 9375 Chesapeake Street, Suite 203, La Plata, Maryland 20646:

	Number of Shares (Common)		% of Class
DIRECTORS AND OFFICERS:
John Pappajohn (2)		2,508,342		21.3	%
Richard Turner (3)		100,000		*
Ronald H. Grubman (4)		133,333		*
Richard P. Olson (4)		133,333		*
Howard M. Haft (4)		533,334		4.5	%
Thomas W. Fry (5)		-		*
All directors and named executive officers as a group (1)		3,408,342		28.6	%
OTHER 5% OR MORE SHAREHOLDERS:
Edgewater Private Equity Fund, L.P.		845,715		7.2	%
Gainesborough, LLC		893,544		7.6	%
Lehman Brothers (6)		2,666,667		21.4	%
Pinnacle (6)		2,666,667		21.4	%
All 5% or more shareholders		7,072,593		53.9	%
ALL SHAREHOLDERS
Shares outstanding		11,800,000

_______________________________________

* Less than 1% of the Company's common stock

(1)  Beneficial ownership is determined in accordance with Rule 13d-3(a) of the Securities Exchange Act of 1934 and generally includes voting or investment power with respect to securities. Except as indicated by footnotes and subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of the common stock shown as beneficially owned by him or her.

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(2) Includes 100,000 shares of common stock held by Halkis, Ltd, and 109,917 shares of common stock held by the John and Mary Pappajohn Scholarship Foundation, both affiliates of Mr. Pappajohn. Mr. Pappajohn’s address is 2116 Financial Center, Des Moines, Iowa 50309.

(3)  Dr. Turner’s beneficial ownership includes options to purchase 100,000 shares of common stock issued under the 2007 Stock Option Plan, subject to approval by shareholders as part of the Plan of Recapitalization that may be acquired within 60 days of such approval. Dr. Turner’s beneficial ownership excludes 900,000 shares of common stock issued under the 2007 Stock Option Plan, subject to approval by shareholders as part of the Plan of Recapitalization that may be acquired more than 60 days after such approval.

(4)  The beneficial ownership of Mr. Grubman, Mr. Olson and Dr. Haft excludes options to purchase 83,333 shares of common stock issued to each (250,000 shares in aggregate) under the 2007 Stock Option Plan, subject to approval by shareholders as part of the Plan of Recapitalization that may be acquired more than 60 days after such approval.

(5)  Mr. Fry’s beneficial ownership excludes 118,000 shares of common stock issued under the 2007 Stock Option Plan, subject to approval by shareholders as part of the Plan of Recapitalization that may be acquired more than 60 days after such approval.

(6)  Lehman Brother's and Pinnacle's beneficial ownership each includes 500,000 warrants to purchase common stock at $0.30 per share as well as warrants to purchase 166,667 shares common stock at $2.50 per share.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

During 2006 and 2005, the Company paid $4,167 on a monthly basis, plus direct expenses, to Equity Dynamics, Inc., an entity wholly owned by John Pappajohn, a director of the Company, for administrative services that include among other things; accounting, investor relations, and Commission reporting. Total payments received during 2006 and 2005 were $78,390 and $50,500, respectively.

On October 24, 2005, Pace issued 750,000 warrants to purchase Common Stock. Of these warrants, 600,000 were issued to John Pappajohn and the remaining 150,000 warrants were issued to his designees. The warrants were issued as compensation for past services rendered and all warrants immediately vested. The warrants have an exercise price of $0.50, which exceeded the market price of Common Stock at the time of issuance. The value of the warrants was separately estimated at $0.01 per share or $10,000 based on the Black-Scholes valuation of the call option associated with a five year warrant. As part of the Plan of Recapitalization, Mr. Pappajohn relinquished the 600,000 warrants that were issued to him, and the remaining 150,000 warrants issued to his designees were adjusted to 250,000 warrants to purchase Common Stock, exercisable at $0.30 per share (post-split).

Mr. John Pappajohn, Pace’s chairman and, at the time, sole director, retained Maxim Group LLC as the placement agent in the Private Placement and is engaged in other matters with Maxim Group LLC unrelated to Pace and CONMED.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Information included in this section contains forward-looking statements regarding the business, operations and financial condition of both the Company and CONMED 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, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" 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 and CONMED’s 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. 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.

CONMED, INC.

The following discussion of CONMED’s results below is derived from CONMED’s unaudited financial statements for the nine months ended September 2006 and 2005, as well as the audited financial statements included in this filing as Exhibits 99.1 and 99.2.

Overview

CONMED began providing correctional healthcare services in 1984. It was incorporated on June 10, 1987 in the State of Maryland for the purpose of providing healthcare services exclusively to county detention centers located in Maryland. Our initial business plan targeted small to medium size facilities for staffing only. As we developed experience, we accepted more contracts for additional services, including mental health, dentistry, laboratory, diagnostic imaging and radiologic services, pharmacy and out-of-facility healthcare expenses. In 2000, we served more than 50% of the market in Maryland. In 2003, we elected to seek contracts outside of our home State of Maryland and by 2006, we had secured contracts in the States of Kansas, Virginia and Washington. Currently, we are in contract with and providing service to 18 detention centers/facilities in the United States.

Results of Operations

Nine-Months Ended September 30, 2006 compared to September 30, 2005

Net revenue from CONMED’s medical services provided to correctional institutions for the nine months ended September 30, 2006 and 2005, was $11,117,051 and $8,255,161, respectively, which represents an increase of $2,861,890 or 34.7%. Net income was $350,462 or 3.2% of revenue compared to $597,775 or 7.2% of revenue for the nine months ended December 31, 2006 and 2005, respectively. The decrease in net income is primarily attributable to increased spending for out-of-facility services, medical supplies and pharmacy costs incurred in the first half of 2006.

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Revenues

The improvement in CONMED’s revenue for the nine months ended September 30, 2006 compared to the same period for the prior year resulted from the addition of a new contract with Yakima County, Washington and a new transition contract with Baltimore County, Maryland, in September of 2006, which together accounted for $381,100 or 13.3% of the increase in revenue. Service contracts, which were initiated during 2005, but operating for a full year in 2006 in Howard County, Maryland, in Loudoun, County, Virginia and in Sedgwick County, Kansas represented $1,609,787 or 56.2% of the total revenue improvement. Additional revenue improvement totaling $776,809 or 27.1% of the increase resulted from expansion of the services provided to a number of existing contracts initiated in prior years, primarily in Fredrick County, Maryland. Price increases related to existing service requirements totaling $94,194 or 3.3% of the increase.

Salaries and employee benefits

Salaries and employee benefits were $6,421,376 or 57.8% of revenue for the nine-month period ended September 30, 2006, compared to $4,752,434 or 57.6% of revenue for the nine months ended September 30, 2005. The increase in spending for salaries and employee benefits of $1,668,942 or 35.1% is primarily due to the addition of new employees to support the increase in service contracts.

Lab fees and medical expenses

Laboratory fees and medical expenses for the nine months ended September 30, 2006 and 2005 were $3,140,173 or 28.2% of revenue and $2,120,739 or 25.7% or revenue, respectively, which represented an increase of $1,019,434 or 48.1%. The increase in spending for laboratory fees and medical expenses in absolute dollars is primarily due to the increase in revenue and number of persons covered by CONMED’s services under the additional contracts. The increase in spending as a percentage of revenue reflects the addition of new full service contracts plus expansion of services to existing contracts. The addition of new medical services to existing service contracts, which previously provided staffing only services results in a higher proportion of medical expenses to historical total revenue. Additionally, expensive procedures were incurred in the first half of 2006 at Sedgwich County, Kansas where there is no limit to the maximum cost of care provided, a feature contained in most of CONMED’s contracts. However, recent legislation in Kansas that limits the cost for these procedures to Medicaid rates will significantly reduce these costs in the future. Key factors causing the increase in spending as a percentage of revenue were: out-of-facility charges for hospital, emergency room and other out-patient visits, which increased $355,901 or 51.3%; as well as pharmacy, which was up $297,824 or 41.5%, medical supplies, which were up $63,636 or 94.2%; and laboratory fees, which increased $89,213 or 117.6%.

Other operating expenses

Other operating expenses were $1,198,318 or 10.8% of revenue for the nine months ended September 30, 2006, compared to $782,155 or 9.5% of revenue for the nine-month period September 30, 2005. The increase in spending is primarily due to increased insurance fees for health, surety bonds and workers compensation higher professional fees, educational seminars and conferences, travel and advertising expenses.

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Interest expense

Interest expenses for the nine months ended September 30, 2006 and 2005 were $6,722 and $2,058, respectively.

Provision for income taxes

CONMED elected under the Internal Revenue Code to be taxed as an S Corporation effective July 1987. The stockholders of an S Corporation are taxed on their proportional share of the Company’s taxable income. Therefore, no provision or liability for federal income taxes has been included in the financial statements.

Years Ended December 31, 2005 compared to December 31, 2004

Net revenue from CONMED’s medical services provided to correctional institutions for the years ended December 31, 2005 and 2004 was $11,669,322 and $6,677,886, respectively, which represented an increase of $4,991,436 or 74.7%. Net income was $581,672 or 5.0 % compared to $285,160 or 4.3% for the years ended December 31, 2005 and 2004, respectively. The increase in net income is attributable to the increased revenue.

Revenues

The improvement in revenue in 2005 compared to 2004 reflects the addition of new service contracts in Howard County, Maryland, in Loudoun, County, Virginia and in Sedgwick County, Kansas, which were initiated during 2005 and represented $3,934,798 or 78.8% of the total revenue improvement. Additional revenue improvement resulted from an expansion of the services provided to contracts which were initiated in prior years, primarily in Charles County, Maryland, totaling $934,998 or 18.7% of the increase in revenue. Price increases related to existing service requirements totaling $121,640 or 2.5% of the increase.

Salaries and employee benefits

Salaries and employee benefits were $6,991,780 or 59.9% of revenue for the year ended December 31, 2005, compared to $4,205,068 or 63.0% of revenue for the year ended December 31, 2004. The increase in spending for salaries and employee benefits of $2,786,712 or 66.3% is primarily due to the increase in new service contracts plus higher officers’ compensation. The improvement in spending for salaries and employee benefits as a percentage of sales results from the expansion of CONMED’s business model from providing staffing only to becoming a full service provider, which results in lower spending on salaries as a percentage of revenue.

Lab fees and medical expenses

Laboratory fees and medical expenses for the years ended December 31, 2005 and 2004 were $2,989,838 or 25.6% of revenue and $1,259,967 or 18.9% or revenue, respectively, which represented an increase of $1,729,871 or 137.3%. The increase in spending for laboratory fees and medical expenses in absolute dollars is primarily due to the increase in revenue. The increase in spending as a percentage of revenue reflects the addition of new full service contracts plus expansion of services to existing contracts. The expansion of services from staffing only to full service results in a higher proportion of medical expenses compared to historical total revenue. Key factors causing the increase in spending as a percentage of revenue were: out of facility charges for hospital services, emergency room services and other out-patient visits, which increased $767,209 or 334.0%; as well as pharmacy, which was up $513,151 or 112.4%, and laboratory fees, which increased $62,100 or 104.0%.

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Other operating expenses

Other operating expenses were $1,101,599 or 9.4% of revenue for the year ended December 31, 2005, compared to $914,919 or 13.7% of revenue for the year ended December 31, 2004. The increase in spending for other operating expenses is primarily due to increased insurance fees for professional insurance and surety bonds, of $85,138 travel and automobile expenditures of $127,394, legal fees of $64,504 plus advertising and bid expenses of $101,812. The improvement in spending in other operating expenses as a percentage of sales results from the absence of a $115,410 loss from an asset sale in 2004 and $267,830 related to a variance in healthcare insurance.

Interest expense

Interest expenses for the years ended December 31, 2005 and 2004 were $4,433 and $12,772, respectively, reflecting a reduction in outstanding automobile loans.

Liquidity and Capital Resources

Financing is provided by funds generated from our operating activities; historically CONMED distributed excess funds to its shareholders.

Cash and Cash Flow for the Years Ended December 31, 2005, Compared to 2004

Cash as of December 31, 2005 and 2004 was $487,029 and $44,461, respectively. Total increases in cash were $442,568 and $40,854 for the years ending December 31, 2005 and 2004, respectively.

Operating activities provided $898,073 reflecting net income of $581,672 plus non-cash expenses for depreciation of $42,830. Changes in working capital provided $273,571 reflecting increases in accounts payable of $262,865, accrued expenses of $195,487 and deferred revenue of $85,491, offset by increased accounts receivable of $184,491 and prepaid expenses of $85,321.

Investing activities used $67,529 for the purchase of office and medical equipment.

Financing activities used $387,976 primarily due to distribution to CONMED’s stockholders of $372,000. Payments on existing loans were $15,976.

Cash and Cash Flow for the Nine-Months Ended September 30, 2006, Compared to 2005

Cash as of September 30, 2006 and 2005 was $564,032 and $487,029, respectively. Total increases in cash were $77,003 and $620,562 for the nine months ended September 30, 2006 and 2005, respectively.

Operating activities provided $467,658, reflecting net income of $350,462 plus non-cash expenses for depreciation of $33,322 and loss on the disposal of equipment of $9,734. Changes in working capital provided $74,140, reflecting increases in accounts payable of $526,489 and accrued expenses of $302,809 partially offset by increased accounts receivable $545,635 deposits of $137,742, prepaid expenses of $50,164 and deferred revenue of $21,617.

Investing activities provided $8,213, reflecting $28,000 from the sale of equipment, which was partially offset by $19,787 used for the purchase of office and medical equipment.

Financing activities used $398,868, primarily due to distribution to the company’s stockholders of $375,000. Payments on existing loans were $23,868.

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Liquidity

CONMED maintained a $1,000,000 line of credit which expired in December 2006. Interest was paid monthly at the prime rate as listed in the Wall Street Journal plus 5% per annum. In addition CONMED has $500,000 available for letters of credit, which reduces the amount available from the line of credit. The outstanding balance is due on demand and is guaranteed by CONMED’s stockholders and spouses. The line of credit is collateralized by CONMED’s accounts receivable. In addition the line of credit has certain other covenants, which CONMED must meet to maintain the credit facility. There were no borrowings respectively on the line of credit at September 30, 2006 and 2005.

Auto Loan

As of September 30, 2006, CONMED had a note outstanding for $22,328.

Off Balance Sheet Arrangements

CONMED is required to provide performance and payment guarantee bonds with county governments under certain contracts. As of September 30, 2006, it has two performance bonds totaling $4,363,566. The surety issuing the bonds has recourse against certain of CONMED’s assets in the event the surety is required to honor the bonds. In addition ourCONMED’s stockholders and their spouses guarantee the bonds.

Contractual Obligations

The following table presents our expected cash requirements for contractual obligations outstanding as of September 30, 2006:

	Total		Due as of 9/30/07		Due as of 9/30/08 and 9/30/09		Due as of 9/30/10 and 9/30/11		Due Thereafter
Automobile Loan	$	22,328	$	15,100	$	7,434	$	-	$	-
Automobile Leases		11,681		4,303		-		-		-
Office Space Leased		102,873		72,238		48,869
Total Contractual Cash Obligations	$	136,882	$	91,641	$	56,303	$	-	$	-

Effects of Inflation

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

Potential Areas of Future Growth

1.   Pharmacy as a revenue source. CONMED currently contracts with specialty pharmacy companies for the provision of pharmacy services. It is likely that as CONMED grows past $30 million in annual revenue, the pharmacy utilization will exceed $2.5 million per year. At that point in time, it may be possible to build or purchase independent pharmacy capability to serve the needs of CONMED at less cost. In addition, these services can be marketed to other facilities that may seek these services independent of CONMED’s other correctional healthcare services. Also, opportunities exist for the provision of pharmacy services to Nursing Homes and Assisted Living facilities requiring similar packaging and distribution systems. CONMED has grown this source of revenue from nonexistent in 2000 to over $1 million per year in 2006.

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2.   TPA services. The business of repricing claims for county detention centers will likely be appealing to virtually all counties across the country independent of their desire to utilize CONMED’s other correctional healthcare services. A particularly attractive market for these services is found in the large number of small detention centers across the country. These facilities have little or no market clout for negotiation of favorable rates and would benefit greatly from the services. CONMED has grown this line of business from nonexistent in 2003 to over $1 million in 2006.

3.   Dental Services. CONMED anticipates the development of a division to provide mobile dental services to the facilities we serve, as well as those seeking only dental services. Many small facilities do not have dental suites. The costs of sending inmates out to local dentists are high in comparison to the costs of contracting with a mobile unit. We believe this may be an attractive program.

4.   Occupational Medicine Services. CONMED has found that the juxtaposition of our inmate healthcare services to other county law enforcement services has found us frequently selected to provide pre-employment physical examinations, drug screening programs, OSHA programs and others as needed. We believe that we can provide incentives to local site managers and Physicians to develop these programs with corporate support and training. CONMED recognizes nearly $100,000 of annual revenue from these services currently.

Summary of Significant Accounting Policies

Revenue

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

CONMED’s contracts call for either a fixed monthly fee or a fixed fee per average daily population of the correctional facility. The timing of each payment varies per contract. Revenues from contracts is recognized ratably, for fixed fees, or monthly for contracts with fixed fees per average daily population.

Receivables

Receivables are carried at original invoice amount less payments received and an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Receivables are generally considered past due 30 days after invoice date. Management determines the allowance for doubtful amounts by regularly evaluating individual receivables and considering a creditor’s financial condition, credit history and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received.

Property and equipment

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

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Income taxes

CONMED has elected under the Internal Revenue Code to be taxed as an S Corporation effective July 1987. The stockholders of an S Corporation are taxed on their proportionate share of CONMED’s taxable income. Therefore, no provision or liability for federal income taxes has been included in the financial statements.

Basic and diluted loss per share

CONMED has adopted Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share, which requires CONMED to present basic and diluted income (loss) per share amounts. Basic 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).

Recently issued accounting standards

In July 2006 the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This interpretation provides that the financial statement effects of a tax position shall initially be recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. This interpretation also may require additional disclosures related to tax positions taken.

The provisions of FIN 48 are effective as of the beginning of fiscal year 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of retained earnings. Management is currently evaluating the impact of adopting FIN 48 on CONMED’s financial statements, but does not expect the adoption of this statement to be significant to the financial statements.

PACE HEALTH MANAGEMENT SYSTEMS, INC.

Overview

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. On October 7, 1998, Pace completed the sale of substantially all of its assets to, and the assumption of certain of its liabilities by, Minnesota Mining and Manufacturing Company (the “Transaction”).

Following the Transaction and prior to the Acquisition, Pace had no ongoing operations and no revenues and has minimal operating expenses. Pace’s September 30, 2006 balance sheet reflects current assets of $1,364,459 and current liabilities of $57,916.

The net proceeds from the Transaction were retained by Pace pending a determination of whether to engage in a follow-on transaction. Prior to the Acquisition, Pace had been seeking to consummate a business combination before considering the possible liquidation and distribution of its assets.

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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 $123,000 and $27,480 for the three months ended September 30, 2006 and 2005, respectively, representing an increase of 347.60%. General and administrative expenses were $225,312 and $82,351 for the nine months ended September 30, 2006 and 2005, respectively, representing an increase of 173.60%, due mainly to an increase in auditing, consulting, and administrative fees, as well as costs and fees incurred in connection with the negotiation of the Acquisition.

Interest Income

Interest income was $17,143 and $14,320 for the three months ended September 30, 2006 and 2005, respectively, representing an increase of 19.71%. Interest income was $55,752 and $30,246 for the nine months ended September 30, 2006 and 2005, respectively, representing an increase of 84.33%. This increase is due mainly to an increase in money market and certificate of deposit interest rates.

Provision for income taxes

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

Liquidity and Capital Resources

Net cash used in operating activities for the nine months ended September 30, 2006 and 2005 was $398,317 and $56,955, respectively. Pace has no ongoing operations and no revenues and has minimal operating expenses. Pace’s September 30, 2006 balance sheet reflects current assets of $1,364,459 and current liabilities of $57,916.

The net proceeds from the Transaction were retained by Pace pending a determination of whether to engage in a follow-on transaction. Prior to the Acquisition, Pace had been seeking to consummate a business combination, before considering possible liquidation and distribution of its assets.

Summary of Significant Accounting Policies

Since, prior to the Acquisition, Pace had no ongoing operations or revenues, it has not identified any critical accounting policies.

Recently Issued Accounting Standards

Effective January 1, 2006, Pace adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised), “Share-Based Payment” (“SFAS 123R”) using a modified version of prospective application. Prior to the adoption of SFAS 123R, Pace accounted for share-based payments to employees using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”). Under the provisions of APB 25, restricted stock awards were accounted for using variable plan accounting whereby compensation expense or benefit was recorded each period from the date of grant to the measurement date based on the fair value of Pace’s common stock at the end of each period. Stock option awards were accounted for using fixed plan accounting whereby Pace recognized no compensation expense for stock option awards because the exercise price of options granted was equal to the fair value of the common stock at the date of grant.

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Under the modified prospective application, the provisions of SFAS 123R apply to new awards and to awards outstanding on January 1, 2006 and subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation expense recognized in the second quarter of 2006 includes compensation costs for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.

As a result of all stock-based compensation being fully vested as of December 31, 2005, there is no effect on income before taxes, net income and basic and diluted earnings per share for the three months ended September 30, 2006.

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MARKET PRICE AND DIVIDENDS ON PACE COMMON EQUITY AND OTHER SHAREHOLDER MATTERS

Beginning May 19, 1998, Pace Common Stock has been quoted on the OTC Bulletin Board under the symbol “PCES.” From the Company’s initial public offering on April 27, 1995 through May 18, 1998, the Company’s Common Stock was traded on The NASDAQ Small Cap Market. The following table sets forth the range of high and low sales prices of the Company’s Common Stock by quarter over the last two years. These quotations reflect inter-dealer prices, without retail markup, markdown, or commission and may not reflect actual transactions.

Quarter ended	High	Low
3/31/05	0.27	0.08
6/30/05	0.20	0.11
9/30/05	0.15	0.10
12/31/05	0.15	0.10
3/31/06	0.50	0.10
6/30/06	0.36	0.15
9/30/06	0.40	0.16
12/31/06	0.22	0.18

The Company has declared no cash dividends since its inception with respect to the Common Stock, and has no plan to declare a dividend in the near future. The Board has declared no cash dividends with respect to the Preferred Stock and has no plan to declare a dividend in the near future.

In January 2007, holders of the Company’s Series A Preferred Stock converted 50% of the accrued but unpaid dividends on their Series A Preferred Stock into an aggregate of 2,600,000 shares of Common Stock. All the holders of Series A Preferred Stock have agreed to waive the remaining accrued and unpaid dividends on their shares of Series A Preferred Stock at the consummation of the Plan of Recapitalization.

As of January 22, 2007, there were 68 shareholders of record of the Company’s Common Stock.

On January 26, 2007, the high and low closing prices of our Common Stock was $0.30 and $0.25 respectively.

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RISK FACTORS

You should carefully consider the risks described below before buying our common stock. If any of the risks described below actually occurs, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment.

Risks related to Our Business

RISKS ASSOCIATED WITH INTERNAL EXPANSION. The Company’s growth is generally dependent upon CONMED’s ability to obtain contracts to provide medical services to inmates in county correctional and detention facilities. The growth rate of the Company’s business depends on a number of factors, including crime rates and sentencing patterns in various jurisdictions and the Company’s ability to integrate new facilities into its management structure. The Company may have to obtain sufficient capital resources in order to compete effectively in the industry. There can be no assurance any contract will, in fact, be awarded. Further, there can be no assurance the Company will be able to obtain contracts to manage the medical services in new facilities or retain existing contracts upon their expiration.

CONMED IS A PROFITABLE COMPANY PROVIDING CONTRACTED BUSINESS SERVICES. IN ANY CONTRACT BUSINESS, IT IS POSSIBLE A CONTRACT WILL BE LOST OR NOT RENEWED. CONMED’s top three clients, Sedgwick County Detention Center, Harford County Detention Center and Charles County Detention Center, generated approximately forty-six percent (46%) of its total revenues for the nine months ended September 30, 2006. These same clients generated approximately forty-two percent (42%) of the Company’s direct profit per contract. If a contracted detention facility, particularly one of the Company’s primary detention facilities, terminates its contract, which generally may be effective upon ninety (90) days written notice, the Company’s business and financial performance may be seriously harmed.

SHORT-TERM CONTRACTS. CONMED’s detention center medical services contracts are typically short-term, ranging from one to three years, with renewal or extension options in favor of the contracting governmental agency. Including extension options, the Company has one major contract and several smaller contracts subject to renewal in 2007, which accounted for approximately 13% and 10% of revenue for the nine-month period ended September 30, 2006, respectively. There can be no assurance these or any other contract will be renewed or that extension options will be exercised. Additionally, the contracting governmental agency typically may terminate a facility contract without cause by giving the Company adequate written notice. The Company customarily incurs significant development and start-up costs in establishing its services within the new facilities, and the termination or non-renewal of a contract would require an immediate write-off of any unamortized costs associated with the contract, and could have a material adverse effect upon the Company’s financial condition, results of operations and liquidity.

CONMED IS CURRENTLY NEGOTIATING A $5.6 MILLION CONTRACT TO PROVIDE MEDICAL SERVICES. IF CONMED DOES NOT FINALIZE THE TERMS OF THIS AGREEMENT, CONMED’S FINANCIAL PERFORMANCE COULD BE NEGATIVELY AFFECTED. CONMED is currently providing medical services to Baltimore County Detention Center on an interim transition basis. CONMED has entered into final negotiations for a new nine year contract with an annual revenue value equal to approximately $5.6 million and an aggregate revenue value equal to approximately $54 million. If CONMED does not finalize the terms of this Baltimore County contract, and does not gain Baltimore County as one of their contracted site facilities, CONMED’s future business and financial performance may be seriously harmed.

CONTRACTS SUBJECT TO GOVERNMENTAL FUNDING. CONMED’s detention center medical services contracts are subject to either annual or bi-annual governmental appropriations. Failure by a governmental agency to receive such appropriations could result in termination of the contract by such agency or a reduction of the fee payable to the Company. In addition, even if funds are appropriated, delays in payments may occur which could have a material adverse effect on the Company’s financial condition, results of operations and liquidity.

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CONMED’S INABILITY TO OBTAIN REQUIRED PERFORMANCE AND/OR PAYMENT BONDS MAY LIMIT ITS ABILITY TO MAINTAIN EXISTING CONTRACTS AND ACQUIRE ADDITIONAL CONTRACTS. In order to expand CONMED’s business and obtain new facilities contracts, as well as maintain certain existing contracts, CONMED will need to obtain bonds in certain counties for which CONMED provides its services. In order to obtain such bonds, or renew existing bonds, CONMED will be required to fulfill certain financial requirements and standards. To the extent CONMED is unable to fulfill the necessary financial requirements and standards, CONMED may not be able acquire new facilities contracts and could lose its existing contracts, all of which could negatively impact the Company’s business operations and financial condition.

UNCERTAIN OCCUPANCY LEVELS. A small portion of the Company’s revenues is generated under detention center medical services contracts that specify an offset for populations under a specified number. Under such a per diem rate structure, a decrease in occupancy levels could cause a decrease in the facilities’ needs for medical services, and therefore, could cause a decrease in revenue and profitability, and may have some adverse effect on the Company’s overall financial condition, results of operations and liquidity.

IMPACT OF DISTURBANCE. An escape, riot, epidemic, catastrophic or other disturbance that seriously impacts the health of a large number of inmates at one of CONMED’s facilities could have a material adverse effect on the Company’s financial condition, results of operations and liquidity. As a result of a disturbance inmates may suffer multiple injuries for which the cost of care may have a temporary but significant effect on profitability. Approximately 75% of CONMED’s healthcare services revenues for the nine month period ended September 30, 2006 are operated under caps which provide limits on the cost of exposure, however, multiple events with significant costs may exceed budget targets.

The remaining 25% of CONMED’s correctional healthcare services revenues from continuing operations, contain no limits on CONMED’s exposure for treatment costs related to catastrophic illnesses or injuries to inmates. Although CONMED attempts to compensate for the increased financial risk when pricing contracts that do not contain catastrophic limits and has not had any catastrophic illnesses or injuries to inmates that exceeded its insurance coverage in the past, there can be no assurance CONMED will not experience a catastrophic illness or injury of a patient that exceeds its coverage in the future. The occurrence of severe individual cases outside of those catastrophic limits could render contracts unprofitable and could have a material adverse effect on CONMED’s financial condition and results of operations.

WE MAY BE SUBJECT TO CERTAIN LITIGATION CLAIMS RESULTING FROM OR RELATING TO INMATE DEATHS. Prisoners may die while in a correctional facility due to various reasons, including, without limitation, natural causes and suicide. Consequently, CONMED may be exposed to potential liability arising from or relating to such deaths. Such occurrences may have negatively impact CONMED’s business operations.

WE MAY INCUR SIGNIFICANT START-UP AND OPERATING COSTS ON NEW CONTRACTS BEFORE RECEIVING RELATED REVENUES, WHICH MAY IMPACT OUR CASH FLOWS AND NOT BE RECOUPED.When we are awarded a contract to provide medical services to a facility, we may incur significant start-up and operating expenses, including the cost of purchasing equipment and staffing the facility, before we receive any payments under the contract. These expenditures could result in a significant reduction in our cash reserves and may make it more difficult for us to meet other cash obligations. In addition, a contract may be terminated prior to its scheduled expiration and as a result we may not recover these expenditures or realize any return on our investment.

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CONMED UTILIZES THIRD PARTY ADMINISTRATORS (TPA) AND PROVIDER NETWORKS TO OBTAIN OUT-OF-FACILITY CARE IN VARIOUS MARKETS. SHOULD THOSE NETWORKS BECOME INACCESSIBLE THE COSTS TO CONMED FOR PROVIDING THOSE SERVICES WOULD RISE 35-40%.Our current profit margin is in part due to our ability to reduce out-of-facility costs that are defined by contracted networks. Our costs are typically 40% less than the stated charges for these services. It is important to note that healthcare providers for the general public utilize these same programs. It is unlikely the environment will change, causing the return of payments based on healthcare provider’s charges without discounts. The trend over the past ten years has been one of deeper discounting against these charges. If the trend reversed or slowed, it would negatively impact our operating margins and could have a material adverse effect on the Company.

CHANGES IN STATE AND FEDERAL REGULATIONS COULD RESTRICT CONMED’S ABILITY TO CONDUCT ITS BUSINESS.CONMED is subject to extensive regulation by both the federal government and the states in which it conducts its business. There are numerous healthcare and other laws and regulations that CONMED is required to comply with in the conduct of its business. These laws may be materially changed in the future or new or additional laws or regulations may be adopted with which CONMED will be required to comply. The cost of compliance with current and future applicable laws, rules and regulations may be significant.

These state and federal laws and regulations that affect CONMED’s business and operations include, but are not necessarily limited to:

·   healthcare fraud and abuse laws and regulations, which prohibit illegal referral and other payments;

·   Employee Retirement Income Security Act of 1974 and related regulations, which regulate many healthcare plans;

·   pharmacy laws and regulations;

·   privacy and confidentiality laws and regulations;

·   civil liberties protection laws and regulations;

·   state and national correctional healthcare auditing bodies;

·   various licensure laws, such as nursing and physician licensing bodies;

·   drug pricing legislation; and

·   Medicare and Medicaid reimbursement regulations.

CONMED believes it is operating its business in substantial compliance with all existing legal requirements material to the operation of its business. There are, however, significant uncertainties regarding the application of many of these legal requirements to its business, and there cannot be any assurance that a regulatory agency charged with enforcement of any of these laws or regulations will not interpret them differently or, if there is an enforcement action, that CONMED’s interpretation would prevail. In addition, there are numerous proposed healthcare laws and regulations at the federal and state levels, many of which could materially affect CONMED’s ability to conduct its business or adversely affect its results of operations.

For example, the State of Maryland Board of Nursing has requested that CONMED provide 24 hour 365 day per year nursing coverage in order to be compliant with newly approved state regulations regarding nursing standards. To be compliant with this change would require several of the smaller facilities to significantly increase the level of staffing from part-time medics to full-time nursing positions. The costs for this increase would be outside the scope of the current contracts. In order to be compliant, CONMED will need to secure contract extensions for the higher level of staffing.

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CONMED is currently in discussion with the Maryland Sheriff’s, Maryland Association of Counties, Maryland Correctional Administrators Association and the Department of Health and Mental Hygiene to develop a workable matrix of staffing that will fit the needs and budgets of small county detention centers. Considerable progress has been made toward reaching a negotiated resolution, however, there can be no assurance the Company will succeed in developing such a workable matrix of staffing.

CONMED IS SUBJECT TO HIPAA, THE FAILURE WITH WHICH TO COMPLY COULD ADVERSELY AFFECT CONMED’S BUSINESS.On August 21, 1996, Congress passed the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). This legislation required the Secretary of the Department of Health and Human Services to adopt national standards for electronic health transactions and the data elements used in such transactions. The Secretary has adopted safeguards to ensure the integrity and confidentiality of such health information. Violation of the standards is punishable by fines and, in the case of wrongful disclosure of individually identifiable health information, imprisonment. Although CONMED intends to comply with all applicable laws and regulations regarding medical information privacy, failure to do so could have an adverse effect on CONMED’s business.

OUR ABILITY TO SECURE NEW CONTRACTS TO PROVIDE HEALTHCARE AND MEDICAL SERVICES TO CORRECTIONAL AND DETENTION FACILITIES DEPENDS ON MANY FACTORS OUTSIDE OUR CONTROL. Our growth is generally dependent upon our ability to obtain new contracts to provide healthcare medical services to correctional and detention facilities. This possible growth depends on a number of factors we cannot control, including crime rates and sentencing patterns in various jurisdictions and acceptance of privatization. The demand for our services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction and sentencing practices or through the decriminalization of certain activities currently proscribed by our criminal laws. For instance, any changes with respect to drugs and controlled substances or illegal immigration could affect the number of persons arrested, convicted and sentenced, thereby potentially reducing demand for correctional facilities to house them, and thus, reduce the number of inmates receiving medical services. Legislation has been proposed in numerous jurisdictions that could lower minimum sentences for some non-violent crimes and make more inmates eligible for early release based on good behavior. Also, sentencing alternatives under consideration could put some offenders on probation with electronic monitoring who would otherwise be incarcerated. Similarly, reductions in crime rates could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities.

In January 2005, the Supreme Court declared the federal sentencing guidelines, previously considered mandatory, as unconstitutional, stating they violate defendants’ rights under the Sixth Amendment to be tried by a jury. The Supreme Court advised that federal judges should continue to use the federal sentencing guidelines as suggestions rather than mandatory guidelines. Although it is too early to predict the impact, if any, on our business, the ruling could lead to federal sentences becoming more varied which could lead to a reduction in the length of sentences at correctional facilities.

GOVERNMENT AGENCIES MAY INVESTIGATE AND AUDIT OUR CONTRACTS AND, IF ANY IMPROPRIETIES ARE FOUND, WE MAY BE REQUIRED TO REFUND REVENUES WE HAVE RECEIVED, REQUIRED TO FOREGO ANTICIPATED REVENUES, AND SUBJECT TO PENALTIES AND SANCTIONS. Certain governmental agencies have the authority to audit and investigate our contracts. As part of that process, government agencies may review our performance of the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. For contracts that actually or effectively provide for reimbursement of expenses, if an agency determines we have improperly allocated costs to a specific contract, we may not be reimbursed for those costs, and we could be required to refund the amount of any such costs that have been reimbursed. If a government audit asserts improper or illegal activities by us, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with certain government entities.

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THERE ARE LARGE COMPETITORS IN THE HEALTHCARE INDUSTRY THAT COULD CHOOSE TO COMPETE AGAINST CONMED REDUCING CONMED’S PROFIT MARGINS.Existing national correctional healthcare contract companies, localized and regional contracting companies, hospitals and integrated Health Systems are potential competitors of CONMED. These companies include well-established companies which may have greater financial, marketing and technological resources than CONMED, such as PHS, CMS and Wexford Health. Increased price competition could reduce CONMED’s profit margins and have a material adverse effect on the Company.

THERE ARE BARRIERS TO ENTRY INTO THE CORRECTIONAL HEALTHCARE SERVICES MARKET WHICH COULD BE OVERCOME RESULTING IN GREATER COMPETITION.The barriers to entrance to compete for contracts are typically 5 years experience providing the same services and demonstrated financial stability. Although a new startup company would be unable to meet the experience criteria, it would be possible for an investor to purchase an existing experienced company, add capital and quickly become competitive on a national scale.

WE ARE DEPENDENT ON GOVERNMENT APPROPRIATIONS. Our cash flow is subject to the receipt of sufficient funding of, and timely payment by, contracting governmental entities. If the appropriate governmental agency does not receive sufficient appropriations to cover its contractual obligations, it may terminate our contract or delay or reduce payment to us. Any delays in payment, or the termination of a contract, could have an adverse effect on our cash flow and financial condition. In addition, as a result of, among other things, recent economic developments, federal, state and local governments have encountered, and may encounter, unusual budgetary constraints. As a result, a number of state and local governments are under pressure to control additional spending or reduce current levels of spending. Accordingly, we may be requested in the future to reduce our existing per diem contract rates or forego prospective increases to those rates. In addition, it may become more difficult to renew our existing contracts on favorable terms or otherwise.

CONMED’S INABILITY TO REACT EFFECTIVELY TO CHANGES IN THE HEALTHCARE INDUSTRY COULD ADVERSELY AFFECT ITS OPERATING RESULTS.In recent years, the healthcare industry has undergone significant change driven by various efforts to reduce costs, including potential national healthcare reform, trends toward managed care, cuts in Medicare reimbursements, and horizontal and vertical consolidation within the healthcare industry. Proposed changes to the U.S. healthcare system may increase governmental involvement in healthcare and ancillary health services, and otherwise change the way payers, networks and providers conduct business. Healthcare organizations may react to these proposals and the uncertainty surrounding them by reducing or delaying purchases of cost control mechanisms and related services that CONMED provides. Other legislative or market-driven changes in the healthcare system that CONMED cannot anticipate could also materially adversely affect CONMED’s business. CONMED’s inability to react effectively to these and other changes in the healthcare industry could adversely affect its operating results. CONMED cannot predict whether any healthcare reform efforts will be enacted and what effect any such reforms may have on CONMED or its customers. The inability of CONMED to react effectively to changes in the healthcare industry may result in a material adverse effect on its business.

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THE CONTINUED SERVICES AND LEADERSHIP OF CONMED’S SENIOR MANAGEMENT IS CRITICAL TO ITS ABILITY TO MAINTAIN GROWTH AND ANY LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT ITS BUSINESS.The future of the business of CONMED depends to a significant degree on the skills and efforts of its senior executives, in particular, Dr. Richard Turner, its President andChief Executive Officer, Ronald Grubman, its former President and Chief Executive Officer (anticipated to be Executive Vice President of Strategic Development immediately after the Closing Date) and Howard Haft, MD, MMM, CPE, its Chief Medical Officer, (anticipated to be Executive Vice President and Chief Medical Officer immediately after the Closing Date). If CONMED loses the services of any of its senior executives, and especially if any of its executives joins a competitor or forms a competing company, CONMED’s business and financial performance could be seriously harmed.

The Company has executed employment agreements with Mr. Grubman, Dr. Haft and Dr. Turner, effective as of the closing of the Acquisition, which include, except for Dr. Turner’s employment agreement, noncompetition clauses that expire three (3) years after termination of employment, or during the period that such employee is an owner of any issued and outstanding stock of the Company. If, for any reason, we lose any of our executive officers’ skills, knowledge of the industry, contacts and expertise, it could result in a setback to the Company operating plan.

CONMED WILL INCUR ADDITIONAL COSTS AS AN INDEPENDENT PUBLIC COMPANY AND MAY BE UNABLE TO OPERATE PROFITABLY AS A STAND-ALONE COMPANY.CONMED will incur significant additional costs as a separate and independent public company. These costs include, among other things, the payment of a salary to CONMED’s Chief Executive Officer, Dr. Richard Turner and additional legal and accounting costs incurred as a result of becoming a public company. Furthermore, CONMED may not be able to put in place the financial, administrative and managerial structure necessary to operate as a public company, or the development of such structure may require a significant amount of management’s time and other resources including financial resources, which could hinder CONMED’s ability to operate profitably.

CONMED’S REVENUE MARGINS MAY DECREASE DUE TO FIXED REVENUE BASE.CONMED’s existing contracts are primarily structured as fixed fee contracts. The costs of inmate healthcare may fluctuate from what was anticipated by CONMED due to several variables, including increases in inmate population and increased inmate illness. Such additional costs may not be easily passed through under those contracts containing a fixed fee structure, and therefore, CONMED may not always have sufficient revenue to cover such increased costs. As a result, CONMED’s revenue margins may fall. If CONMED’s revenue margins decrease more than 1 or 2 percentage points, CONMED’s ability to perform under its contracts may be limited, which could negatively impact CONMED’s business operations and financial performance.

CONMED MAY BE UNSUCCESSFUL IN THE HIRING AND RETENTION OF SKILLED PERSONNEL.The future growth of CONMED’s business depends on successful hiring and retention of skilled personnel, and CONMED may be unable to hire and retain the skilled personnel it needs to succeed. Qualified personnel are in great demand throughout the healthcare industry, thus it is difficult to predict the availability of qualified personnel or the compensation levels required to hire and retain them. CONMED faces stiff competition for staffing, which may increase its labor costs and reduce profitability. CONMED competes with other healthcare and service providers in recruiting qualified management and staff personnel for the day-to-day operations of its business, including nurses and other healthcare professionals. In some markets, the scarcity of nurses and other medical support personnel has become a significant operating issue to healthcare businesses. This scarcity may require CONMED to enhance wages and benefits to recruit and retain qualified nurses and other healthcare professionals. Because a significant percentage of CONMED’s existing contracts are structured as fixed fee contracts, CONMED has a limited ability to pass along increased labor costs to existing customers. The failure of CONMED to attract and retain sufficient skilled personnel at economically reasonable compensation levels may limit CONMED’s ability to perform under its contracts, which could lead to the loss of existing contracts or its ability to gain new contracts, and may impair CONMED’s ability to operate and expand its business, as well as harm its financial performance.

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CONMED MAY EXPERIENCE UNBUDGETED INCREASES IN COSTS RELATED TO THE PROVISION OF HEALTHCARE.Currently, CONMED predicts the costs of healthcare based on prior experience and projected increases. The projections for future increases are based on historical trends and expected increases related to the development of new healthcare initiatives, treatments and disease states. For example recent increases in the use of high cost psychiatric medications have triggered increases in the projected costs of those medications in the bid process. However, mid cycle increases, such as those associated with the need to use a more expensive antibiotic for a drug resistant infection, or the development of a standard treatment for Hepatitis C, for example, would produce significant cost overruns in pharmacy budgeted expenses.

WE ARE SUBJECT TO NECESSARY INSURANCE COSTS. Workers’ compensation, employee health, medical professional and general liability insurance represent significant costs to us. Because we significantly self-insure for workers’ compensation, employee health, medical professional and general liability risks, our insurance expense is dependent on claims experience, our ability to control our claims experience, and in the case of workers’ compensation and employee health, rising health care costs in general. Further, additional terrorist attacks, such as those on September 11, 2001, and concerns over corporate governance and corporate accounting scandals, could make it more difficult and costly to obtain liability and other types of insurance. Unanticipated additional insurance costs could adversely impact our results of operations and cash flows, and the failure to obtain or maintain any necessary insurance coverage could have a material adverse effect on us.

WE MAY BE ADVERSELY AFFECTED BY INFLATION. Many of our medical services contracts provide for fees that increase by only small amounts during their terms. If, due to inflation or other causes, our operating expenses, such as wages and salaries of our employees, insurance, medical, and food costs, increase at rates faster than increases, if any, in our contract fees, then our profitability would be adversely affected.

CONMED MAY EXPERIENCE LIABILITY SUITS.The Company’s medical services to correctional and detention facilities exposes it to potential third-party claims or litigation by inmates or other persons for adverse outcomes (medical malpractice) as well as suits related to infringement of their 8^th amendment rights (deliberate indifference). It is likely that as the company grows it will be exposed to additional healthcare liability issues. CONMED currently maintains medical professional liability insurance to cover potential losses, in the amounts of $1,000,000 per incident, $3,000,000 per physician or location aggregate, and $5,000,000 in the aggregate. Such insurance is expensive, subject to various coverage exclusions and deductibles and may not be obtainable in the future on terms acceptable to the Company, or at all. A successful claim against us in excess of our insurance coverage could materially harm our business.

RISKS ASSOCIATED WITH ACQUISITIONS. The Company intends to grow through internal expansion and through selective acquisitions. There can be no assurance the Company will be able to identify, acquire or profitably manage acquired operations or that operations acquired will be profitable or achieve levels of profitability that justify the related investment. Acquisitions involve a number of special risks, including possible adverse short-term effects on the Company’s operating results, diversion of management’s attention from existing business, dependence on retaining, hiring and training key personnel, risks associated with unanticipated problems or legal liabilities, and amortization of acquired intangible assets, any of which could have a material adverse effect on the Company’s financial condition, results of operations and liquidity.

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WE DO NOT INTEND TO PAY ANY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE. We currently intend to retain all future earnings, if any, to finance our current and proposed business activities and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. Although there are only a small number of shares of our preferred stock outstanding, the holders of our preferred stock have rights senior to the holders of our Common Stock with respect to any dividends. We may also incur indebtedness in the future that may prohibit or effectively restrict the payment of cash dividends on our Common Stock.

THE LIABILITY OF OUR OFFICERS AND DIRECTORS IS LIMITED. The applicable provisions of the Iowa Corporation Law and our Certificate of Incorporation limit the liability of our officers and directors to the Company and our stockholders for monetary damages for breaches of their fiduciary duties, with certain exceptions, and for other specified acts or omissions of such persons. In addition, the applicable provisions of the Iowa Corporation Law and of our Certificate of Incorporation and By-Laws provide for indemnification of such persons under certain circumstances. As part of the Plan of Recapitalization, we plan to reincorporate as a Delaware corporation and we plan to provide the officers and directors of the Company indemnification to the fullest extent allowed under the Delaware General Corporation Law. In addition, we plan to enter into an indemnification agreement with our officers and directors in 2007 which will provide for expanded indemnification rights for such individuals. As a result of the foregoing, stockholders may be unable to recover damages against our officers and directors for actions taken by them which constitute negligence, gross negligence or a violation of their fiduciary duties and may otherwise discourage or deter our stockholders from suing our officers or directors even though such actions, if successful, might otherwise benefit us and our stockholders.

THE COMPANY IS NOT CURRENTLY COMPLIANT WITH THE SARBANES-OXLEY ACT. The enactment of the Sarbanes-Oxley Act in July 2002 created a significant number of new corporate governance requirements and additional requirements may be enacted in the future. Since the Common Stock is currently quoted on the OTC Bulletin Board, it is not currently subject to a number of such governance requirements. Although the Company expects to implement the requisite changes to become compliant with existing requirements, and new requirements when they do apply to the Company, the Company may not be able to do so, or to do so in a timely manner. If the Company does not come into compliance with the Sarbanes-Oxley governance requirements, it may not be able to list its securities on either AMEX or Nasdaq markets in the event the Company ever attempts to do so.

CERTAIN STOCKHOLDERS CAN EXERT CONTROL OVER CONMED AND MAY NOT MAKE DECISIONS THAT FURTHER THE BEST INTERESTS OF ALL STOCKHOLDERS. The Company’s officers, directors and principal stockholders (greater than 5% stockholders) together own a majority of the Company’s issued and outstanding common stock. Consequently, these stockholders, if they act individually or together, may exert a significant degree of influence over the Company’s management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change of control of the Company and might affect the market price of the Company’s Common Stock, even when a change of control may be in the best interest of all stockholders. Furthermore, the interests of this concentration of ownership may not always coincide with the Company’s interests or the interests of other stockholders, and accordingly, they could cause the Company to enter into transactions or agreements which the Company would not otherwise consider.

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Risks Related to Our Securities

TRADING IN OUR COMMON STOCK OVER THE LAST 12 MONTHS HAS BEEN LIMITED, SO INVESTORS MAY NOT BE ABLE TO SELL AS MANY OF THEIR SHARES AS THEY WANT AT PREVAILING PRICES. Shares of our Common Stock are traded on the OTC Bulletin Board. Approximately 16,533 shares were traded on an average daily trading basis for the twelve (12) months ended September 30, 2006. If limited trading in our Common Stock continues, it may be difficult for investors once and if the securities are registered, to sell the securities acquired by them upon the conversion of the Series B Preferred Stock at any given time at prevailing prices. Also, the sale of a large block of our Common Stock could depress the market price of our Common Stock to a greater degree than a company that typically has a higher volume of trading of its securities.

THE MARKET PRICE OF OUR COMMON STOCK MAY BE HIGHLY VOLATILE. Our Common Stock is currently traded on the OTC Bulletin Board under the symbol “PCES”. The quotation of our Common Stock on the OTC Bulletin Board does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many companies like ours. Our Common Stock is thus subject to this volatility. Sales of substantial amounts of our Common Stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our Common Stock.

AN ACTIVE AND VISIBLE TRADING MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP. We cannot predict whether an active market for our Common Stock will develop in the future. In the absence of an active trading market:

·   investors may have difficulty buying and selling or obtaining market quotations;

·   market visibility for our Common Stock may be limited; and

·   a lack of visibility for our Common Stock may have a depressive effect on the market price for our Common Stock.

The OTC Bulletin Board is an unorganized, inter-dealer, over-the-counter market that provides significantly less liquidity than NASDAQ, and quotes for stocks included on the OTC Bulletin Board are not listed in the financial sections of newspapers, as are those for the NASDAQ Stock Market. The trading price of the Common Stock is expected to be subject to significant fluctuations in response to variations in quarterly operating results, changes in analysts’ earnings estimates, announcements of innovations by the Company or its competitors, general conditions in the industry in which we operate and other factors. These fluctuations, as well as general economic and market conditions, may have a material or adverse effect on the market price of our Common Stock.

OUR COMMON STOCK IS SUBJECT TO, AND OUR ADDITIONAL FINANCING REQUIREMENTS COULD RESULT IN, DILUTION TO EXISTING STOCKHOLDERS. Our Common Stock is subject to dilution from shares reserved for issuance. Additional financings which we may require have and may in the future be obtained through one or more transactions which have diluted or will dilute (either economically or in percentage terms) the ownership interests of our stockholders. Further, we may not be able to secure such additional financing on terms acceptable to us, if at all. We have the authority to issue additional shares of Common Stock and preferred stock, as well as additional classes or series of ownership interests or debt obligations which may be convertible into any one or more classes or series of ownership interests. The issuance of additional warrants or options, and the exercise of such warrants or options, may also cause further dilution of the ownership interests of our stockholders.

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PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR COMMON STOCK. The Commission has adopted regulations which generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, our Common Stock, which qualifies as “penny stock”, is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our securities and may affect the ability of investors to sell our securities in the secondary market and the price at which such purchasers can sell any such securities.

Stockholders should be aware that, according to the Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:

·   Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;

·   Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

·   “Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;

·   Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and

·   The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

Purchasers of penny stocks may have certain legal remedies available to them in the event the obligations of the broker-dealer from whom the penny stock was purchased violates or fails to comply with the above obligations or in the event that other state or federal securities laws are violated in connection with the purchase and sale of such securities. Such rights include the right to rescind the purchase of such securities and recover the purchase price paid for them. Application of these penny stock regulations to our Common Stock could adversely affect the market liquidity of the shares, which in turn may affect the ability of holders of our Common Stock to resell the stock.

ADDITIONAL AUTHORIZED SHARES OF COMMON STOCK AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT THE MARKET. The Company is authorized to issue 20,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. As of the date hereof, there were 8,316,074 shares of Common Stock, 2,875,000 shares of Series A Preferred Stock, 15,000 shares of Series B Preferred Stock and 8,000 shares of Series C Preferred Stock issued and outstanding. However, the total number of shares of Common Stock issued and outstanding does not include shares reserved for issuance upon the exercise of outstanding options or warrants or shares reserved for issuance under the Company’s 2007 Stock Option Plan (the “Stock Option Plan”). As of the date hereof, the Company had outstanding stock options and warrants to purchase an aggregate of 4,053,000 shares of our Common Stock, and we have reserved shares of our Common Stock for issuance in connection with the potential exercise thereof.

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After effectiveness of the Plan of Recapitalization and upon conversion of the Series A, Series B and Series C Preferred Stock into Common Stock, there will be 11,800,000 shares of Common Stock issued and outstanding, in addition to warrants to purchase 1,500,000 shares of Common Stock, exercisable at $0.30 per share, and expiring5 years from the grant date, and warrants to purchase 500,000 shares of Common Stock, exercisable at $2.50 per share, expiring 5 years from the grant date, all of which were issued to investors in the Private Placement. The total number of shares of Common Stock issued and outstanding also does not include shares reserved for issuance upon the exercise of outstanding options or warrants or shares reserved for issuance under the Stock Option Plan. Giving effect to the Plan of Recapitalization, the Company will have outstanding warrants to purchase an aggregate of 250,000 shares of our Common Stock, the exercise prices of which are $0.30 per share, and we have reserved shares of our Common Stock for issuance in connection with the potential exercise thereof. Further, the Company issued warrants to purchase 300,000 shares of Common Stock to the placement agent in the Private Placement, at an exercise price equal to $2.75 per share. In addition, the Board of Directors has approved the Stock Option Plan which reserves up to 1,600,000 shares of our Common Stock for issuance under its terms, of which 1,503,000 has been authorized by written consent of the Board of Directors for issuance at the time of the Acquisition, at an exercise price of $2.01 per share, subject to shareholder approval of the 2007 Stock Option Plan and the Plan of Recapitalization. To the extent shares of our Common Stock are issued or options or warrants are exercised, investors in our securities will experience further dilution and the presence of such derivative securities may make it more difficult to obtain any future financing. In addition, in the event any future financing should be in the form of, or be convertible into or exchangeable for, equity securities, upon the issuance of such equity securities, investors may experience additional dilution.

ALTHOUGH WE ARE REQUIRED TO USE OUR BEST EFFORTS TO HAVE AN EFFECTIVE REGISTRATION STATEMENT COVERING THE ISSUANCE OF THE SHARES UNDERLYING THE WARRANTS AT THE TIME THAT OUR WARRANT HOLDERS EXERCISE THEIR WARRANTS, WE CANNOT GUARANTEE THAT A REGISTRATION STATEMENT WILL BE EFFECTIVE, IN WHICH CASE OUR WARRANT HOLDERS MAY NOT BE ABLE TO EXERCISE OUR WARRANTS. Although we have undertaken to use our best efforts to maintain a current registration statement covering the shares underlying the warrants following completion of the Private Placement, we cannot assure that we will be able to do so. In addition, we have agreed to use our reasonable efforts to register the shares underlying the warrants under the blue sky laws of the states of residence of the exercising warrant holders, to the extent an exemption is not available. The value of the warrants may be greatly reduced if a registration statement covering the shares issuable upon the exercise of the warrants is not kept current or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. Holders of warrants who reside in jurisdictions in which the shares underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised, in which case the warrants would be automatically exercised using a cashless conversion.

SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET. From time to time, certain of our stockholders may be eligible to sell all or some of their shares of our Common Stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, subject to certain limitations. All the shares outstanding, post Plan of Recapitalization and prior to the conversion of the Series B Preferred Stock and Series C Preferred Stock, have been issued for more than two years and are eligible for sale in compliance with Rule 144, without regard to the volume limitations thereunder, except for any shares held by our affiliates within the meaning of Rule 144.

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In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by a non-affiliate of the Company that has satisfied a two-year holding period. Any substantial sale of our Common Stock pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse effect on the market price of our publicly traded securities.

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DESCRIPTION OF SECURITIES

The Company is authorized to issue 25,000,000 shares of capital stock divided into (i) 20,000,000 shares of common stock, no par value and (ii) 5,000,000 shares of preferred stock, par value $0.01 per share.

Common Stock

As of January 26, 2007, there are 8,316,074 shares of Common Stock issued and outstanding. The total number of shares of Common Stock issued and outstanding does not include shares reserved for issuance upon the exercise of outstanding options or warrants or shares reserved for issuance under the Company’s Stock Option Plan or conversion of preferred stock. As of today, the Company had outstanding stock options and warrants to purchase an aggregate of 4,053,000 shares of our Common Stock, and we have reserved shares of our Common Stock for issuance in connection with the potential exercise thereof.

After approval and adoption of the Plan of Recapitalization, the Company will be authorized to issue 40,000,000 shares of Common Stock. After effectiveness of the Plan of Recapitalization and upon conversion of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock into Common Stock, there will be 11,800,000shares of Common Stock issued and outstanding. The total number of shares of Common Stock issued and outstanding does not include shares reserved for issuance upon the exercise of outstanding options or warrants or shares reserved for issuance under the Company’s Stock Option Plan. Giving effect to the Plan of Recapitalization, the Company will have outstanding warrants to purchase an aggregate of 250,000 shares of the Company’s Common Stock, exercisable at $0.30 per share. Additionally, the Company issued to investors warrants to purchase an aggregate of 1,500,000 shares of the Company’s Common Stock, exercisable at $0.30 per share, warrants to purchase an aggregate of 500,000 shares of the Company’s Common Stock, exercisable at $2.50 per share,warrants to purchase 300,000 shares of Common Stock to the Placement Agent, at an exercise price equal to $2.75 per share and the Company reserved shares of its Common Stock for issuance in connection with the potential exercise thereof. In addition, the Board approved and authorized the issuance of 1,503,000 employee stock options upon closing of the Acquisition, exercisable at a price per share equal to $2.01 per share, and expiring 10 years from the grant date, pursuant to the 2007 Stock Option Plan which reserves up to 1,600,000 shares of the Company’s Common Stock for issuance. Such issuance is subject to shareholder approval of the Plan of Recapitalization and the 2007 Stock Option Plan which will take place at the next shareholder meeting

The holders of the Company’s Common Stock are entitled to one vote for each share held of record in the election of directors and in all other matters to be voted on by the stockholders. There is no cumulative voting with respect to the election of directors. As a result, the holders of more than 50% of the shares voting for the election of directors can elect all of the directors. Holders of Common Stock are entitled:

·   to receive any dividends as may be declared by the Board of Directors out of funds legally available for such purpose after payment of accrued dividends on the outstanding shares of preferred stock; and

·   in the event of the Company’s liquidation, dissolution, or winding up, to share ratably in all assets remaining after payment of liabilities and after provisions have been made for each class of stock having preference over the Common Stock.

All of the outstanding shares of Common Stock are validly issued, fully paid and nonassessable. Holders of the Company’s Common Stock have no preemptive right to subscribe for or purchase additional shares of any class of the Company’s capital stock.

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Preferred Stock

Our Board of Directors has the authority, within the limitations set forth in our certificate of designations and certificate of incorporation to provide by resolution for the issuance of preferred stock, in one or more classes or series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designation of such series. As of January 26, 2007, there are 2,875,000 shares of Series A Preferred Stock outstanding, 15,000 shares of Series B Preferred Stock outstanding and 8,000 shares of Series C Preferred Stock outstanding. After effectiveness of the Plan of Recapitalization, and following conversion of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock into Common Stock, the Company will be authorized to designate the rights and preferences and issue up to 5,000,000 shares of preferred stock.

Series A Convertible Preferred Stock

The Series A Preferred Stock must be converted into fully paid and non-assessable shares of Common Stock by the Company upon the earlier of (i) the closing of a Qualified Public Offering, or (ii) the affirmative vote of the holders of a majority of the outstanding Series A Preferred Stock for a mandatory conversion. A “Qualified Public Offering” is a public offering of the shares of the Company in which (a) a minimum of $10 million is raised in such offering by the Company, or (b) the per share purchase price is at least $4.00 and (c) the offering is underwritten on a firm basis by a recognized underwriter.

Each share of Series A Preferred Stock shall be convertible into fully paid and nonassessable shares of Common Stock at a rate of two shares of Common Stock for each share of Series A Preferred Stock, subject to adjustment when Common Stock has been proportionately adjusted. Upon conversion, all accumulated and unpaid dividends to the conversion date on the Series A Preferred Stock so converted shall also be converted into fully paid and nonassessable shares of Common Stock at the rate of $0.50 of accumulated and unpaid dividends for each share of Common Stock.

The holders of the Series A Preferred Stock are entitled to an annual $0.10 cumulative dividend per share payable in cash and shall become due and payable when, as and if declared by the Board of Directors or the conversion of the Series A Preferred Stock. Series A Preferred Stock is entitled to two votes per share (reflecting its 2-for-1 conversion feature) on all matters submitted to a vote of the holders of Common Stock. In January, 2007, the Company issued 2,600,000 shares of Common Stock to holders of Series A Preferred Stock in satisfaction of 50% of the accrued but unpaid dividends owed to holders of Series A Preferred Stock as of December 31, 2006.

As part of the Plan of Recapitalization, the Series A Preferred Stock will be converted or exchanged into 4,584,196 shares of Common Stock immediately after the 1 for 20 exchange or reverse stock split pursuant to the Plan of Recapitalization, and the holders of Series A Preferred Stock will waive any remaining accrued and unpaid dividends thereon.

Series B Convertible Preferred Stock

At any time after approval of the Plan of Recapitalization but prior to satisfaction of all conditions necessary for the mandatory conversion set forth below, holders of the Series B Preferred Stock may convert the Series B Preferred Stock into shares of Common Stock, at their option, in whole or part, at an initial conversion price equal to $2.50 per shareof Common Stock (the “Conversion Price”), such Conversion Price being effective after giving effect to the Plan of Recapitalization.

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Holders of the Series B Preferred Stock will be obligated to convert their Series B Preferred Stock into shares of Common Stock at the Conversion Price following such time as the Plan of Recapitalization has been approved by the stockholders of the Company and adopted by the Board of Directors, subject to Company compliance with certain conditions as set forth in the Certificate of Designation establishing the terms of the Series B Preferred Stock.

Upon the occurrence of certain triggering events (as set forth in the Certificate of Designation with respect to the Series B Preferred Stock), holders of the Series B Preferred Stock shall have the right to have all shares of Series B Preferred Stock then held by them redeemed for cash in an amount per share equal to the sum of (i) the greater of (A) 115% of the Stated Value and (B) the product of (a) the VWAP (as defined in the Certificate of Designation) on the trading day immediately preceding the date of the triggering event and (b) the Stated Value divided by the conversion price and (ii) all liquidated damages and other costs, expenses or amounts due in respect of the Series B Preferred Stock.

Except as required by law, the Series B Preferred Stock shall have voting rights equal to the number of shares of Common Stock such Series B Preferred Stock is convertible into as of the record date for such vote (such conversion rate assumes the Plan of Recapitalization has been approved by the stockholders of the Company).

There are no dividends payable on the Series B Preferred Stock unless declared payable by the Board of Directors of the Company.

Upon an Event of Liquidation, holders of any then unconverted shares of the Series B Preferred Stock will be entitled to receive the Liquidation Preference Amount before holders of Common Stock are entitled to receive any portion of the consideration available from the liquidation of the Company. If there are insufficient assets available for distribution to pay such holders of Series B Preferred Stock the full amount to which they are entitled, holders of Series B Preferred Stock will share ratably 100% of the liquidation consideration available with the holders of our Series C Preferred Stock in any distribution of our assets. The “Liquidation Preference Amount” shall be equal to the sum of: (i) the Stated Amount of any then unconverted Series B Preferred Stock, and (ii) any accrued and unpaid dividends, fees or damages owing thereon. For purposes hereof, an “Event of Liquidation” shall mean any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.

For so long as any shares of Series B Preferred Stock are outstanding, the Company shall be prohibited from taking certain actions without the prior written consent of the holders of a majority in interest of the Series B Preferred Stock then outstanding, as set forth in the Certificate of Designation.

Series C Convertible Preferred Stock

Holders of the Series C Preferred Stock will be obligated to convert the Series C Preferred Stock into shares of Common Stock (the “Series C Conversion Shares”), after the Plan of Recapitalization has been approved by the stockholders of the Company and adopted by the Board of Directors at an initial conversion price equal to $2.50 per shareof Common Stock (the “Series C Conversion Price”), after giving effect to the Plan of Recapitalization.

Except as required by law, the Series C Preferred Stock shall have no voting rights. In addition, there are no dividends payable on the Series C Preferred Stock unless declared payable by the Board of Directors of the Company.

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Upon an Event of Liquidation, holders of any then unconverted shares of the Series C Preferred Stock will be entitled to receive the Series C Liquidation Preference Amount before holders of Common Stock are entitled to receive any portion of the consideration available from the liquidation of the Company. If there are insufficient assets available for distribution to pay such holders of Series C Preferred Stock the full amount to which they are entitled, holders of Series C Preferred Stock will share ratably 100% of the liquidation consideration available with the holders of our Series B Preferred Stock in any distribution of our assets. The “Series C Liquidation Preference Amount” shall be equal to $250.00 per share of any then unconverted Series C Preferred Stock.

Warrants and Options

Common stock warrants

Existing Warrants @ $0.30 per share

On October 24, 2005, the Company issued 750,000 warrants to purchase Common Stock. Of these warrants, 600,000 were issued to John Pappajohn and the remaining 150,000 warrants were issued to his designees. The warrants were issued as compensation for past services rendered and all warrants were immediately vested. The warrants have an exercise price of $0.50, which exceeded the market price of the Company’s common stock at the time of issuance. The value of the warrants was separately estimated at $0.01 per share or $10,000 based on the Black-Scholes valuation of the call option associated with a five year warrant. As part of the financing, Mr. Pappajohn relinquished the 600,000 warrants that were issued to him, and the remaining 150,000 warrants issued to his designees will be adjusted to 250,000 warrants to purchase common stock exercisable at $0.30 per share.

Investor Warrants @ $0.30 per share

In connection with the private placement consummated recently (and described under “Recent Sales of Unregistered Securities” below), each investor received a warrant to purchase up to a number of shares of Common Stock equal to 25% of such investor’s subscription amount divided by the Conversion Price (as defined in the Certificate of Designation establishing the Series B Preferred Stock), with an exercise price equal to $0.30. After approval and adoption of the Plan of Recapitalization, the Company will have issued to investors warrants to purchase an aggregate of 1,500,000 shares of Common Stock, exercisable at $0.30 per share, expiring five years from the date the Plan of Recapitalization has been approved by the stockholders of the Company.

Investor Warrants @ $2.50 per share

In connection with the private placement consummated recently (and described under “Recent Sales of Unregistered Securities” below), each investor received a warrant to purchase up to a number of shares of Common Stock equal to 8.3% of such investor’s subscription amount divided by the Conversion Price (as defined in the Certificate of Designation establishing the Series B Preferred Stock), with an exercise price equal to $2.50 per share. After approval and adoption of the Plan of Recapitalization, the Company will have issued to investors warrants to purchase an aggregate of 500,000 shares of Common Stock, exercisable at $2.50 per share, expiring five years from the date the Plan of Recapitalization has been approved by the stockholders of the Company.

Placement Agent Warrants @ $2.75 per share

In connection with the private placement consummated recently (and described under “Recent Sales of Unregistered Securities” below), the Company issued to the Placement Agent (as defined below) a warrant to purchase 5% of the Common Stock issuable upon conversion of the Series B Preferred Stock at each Closing at an exercise price equal to $2.75 per share. After approval of the Plan of Recapitalization, the Company will have issued to the Placement Agent warrants to purchase 300,000 shares of the Common Stock, exercisable at $2.75 per share, and expiring five years from the date of grant.

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In sum, after effectiveness of the Plan of Recapitalization, the Company will have outstanding warrants to purchase an aggregate of 2,550,000 shares of the Company’s Common Stock (2,000,000 warrants associated with the sale of the Series B Preferred Stock and 250,000 warrants remaining from the warrants issued on October 14, 2005, the exercise prices of which are $2.50 per share pertaining to 500,000 of such warrants and the exercise prices of which are $0.30 per share for the remaining warrants, as well as 300,000 Placement Agent Warrants), and the Company has reserved shares of its Common Stock for issuance in connection with the potential exercise thereof.

Common stock options

The Board of Directors has adopted the 2007 Stock Option Plan, subject to the effectiveness of the Plan of Recapitalization (the “Stock Option Plan”). The Stock Option Plan will provide for the grant of 1,600,000 incentive stock options, nonqualified stock options, restricted stock, stock bonuses and stock appreciation rights. The Stock Option Plan will be administered by the Board of Directors which has the authority and discretion to determine: (1) 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 Board of Directors has approved and authorized the issuance from the Stock Option Plan of 1,503,000 stock options to certain employees of CONMED at the Closing of the Acquisition, exercisable at $2.01 per share, which the Board determined to be equal to the fair market value at the time of closing, and expiring10 years from the grant date, such issuance subject to shareholder approval of the Plan of Recapitalization and the Stock Option Plan at the next shareholder meeting.

Transfer Agent and Registrar

Our transfer agent and registrar for our common stock is Wells Fargo Shareowner Services, P.O. Box 64875, St. Paul, MN 55164-0875.

Changes in and Disagreements with Accountants

None

Recent Sales of Unregistered Securities

In January 2007, holders of Pace’s Series A Preferred Stock converted 50% of the accrued but unpaid dividends on their Series A Preferred Stock into an aggregate of 2,600,000 shares of Common Stock. All the holders of Series A Preferred Stock have agreed to waive the remaining accrued and unpaid dividends on their shares of Series A Preferred Stock at the consummation of the Plan of Recapitalization.

On January 26, 2007, Pace sold to certain “accredited investors” 150 units, each unit consisting of (i) 100 shares of its Series B Convertible Preferred Stock (“Series B Preferred Stock”), (ii) a common stock purchase warrant entitling the holder to purchase up to 10,000 shares of its Common Stock at an exercise price equal to $0.30 per share and (iii) a common stock purchase warrant entitling the holder to purchase up to 3,320 shares of its Common Stock at an exercise price equal to $2.50 per share (such units, the “Units”), in a private offering pursuant to exemption from registration under Section 4(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D promulgated thereunder. Each Unit was sold for $100,000, for an aggregate purchase price of $15,000,000. The proceeds from the sale of the Units were used to purchase all the issued and outstanding capital stock of CONMED and to provide working capital following such purchase.

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

The Company agreed to provide investors in the Units with a Registration Rights Agreement whereby it will use its best efforts to register the resale of the Common Stock to be issued upon conversion of the Series B Preferred Stock and exercise of the warrants contained in the Units within one hundred (100) days after the final closing date of the Acquisition. In the event such registration is not effective on or before the 180^th day following such final closing date (the “Effectiveness Date”), the Company will pay a cash penalty equal to 1% per month of the gross proceeds received from the sale of the Units (or the ratable portion thereof for a partial month) for each month following the Effectiveness Date that there shall fail to be an effective registration statement for the Common Stock up to a maximum of 10%.

Indemnification of Directors and Officers

Iowa law provides for mandatory indemnification of directors in the case where a director is wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was a party because the director is or was a director of the corporation. In addition, a corporation may indemnify a director or officer against liability incurred in a proceeding if either (a) the director or officer acted in good faith; and (b) the director or officer reasonably believed that the conduct was in or at least not opposed to the best interest of the corporation; or (c) the director or officer engaged in conduct for which broader indemnification has been made permissible under a corporation’s articles of incorporation. Indemnification is available in a criminal action only if the person seeking indemnity had no reasonable cause to believe that the person’s conduct was unlawful.

Iowa law generally does not allow indemnification in connection with a proceeding with respect to conduct for which a director or officer receives a financial benefit for which he or she was not entitled, whether or not the director or officer was acting in his or her official capacity. A director or officer can also not be indemnified in connection with a proceeding by or in the right of the corporation, except for reasonable expenses if it is determined that the director or officer has met the relevant standard of conduct.

The Bylaws of the Company provide for indemnification to the fullest extent provided by Iowa law.

Item 8.01 Other Events.

On January 15, 2007, Pace’s Board of Directors approved a Plan of Recapitalization for the Company, which it expects to submit for shareholder approval. Under the proposed plan of recapitalization Pace expects, as soon as practicable, to effect some or all of the following:

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·   A reverse split or exchange of 1 share for each 20 shares of common stock.

·   Conversion of the existing Series A Preferred Stock of Pace into 4,584,196 shares of common stock (immediately after the 1 for 20 exchange or reverse stock split) in exchange for conversion of and waiver of remaining accrued and unpaid dividends.

·   Reincorporation in the state of Delaware.

·   Implementing a stock option plan.

Pace expects to file a preliminary proxy statement as required under applicable SEC rules in the near future. Assuming the preliminary proxy statement is approved by the SEC, a final proxy statement will be mailed to shareholders of record for the meeting of shareholders to approve the Plan of Recapitalization.

Following the Acquisition, Pace’s executive offices moved from Des Moines, Iowa to La Plata, Maryland.

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Item 9.01.Financial Statements and Exhibits.

(a) Financial statements of Pace and CONMED.

The financial statements of Pace as of and for the years ended December 31, 2005 and 2004 have been previously included in a Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2006, and are hereby incorporated by reference. The unaudited financial statements of Pace as of and for the nine months ended September 30, 2006 and 2005 have been previously included in a Form 10-QSB as filed with the Securities and Exchange Commission on November 14, 2006, and are hereby incorporated by reference.

The audited financial statements and notes to the financial statements of CONMED as of and for the years ended December 31, 2005 and 2004 are included as Exhibit 99.1 to this Report on Form 8-K.

The unaudited financial statements and notes to the financial statements of CONMED as of and for the nine months ended September 30, 2006 and 2005 are included as Exhibit 99.2 to this Report on Form 8-K.

(b) Pro forma financial information.

The unaudited condensed pro forma combined balance sheet as of September 30, 2006, unaudited condensed pro forma combined statement of operations for the nine months ended September 30, 2006, unaudited condensed pro forma combined statement of operations for the twelve months ended December 31, 2005 and notes to unaudited condensed pro forma combined financial statements are included as Exhibit 99.3 to this Report on Form 8-K.

(c)	Exhibits.
3.1	Bylaws
4.1	Amendment to Certificate of Incorporation defining rights of Series B Preferred Stock
4.2	Amendment to Certificate of Incorporation defining rights of Series C Preferred Stock
4.3	Form of Investor Warrant ($.30)
4.4	Form of Investor Warrant ($2.50)
10.1	Stock Purchase Agreement by and among Pace, CONMED and the CONMED Stockholders set forth therein, dated August 2, 2006 (1)
10.2	Side letter by and among Pace, CONMED and the CONMED Stockholders set forth therein, dated as of January 12, 2007 (2)
10.3	Form of Subscription Agreement dated January 26, 2007, with Registration Rights, by and among Pace and certain investors in the Private Placement
10.4	Placement Agency Agreement dated January 16, 2007, by and between Pace and Maxim Group LLC

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10.5		Form of Securities Purchase Agreement dated January 26, 2007, by and among Pace and certain investors in the Private Placement
10.6		Form of Registration Rights Agreement dated January 26, 2007 by and among Pace and certain investors in the Private Placement
23.1		Consent of McGladrey & Pullen, LLP dated February 1, 2007
23.2		Consent of McGladrey & Pullen, LLP dated February 1, 2007
99.1		Audited financial statements and notes to the financial statements of CONMED as of and for the years ended December 31, 2005 and 2004
99.2		Unaudited financial statements and notes to the financial statements of CONMED as of and for the nine months ended September 30, 2006 and 2005.
99.3		Unaudited condensed pro forma combined balance sheet as of September 30, 2006, unaudited condensed pro forma combined statement of operations for the nine months ended September 30, 2006, unaudited condensed pro forma combined statement of operations for the twelve months ended December 31, 2005 and notes to unaudited condensed pro forma combined financial statements.
(1)	Incorporated by reference to the Company’s Report on Form 8-K filed on August 8, 2006
(2)	Incorporated by reference to the Company’s Report on Form 8-K filed on January 17, 2007

This Current Report on Form 8-K may contain, among other things, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, (i) statements with respect to the Company’s plans, objectives, expectations and intentions; and (ii) other statements identified by words such as “may”, “could”, “would”, “should”, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans” or similar expressions. These statements are based upon the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. 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).

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SIGNATURES

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

	PACE HEALTH MANAGEMENT SYSTEMS, INC.
Date: February 1, 2007	By:  /s/ Richard W. Turner
	Richard W. Turner, President and Chief Executive Officer

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EX-3.1

EX-4.3

EXHIBIT 4.3

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

COMMON STOCK PURCHASE WARRANT

PACE HEALTH MANAGEMENT SYSTEMS, INC.

Warrant No. ______ Warrant Shares: _______

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, ____________ (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date Shareholder Approval is obtained and deemed effective (the “Initial Exercise Date”) and on or prior to the close of business on the fifth anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Pace Health Management Systems, Inc., an Iowa corporation (the “Company”), up to ______ shares (the “Warrant Shares”) of common stock, no par value per share (the “Common Stock”), of the Company. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Securities Purchase Agreement (the “Purchase Agreement”), dated January 24, 2007, among the Company and the purchasers signatory thereto.

Section 2. Exercise.

a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto (or such

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other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company); and, within 3 Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of the aggregate Exercise Price of the Warrant Shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within 3 Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within 1 Business Day of receipt of such notice. In the event of any dispute or discrepancy, the Notice of Exercise shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

b) Exercise Price. The exercise price per Warrant Share under this Warrant shall be $0.30, subject to adjustment hereunder (the “Exercise Price”).

c) Cashless Exercise. If at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A) = the VWAP on the Trading Day immediately preceding the date of such election;

(B) = the Exercise Price of this Warrant, as adjusted; and

(X) = the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise.

Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c).

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d) Holder’s Restrictions. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2(c) or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, such Holder (together with such Holder’s Affiliates, and any other person or entity acting as a group together with such Holder or any of such Holder’s Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by such Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by such Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Preferred Stock) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by such Holder or any of its affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 2(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by a Holder that the Company is not representing to such Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and such Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(d) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder together with any Affiliates) and of which a portion of this Warrant is exercisable shall be in the sole discretion of a Holder, and the submission of a Notice of Exercise shall be deemed to be each Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(d), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-QSB or Form 10-KSB, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s Transfer Agent setting forth the number of shares of Common Stock

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outstanding.  Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to such Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by such Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(d) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

e) Mechanics of Exercise.

i. Authorization of Warrant Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant and payment of the purchase price for the Warrant Shares so purchased will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

ii. Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the transfer agent of the Company to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system if the Company is a participant in such system, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise within 3 Trading Days from the delivery to the Company of the Notice of Exercise Form, surrender of this Warrant (if required) and payment of the aggregate Exercise Price as set forth above (“Warrant Share Delivery Date”). This Warrant shall be deemed to have been exercised on the date the Exercise Price is received by the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price (or by cashless exercise, if

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permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(e)(vii) prior to the issuance of such shares, have been paid.

iii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

iv. Rescission Rights. If the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 2(e)(iv) by the second Trading Day following the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise on or before the second Trading Day following the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (1) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the

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Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

vi. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

vii. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

viii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

Section 3. CertainAdjustments.

a) Stock Dividends and Splits. Other than (a) in accordance with the Reverse Merger or (b) the transactions for which Shareholder Approval is being obtained, if the Company, at any time while this Warrant is outstanding: (A) pays a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (B) subdivides outstanding shares of Common Stock into a larger number of shares, (C) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury

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shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase or sell or grant any right to reprice its securities, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Exercise Price (such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance), then the Exercise Price shall be reduced and only reduced to equal the Base Share Price and the number of Warrant Shares issuable hereunder shall be increased such that the aggregate Exercise Price payable hereunder, after taking into account the decrease in the Exercise Price, shall be equal to the aggregate Exercise Price prior to such adjustment. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustments shall be made, paid or issued under this Section 3(b) in respect of an Exempt Issuance. The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 3(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b), upon the occurrence of any Dilutive Issuance, after the date of such Dilutive Issuance the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise.

c) Subsequent Rights Offerings. If the Company, at any time while the Warrant is outstanding, shall issue rights, options or warrants to all holders of Common Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the VWAP at the record date mentioned below, then the Exercise Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of the Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of the

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Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered (assuming receipt by the Company in full of all consideration payable upon exercise of such rights, options or warrants) would purchase at such VWAP. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants.

d) Pro Rata Distributions. If the Company, at any time prior to the Termination Date, shall distribute to all holders of Common Stock (and not to Holders of the Warrants) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

e) Fundamental Transaction. If, at any time while this Warrant is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (each “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a

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reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder’s right to exercise such warrant into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 3(e) and insuring that this Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended, or (3) a Fundamental Transaction involving a person or entity not traded on a national securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market, the Company or any successor entity shall pay at the Holder’s option, exercisable at any time concurrently with or within 30 days after the consummation of the Fundamental Transaction, an amount of cash equal to the value of this Warrant as determined in accordance with the Black-Scholes option pricing formula using an expected volatility equal to the 100 day historical price volatility obtained from the HVT function on Bloomberg L.P. as of the trading day immediately prior to the public announcement of the Fundamental Transaction. Notwithstanding anything contained herein to the contrary, neither the Reverse Merger nor any action taken as a result of the obtaining of Shareholder Approval shall be deemed a Fundamental Transaction.

f) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

g) Voluntary Adjustment By Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.

h) Notice to Holder.

i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. If the Company issues a variable rate security, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at

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the lowest possible conversion or exercise price at which such securities may be converted or exercised in the case of a Variable Rate Transaction (as defined in the Purchase Agreement).

ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock; (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property (other than in connection with the Reverse Merger or Shareholder Approval); (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder is entitled to exercise this Warrant during the 20-day period commencing on the date of such notice to the effective date of the event triggering such notice.

Section 4. Transfer of Warrant.

a) Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in Section 4(d) hereof and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly

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executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

d) Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer, that (i) the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, and (ii) the Holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company, and (iii) the transferee be an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under the Securities Act or a “qualified institutional buyer” as defined in Rule 144A(a) promulgated under the Securities Act.

Section 5. Miscellaneous.

a) No Rights as Shareholder Until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof as set forth in Section 2(e)(ii).

b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of

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the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.

d) Authorized Shares.

The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed.

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant.

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Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase Agreement.

f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

h) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement.

i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

j) Remedies. Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders

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from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares.

l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

********************

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

PACE HEALTH MANAGEMENT SYSTEMS, INC.

By:__________________________________________

Name: John Pappajohn

Title: President & Chief Executive Officer

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NOTICE OF EXERCISE

TO:_______________________

(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2) Payment shall take the form of (check applicable box):

[ ] lawful money of the United States; or

[ ] [if permitted] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

_______________________________

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

_______________________________

_______________________________

_______________________________

(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

[SIGNATURE OF HOLDER]

Name of Investing Entity: ________________________________________________________________________

Signature of Authorized Signatory of Investing Entity: _________________________________________________

Name of Authorized Signatory: ___________________________________________________________________

Title of Authorized Signatory: ____________________________________________________________________

Date: ________________________________________________________________________________________

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

_______________________________________________ whose address is

_______________________________________________________________.

_______________________________________________________________

Dated: ______________, _______

Holder’s Signature:_____________________________

Holder’s Address:_____________________________

_____________________________

Signature Guaranteed: ___________________________________________

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

EX-4.4

EXHIBIT 4.4

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

COMMON STOCK PURCHASE WARRANT

PACE HEALTH MANAGEMENT SYSTEMS, INC.

Warrant No. _____ Warrant Shares: ______

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, ___________ (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date Shareholder Approval is obtained and deemed effective (the “Initial Exercise Date”) and on or prior to the close of business on the fifth anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Pace Health Management Systems, Inc., an Iowa corporation (the “Company”), up to _____ shares (the “Warrant Shares”) of common stock, no par value per share (the “Common Stock”), of the Company. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Securities Purchase Agreement (the “Purchase Agreement”), dated January 24, 2007, among the Company and the purchasers signatory thereto.

Section 2. Exercise.

a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto (or such

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other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company); and, within 3 Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of the aggregate Exercise Price of the Warrant Shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within 3 Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within 1 Business Day of receipt of such notice. In the event of any dispute or discrepancy, the Notice of Exercise shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

b) Exercise Price. The exercise price per Warrant Share under this Warrant shall be $2.50, subject to adjustment hereunder (the “Exercise Price”).

c) Cashless Exercise. If at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A) = the VWAP on the Trading Day immediately preceding the date of such election;

(B) = the Exercise Price of this Warrant, as adjusted; and

(X) = the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise.

Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c).

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d) Holder’s Restrictions. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2(c) or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, such Holder (together with such Holder’s Affiliates, and any other person or entity acting as a group together with such Holder or any of such Holder’s Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by such Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by such Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Preferred Stock) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by such Holder or any of its affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 2(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by a Holder that the Company is not representing to such Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and such Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(d) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder together with any Affiliates) and of which a portion of this Warrant is exercisable shall be in the sole discretion of a Holder, and the submission of a Notice of Exercise shall be deemed to be each Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(d), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-QSB or Form 10-KSB, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s Transfer Agent setting forth the number of shares of Common Stock

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outstanding.  Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to such Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by such Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(d) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

e) Mechanics of Exercise.

i. Authorization of Warrant Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant and payment of the purchase price for the Warrant Shares so purchased will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

ii. Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the transfer agent of the Company to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system if the Company is a participant in such system, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise within 3 Trading Days from the delivery to the Company of the Notice of Exercise Form, surrender of this Warrant (if required) and payment of the aggregate Exercise Price as set forth above (“Warrant Share Delivery Date”). This Warrant shall be deemed to have been exercised on the date the Exercise Price is received by the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price (or by cashless exercise, if

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permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 2(e)(vii) prior to the issuance of such shares, have been paid.

iii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

iv. Rescission Rights. If the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 2(e)(iv) by the second Trading Day following the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise on or before the second Trading Day following the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (1) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the

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Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

vi. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

vii. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

viii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

Section 3. CertainAdjustments.

a) Stock Dividends and Splits. Other than (a) in accordance with the Reverse Merger or (b) the transactions for which Shareholder Approval is being obtained, if the Company, at any time while this Warrant is outstanding: (A) pays a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (B) subdivides outstanding shares of Common Stock into a larger number of shares, (C) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury

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shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase or sell or grant any right to reprice its securities, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Exercise Price (such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance), then the Exercise Price shall be reduced and only reduced to equal the Base Share Price and the number of Warrant Shares issuable hereunder shall be increased such that the aggregate Exercise Price payable hereunder, after taking into account the decrease in the Exercise Price, shall be equal to the aggregate Exercise Price prior to such adjustment. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustments shall be made, paid or issued under this Section 3(b) in respect of an Exempt Issuance. The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 3(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b), upon the occurrence of any Dilutive Issuance, after the date of such Dilutive Issuance the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise.

c) Subsequent Rights Offerings. If the Company, at any time while the Warrant is outstanding, shall issue rights, options or warrants to all holders of Common Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the VWAP at the record date mentioned below, then the Exercise Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of the Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of the

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Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered (assuming receipt by the Company in full of all consideration payable upon exercise of such rights, options or warrants) would purchase at such VWAP. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants.

d) Pro Rata Distributions. If the Company, at any time prior to the Termination Date, shall distribute to all holders of Common Stock (and not to Holders of the Warrants) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

e) Fundamental Transaction. If, at any time while this Warrant is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (each “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a

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reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder’s right to exercise such warrant into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 3(e) and insuring that this Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended, or (3) a Fundamental Transaction involving a person or entity not traded on a national securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market, the Company or any successor entity shall pay at the Holder’s option, exercisable at any time concurrently with or within 30 days after the consummation of the Fundamental Transaction, an amount of cash equal to the value of this Warrant as determined in accordance with the Black-Scholes option pricing formula using an expected volatility equal to the 100 day historical price volatility obtained from the HVT function on Bloomberg L.P. as of the trading day immediately prior to the public announcement of the Fundamental Transaction. Notwithstanding anything contained herein to the contrary, neither the Reverse Merger nor any action taken as a result of the obtaining of Shareholder Approval shall be deemed a Fundamental Transaction.

f) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

g) Voluntary Adjustment By Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.

h) Notice to Holder.

i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. If the Company issues a variable rate security, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at

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the lowest possible conversion or exercise price at which such securities may be converted or exercised in the case of a Variable Rate Transaction (as defined in the Purchase Agreement).

ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock; (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property (other than in connection with the Reverse Merger or Shareholder Approval); (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder is entitled to exercise this Warrant during the 20-day period commencing on the date of such notice to the effective date of the event triggering such notice.

Section 4. Transfer of Warrant.

a) Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in Section 4(d) hereof and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly

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executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

d) Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer, that (i) the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, and (ii) the Holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company, and (iii) the transferee be an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under the Securities Act or a “qualified institutional buyer” as defined in Rule 144A(a) promulgated under the Securities Act.

Section 5. Miscellaneous.

a) No Rights as Shareholder Until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof as set forth in Section 2(e)(ii).

b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of

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the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.

d) Authorized Shares.

The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed.

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant.

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Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase Agreement.

f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

h) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement.

i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

j) Remedies. Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders

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from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares.

l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

********************

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

PACE HEALTH MANAGEMENT SYSTEMS, INC.

By:__________________________________________

Name: John Pappajohn

Title: President & Chief Executive Officer

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NOTICE OF EXERCISE

TO:_______________________

(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2) Payment shall take the form of (check applicable box):

[ ] lawful money of the United States; or

[ ] [if permitted] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

_______________________________

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

_______________________________

_______________________________

_______________________________

(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

[SIGNATURE OF HOLDER]

Name of Investing Entity: ________________________________________________________________________

Signature of Authorized Signatory of Investing Entity: _________________________________________________

Name of Authorized Signatory: ___________________________________________________________________

Title of Authorized Signatory: ____________________________________________________________________

Date: ________________________________________________________________________________________

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

_______________________________________________ whose address is

_______________________________________________________________.

_______________________________________________________________

Dated: ______________, _______

Holder’s Signature:_____________________________

Holder’s Address:_____________________________

_____________________________

Signature Guaranteed: ___________________________________________

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

EX-10.3

EXHIBIT 10.3

SUBSCRIPTION BOOKLET

PACE HEALTH MANAGEMENT SYSTEMS, INC.

Offering of up to $15,000,000 of Units of

Pace Health Management Systems, Inc.

CONTENTS

Instructions for Subscription

Subscription Agreement

Exhibit A: Registration Rights

Exhibit B: Confidential Purchaser Questionnaire

PACE HEALTH MANAGEMENT SYSTEMS, INC.

INSTRUCTIONS FOR SUBSCRIPTION

The subscriber must do the following:

1. Complete, sign and deliver the Subscription Agreement included in this Subscription Booklet (fill out and sign on page S-1).

2. Complete, sign and deliver the Confidential Purchaser Questionnaire included in this Confidential Subscription Booklet and attached hereto as Exhibit B(fill out (pages 1-5) and sign on page 5).

3. Deliver payment in the aggregate amount of your subscription.

Delivery of the completed subscription documents described above and checks for subscription amounts made out to “Continental Stock Transfer & Trust Company, as Agent for Pace Health Management Systems, Inc.” should be delivered directly to:

Maxim Group LLC

405 Lexington Avenue

New York, New York 10174.

Attention: Andrew Rosen

Subscription amounts may also be sent by wire transfer of immediately available funds to:

Bank Name:	JP Morgan Chase
ABA #:	021000021
Acct #:	530-062054
Acct. Name:	Continental Stock Transfer & Trust Company, as Agent for Pace Health Management Systems, Inc.

THE COMPANY MAY ACCEPT OR REJECT SUBSCRIPTIONS IN ITS SOLE DISCRETION. THE OFFERING IS AVAILABLE ONLY TO “ACCREDITED INVESTORS” AS DEFINED UNDER REGULATION D UNDER THE SECURITIES ACT OF 1933, AS AMENDED. In the event that a subscription offer is not accepted by the Company, the subscription funds shall be returned to the subscriber, without interest or deduction thereon.

PACE HEALTH MANAGEMENT SYSTEMS, INC.

SUBSCRIPTION AGREEMENT

The undersigned (hereinafter “Subscriber”) hereby confirms his/her/its subscription for the purchase of Units, each Unit to consist of: (1) 100 shares of Series B Convertible Preferred Stock of Pace Health Management Systems, Inc., an Iowa corporation (the “Company”), (2) a common stock purchase warrant entitling the holder to purchase up to 10,000 shares of Common Stock of the Company at an exercise price equal to $0.30 per share and (3) a common stock purchase warrant entitling the holder to purchase up to 3,320 shares of Common Stock of the Company at an exercise price equal to $2.50 per share. (“Units”) of Series B Convertible Preferred Stock, par value $0.01 per share (the “Preferred Stock”) of Pace Health Management Systems, Inc., on the terms described below:

Capitalized terms used and not otherwise defined herein shall have the respective meanings set forth in the Private Placement Memorandum of the Company, dated as of January 16, 2007, and its attachments thereto (the “Memorandum”). The Units and the underlying common stock are sometimes referred to herein as the “Securities.”

In connection with this subscription, Subscriber and the Company agree as follows:

1. Purchase and Sale of the Units.

(a) The Company hereby agrees to issue and to sell to Subscriber, and Subscriber hereby agrees to purchase from the Company, such number of Units at a price of One Thousand Dollars ($1,000.00) per Unit (the “Unit Price”) and for the aggregate subscription amount set forth on the signature page hereto. The Subscriber understands that this subscription is not binding upon the Company until the Company accepts it. The Subscriber acknowledges and understands that acceptance of this Subscription will be made only by a duly authorized representative of the Company executing and mailing or otherwise delivering to the Subscriber at the Subscriber’s address set forth herein, a counterpart copy of the signature page to this Subscription Agreement indicating the Company’s acceptance of this Subscription. The Company and Maxim Group LLC (the “Placement Agent”) reserve the right, in their sole discretion for any reason whatsoever, to accept or reject this subscription in whole or in part. Following the acceptance of this Subscription Agreement by the Company, and the receipt and acceptance by the Company of subscriptions to the Minimum Offering (defined below), the Company shall instruct its transfer agent to issue and deliver to Subscriber (i) a share certificate evidencing the applicable number of Shares subscribed for hereunder against payment in U.S. Dollars of the Purchase Price (as defined below), (ii) a Common Stock purchase warrant exercisable at $0.30 per share, and (iii) a Common Stock purchase warrant exercisable at $2.50 per share. If this subscription is rejected, the Company and the Subscriber shall thereafter have no further rights or obligations to each other under or in connection with this Subscription Agreement. If this subscription is not accepted by the Company on or before the last day of the Offering Period, this subscription shall be deemed rejected.

(b) Subscriber has hereby delivered and paid concurrently herewith the aggregate purchase price for the Units set forth on the signature page hereof in an amount required to purchase and pay for the Units subscribed for hereunder (the “Purchase Price”), which amount has been paid in U.S. Dollars by wire transfer or check, subject to collection, to the order of “Continental Stock Transfer & Trust Company - Pace Health Management Systems, Inc. Escrow Account.”

(c) Subscriber understands and acknowledges that this subscription is part of a private placement by the Company of up to $15,000,000 of Units, which offering is being made on a “best efforts” basis, for a minimum of 10,000 Units (the “Minimum Offering”) and a maximum of 15,000 Units (the “Maximum Offering”). Subscriber understands that payments hereunder as to the Minimum Offering will be held in a non-interest bearing escrow account established by the Company with Continental Stock Transfer & Trust Company as escrow agent, and will be released to the Company if subscriptions for the Minimum Offering are received and accepted by the Company within the Offering Period (as described in the Memorandum), including any extended period. If subscriptions for the Minimum Offering are not received and accepted by the Company within the Offering Period (including any extended period), the funds held in such escrow account will be promptly returned to the subscribers in full without interest or deduction. If the Company or the Placement Agent rejects all or a portion of any subscription, a check will be promptly mailed to the subscriber for all, or the appropriate portion of, the amount submitted with such subscriber’s subscription, without interest or deduction. All subscriptions received after subscriptions for the Minimum Offering have been received and accepted by the Company and the Placement Agent will be deposited in such escrow account until accepted by the Company and the Placement Agent, whereupon such subscription proceeds will be released by the escrow agent to the Company.

2. Representations and Warranties of Subscriber. Subscriber represents and warrants to the Company and the Placement Agent as follows:

(a) Subscriber is an “accredited investor” as defined by Rule 501 under the Securities Act of 1933, as amended (the “Act”), and Subscriber is capable of evaluating the merits and risks of Subscriber’s investment in the Units and has the ability and capacity to protect Subscriber’s interests.

(b) Subscriber understands that the Securities are not presently registered, but Subscriber is entitled to certain rights with respect to the registration of the common stock underlying the Units (see Section 6 below). Subscriber understands that the Securities will not be registered under the Act on the ground that the issuance thereof is exempt under Section 4(2) of the Act as a transaction by an issuer not involving any public offering and that, in the view of the Commission, the statutory basis for the exemption claimed would not be present if any of the representations and warranties of Subscriber contained in this Subscription Agreement or those of other purchasers of the Securities are untrue or, notwithstanding the Subscriber’s representations and warranties, the Subscriber currently has in mind acquiring any of the Securities for resale upon the occurrence or non-occurrence of some predetermined event.

(c) Subscriber is purchasing the Securities subscribed for hereby for investment purposes and not with a view to distribution or resale, nor with the intention of selling, transferring or otherwise disposing of all or any part thereof for any particular price, or at any particular time, or upon the happening of any particular event or circumstance, except selling, transferring, or disposing the Securities made in full compliance with all applicable provisions of the Act, the rules and regulations promulgated by the United States Securities and Exchange Commission (the “SEC”) thereunder, and applicable state securities laws; and that an investment in the Securities is not a liquid investment.

(d) Subscriber acknowledges that there exists no public market for the Securities, that no such public market may develop in the future and as a result, Subscriber acknowledges that the Securities must be held indefinitely unless subsequently registered under the Act or unless an exemption from such registration is available. Subscriber is aware of the provisions of Rule 144 promulgated under the Act which permit resales of common stock purchased in a private placement subject to certain limitations and

to the satisfaction of certain conditions provided for thereunder, including, among other things, the existence of a public market for the common stock, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being effected through a “broker’s transaction” or in transactions directly with a “market maker” and the number of shares of common stock being sold during any three-month period not exceeding specified limitations.

(e) Subscriber acknowledges that Subscriber has had the opportunity to ask questions of, and receive answers from, each of the Company and ConMed, Inc., a Maryland corporation (“ConMed”), or any authorized person acting on behalf of such entity concerning such entity and its business and to obtain any additional information, to the extent possessed by the Company and ConMed (or to the extent it could have been acquired by the Company or ConMed without unreasonable effort or expense) necessary to verify the accuracy of the information received by Subscriber. In connection therewith, Subscriber acknowledges that Subscriber has had the opportunity to discuss each of the Company’s and ConMed’s business, management and financial affairs with such entity’s management or any authorized person acting on its behalf. Subscriber has received and reviewed the Memorandum and all the information concerning the Company, ConMed and the Units, both written and oral, that Subscriber desires. Without limiting the generality of the foregoing, Subscriber has been furnished with or has had the opportunity to acquire, and to review: all information, both written and oral, that Subscriber desires with respect to each of the Company’s and ConMed’s business, management, financial affairs and prospects. In determining whether to make this investment, Subscriber has relied solely on (i) Subscriber’s own knowledge and understanding of the Company, ConMed and the business of each such entity based upon Subscriber’s own due diligence investigations and the information furnished pursuant to this paragraph, and (ii) the information described in subparagraph 2(g) below. Subscriber understands that no person has been authorized to give any information or to make any representations which were not contained in the Memorandum and Subscriber has not relied on any other representations or information.

(f) Subscriber has all requisite legal and other power and authority to execute and deliver this Subscription Agreement and to carry out and perform Subscriber’s obligations under the terms of this Subscription Agreement. This Subscription Agreement constitutes a valid and legally binding obligation of Subscriber, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other general principals of equity, whether such enforcement is considered in a proceeding in equity or law.

(g) Subscriber has carefully considered and has discussed with the Subscriber’s legal, tax, accounting and financial advisors, to the extent the Subscriber has deemed necessary, the suitability of this investment and the transactions contemplated by this Subscription Agreement for the Subscriber’s particular federal, state, local and foreign tax and financial situation and has independently determined that this investment and the transactions contemplated by this Subscription Agreement are a suitable investment for the Subscriber. Subscriber has relied solely on such advisors and not on any statements or representations of the Company or any of its agents. Subscriber understands that Subscriber (and not the Company) shall be responsible for Subscriber’s own tax liability that may arise as a result of this investment or the transactions contemplated by this Subscription Agreement.

(h) This Subscription Agreement and the Confidential Purchaser Questionnaire accompanying this Subscription Agreement do not contain any untrue statement of a material fact or omit any material fact concerning Subscriber.

(i) There are no actions, suits, proceedings or investigations pending against Subscriber or Subscriber’s assets before any court or governmental agency (nor, to Subscriber’s knowledge, is there any threat thereof) which would impair in any way Subscriber’s ability to enter into and fully perform Subscriber’s commitments and obligations under this Subscription Agreement or the transactions contemplated hereby.

(j) The execution, delivery and performance of and compliance with this Subscription Agreement and the issuance of the Securities will not result in any violation of, or conflict with, or constitute a default under, any of Subscriber’s articles of incorporation or by-laws, if applicable, or any agreement to which Subscriber is a party or by which it is bound, nor result in the creation of any mortgage, pledge, lien, encumbrance or charge against any of the assets or properties of Subscriber or the Securities.

(k) Subscriber acknowledges that an investment in the Securities is speculative and involves a high degree of risk and that Subscriber can bear the economic risk of the purchase of the Securities, including a total loss of his/her/its investment.

(l) Subscriber acknowledges that he/she/it has carefully reviewed and considered the risk factors discussed in the “Risk Factors” section of the Memorandum.

(m) Subscriber recognizes that no federal, state or foreign agency has recommended or endorsed the purchase of the Securities.

(n) Subscriber is aware that the Securities are and will be, when issued, “restricted securities” as that term is defined in Rule 144 of the general rules and regulations under the Act.

(o) Subscriber understands that any and all certificates representing the Securities and any and all securities issued in replacement thereof or in exchange therefor shall bear the following legend or one substantially similar thereto, which Subscriber has read and understands:

“THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS WHICH, IN THE OPINION OF COUNSEL FOR THIS CORPORATION, IS AVAILABLE.”

(p) In addition, the certificates representing the Securities, and any and all securities issued in replacement thereof or in exchange therefor, shall bear such legend as may be required by the securities laws of the jurisdiction in which Subscriber resides.

(q) Because of the legal restrictions imposed on resale, Subscriber understands that the Company shall have the right to note stop-transfer instructions in its stock transfer records, and Subscriber has been informed of the Company’s intention to do so. Any sales, transfers, or other

dispositions of the Securities by Subscriber, if any, will be made in compliance with the Act and all applicable rules and regulations promulgated thereunder.

(r) Subscriber acknowledges that Subscriber has such knowledge and experience in financial and business matters that Subscriber is capable of evaluating the merits and risks of an investment in the Securities and of making an informed investment decision with respect thereto.

(s) Subscriber represents that: (i) Subscriber is able to bear the economic risks of an investment in the Securities and to afford a complete loss of the investment, and (ii) (A) Subscriber could be reasonably assumed to have the ability and capacity to protect his/her/its interests in connection with this subscription; or (B) Subscriber has a pre-existing personal or business relationship with either the Company or any affiliate thereof of such duration and nature as would enable a reasonably prudent purchaser to be aware of the character, business acumen and general business and financial circumstances of the Company or such affiliate and is otherwise personally qualified to evaluate and assess the risks, nature and other aspects of this subscription.

(t) Subscriber further represents that the address of Subscriber set forth below is his/her principal residence (or, if Subscriber is a company, partnership or other entity, the address of its principal place of business); that Subscriber is purchasing the Securities for Subscriber’s own account and not, in whole or in part, for the account of any other person; Subscriber is purchasing the Securities for investment and not with a view to the resale or distribution thereof; and that Subscriber has not formed any entity, and is not an entity formed, for the purpose of purchasing the Securities.

(u) Subscriber understands that the Company and the Placement Agent shall have the unconditional right to accept or reject this subscription, in whole or in part, for any reason or without a specific reason, in the sole and absolute discretion of the Company (even after receipt and clearance of Subscriber’s funds). This Subscription Agreement is not binding upon the Company until accepted in writing by an authorized officer of the Company. In the event that this subscription is rejected, then Subscriber’s subscription funds (to the extent of such rejection) will be promptly returned in full without interest thereon or deduction therefrom.

(v) Subscriber has not been furnished with any oral representation or oral information in connection with the offering of the Securities that is not contained in, or is in any way contrary to or inconsistent with, statements made in the Memorandum and this Subscription Agreement.

(w) Subscriber represents that Subscriber is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over the Internet, television or radio or presented at any seminar or meeting or any public announcement or filing of or by the Company.

(x) Subscriber has carefully read this Subscription Agreement and the Memorandum, and Subscriber has accurately completed the Confidential Purchaser Questionnaire which accompanies this Subscription Agreement.

(y) No representations or warranties have been made to Subscriber by the Company, or any officer, employee, agent, affiliate or subsidiary of the Company, other than the representations of the Company contained herein, and in subscribing for the Securities the Subscriber is not relying upon any representations other than those contained in the Memorandum or in this Subscription Agreement.

(z) Subscriber represents and warrants, to the best of Subscriber’s knowledge, that other than the Placement Agent, no finder, broker, agent, financial advisor or other intermediary, nor any purchaser representative or any broker-dealer acting as a broker, is entitled to any compensation in connection with the transactions contemplated by this Subscription Agreement.

(aa) Subscriber represents and warrants that Subscriber has: (i) not distributed or reproduced the Memorandum, in whole or in part, at any time, without the prior written consent of the Company and the Placement Agent, (ii) kept confidential and non-public the existence of the Memorandum and the information contained therein or made available in connection with any further investigation of the Company, and Subscriber has not used such information for the Subscriber’s personal benefit (other than in connection with this subscription), nor has disclosed such information to any third party for any reason, notwithstanding that the Subscriber’s subscription may not be accepted by the Company, and (iii) refrained and shall refrain from trading in the publicly-traded securities of the Company for so long as such recipient has been in possession of the material non-public information contained in the Memorandum.

(bb) If the Subscriber is a corporation, partnership, limited liability company, trust, or other entity, the person executing this Subscription Agreement hereby represents and warrants that the above representations and warranties shall be deemed to have been made on behalf of such entity and the Subscriber has made the same after due inquiry to determine the truthfulness of such representations and warranties.

(cc) If the Subscriber is a corporation, partnership, limited liability company, trust, or other entity, it represents that: (i) it is duly organized, validly existing and in good standing in its jurisdiction of incorporation or organization and has all requisite power and authority to execute and deliver this Subscription Agreement and purchase the Shares as provided herein; (ii) its purchase of the Shares will not result in any violation of, or conflict with, any term or provision of the charter, By-Laws or other organizational documents of Subscriber or any other instrument or agreement to which the Subscriber is a party or is subject; (iii) the execution and delivery of this Subscription Agreement and Subscriber’s purchase of the Shares has been duly authorized by all necessary action on behalf of the Subscriber; and (iv) all of the documents relating to the Subscriber’s subscription to the Shares have been duly executed and delivered on behalf of the Subscriber and constitute a legal, valid and binding agreement of the Subscriber.

(dd) The Subscriber acknowledges that if he or she is a registered representative of an NASD member firm, he or she must give such firm the notice required by the NASD Rules of Fair Practice, receipt of which must be acknowledged by such firm.

(ee) The Subscriber understands that all information regarding the Offering is confidential and represents that it will not be used for any purpose other than in connection with his, her or its consideration of a purchase of the Securities and agrees to treat it in a confidential manner. The Subscriber has not, during the last thirty (30) days prior to the date hereof, directly or indirectly, nor has any party acting on behalf of or pursuant to any understanding with such Subscriber, effected or agreed to effect any short sale, whether or not against the box, established any “put equivalent position” (as defined in Rule 16(a)-1(h) under the Exchange Act) with respect to any security of the Company, granted any other right (including, without limitation, any put or call option) with respect to any security of the Company or with respect to any security that includes, relates to, or derives any significant part of its value from any security of the Company or otherwise sought to hedge its positioning of the Company’s Securities. For purposes of this Section 2(ee), short sales and hedging activities include, without limitation, all types of direct and indirect stock pledges, forward sale contracts, options, puts, calls, short

sales, swaps, and similar arrangements (including on a total return basis), and sales and other transactions through non-U.S. broker-dealers or foreign regulated brokers having the effect of hedging the securities or investment made under this Agreement. The Subscriber acknowledges and agrees that in order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to any shares Preferred Stock or the common stock underlying such shares or any other securities exchangeable, convertible or exercisable for shares of Preferred Stock.

(ff) Subscriber represents and warrants that he/she/it will have no open position in the Company’s common stock at the time a Registration Statement is filed with the SEC to register the Securities (the “Registration Statement”) and is aware of the following Telephone Interpretation in the SEC Manual of Publicly Available Telephone Interpretations (July 1997):

A.65. Section 5

An issuer filed a Form S-3 registration statement for a secondary offering of common stock which is not yet effective. One of the selling shareholders wanted to do a short sale of common stock “against the box” and cover the short sale with registered shares after the effective date. The issuer was advised that the short sale could not be made before the registration statement becomes effective, because the shares underlying the short sale are deemed to be sold at the time such sale is made. There would, therefore, be a violation of section 5 if the shares were effectively sold prior to the effective date.

(gg) Subscriber acknowledges that it will execute and deliver to the Company a completed selling stockholder questionnaire in connection with the filing of the Registration Statement, prior to the filing thereof.

(hh) Subscriber represents and warrants that he/she/it has complied with all applicable provisions of the Act, the rules and regulations promulgated by the SEC thereunder, including Regulation M and applicable state securities laws, and will comply at the time of sale pursuant to the Registration Statement

(ii) The Subscriber acknowledges that the Placement Agent (including any of its members, managers, employees, agents or representatives) has not made any representations or warranties to the Subscriber concerning the Company or any subsidiary and their respective businesses, condition (financial or otherwise) or prospects.

3. Representations and Warranties of the Company. The Company represents and warrants to Subscriber as follows:

(a) The Company is duly organized and validly exists as a corporation in good standing under the laws of the State of Iowa.

(b) The Company has all such corporate power and authority to enter into, deliver and perform this Subscription Agreement.

(c) All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Subscription Agreement by the Company, and the issuance and sale of the Securities to be sold by the Company pursuant to this Subscription Agreement. This Subscription Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by

bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles.

(d) In addition to the foregoing, Subscriber shall be entitled to rely on all of the representations, warranties and covenants made by the Company to the Placement Agent in that certain Placement Agency Agreement, as the same may be amended, entered into between the Placement Agent and the Company in connection with the Offering as if such representations, warranties and covenants were made directly to the Subscriber.

4. Condition to Obligations of Subscriber. The Subscriber’s obligations hereunder are subject to the closing of the transactions contemplated by the Stock Purchase Agreement, and the Company owning all of the issued and outstanding common stock of ConMed.

5. Indemnification. Subscriber agrees to indemnify and hold harmless the Company, the Placement Agent, and their respective officers, directors, employees, shareholders, agents, attorneys, representatives and affiliates, and any person acting for or on behalf of the Company or the Placement Agent, from and against any and all damage, loss, liability, cost and expense (including reasonable attorneys’ fees and disbursements) which any of them may incur by reason of the failure by Subscriber to fulfill any of the terms and conditions of this Subscription Agreement, or by reason of any breach of the representations and warranties made by Subscriber herein, or in any other document provided by Subscriber to the Company in connection with this investment. All representations, warranties and covenants of each of Subscriber and the Company contained herein shall survive the acceptance of this subscription and the Closings.

6. Registration Rights.

(a) In consideration of the investment in the Units described in this Subscription Agreement and the Memorandum, the Company hereby grants to the Subscriber, and Subscriber hereby agrees to and accepts from the Company, the registration rights set forth in the Registration Rights Agreement, substantially in the form attached hereto as Exhibit A (the “Registration Rights Agreement”).

(b) In connection with the exercise by Subscriber of the registration rights set forth in the Registration Rights Agreement, and with respect to the Securities held by such Subscriber, Subscriber hereby covenants that, prior to filing a Registration Statement or Prospectus (each as defined in Registration Rights Agreement) or any amendments or supplements thereto, Subscriber shall promptly and truthfully complete and execute a selling security-holder questionnaire provided by the Company, and provide any and all such other material information as the Company may require in order to prepare and file such Registration Statement, Prospectus or any amendment or supplement thereto.

7. Covenants. Subscriber hereby agrees to vote all shares of the Company voting stock over which Subscriber has voting control in favor of any resolution presented to the shareholders of the Company with respect to Plan of Recapitalization (as defined in the Memorandum).

8. Miscellaneous.

(a) Subscriber agrees not to transfer or assign this Subscription Agreement or any of Subscriber’s interest herein and further agrees that the transfer or assignment of the Securities acquired pursuant hereto shall be made only in accordance with all applicable laws.

(b) Subscriber agrees that Subscriber cannot cancel, terminate, or revoke this Subscription Agreement or any agreement of Subscriber made hereunder, and this Subscription Agreement shall survive the death or legal disability of Subscriber and shall be binding upon Subscriber’s heirs, executors, administrators, successors, and permitted assigns.

(c) Subscriber has read and has accurately completed this entire Subscription Agreement.

(d) This Subscription Agreement, together with the Memorandum, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and may be amended or waived only by a written instrument signed by all parties.

(e) Subscriber acknowledges that it has been advised and has had the opportunity to consult with Subscriber’s own attorney regarding this subscription and Subscriber has done so to the extent that Subscriber deems appropriate.

(f) Any notice or other document required or permitted to be given or delivered to the parties hereto shall be in writing and sent: (i) by fax if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (ii) by registered or certified mail with return receipt requested (postage prepaid) or (iii) by a recognized overnight delivery service (with charges prepaid).

If to the Company:

PACE Health Management Systems, Inc.

666 Walnut Street, Suite 2116

Des Moines, IA 50309

Attention: John Pappajohn

Telephone: (515) 244-5746

With a copy to:

Ellenoff Grossman & Schole LLP

370 Lexington Avenue

New York, NY 10017

Attn: Barry I. Grossman, Esq.

Tel: (212) 370-1300, Fax: (212) 370-7889

If to the Holder, to the Address Set Forth In the Records of the Company

With copies to:

Maxim Group LLC

405 Lexington Avenue

New York, New York 10174

Tel: (212) 895-3500

Fax: (212) 895-3555

Attn: Andrew Rosen

(g) Failure of the Company to exercise any right or remedy under this Subscription Agreement or any other agreement between the Company and the Subscriber, or otherwise, or any delay by the Company in exercising such right or remedy, will not operate as a waiver thereof. No waiver by the Company will be effective unless and until it is in writing and signed by the Company.

(h) This Subscription Agreement shall be enforced, governed and construed in all respects in accordance with the laws of the State of New York, as such laws are applied by the New York courts except with respect to the conflicts of law provisions thereof, and shall be binding upon the Subscriber and the Subscriber’s heirs, estate, legal representatives, successors and permitted assigns and shall inure to the benefit of the Company, and its successors and assigns.

(i) Any legal suit, action or proceeding arising out of or relating to this Subscription Agreement or the transactions contemplated hereby shall be instituted exclusively in New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York. The parties hereto hereby: (i) waive any objection which they may now have or hereafter have to the venue of any such suit, action or proceeding, and (ii) irrevocably consent to the jurisdiction of the New York Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. The parties further agree to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York and agree that service of process upon a party which is mailed by certified mail to such party’s address shall be deemed in every respect effective service of process upon such party in any such suit, action or proceeding.

(j) If any provision of this Subscription Agreement is held to be invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed modified to conform with such statute or rule of law. Any provision hereof that may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provisions hereof.

(k) The parties understand and agree that money damages would not be a sufficient remedy for any breach of this Subscription Agreement by the Company or the Subscriber and that the party against which such breach is committed shall be entitled to equitable relief, including an injunction and specific performance, as a remedy for any such breach, without the necessity of establishing irreparable harm or posting a bond therefor. Such remedies shall not be deemed to be the exclusive remedies for a breach by either party of this Subscription Agreement but shall be in addition to all other remedies available at law or equity to the party against which such breach is committed.

(l) All pronouns and any variations thereof used herein shall be deemed to refer to the masculine, feminine, singular or plural, as identity of the person or persons may require.

(m) This Subscription Agreement may be executed in counterparts and by facsimile, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.

Signature Page for Individuals:

IN WITNESS WHEREOF, Subscriber has caused this Subscription Agreement to be executed as of the date indicated below.

$___________________________________	___________________________________
Purchase Price	Number of Units
____________________________________	___________________________________
Print or Type Name	Print or Type Name (Joint-owner)
____________________________________	___________________________________
Signature	Signature (Joint-owner)
____________________________________	___________________________________
Date	Date (Joint-owner)
____________________________________	___________________________________
Social Security Number	Social Security Number (Joint-owner)
____________________________________	___________________________________
____________________________________	___________________________________
Address	Address (Joint-owner)
_______ Joint Tenancy	______ Tenants in Common

Signature Page for Partnerships, Corporations or Other Entities:

IN WITNESS WHEREOF, Subscriber has caused this Subscription Agreement to be executed as of the date indicated below.

$ __________________________	___________________________________
Total Purchase Price	Number of Units
_________________________________
Print or Type Name of Entity
___________________________________________________________________________________________________________
Address
_________________________________	____________________________________
Taxpayer I.D. No. (if applicable)	Date
_________________________________	____________________________________
Signature	Print or Type Name and Indicate
	Title or Position with Entity
_________________________________	____________________________________
Signature (other authorized signatory)	Print or Type Name and Indicate
	Title or Position with Entity

Acceptance:

IN WITNESS WHEREOF, the Company has caused this Subscription Agreement to be executed, and the foregoing subscription accepted, as of the date indicated below, as to _______ Units.

PACE HEALTH MANAGEMENT SYSTEMS, INC.

By: __________________________________

Name:

Title:

Date: __________________________, 200__

EXHIBIT A

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (this “Agreement”) is made and entered into as of January ___, 2007 among Pace Health Management Systems, Inc., an Iowa corporation (the “Company”), and the several purchasers signatory hereto (each such purchaser is a “Purchaser” and collectively, the “Purchasers”).

This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof between the Company and each Purchaser (the “Purchase Agreement”).

The Company and each Purchaser hereby agrees as follows:

1. Definitions.Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings:

“Advice” shall have the meaning set forth in Section 6(d).

“Effectiveness Date” means, with respect to the initial Registration Statement required to be filed hereunder, June 1, 2007 and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 90^th calendar day following the date on which the Company first knows, or reasonably should have known, that such additional Registration Statement is required hereunder; provided, however, that in the event the Company is notified by the Commission that one of the above Registration Statements will not be reviewed or is no longer subject to further review and comments, the Effectiveness Date as to such Registration Statement shall be the fifth Trading Day following the date on which the Company is so notified if such date precedes the dates required above.

“Effectiveness Period” shall have the meaning set forth in Section 2(a).

“Event” shall have the meaning set forth in Section 2(b).

“Event Date” shall have the meaning set forth in Section 2(b).

“Filing Date” means, with respect to the initial Registration Statement required hereunder, April 1, 2007 and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 30^th calendar day following the earlier of: (i) the date on which the Company first knows, or reasonably should have known that such additional Registration Statement is required hereunder and (ii) the date any such additional Registration Statement is permitted to be filed with the Commission.

“Holder” or “Holders” means the holder or holders, as the case may be, from time to time of Registrable Securities.

“Indemnified Party” shall have the meaning set forth in Section 5(c).

“Indemnifying Party” shall have the meaning set forth in Section 5(c).

“Losses” shall have the meaning set forth in Section 5(a).

“Plan of Distribution” shall have the meaning set forth in Section 2(a).

“Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

“Registrable Securities” means, as of the date in question, (i) all of the shares of Common Stock issuable upon conversion in full of the shares of Preferred Stock, (ii) all Warrant Shares, (iii) any additional shares issuable in connection with any anti-dilution provisions associated with the Preferred Stock and Warrants (in each case, without giving effect to any limitations on conversion set forth in the Certificate of Designation or limitations on exercise set forth in the Warrant) and (iv) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing.

“Registration Statement” means the registration statements required to be filed hereunder and any additional registration statements contemplated by Section 3(c), including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

“Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

“Rule 424” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

“Selling Shareholder Questionnaire” shall have the meaning set forth in Section 3(a).

2. Shelf Registration

(a) On or prior to each Filing Date, the Company shall prepare and file with the Commission a “Shelf” Registration Statement covering the resale of the Registrable Securities on such Filing Date for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith) and shall contain (unless otherwise directed by at least an 85% majority in interest of the Holders) substantially the “Plan of Distribution” attached hereto as Annex A. Subject to the terms of this Agreement, the Company shall use its best efforts to cause a Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the applicable Effectiveness Date, and shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until all Registrable Securities covered by such Registration Statement have been sold, or may be sold without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders (the “Effectiveness Period”). The Company shall telephonically request effectiveness of a Registration Statement as of 5:00 pm Eastern time on a Trading Day. The Company shall immediately notify the Holders via facsimile of the effectiveness of a Registration Statement on the same Trading Day that the Company telephonically confirms effectiveness with the Commission, which shall be the date requested for effectiveness of a Registration Statement. The Company shall, by 9:30 am Eastern time on the second Trading Day after the Effective Date (as defined in the Purchase Agreement), file a final Prospectus with the Commission as required by Rule 424. Failure to so notify the Holder within two Trading Days of such notification of effectiveness or failure to file a final Prospectus as aforesaid shall be deemed an Event under Section 2(b). All selling shareholders included on the applicable Registration Statement shall be given notice of the effectiveness of such Registration Statement substantially at the same time.

(b) If: (i) a Registration Statement is not filed on or prior to the 15^th day following its Filing Date (if the Company files a Registration Statement without affording the Holders the opportunity to review and comment on the same as required by Section 3(a) herein, the Company shall be deemed to not have satisfied this clause (i)), or (ii) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that a Registration Statement will not be “reviewed,” or not subject to further review, or (iii) prior to the 30^th day following its Effectiveness Date, the Company fails to file a pre-effective amendment and otherwise respond in writing to comments made by the

Commission in respect of such Registration Statement within 15 calendar days after the receipt of comments by or notice from the Commission that such amendment is required in order for a Registration Statement to be declared effective, or (iv) a Registration Statement filed or required to be filed hereunder is not declared effective by the Commission by its Effectiveness Date, or (v) after the Effectiveness Date, a Registration Statement ceases for any reason to remain continuously effective as to all Registrable Securities for which it is required to be effective, or the Holders are otherwise not permitted to utilize the Prospectus therein to resell such Registrable Securities for more than 20 consecutive calendar days or more than an aggregate of 30 calendar days during any 12-month period (which need not be consecutive calendar days) (any such failure or breach being referred to as an “Event”, and for purposes of clause (i) or (iv) the date on which such Event occurs, or for purposes of clause (ii) the date on which such five Trading Day period is exceeded, or for purposes of clause (iii) the date which such 15 calendar day period is exceeded, or for purposes of clause (v) the date on which such 20 or 30 calendar day period, as applicable, is exceeded being referred to as “Event Date”), then in addition to any other rights the Holders may have hereunder or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the aggregate purchase price paid by such Holder pursuant to the Purchase Agreement for any Registrable Securities then held by such Holder and not then registered for resale pursuant to an effective Registration Statement (calculated as calculated as if all convertible securities had been fully converted). The parties agree that (1) in no event shall the Company be liable for liquidated damages under this Agreement in excess of 1.0% of the aggregate Subscription Amount of the Holders in any 30-day period and (2) the maximum aggregate liquidated damages payable to a Holder under this Agreement shall be 10.0% of the aggregate Subscription Amount paid by such Holder pursuant to the Purchase Agreement. Notwithstanding anything herein to the contrary and subject to the payment of liquidated damages as set forth above, in the event the Commission determines any Registration Statement filed pursuant hereto constitutes a primary offering of securities by the Company and/or requires any Holder to be named as an underwriter, or otherwise restricts the number of Registrable Securities that can be registered in a given Registration Statement citing the percentage of Registrable Securities to be registered as compared to the then-current public float or market capital of the Company (“SEC Caused Event”), Holders understand and agree that the Company may reduce, on a pro-rata basis, the total number of Registrable Securities to be registered on behalf of each such Holder. Notwithstanding anything herein to the contrary, the Company will not be liable for liquidated damages under this Agreement with respect to any Warrants or Warrant Shares. In the event of such reduction, the affected Holders shall have demand registration rights during the term of the Effectiveness Period and the Holders acknowledge and agree the provisions of this paragraph may apply to more than one Registration Statement and that the Commission may limit or condition any subsequent Registration Statement. If the Company fails to pay any partial liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will

pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms hereof shall apply on a daily pro-rata basis for any portion of a month prior to the cure of an Event.

3. Registration Procedures.

In connection with the Company’s registration obligations hereunder, the Company shall:

(a) Not less than five Trading Days prior to the filing of each Registration Statement and not less than one Trading Day prior to the filing of any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall, (i) furnish to each Holder copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to each Holder to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file a Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities shall reasonably object in good faith, provided that, the Company is notified of such objection in writing no later than 5 Trading Days after the Holders have been so furnished copies of a Registration Statement or 1 Trading Day after the Holders have been so furnished copies of any related Prospectus or amendment or supplement thereto. Each Holder agrees to furnish to the Company a completed Questionnaire in the form attached to this Agreement as Annex B (a “Selling Shareholder Questionnaire”) not less than two Trading Days prior to the Filing Date or by the end of the fourth Trading Day following the date on which such Holder receives draft materials in accordance with this Section.

(b)(i) Prepare and file with the Commission such amendments, including post-effective amendments, to a Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement (subject to the terms of this Agreement), and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to a Registration Statement or any amendment thereto and as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to a Registration Statement (provided that the Company may excise any information

contained therein which would constitute material non-public information as to any Holder which has not executed a confidentiality agreement with the Company); and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by a Registration Statement during the applicable period in accordance (subject to the terms of this Agreement) with the intended methods of disposition by the Holders thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented.

(c) If during the Effectiveness Period, the number of Registrable Securities at any time exceeds the number of shares of Common Stock then registered in a Registration Statement, then the Company shall file as soon as reasonably practicable but in any case prior to the applicable Filing Date, an additional Registration Statement covering the resale by the Holders of not less than 100% of the number of such Registrable Securities.

(d) Notify the Holders of Registrable Securities to be sold (which notice shall, pursuant to clauses (iii) through (vi) hereof, shall also be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) as promptly as reasonably possible (and, in the case of (i)(A) below, not less than 1 Trading Day prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement; and (C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of a Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (vi) the occurrence or existence of any pending corporate development with respect to the Company that the Company believes may be material and that, in the determination of the

Company, makes it not in the best interest of the Company to allow continued availability of a Registration Statement or Prospectus; provided that any and all of such information shall remain confidential to each Holder until such information otherwise becomes public, unless disclosure by a Holder is required by law; provided, further, that notwithstanding each Holder’s agreement to keep such information confidential, the Holders make no acknowledgement that any such information is material, non-public information.

(e) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of a Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.

(f) Furnish to each Holder, without charge, at least one conformed copy of each such Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference to the extent requested by such Person, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission.

(g) Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto, except after the giving of any notice pursuant to Section 3(d).

(h) The Company shall effect a filing with respect to the public offering contemplated by the Registration Statement (an “Issuer Filing”) with the National Association of Securities Dealers, Inc. (“NASD”) Corporate Financing Department pursuant to NASD Rule 2710(b)(4) within one Trading Day of the date that the Registration Statement is first filed with the Commission and pay the filing fee required by such Issuer Filing. The Company shall use commercially reasonable efforts to pursue the Issuer Filing until the NASD issues a letter confirming that it does not object to the terms of the offering contemplated by the Registration Statement.

(i) Prior to any resale of Registrable Securities by a Holder, use its commercially reasonable efforts to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from the Registration or qualification) of such Registrable Securities for the resale by the Holder under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder reasonably requests in writing, to keep each registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by each Registration Statement; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction

where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction.

(j) If requested by the Holders, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the Purchase Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request.

(k) Upon the occurrence of any event contemplated by this Section 3, as promptly as reasonably possible under the circumstances taking into account the Company’s good faith assessment of any adverse consequences to the Company and its stockholders of the premature disclosure of such event, prepare a supplement or amendment, including a post-effective amendment, to a Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither a Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.If the Company notifies the Holders in accordance with clauses (iii) through (vi) of Section 3(d) above to suspend the use of any Prospectus until the requisite changes to such Prospectus have been made, then the Holders shall suspend use of such Prospectus. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable. The Company shall be entitled to exercise its right under this Section 3(k) to suspend the availability of a Registration Statement and Prospectus, subject to the payment of partial liquidated damages pursuant to Section 2(b), for a period not to exceed 60 calendar days (which need not be consecutive days) in any 12 month period.

(l) Comply with all applicable rules and regulations of the Commission.

(m) The Company may require each selling Holder to furnish to the Company a certified statement as to the number of shares of Common Stock beneficially owned by such Holder and, if required by the Commission, the natural persons thereof that have voting and dispositive control over the Shares. During any periods that the Company is unable to meet its obligations hereunder with respect to the registration of the Registrable Securities solely because any Holder fails to furnish such information within three Trading Days of the Company’s request, any liquidated damages that are accruing at such time as to such Holder only shall be tolled and any Event that may otherwise occur solely because of such delay shall be suspended as to such Holder only, until such information is delivered to the Company.

4. Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with any Trading Market on which the Common Stock is then listed for trading, (B) in compliance with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions of the Registrable Securities) and (C) if not previously paid by the Company in connection with an Issuer Filing, with respect to any filing that may be required to be made by any broker through which a Holder intends to make sales of Registrable Securities with NASD Regulation, Inc. pursuant to the NASD Rule 2710, so long as the broker is receiving no more than a customary brokerage commission in connection with such sale, (ii) printing expenses of the Company (including, without limitation, expenses of printing certificates for Registrable Securities, (iii) messenger, telephone and delivery expenses of the Company, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. In no event shall the Company be responsible for any broker or similar commissions of any Holder or, except to the extent provided for in the Transaction Documents, any legal fees or other costs of the Holders.

5. Indemnification

(a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, members, partners, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title) of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, members, shareholders, partners, agents and employees (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title) of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable attorneys’ fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating to (1) any untrue or alleged untrue statement of a material fact contained in a Registration Statement, any Prospectus or any form of prospectus or in any

amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, or (2) any violation or alleged violation by the Company of the Securities Act, Exchange Act or any state securities law, or any rule or regulation thereunder, in connection with the performance of its obligations under this Agreement, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (ii) in the case of an occurrence of an event of the type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding arising from or in connection with the transactions contemplated by this Agreement of which the Company is aware.

(b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, to the extent arising out of or based solely upon: (x) such Holder’s failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading (i) to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or (ii) to the extent that such information relates to such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (iii) in the case of an occurrence of an event of the type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified

such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.

(c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall have the right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have prejudiced the Indemnifying Party.

An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and counsel to the Indemnified Party shall reasonably believe that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of no more than one separate counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld or delayed. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

Subject to the terms of this Agreement, all reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party; provided, that the

Indemnified Party shall promptly reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is judicially determined to be not entitled to indemnification hereunder.

(d) Contribution. If the indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party or insufficient to hold an Indemnified Party harmless for any Losses, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the net proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, except in the case of fraud by such Holder.

The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

6. Miscellaneous

(a) Remedies. In the event of a breach by the Company or by a Holder, of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary

damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall not assert or shall waive the defense that a remedy at law would be adequate.

(b) No Piggyback on Registrations. Except as set forth on Schedule 6(b) attached hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in any Registration Statement other than the Registrable Securities. The Company shall not file any other registration statements until there is an effective Registration Statement(s) pursuant to which the Holders are permitted to utilize a Prospectus to resell all Registrable Securities or such Registrable Securities may be resold by the Holders pursuant to Rule 144(k), provided that this Section 6(b) shall not prohibit the Company from filing amendments to registration statements filed prior to the date of this Agreement.

(c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to a Registration Statement.

(d) Discontinued Disposition. Each Holder agrees by its acquisition of Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(d)(iii) through (vi), such Holder will forthwith discontinue disposition of such Registrable Securities under a Registration Statement until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus (as it may have been supplemented or amended) may be resumed. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as it practicable. The Company agrees and acknowledges that any periods during which the Holder is required to discontinue the disposition of the Registrable Securities hereunder shall be subject to the provisions of Section 2(b).

(e) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with the stock option or other employee benefit plans, then the Company shall send to each Holder a written notice of such determination and, if within fifteen days after the date of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Holder requests to be registered; provided, however, that, the Company shall not be required to register any Registrable Securities pursuant to this

Section 6(e) that are eligible for resale pursuant to Rule 144(k) promulgated under the Securities Act or that are the subject of a then effective Registration Statement.

(f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and Holders holding at least 67% of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of all of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence.

(g) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be delivered as set forth in the Purchase Agreement.

(h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign (except by merger) its rights or obligations hereunder without the prior written consent of all of the Holders of the then-outstanding Registrable Securities. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement.

(i) No Inconsistent Agreements. Neither the Company nor any of its Subsidiaries has entered, as of the date hereof, nor shall the Company or any of its Subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities, that would have the effect of impairing the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as set forth on Schedule 6(i), neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been satisfied in full.

(j) Execution and Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

(k) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be determined in accordance with the provisions of the Purchase Agreement.

(l) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any other remedies provided by law.

(m) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

(n) Headings. The headings in this Agreement are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.

(o) Independent Nature of Holders’ Obligations and Rights. The obligations of each Holder hereunder are several and not joint with the obligations of any other Holder hereunder, and no Holder shall be responsible in any way for the performance of the obligations of any other Holder hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holders as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Holders are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Holder shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Holder to be joined as an additional party in any proceeding for such purpose.

********************

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.

PACE HEALTH MANAGEMENT SYSTEMS, INC.

By:__________________________________________

Name:

Title:

[SIGNATURE PAGE OF HOLDERS FOLLOWS]

[SIGNATURE PAGE OF HOLDERS TO PACE RRA]

Name of Holder: __________________________

Signature of Authorized Signatory of Holder: __________________________

Name of Authorized Signatory: _________________________

Title of Authorized Signatory: __________________________

[SIGNATURE PAGES CONTINUE]

ANNEX A

Plan of Distribution

Each Selling Stockholder (the “Selling Stockholders”) of the common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the OTC Bulletin Board or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods when selling shares:

· ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

· block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

· purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

· an exchange distribution in accordance with the rules of the applicable exchange;

· privately negotiated transactions;

· settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;

· broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;

· through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

· a combination of any such methods of sale; or

· any other method permitted pursuant to applicable law.

The Selling Stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage

commission in compliance with NASDR Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASDR IM-2440.

In connection with the sale of the common stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the Common Stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).

The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

Because Selling Stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Stockholders.

We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the Selling Stockholders without registration and without regard to any volume limitations by reason of Rule 144(k) under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

Annex B

PACE HEALTH MANAGEMENT SYSTEMS, INC.

Selling Securityholder Notice and Questionnaire

The undersigned beneficial owner of common stock (the “Registrable Securities”) of Pace Health Management Systems, Inc., an Iowa corporation (the “Company”), understands that the Company has filed or intends to file with the Securities and Exchange Commission (the “Commission”) a registration statement (the “Registration Statement”) for the registration and resale under Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”), of the Registrable Securities, in accordance with the terms of the Registration Rights Agreement (the “Registration Rights Agreement”) to which this document is annexed. A copy of the Registration Rights Agreement is available from the Company upon request at the address set forth below. All capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Registration Rights Agreement.

Certain legal consequences arise from being named as a selling securityholder in the Registration Statement and the related prospectus. Accordingly, holders and beneficial owners of Registrable Securities are advised to consult their own securities law counsel regarding the consequences of being named or not being named as a selling securityholder in the Registration Statement and the related prospectus.

NOTICE

The undersigned beneficial owner (the “Selling Securityholder”) of Registrable Securities hereby elects to include the Registrable Securities owned by it in the Registration Statement.

The undersigned hereby provides the following information to the Company and represents and warrants that such information is accurate:

QUESTIONNAIRE

1.Name.

(a) Full Legal Name of Selling Securityholder

(b) Full Legal Name of Registered Holder (if not the same as (a) above) through which Registrable Securities are held:

(c) Full Legal Name of Natural Control Person (which means a natural person who directly or indirectly alone or with others has power to vote or dispose of the securities covered by the questionnaire):

2. Address for Notices to Selling Securityholder:

Telephone:

Fax:

Contact Person:

3. Broker-Dealer Status:

(a) Are you a broker-dealer?

Yes o   No o

(b) If “yes” to Section 3(a), did you receive your Registrable Securities as compensation for investment banking services to the Company.

Yes o    No o

Note:If no, the Commission’s staff has indicated that you should be identified as an underwriter in the Registration Statement.

(c) Are you an affiliate of a broker-dealer?

Yes o    No o

(d) If you are an affiliate of a broker-dealer, do you certify that you bought the Registrable Securities in the ordinary course of business, and at the time of the purchase of the Registrable Securities to be resold, you had no agreements or understandings, directly or indirectly, with any person to distribute the Registrable Securities?

Yes o    No o

Note: If no, the Commission’s staff has indicated that you should be identified as an underwriter in the Registration Statement.

4. Beneficial Ownership of Other Securities of the Company Owned by the Selling Securityholder.

Except as set forth below in this Item 4, the undersigned is not the beneficial or registered owner of any securities of the Company other than the securities issuable pursuant to the Purchase Agreement.

(a) Type and Amount of other securities beneficially owned by the Selling Securityholder:

5. Relationships with the Company:

Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (owners of 5% of more of the equity securities of the undersigned) has held any position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years.

State any exceptions here:

The undersigned agrees to promptly notify the Company of any inaccuracies or changes in the information provided herein that may occur subsequent to the date hereof at any time while the Registration Statement remains effective.

By signing below, the undersigned consents to the disclosure of the information contained herein in its answers to Items 1 through 5 and the inclusion of such information in the Registration Statement and the related prospectus and any amendments or supplements thereto. The undersigned understands that such information will be relied upon by the Company in connection with the preparation or amendment of the Registration Statement and the related prospectus.

IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this Notice and Questionnaire to be executed and delivered either in person or by its duly authorized agent.

Dated: ______________________________________

Beneficial Owner:________________________________

By: __________________________________________

Name:

Title:

PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:

EXHIBIT B

CONFIDENTIAL PURCHASER QUESTIONNAIRE

PACE HEALTH MANAGEMENT SYSTEMS, INC.

THIS QUESTIONNAIRE MUST BE ANSWERED FULLY AND RETURNED ALONG WITH YOUR COMPLETED SUBSCRIPTION AGREEMENT IN CONNECTION WITH YOUR PROSPECTIVE PURCHASE OF SECURITIES FROM PACE HEALTH MANAGEMENT SYSTEMS, INC. (THE “COMPANY”).

THE INFORMATION SUPPLIED IN THIS QUESTIONNAIRE WILL BE HELD IN STRICT CONFIDENCE. NO INFORMATION WILL BE DISCLOSED EXCEPT TO THE EXTENT THAT SUCH DISCLOSURE IS REQUIRED BY LAW OR REGULATION, OTHERWISE DEMANDED BY PROPER LEGAL PROCESS OR IN LITIGATION INVOLVING THE COMPANY.

Capitalized terms used herein without definition shall have the respective meanings given such terms as set forth in the Subscription Agreement between Pace Health Management Systems, Inc. and the subscriber signatory thereto (the “Subscription Agreement”) or in the Company’s Confidential Private Placement Memorandum, dated as of January 16, 2007 (as amended or supplemented, and together with all exhibits attached thereto, the “Memorandum”).

(1) The undersigned represents and warrants that he, she or it comes within at least one category marked below, and that for any category marked, he, she or it has truthfully set forth, where applicable, the factual basis or reason the undersigned comes within that category. The undersigned agrees to furnish any additional information which the Company deems neces-sary in order to verify the answers set forth below.

Category A ___ The undersigned is an individual (not a partnership, corporation, etc.) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000.

Explanation. In calculating net worth you may include equity in personal property and real estate, including your principal residence, cash, short-term investments, stock and securities. Equity in personal property and real estate should be based on the fair market value of such property less debt secured by such property.

Category B ___ The undersigned is an individual (not a partnership, corporation, etc.) who had an income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year.

Category C ___ The undersigned is a director or executive officer of the Company which is issuing and selling the Securities.

Category D ___ The undersigned is a bank, as defined in Section 3(a)(2) of the Securities Act of 1933, as amended (the “Act”); a savings and loan associa-tion or other institution as defined in Section 3(a)(5)(A) of the Act, whether acting in its individual or fiduciary capacity; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors (describe entity).

______________________________________________________________

______________________________________________________________

Category E ___ The undersigned is a private business development company as defined in section 202(a) (22) of the Investment Advisors Act of 1940 (describe entity)

______________________________________________________________

______________________________________________________________

Category F ___ The undersigned is either a corporation, partnership, Massachusetts business trust, or non-profit organization within the meaning of Section 501(c)(3) of the Internal Revenue Code, in each case not formed for the specific purpose of acquiring the Securities and with total assets in excess of $5,000,000 (describe entity)

______________________________________________________________

______________________________________________________________

Category G ___ The undersigned is a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Securities, where the purchase is directed by a “sophisticated investor” as defined in Regulation 506(b)(2)(ii) under the Act.

Category H ___ The undersigned is an entity in which all of the equity owners are “accredited investors” within one or more of the above categories. If relying upon this Category alone, each equity owner must complete a separate copy of this Purchaser Questionnaire (describe entity). If the entity is a trust, a copy the trust documents must be provided and in the case of a revocable trust, the grantor must provide a copy of the Purchaser Questionnaire.

______________________________________________________________

______________________________________________________________

The undersigned agrees that the undersigned will notify the Company at any time on or prior to the applicable Closing (as defined in the Memorandum) in the event that the representations and warranties in this Purchaser Questionnaire shall cease to be true, accurate and complete.

(2) Suitability (please answer each question)

(a) For an individual, please describe your current employment, including the company by which you are employed and its principal business:

______________________________________________________________

______________________________________________________________

______________________________________________________________

(b) For an individual, please describe any college or graduate degrees held by you:

______________________________________________________________

______________________________________________________________

______________________________________________________________

(c) For all subscribers, please list types of prior investments:

______________________________________________________________

______________________________________________________________

______________________________________________________________

(d) For all subscribers, please state whether you have you participated in other private placements before:

YES NO

(e) If your answer to question (d) page #3 was “YES”, please indicate frequency of such prior participation in private placements of:

	Public Companies	Private Companies
Frequently
Occasionally
Never

(f) For individuals, do you expect your current level of income to significantly decrease in the foreseeable future?

YES NO

(g) For trust, corporate, partnership and other institutional subscribers, do you expect your total assets to significantly decrease in the foreseeable future?

YES NO

(h) For all subscribers, do you have any other investments or contingent liabilities which you reasonably anticipate could cause you to need sudden cash requirements in excess of cash readily available to you?

YES NO

(i) For all subscribers, are you familiar with the risk aspects and the non-liquidity of investments such as the Securities for which you seek to purchase?

YES NO

(j) For all subscribers, do you understand that there is no guarantee of financial return on this investment and that you run the risk of losing your entire investment?

YES NO

(3) Manner in which title is to be held: (circle one)

(a) Individual Ownership

(b) Community Property

(c) Joint Tenant with Right of Survivorship (both parties must sign)

(d) Partnership

(e) Tenants in Common

(f) Company

(g) Trust

(h) Other

(4) NASD Affiliation.

Are you affiliated or associated with an NASD member firm (please check one):

YES NO

If Yes, please describe:

_________________________________________________________

_________________________________________________________

_________________________________________________________

*If subscriber is a Registered Representative with an NASD member firm, have the following acknowledgment signed by the appropriate party:

The undersigned NASD member firm acknowledges receipt of the notice required by the NASD Conduct Rules.

_________________________________

Name of NASD Member Firm

By: ______________________________

Authorized Officer

Date: _____________________________

The undersigned has been informed of the significance to the Company of the foregoing representations and answers contained in this Confidential Purchaser Questionnaire and such representations and answers have been provided with the understanding that the Company and the Placement Agent will rely on them.

	Individual
Date:________________________	______________________________
	Name of Individual
	(Please type or print)
	_______________________________
	Signature of Individual
	_______________________________
	Name of Joint Owner
	(Please type or print)
	_______________________________
	Signature (Joint Owner)
	Partnership, Corporation or
	Other Entity
Date: _______________________	_______________________________
	Print or Type Entity Name
	By:____________________________
	Print or Type Name
	Title:
	_______________________________
	Signature
	Title: __________________________
	_______________________________
	Signature (other authorized signatory)

EX-10.4

 

EXHIBIT 10.4

PLACEMENT AGENCY AGREEMENT

January 16, 2007

Pace Health Management Systems, Inc.

666 Walnut Street, Suite 2116

Des Moines, IA 50309

Ladies and Gentlemen:

This Placement Agency Agreement (the “Agreement”) confirms the retention by PACE Health Management Systems, Inc., an Iowa corporation (“Pace” or the “Company”), of Maxim Group LLC(the “Placement Agent”), to act as the placement agent on a “best efforts” basis in connection with the private placement (the “Placement”) of Units (as defined below) on the terms set forth below. As a condition to the closing of the Placement, the Stock Purchase Agreement and amendment thereto entered into among Pace, Conmed, Inc. (“Conmed”) and the other parties named therein (the “Stock Purchase Agreement”) pursuant to which Pace shall acquire all of the outstanding capital stock of Conmed (the “Acquisition”) shall have been, simultaneously with the closing of the Placement, consummated pursuant to the terms of the Stock Purchase Agreement and as described in the Offering Documents (as defined below).

1. PLACEMENT

(a) The securities of the Company which are the subject of the Placement shall consist of no less than Ten Million Dollars ($10,000,000) (the “Minimum Amount”) and no more than Fifteen Million Dollars ($15,000,000) (the “Maximum Amount”) of Units (the “Units”), each Unit consisting of: (1) 100 shares (the “Shares”) of Series B Convertible Preferred Stock, no par value, of Pace (the “Preferred Stock”), (2) a common stock purchase warrant entitling the holder to purchase up to 10,000 shares of Common Stock at an exercise price of $0.30 per share and (3) a common stock purchase warrant entitling the holder to purchase up to 3,320 shares of Common Stock at an exercise price equal to $2.50 per share (collectively the “Warrants”) at a purchase price of $100,000 per Unit, or $1,000 per share of Series B Preferred Stock (the “Purchase Price”). The Preferred Stock shall be convertible by the holder thereof, at any time following approval by the shareholders of the Company of the Plan of Recapitalization described in the Memorandum, into four hundred (400) shares of common stock, no par value per share, of Pace (the “Common Stock”). The conversion rate of 400 for 1 assumes the prior effectiveness of the 1 for 20 reverse stock split which the Company covenants to effect as soon as practical after consummation of the Acquisition described in the Confidential Private Placement Memorandum dated January 16, 2007 (the “Memorandum”) pursuant to which the Units are being offered by the Company. The Units, the Shares, the Warrants, the Placement Agent Warrants (defined below) and the shares of Common Stock issuable upon conversion of the Preferred Stock and the exercise of the Warrants (the “Warrant Shares”) and the Placement Agent Warrants (the “Placement Agent Shares”), are

Pace Health Management Systems, Inc. January 16, 2007 Page 2

referred to herein as the “Securities,” which Securities shall be issued to the investor(s) in the Placement (an “Investor” or the “Investors”) or the Placement Agent, respectively. Subscriptions for the Units shall be accepted in minimum increments of $100,000; provided that the Company and the Placement Agent may agree, in their discretion, to allow subscriptions in smaller increments. The terms of the Securities shall be as set forth in the Offering Documents (as defined below).

(b) The Placement will be made by the Company solely pursuant to the Offering Documents (as defined below). The Securities will not be registered under the Securities Act of 1933, as amended, or any applicable successor statute (the “Act”), but will be issued in reliance on the private offering exemption available under Section 4(2) of the Act and the rules and regulations promulgated thereunder, including Regulation D (“Regulation D”). The Placement Agent understands that all subscriptions for Units are subject to acceptance by the Company. The Company and the Placement Agent reserve the right in their reasonable discretion to accept or reject any or all subscriptions for Units in whole or in part, regardless whether any funds have been deposited into an escrow account. Any subscription monies received by the Placement Agent from Investors will be handled in accordance with Rule 15c2-4 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Placement Agent is subject to the Exchange Act, and as otherwise may be prescribed by the terms of the Offering Documents (as defined in Section 2 below).

(c) Until the Closing (as defined below) is held, all subscription funds received shall be held by Continental Stock Transfer & Trust Company (the “Escrow Agent”). The Placement Agent shall not have any independent obligation to verify the accuracy or completeness of any information contained in any Subscription Documents (as defined in Section 2 below) or the authenticity, sufficiency or validity of any check delivered by any prospective Investor in payment for the Units, nor shall the Placement Agent incur any liability with respect to any such verification or failure to verify. All subscription checks and funds shall be promptly and directly delivered without offset or deduction to the Escrow Agent.

2. OFFERING MEMORANDUM AND RELATED MATTERS

(a) The Company has prepared offering documents, including a Confidential Private Placement Memorandum and the Subscription Documents (defined below), relating to the Company and the Placement (such documents, together with the exhibits and attachments thereto or available thereunder or delivered to potential investors in connection with the Placement and any amendments or supplements thereto prepared and furnished by the Company, including Pace’s reports and other filings with the Securities and Exchange Commission (the “SEC”) attached as exhibits to the Confidential Private Placement Memorandum (the “SEC Documents”), being referred to herein as the “Offering Documents”), which, among other things, describes the Placement, the Acquisition and certain investment risks relating thereto.

Pace Health Management Systems, Inc. January 16, 2007 Page 3

(b) The Company has been and will continue to be responsible for preparing and filing required documentation, if any, with the authorities in the United States or any state located therein (and subsequent to, if required by the laws of any such jurisdiction) in connection with the distribution of the Offering Documents to prospective Investors (the parties acknowledging, however, that the Placement of the Units is intended and expected to be wholly or partially exempt from filing requirements in the United States by reason of an “accredited investor” exemption).

(c) The Placement Agent and its counsel and the Company and its counsel have or will jointly prepare forms of subscription agreement and securities purchase agreements (“SPAs”, and collectively with the subscription agreements, the “Subscription Agreement”) and a form of purchaser questionnaire (collectively with the Subscription Agreement, and any other stock purchase or other documents required in connection with the Placement, including the Escrow Agreement to be entered into with the Escrow Agent, the “Subscription Documents”), which Subscription Documents shall contain such representations, warranties, conditions and covenants as are customary in private placements of corporate debt and equity securities with United States accredited investors. The Placement Agent and its counsel have had or will have an opportunity to review the final form of the Offering Documents prior to the distribution thereof to prospective Investors, and the Offering Documents will be the only offering documents (other than cover letters which may be used by the Placement Agent, and any documents made available to Investors in accordance with the terms of the Offering Documents) shown to prospective Investors. The Company and its counsel will advise the Placement Agent and its counsel in writing of those jurisdictions in which the Shares may lawfully be offered and sold, and the manner in which the Shares may lawfully be offered and sold in each such jurisdiction in connection with the Placement,and the Placement Agent agrees that the Shares will be offered or sold only in such jurisdictions and in the manner specified by the Company; provided, however, that the Placement Agent shall not be responsible for independently verifying such written advice with respect to the jurisdictions in which the Shares may be offered and sold and with respect to the manner in which the Shares may be offered and sold in such jurisdictions. Notwithstanding the foregoing, the Placement Agent shall determine whether it is licensed to offer and sell the Shares in each jurisdiction in which it intends to do so.

(d) The Placement will be made in accordance with the requirements of Section 4(2) under the Act and/or Regulation D only to investors that qualify as accredited investors, as defined in Rule 501(a) under the Act (“Accredited Investors”), purchasing for their own account for investment purposes only and not for distribution in violation of securities laws. Furthermore, prospective Investors will have been provided the Offering Documents and access to the management of the Company and afforded the opportunity to ask questions.

(e) The Company recognizes, agrees and confirms that the Placement Agent (or any selling agent permitted to be utilized by the Placement Agreement under Section 3(a) hereof): (i) will use and rely primarily on the information contained in the Offering Documents in performing the services contemplated by this Agreement without having independently verified the same; (ii) is authorized, as the Company’s exclusive financial advisor and placement agent in connection with

Pace Health Management Systems, Inc. January 16, 2007 Page 4

the Placement, to transmit to any prospective Investor a copy or copies of the Offering Documents and any other documentation supplied to the Placement Agent for transmission to any prospective Investor by or on behalf of the Company or by any of the Company’s officers, representatives or agents, in connection with the performance of the Placement Agent’s services hereunder or any transaction contemplated hereby; (iii) does not assume responsibility for the accuracy or completeness of any information contained in the Offering Documents or any such other information; (iv) will not make an appraisal of the Company or any assets of the Company or the securities being offered by the Company in the Placement; and (v) retains the right to continue to perform due diligence of the Company during the course of the Company’s engagement of the Placement Agent.

3. PLACEMENT AGENT

(a) The Company hereby employs the Placement Agent during the Offered Period (as defined below) as its exclusive placement agent in the United States for the purpose of placing the Units for the account and risk of the Company. This appointment shall be exclusive with respect to the Placement and otherwise as provided herein, and the Company shall not have the right to appoint additional sales agents in the United States without the Placement Agent’s express prior written consent. The Company hereby agrees that the Placement Agent shall have the right to utilize other selling broker-dealers in connection with the Placement of the Units on terms approved by the Placement Agent. Subject to the provisions of Section 5 hereof and to the performance by the Company of all of its obligations to be performed hereunder, the Placement Agent agrees to use its best efforts to assist in arranging for sales of Units. The Company recognizes that “best efforts” does not assure that the Placement will be consummated. It is understood and agreed that this Agreement does not create any partnership, joint venture or other similar relationship between or among the Placement Agent and the Company, and that the Placement Agent is acting only as a sales agent.

(b) For the services of the Placement Agent hereunder, the Company will pay or caused to be paid to the Placement Agent at any Closing the following fees:

(i) a cash payment equal to 10% of the gross proceeds received by the Company from the sale of the Units, payable at each Closing in lawful money of the United States by check or wire transfer of immediately available funds; and

(ii) $55,000 for all out-of-pocket expenses, including the reasonable fees and expenses of counsel to the Placement Agent, whether or not the Placement is consummated, as well as any fees in connection with any Blue Sky filings; such expenses to be paid at the Initial Closing, payable in lawful money of the United States by check or wire transfer of immediately available funds (with blue sky filing fees paid as incurred); and

(iii) a warrant (the “Placement Agent Warrants”) to purchase a number of shares of Common Stock, equal to five percent (5%) of the number of shares issuable upon

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conversion of the Shares sold in the Placement. Such Placement Agent Warrants will be issued at each Closing and shall provide, among other things:

(A) that the Placement Agent Warrants shall:

(1) be exercisable at an initial exercise price of $2.75;

(2) expire five (5) years from the date of issuance; and

(3) be non-redeemable,

(B) for registration rights on the same terms granted to the Investors (other than provisions for liquidated damages),

(C) for the ability of a cashless exercise of the warrants included in the Placement Agent Warrants, and

(D) for such other terms as are normal and customary for warrants issued to placement agents, including, without limitation, standard anti-dilution protections.

(c) Notwithstanding any termination of this Agreement pursuant to the terms hereof or otherwise, if on or before the twelve (12) month anniversary of the final Closing, the Company or any successor or subsidiary of the Company, enters into a commitment or letter of intent relating to any offering of debt or equity securities of the Company or any other financing: with any financing source to whom the Company was introduced by the Placement Agent or who was contacted by Placement Agent in connection with its services for the Company hereunder, the Company shall pay to the Placement Agent, at the closing of any such offering or financing, the fees described in, and in accordance with the terms and provisions of, Section 3(b)(i) and (iii) above.

(d) The Engagement Letter dated May 25, 2006 between the Company and the Placement Agent (the “Engagement Letter”), and the obligations and liabilities thereunder shall be superseded by this Agreement.

(e) Upon receipt by the Company from a proposed Investor of completed Subscription Documents, and such other documents as the Company requests, the Company and the Placement Agent will determine in their reasonable joint discretion whether they wish to accept or reject the subscription, in whole or in part.

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4. PAYMENT BY COMPANY OF EXPENSES

The Company will pay for, whether or not any Units are sold in connection with the Placement, all expenses relating to the Placement, including, without limitation: (i) the preparation, printing, reproduction, filing, distribution and mailing of the Offering Documents and all other documents relating to the Placement, and any supplements or amendments thereto, including the fees and expenses of counsel to the Company, and the cost of all copies thereof; (ii) the issuance, sale, transfer and delivery of the Units, and the Securities contained therein, including any transfer or other taxes payable thereon and the fees of any transfer agent or registrar; (iii) the public registration and listing of, or registration and qualification of the Securities or the securing of an exemption therefrom under state of foreign “blue sky” or securities laws, including, without limitation, filing fees payable in the jurisdictions in which such registration or qualification or exemption therefrom is sought, the costs of preparing preliminary, supplemental and final “blue sky surveys” relating to the offer and sale of the Securities and the fees and disbursements of counsel to the Placement Agent in connection with such “blue sky” matters, (iv) the filing fees in connection with filings required by the applicable securities regulatory authorities, including filings with the National Association of the Securities Dealers; Inc. in connection with the Placement and the registration for resale of the Securities with the SEC on behalf of the Investors; (v) all Escrow Agent fees; and (vi) all road show expenses, travel, legal, and other related expenses of the Company. Notwithstanding the limitation set forth in Section 3(b)(ii), the Company shall be responsible for the payment of the fees and expenses, including legal fees and expenses, described under clauses (iii), (iv) and (v) of this Section. In addition, the Company will be responsible for the expenses of the Placement Agent subject to the limitations of Section 3(b)(ii).

5. TERMINATION OF PLACEMENT

Notwithstanding the Offering Period set forth in Section 6 of this Agreement, the Placement may be terminated immediately by the Placement Agent upon giving written notice to the Company, but only in the event that:

(a) in the opinion of the Placement Agent, the Offering Documents contain an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements appearing therein not misleading in the light of the circumstances in which they were made, and the Company shall not have corrected such untrue statement or omission to the reasonable satisfaction of the Placement Agent and its counsel within ten (10) days after the Company receives notice of such untrue statement or omission, provided that notwithstanding such ten (10) day period, the Closing (as defined in Section 6 below) shall not occur hereunder until the Placement Agent shall notify the Company that it is satisfied, in its reasonable determination, that the Company has taken such steps (including circulating amended offering materials and afforded prospective Investors a reasonable opportunity to review such amendments) to allow the Closing to occur; or

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(b) the Company shall be in material breach of any representation, warranty or covenant made by it in this Agreement, any Offering Document or any other document relating to the Placement; or

(c)(i) any calamitous domestic or international event or act or occurrence has taken place and, in the Placement Agent’s opinion, has or will materially disrupt general securities markets in the United States in the immediate future; or (ii) if trading on the New York Stock Exchange, the American Stock Exchange, or in the over-the-counter market shall have been suspended or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the National Association of Securities Dealers, Inc. (“NASD”) or by order of the SEC or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a war, major hostilities, acts of terrorism or the like; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if the Company shall have sustained a material loss, whether or not insured, by reason of fire, flood, accident or other calamity; or (vii) if there shall have been such material adverse change in the conditions or prospects of the Company, involving a change not contemplated by the Offering Documents; or (viii) if there shall have been such material adverse general market conditions as in the Placement Agent’s reasonable judgment would make it inadvisable to proceed with the Placement or the sale or delivery of the Units.

In the event of any such termination pursuant to this Section 5, the Placement Agent shall be entitled to receive, in addition to other rights and remedies it may have hereunder, at law or otherwise, an amount equal to the sum of (A) all Placement Agent’s fees in accordance with Section 3 and (B) the fees and expenses incurred by the Placement Agent in connection with the Placement in accordance with Section 4 subject to the limitations in Section 3(b)(ii).

6. OFFERING PERIOD; CLOSINGS

(a) Subject to the terms and conditions set forth in Sections 5 and 10 hereof, the Shares will be offered for a period beginning from the date hereof and ending on the earliest to occur of (i) January 31, 2007 (which date may be extended to February 15, 2007 by the parties), (ii) such time as the Company and the Placement Agent shall agree; (iii) the Placement is terminated by the Company and/or the Placement Agent in accordance with the terms hereof; and (iv) the date on which full subscription for an acceptance by the Company of the Maximum Amount (such period, the “Offering Period”). If any Shares have been subscribed for and accepted by the Company at any time during the Offering Period representing the Minimum Amount, the Company will promptly conduct a closing on such Shares. Thereafter, additional closings (together with any initial closing, each, a “Closing”) will occur until the first to occur of: (i) the full subscription for an acceptance by the Company of the Maximum Amount, (ii) the conclusion of the Offering Period, or (iii) the termination of the Placement or this Agreement. Any Closing shall be undertaken in a manner agreed to by the Company and the Placement Agent. The date upon which a Closing is held shall hereinafter be referred to as the “Closing Date.” Notwithstanding the foregoing, the Company

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and the Placement understand and agree that the initial Closing shall be for not less than the Minimum Amount.

(b) At any Closing, the Company shall deliver to the Investors certificates representing the Shares, duly executed by the Company, together with Warrants and such other closing documentation as may be required in order to affect the Closing.

7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Placement Agent that all representations and warranties (i) of Conmed and Pace in the Stock Purchase Agreement and (ii) of Conmed and Pace in any SPA or Subscription Agreement with any investor in the Placement, including but not limited to a SPA with LB I Group, Inc. dated January 26, 2007, are accurate and complete and the Placement Agent and the Investors, as intended third party beneficiaries, may rely on such representations and warranties as if made directly to them. Conmed and Pace have substantially complied with all covenants and other obligations to which they are bound under the Stock Purchase Agreement. The transactions contemplated by the Stock Purchase Agreement are being consummated as described in the Offering Documents, simultaneously with the closing of any SPA or Subscription Agreement with Investors.

8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLACEMENT AGENT

The Placement Agent hereby represents and warrants to, and covenants with, the Company that:

(a) This Agreement has been duly authorized, executed and delivered by the Placement Agent and constitutes the legal, valid and binding obligation of the Placement Agent, enforceable against it in accordance with its terms, except insofar as enforcement of the indemnification or contribution provisions hereof may be limited by applicable laws or principles of public policy and subject, as to enforcement, to the availability of equitable remedies and limitations imposed by bankruptcy, insolvency, reorganization and other similar laws and related court decisions relating to or affecting creditors’ rights generally.

(b)(i) Sales of Units by the Placement Agent will be made only in such jurisdictions in which: (i) the Placement Agent is a registered broker-dealer; and (ii) the Placement Agent has been advised by counsel that the offering and sale of the Units is registered under, or is exempt from registration under, applicable laws.

(ii)Offers and sales of Units by the Placement Agent will be made in compliance with the provisions of Regulation D under the Act and/or Section 4(2) of the Act, and the Placement Agent shall furnish to each investor a copy of the Offering Documents (including all Schedules and Exhibits thereto) prior to accepting any payments for Units.

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(c) The Placement Agent is: (i) a registered broker-dealer under the Exchange Act; (ii) a member in good standing of the NASD; and (iii) registered as a broker-dealer in each jurisdiction in which it is required to be registered as such in order to offer and sell the Units in such jurisdiction.

(d) The Placement Agent will periodically notify the Company of the jurisdiction in which it intends the Securities to be offered by it or will be offered by it pursuant to this Agreement, and will periodically notify the Company of the status of the offering conducted pursuant to this Agreement.

9. COVENANTS

The Company covenants to the Placement Agent that it shall:

(a) Notify the Placement Agent as soon as practicable, and confirm such notice promptly in writing: (i) when any event shall have occurred during the period commencing on the date hereof and ending on the final Closing Date as a result of which the Offering Documents would include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) of the receipt of any notification with respect to the modification, rescission, withdrawal or suspension of the qualification or registration of the Securities or of an exemption from such registration or qualification in any jurisdiction. The Company will use its reasonable best efforts to prevent the issuance of any such modification, rescission, withdrawal or suspension and, if any such modification, rescission, withdrawal or suspension is issued, to obtain the lifting thereof as promptly as possible.

(b) Not supplement or amend the Offering Documents unless the Placement Agent and its counsel shall have approved of such supplement or amendment in writing, such approval not to be unreasonably withheld, delayed or conditioned. If, at any time during the period commencing on the date hereof and ending on the final Closing Date, any event shall have occurred as a result of which the Offering Documents contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or if, in the opinion of counsel to the Company or counsel to the Placement Agent, it is necessary at any time to supplement or amend the Offering Documents to comply with the Act, Regulation D or any applicable securities or “blue sky” laws, the Company will promptly prepare an appropriate supplement or amendment (in form and substance reasonably satisfactory to the Placement Agent and its counsel) which will correct such statement or omission or which will effect such compliance.

(c) Deliver without charge to the Placement Agent such number of copies of the Offering Documents and any supplement or amendment thereto as may reasonably be requested by the Placement Agent.

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(d) Not, directly or indirectly, in connection with the Placement or as otherwise agreed to in this Agreement, solicit any offer to buy from, or offer to sell to, any person or entity any Securities or other securities of the Company except through the Placement Agent.

(e) Not solicit any offer to buy or offer to sell Securities by any form of general solicitation or advertising, including, without limitation, any advertisement, article, notice or other communication published in any newspaper, magazine or similar medium or broadcast over the Internet, television or radio or at any seminar or meeting whose attendees have been invited by any general solicitation or advertising.

(f) At all times during the period commencing on the date hereof and ending on the date of the final Closing, provide to each prospective Investor or his purchaser representative, if any, on reasonable request, such information (in addition to that contained in the Offering Documents) concerning the Placement, the Company, the Securities and any other relevant matters as it possesses or can acquire without unreasonable effort or expense and extend to each prospective investor or his purchaser representative, if any, the opportunity to ask questions of, and receive answers from the Company concerning the terms and conditions of the Placement and the business of the Company and to obtain any other additional information, to the extent it possesses the same or can acquire it without unreasonable effort or expense, as such prospective Investor or purchaser representative may consider necessary in making an informed investment decision or in order to verify the accuracy of the information furnished to such prospective Investor or purchaser representative, as the case may be.

(g) Notify the Placement Agent promptly of the acceptance or rejection of any subscription.

(h) File five (5) copies of a Notice of Sales of Securities on Form D with the SEC no later than 15 days after the first sale of the Units, if required by law. The Company shall file promptly such amendments to such Notices on Form D as shall become necessary and shall also comply with any filing requirement imposed by the laws of any province or jurisdiction in which offers and sales are made. The Company shall furnish the Placement Agent with copies of all such filings.

(i) Place the following or similar legend on all certificates representing the Securities:

“THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM

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REGISTRATION UNDER SUCH ACT AND SUCH LAWS WHICH, IN THE OPINION OF COUNSEL FOR THIS CORPORATION, IS AVAILABLE.”

(j) Not, directly or indirectly, engage in any act or activity which may jeopardize the status of the offering and sale of the Units as exempt transactions under the Act or under the securities or “blue sky” laws of any jurisdiction in which the Placement may be made.

(k) Apply the net proceeds from the sale of the Units for the purposes set forth under the caption “Use of Proceeds” in the Offering Documents in the manner indicated thereunder.

(l) Except as required by law, not, during the period commencing on the date hereof and ending on the Closing Date, issue any press release or other communication or hold any press conference with respect to the Company, its financial condition, results of operations, business properties, assets, liabilities or future prospects of the Placement, without the prior written consent of the Placement Agent, which consent will not be unreasonably withheld.

(m) Not, prior to the completion of the Placement, bid for, purchase, attempt to induce others to purchase, or sell, directly or indirectly, any shares of Common Stock or any other securities in violation of the provisions of Regulation M under the Exchange Act.

(n) The Company will include all the shares of Common Stock underlying the Preferred Shares, the Warrants and the Placement Agent Warrants in a registration statement of its securities under the Act to be filed with the SEC pursuant to the terms of the Subscription Agreements.

(o) So long as the Securities are “restricted securities” within the meaning of Rule 144(a)(3) under the Act, the Company, during any period in which it is not subject to and in compliance with Section 13 or 15(d) of the Exchange Act, or is not exempt from such reporting requirements pursuant to and in compliance with Rule 12g3-2b under the Exchange Act, provide to each holder of Securities and to each prospective purchaser (as designated by such holder) of Securities, upon the request of such holder or prospective holder, any information required to be provided by Rule 144A(d)(4) under the Act.

(p) The Company will initially invest the proceeds of the Placement and all other funds of the Company in such a manner so as to cause the Company not to be subject to the United States Investment Company Act of 1940, as amended (the “1940 Act”), and will thereafter use its best efforts to avoid the Company’s becoming subject to the 1940 Act.

(q) In addition to the foregoing, to the extent not set forth herein, the Placement Agent may rely on the covenants made by the Company in the SPAs and the other Subscription Documents used in connection with the Placement.

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10. CONDITIONS OF THE PLACEMENT AGENT’S OBLIGATIONS

The obligations of the Placement Agent pursuant to this Agreement shall be subject, in its discretion, to the continuing accuracy of the representations and warranties of the Company contained herein and in each certificate and document contemplated under this Agreement to be delivered to the Placement Agent or otherwise at any Closing (including, without limitation, all Subscription Documents), as of the date hereof and as of the Closing Date or the date of any Closing subsequent to the Closing Date, to the performance by the Company of its obligations hereunder, and to the following conditions:

(a) At the Closing, the Placement Agent shall have received the favorable opinion of Ellenoff Grossman & Schole LLP, counsel for the Company, in the form and substance reasonably satisfactory to the Placement Agent and addressed to the Placement Agent and the Investors with respect to the Placement and the Acquisition.

(b) If there is more than one Closing, then at each such Closing there shall be delivered to the Placement Agent updated opinions, certificates or other information described in this Section 10.

(c) On or prior to or following the Closing Date, as the case may be, the Placement Agent shall have been furnished such information, documents and certificates as it may reasonably require for the purpose of enabling it to review the matters referred to in this Section 10 and in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties, covenants, agreements or conditions herein contained, or as it may otherwise reasonably request.

(d) The Company shall have delivered to the Placement Agent (i) a Good Standing Certificate from the Secretary of State of its jurisdiction of incorporation and each jurisdiction in which the Company and the Subsidiary are qualified to do business as a foreign corporation, and (ii) certified resolutions of the Company’s Board of Directors approving this Agreement and any other Offering Agreements and the transactions and agreements contemplated by this Agreement and any other Offering Agreements.

(e) At each Closing, the Placement Agent shall have received a certificate of all officers of the Company and the Subsidiary, dated, as applicable, as of the Closing Date or the date of such Closing, to the effect that, as of the date of this Agreement and as of the applicable date, the representations and warranties of the Company contained or incorporated herein were and are accurate, and that, as of the applicable date, the obligations to be performed by the Company hereunder on or prior thereto have been fully performed.

(f) All proceedings taken in connection with the issuance, sale and delivery of the Units, the Shares, the Warrants and the Placement Agent Warrants shall be reasonably satisfactory in form and substance to the Placement Agent and its counsel.

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(g) Lock-up agreements from each of the following shareholders of the Company. John Pappajohn, Edgewater Private Equity Fund, L.P., Gainesborough LLC and Ann Vassilou.

(h) Any certificate or other document signed by any officer of the Company and delivered to the Placement Agent and its counsel as required hereunder shall be deemed a representation and warranty by the Company hereunder as to the statements made therein. If any condition to the Placement Agent’s obligations hereunder have not been fulfilled as and when required to be so fulfilled, the Placement Agent may terminate this Agreement or, if the Placement Agent so elects, in writing waive any such conditions which have not been fulfilled or extended the time for their fulfillment. In the event that Placement Agent elects to terminate this Agreement, Placement Agent shall notify the Company of such election in writing. Upon such termination, neither party shall have any further liability nor obligation to the other except as provided in Section 11 hereof.

11. INDEMNIFICATION

(a) The Company agrees to indemnify and hold harmless the Placement Agent, any person who controls the Placement Agent within the meaning of the Act, Section 20(a) of the Exchange Act or any applicable statute, and each partner, director, officer, employee, agent and representative of the Placement Agent and its representatives from and against any loss, damage, expense, liability or claim, or actions or proceedings in respect thereof (including, without limitation, reasonable attorneys’ fees and expenses incurred in investigating, preparing or defending against any litigation commenced) which any such person may incur or which may be made or brought against any such person arising out of or based upon: (i) any breach of any of the agreements, representations or warranties of the Company contained in or contemplated by this Agreement or the Offering Documents, including, without limitation, those arising out of or based on any alleged untrue statement of a material fact contained in the Offering Documents or omission to state a material fact required to be stated in the Offering Documents or necessary in order to make the statements appearing therein not misleading in the light of the circumstances in which they were made, (ii) any violation of any federal or state securities laws attributable to the Placement, (iii) any violation of law by the Company or any affiliate thereof, or any director, officer, employee, agent or representative of any of them, related to or arising out of the Placement or (iv) the Placement Agent’s entering into or performing services under this Agreement, or arising out of any other matter referred to in this Agreement. This indemnity agreement by, and the agreements, warranties and representations of, the Company shall survive the offer, sale and delivery of the Units and the termination of this Agreement and shall remain in full force and effect regardless of any investigation made by or on behalf of any person indemnified hereunder, and termination of this Agreement and acceptance of any payment for the Units hereunder.

(b) The Placement Agent agrees to indemnify and hold harmless the Company and its affiliates, any person who controls any of them within the meaning of the Act, Section 20(a) of the Exchange Act or any applicable statute, and each officer, director, employee, agent and representative of the Company or any of its affiliates from and against any loss, damage, expense,

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liability or claim or actions or proceedings in respect thereof (including, without limitation, reasonable attorneys’ fees and expenses incurred in investigating, preparing or defending against any litigation commenced) which any such person may incur or which may be made or brought against any such person, but only to the extent the same arises out of or is based upon: (i) any breach of any of the agreements, representations or warranties of the Placement Agent contained in this Agreement, or (ii) any untrue statement of a material fact in any information provided to the Company in writing by the Placement Agent, expressly for use in and used in the Offering Documents. This indemnity agreement by, and the agreements, warranties and representations of, the Placement Agent shall survive the offer, sale and delivery of the Units and shall remain in full force and effect regardless of any investigation made by or on behalf of any person indemnified hereunder, and termination of this Agreement and acceptance of any payment for the Units hereunder.

(c) If any action is brought against a party (the “Indemnified Party”) in respect of which indemnity may be sought against one or more other parties (the “Indemnifying Party” or “Indemnifying Parties”), the Indemnified Party shall promptly notify the Indemnifying Party or Parties in writing of the institution of such action; provided, however, the failure to give such notice shall not release the Indemnifying Party or Parties from its or their obligation to indemnify the Indemnified Party hereunder except to the extent the Indemnifying Party actually incurs substantial damage by reason of such failure and shall not release the Indemnifying Party or Parties from any other obligations or liabilities to the Indemnified Party in any event. The Indemnifying Party or Parties may at its or their own expense elect to assume the defense of such action, including the employment of counsel reasonably acceptable to the Indemnified Party; provided, however, that no Indemnifying or Indemnified Party shall consent to the entry of any judgment or enter into any settlement by which the other party is to be bound without the prior written consent of such other party, which consent shall not be unreasonably withheld. In the event the Indemnifying Party or Parties assume a defense hereunder, the Indemnified Party shall be entitled to retain its own counsel in connection therewith and, except as provided below, shall bear the fees and expenses of any such counsel, and counsel to the Indemnified Party or Parties shall cooperate with such counsel to the Indemnifying Party in connection with such proceeding. If an Indemnified Party reasonably determines that there are or may be differing or additional defenses available to the Indemnified Party which are not available to the Indemnifying Party, or that there is or may be a conflict between the respective positions of the Indemnifying Party and of the Indemnified Party in conducting the defense of any action, then the Indemnifying Party shall bear the reasonable fees and expenses of any counsel retained by the Indemnified Party in connection with such proceeding. All references to the Indemnified Party contained in this Section 11(c) include, and extend to and protect with equal effect, any persons who may control the Indemnified Party within the meaning of the Act, Section 20(a) of the Exchange Act or any applicable statute, any successor to the Indemnified Party and each of its partners, officers, directors, employees, agents and representatives. The indemnity agreements set forth in this Section 11 shall be in addition to any other obligations or liabilities of the Indemnifying Party or Parties hereunder or at common law or otherwise. Notwithstanding anything herein to the contrary, in no event shall the Placement Agent be obligated to indemnify any

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person or entity in an amount in excess of the gross consideration received by the Placement Agent for services rendered hereunder.

(d) If recovery is not available under the foregoing indemnification provisions of this Section 11, for any reason other than as specified therein, the party entitled to indemnification by the terms thereof shall be entitled to contribution to losses, damages, liabilities and expenses of the nature contemplated by such indemnification provisions. In determining the amount of such contribution, there shall be considered the relative benefits received by the Company on the one hand, and the Placement Agent on the other hand from the Placement (which shall be deemed to be the portion of the proceeds of the Placement realized by each party), the parties’ relative knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission, the relative culpability of the parties, the relative benefits received by the parties and any other equitable considerations appropriate under the circumstances. No party shall be liable for contribution with respect to any action or claim settled without its consent. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section 11, notify such party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 11 or otherwise. For purposes of this Section 11, each person, if any, who controls a party to this Agreement within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as that party to this Placement Agreement. Notwithstanding the foregoing, in no event will the aggregate contribution by the Placement Agent hereunder exceed the amount of fees actually received by the Placement Agent pursuant to this Agreement. The reimbursement, indemnity and contribution obligations of the Company hereinabove set forth shall be in addition to any liability which the Company may otherwise have and these obligations and the other provisions hereinabove set forth shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Placement Agent and any other Indemnified Person.

(e) In any claim for indemnification for United States Federal or state securities law violations, the party seeking indemnification shall place before the court the position of: (i) the SEC and (ii) if applicable, any state securities commissioner or agency having jurisdiction with respect to the issue of indemnification for securities law violations.

12. MISCELLANEOUS

(a) The agreements set forth in this Agreement have been made and are made solely for the benefit of the Company, the Placement Agent, and the respective affiliates, heirs, personal representatives and permitted successors and assigns thereof, and except as expressly provided herein nothing expressed or mentioned herein is intended or shall be construed to give any other person, firm or corporation any legal or equitable right, remedy or claim under or in respect of this Agreement or any representation, warranty or agreement herein contained. The term “successors and assigns” as used herein shall not include any purchaser of any Units merely because of such purchase.

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(b) Neither party will be liable to the other by reason of any failure in performances of this Agreement if the failure arises out of the unavailability of third party communication facilities or energy sources or acts of God, acts of governmental authority, fires, strikes, delays in transportation, riots or war, or any cause beyond the reasonable control of such party.

Any notice or other communication required or appropriate under the provisions of this Agreement shall be given in writing addressed as follows: (i) if to the Company, at the address set forth above, Attention: Dr. Richard Turner, with a copy to Ellenoff Grossman & Schole LLP, 370 Lexington Avenue, New York, New York 10017; Attention: Barry I. Grossman, Esq. and (ii) if to the Placement Agent, Maxim Group Inc., 405 Lexington Avenue, New York, NY 10174, Attention: Mr. Andrew Scott; with a copy to Lowenstein Sandler PC, 65 Livingston Avenue, Roseland, New Jersey 07068, Attention: Steven M. Skolnick, Esq., or at such other address as any party may designate to the others in accordance with this Section 12(c).

(c) This Agreement shall be governed and construed in accordance with the laws of the State of New York, without giving effect to conflicts of law provisions thereof. Each of the parties hereto hereby (i) irrevocably consents to the jurisdiction of the United States District Court for the Southern District of New York and any state court in the State of New York (and of the appropriate appellate courts from any of the foregoing) in connection with any suit, action or other proceeding (each a “Proceeding”) directly or indirectly arising out of or relating to this Agreement and (ii) irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such Proceeding in any such court or that any such Proceeding which is brought in any such court has been brought in an inconvenient forum.

(d) This Agreement constitutes the entire agreement between the parties hereto with respect to the Placement and supersedes any and all prior agreements (including the Engagement Letter), and may be amended or modified only by a duly authorized writing signed by such parties. This Agreement may be executed in any number of counterparts and by facsimile, each of which shall be deemed an original and all of which shall constitute a single instrument.

[signature page follows]

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This Placement Agency Agreement is executed and shall be effective as of January 16, 2007.

Very truly yours,

MAXIM GROUP LLC

By:  /s/ Paul LaRosa                         

Name: Paul LaRosa

Title:  Managing Director

ACCEPTED AND AGREED TO:

PACE HEALTH MANAGEMENT SYSTEMS, INC.

By:  /s/ John Pappajohn                   

Name: John Pappajohn

Title: President and CEO

EX-10.5

SECURITIES PURCHASE AGREEMENT

This Securities Purchase Agreement (this “Agreement”) is dated as of January 26, 2007, among Pace Health Management Systems, Inc., an Iowa corporation (the “Company”), and each purchaser identified on the signature pages hereto (each, including its successors and assigns, a “Purchaser” and collectively the “Purchasers”) and listed on Annex A attached hereto along with each such Purchaser’s allocation hereunder.

WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and not jointly, desires to purchase from the Company, securities of the Company as more fully described in this Agreement.

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agree as follows:

ARTICLE I

DEFINITIONS

1.1Definitions. In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Certificate of Designation (as defined herein), and (b) the following terms have the meanings set forth in this Section 1.1:

“Action” shall have the meaning ascribed to such term in Section 3.1(j).

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act. With respect to a Purchaser, any investment fund or managed account that is managed on a discretionary basis by the same investment manager as such Purchaser will be deemed to be an Affiliate of such Purchaser.

“Business Day” means any day except Saturday, Sunday, any day which shall be a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

“Certificate of Designation” means the Certificate of Designation to be filed prior to the Closing by the Company with the Secretary of State of Iowa, in the form of Exhibit A attached hereto.

“Closing” means the closing of the purchase and sale of the Securities pursuant to Section 2.1.

“Closing Date” means the Trading Day when all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) the Purchasers’ obligations to pay the Subscription Amount and (ii) the Company’s obligations to deliver the Securities have been satisfied or waived.

“Commission” means the Securities and Exchange Commission.

“Common Stock” means the common stock of the Company, no par value per share, and any other class of securities into which such securities may hereafter be reclassified or changed into.

“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

“Company Counsel” means Ellenoff Grossman & Schole LLP, with offices located at 370 Lexington Avenue, New York, New York 10017.

“Conversion Price” shall have the meaning ascribed to such term in the Certificate of Designation.

“Disclosure Schedules” shall have the meaning ascribed to such term in Section 3.1.

“CONMED” shall have the meaning ascribed to such term in Section 2.3(b)(iii).

“Effective Date” means the date that the initial Registration Statement filed by the Company pursuant to the Registration Rights Agreement is first declared effective by the Commission.

“Escrow Agent” means Continental Stock Transfer & Trust Company, having an office at 17 Battery Place, New York, New York 10004.

“Escrow Agreement” means the escrow agreement entered into prior to the date hereof, by and among the Company, Maxim and the Escrow Agent pursuant to which the Purchasers, shall deposit Subscription Amounts with the Escrow Agent to be applied to the transactions contemplated hereunder.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Company pursuant to the hiring of any new employee or any bonus stock or option plan duly adopted for such purpose by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established, (b) securities upon the exercise or exchange of or conversion of any Securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Agreement or as otherwise disclosed and set forth on Schedule 3.1(g) attached hereto (including shares issuable pursuant to the Reverse Acquisition and as a result of the reorganization contemplated by the Shareholder Approval), provided that such securities have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise, exchange or conversion price of such securities except pursuant to existing terms of such derivative securities as disclosed in the Disclosure Schedules to the Purchasers and (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that any such issuance shall only be to a Person which is, itself or through its subsidiaries, an operating company and in which the Company receives benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities.

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“FWS” means Feldman Weinstein & Smith LLP with offices located at 420 Lexington Avenue, Suite 2620, New York, New York 10170-0002.

“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).

“Indebtedness” shall have the meaning ascribed to such term in Section 3.1(aa).

“Intellectual Property Rights” shall have the meaning ascribed to such term in Section 3.1(o).

“Legend Removal Date” shall have the meaning ascribed to such term in Section 4.1(c).

“Lehman” means LB I Group Inc.

“Liens” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

“Material Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b).

“Material Permits” shall have the meaning ascribed to such term in Section 3.1(m).

“Maxim” shall mean Maxim Group, LLC.

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“Participation Maximum” shall have the meaning ascribed to such term in Section 4.13.

“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

“Preferred Stock” means the up to 15,000 shares of the Company’s Series B Convertible Preferred Stock issued hereunder having the rights, preferences and privileges set forth in the Certificate of Designation, in the form of Exhibit A hereto.

“Pre-Notice” shall have the meaning ascribed to such term in Section 4.13.

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

“Purchaser Party” shall have the meaning ascribed to such term in Section 4.11.

“Registration Rights Agreement” means the Registration Rights Agreement, dated the date hereof, among the Company and the Purchasers, in the form of Exhibit B attached hereto.

“Registration Statement” means a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale of the Underlying Shares by each Purchaser as provided for in the Registration Rights Agreement.

“Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).

“Required Minimum” means, as of any date, the maximum aggregate number of shares of Common Stock then issued or potentially issuable in the future pursuant to the Transaction Documents, including any Underlying Shares issuable upon exercise or conversion in full of all shares of Preferred Stock and Warrants, ignoring any conversion or exercise limits set forth therein.

“Reverse Acquisition” shall have the meaning ascribed to such term in Section 2.3(b)(iii).

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).

“Securities” means the Preferred Stock, the Warrants and the Underlying Shares.

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“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Shareholder Approval” means the approval by the Company’s stockholders of: (i) a merger transaction with a wholly-owned Subsidiary of the Company for purposes of reincorporating the Company in the State of Delaware, (ii) a 1:20 reverse stock split or exchange ratio of the Common Stock, (iii) a name change to CONMED Healthcare Solutions, Inc., (iv) the adoption of a stock option plan in the form attached hereto as Schedule 1.1 and (v) an increase in the number of authorized shares of Common Stock from 20,000,000 to 40,000,000.

“Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed to include the location and/or reservation of borrowable shares of Common Stock).

“Stated Value” means $1,000 per share of Preferred Stock.

“Subscription Amount” shall mean, as to each Purchaser, the aggregate amount to be paid for the Preferred Stock purchased hereunder as specified below such Purchaser’s name on the signature page of this Agreement and next to the heading “Subscription Amount”, in United States dollars and in immediately available funds.

“Subsequent Financing” shall have the meaning ascribed to such term in Section 4.13.

“Subsequent Financing Notice” shall have the meaning ascribed to such term in Section 4.13.

“Subsidiary” means any subsidiary of the Company as set forth on Schedule 3.1(a).

“Super 8-K” shall have the meaning ascribed to such term in Section 3.1(y).

“Trading Day” means a day on which the Common Stock is traded on a Trading Market.

“Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin Board.

“Transaction Documents” means this Agreement, the Certificate of Designation, the Escrow Agreement, the Warrants, the Registration Rights Agreement and any other documents or agreements executed in connection with the transactions contemplated hereunder.

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“Transfer Agent” means Wells Fargo Shareowner Services, with a mailing address of P.O. Box 64875, St. Paul, MN 55164-0875, and a facsimile number of (651) 450-4033, and any successor transfer agent of the Company.

“Underlying Shares” means the shares of Common Stock issued and issuable upon conversion of the Preferred Stock and exercise of the Warrants.

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time); (b)  if the Common Stock is not then quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (c) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers and reasonably acceptable to the Company.

“Warrants” means collectively the common stock purchase warrants delivered to the Purchasers at the Closing in accordance with Section 2.2(a) hereof, which Warrants shall be exercisable immediately following Shareholder Approval and have a term of exercise equal to 5 years, in the form of Exhibit E attached hereto.

“Warrant Shares” means the shares of Common Stock issuable upon exercise of the Warrants.

ARTICLE II

PURCHASE AND SALE

2.1 Closing. On the Closing Date, upon the terms and subject to the conditions set forth herein, substantially concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and the Purchasers agree, severally and not jointly, to purchase up to an aggregate of, $15,000,000 of shares of Preferred Stock with an aggregate Stated Value equal to such Purchaser’s Subscription Amount and Warrants as determined pursuant to Section 2.2(a). The aggregate number of shares of Preferred Stock sold hereunder shall be up to 15,000. Each Purchaser shall deliver to the Company via wire transfer or a certified check of immediately available funds equal to their Subscription Amount and the Company shall deliver to each Purchaser their respective shares of Preferred Stock, Warrants and the other items set forth in Section 2.2 issuable at the Closing. Upon satisfaction of the conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the offices of FWS, or such other location as the parties shall mutually agree and the Company shall deliver to the Escrow Agent the Form of Escrow Release Notice (as defined in the Escrow Agreement), duly executed.

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2.2 Deliveries.

(a)On the Closing Date, the Company shall deliver or cause to be delivered to each Purchaser the following:

(i)        this Agreement duly executed by the Company;

(ii)a legal opinion of Company Counsel, in the form of Exhibit C attached hereto;

(iii)a certificate evidencing a number of shares of Preferred Stock equal to such Purchaser’s Subscription Amount divided by the Stated Value, registered in the name of such Purchaser;

(iv)the written agreement, in the form of Exhibit D attached hereto, of all of the officers, directors and shareholders holding more than 10% of the issued and outstanding shares of Common Stock and other voting securities of the Company on the date hereof to vote all Common Stock and other voting securities of the Company over which such Persons have voting control as of the record date for the meeting of shareholders of the Company in favor of Shareholder Approval, amounting to, in the aggregate, at least 50% in interest of the issued and outstanding Common Stock and other issued and outstanding voting securities of the Company;

(v)a letter from the Company’s accountants who will be preparing the Company’s periodic reports for the foreseeable future representing the status of the Company’s (on a consolidated basis with CONMED) compliance with the accounting and financial provisions of the Sarbanes-Oxley Act of 2002 and a timetable for post closing action to be taken by the Company to the completion of compliance;

(vi)a Warrant registered in the name of such Purchaser to purchase up to a number of shares of Common Stock equal to 25% of such Purchaser’s Subscription Amount divided by the Conversion Price, with an exercise price equal to $0.30, subject to adjustment therein;

(vii)a Warrant registered in the name of such Purchaser to purchase up to a number of shares of Common Stock equal to 8.3% of such Purchaser’s Subscription Amount divided by the Conversion Price, with an exercise price equal to $2.50, subject to adjustment therein;

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(viii)the Company shall have delivered to each Purchaser an officer’s certificate to the effect that each of the conditions specified in Sections 2.3(b)(i)-(v) and 2.3(b)(vii)-(viii) is satisfied in all respects; and

(ix)the Registration Rights Agreement duly executed by the Company.

(b)On the Closing Date, each Purchaser shall deliver or cause to be delivered to the Company the following:

(i)        this Agreement duly executed by such Purchaser;

(ii)such Purchaser’s Subscription Amount by wire transfer to the Escrow Agent; and

(iii)the Registration Rights Agreement duly executed by such Purchaser.

2.3 Closing Conditions.

(a)The obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met:

(i)the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Purchasers contained herein;

(ii)all obligations, covenants and agreements of the Purchasers required to be performed at or prior to the Closing Date shall have been performed; and

(iii)the delivery by the Purchasers of the items set forth in Section 2.2(b) of this Agreement.

(b)The respective obligations of the Purchasers hereunder in connection with the Closing are subject to the following conditions being met:

(i)the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Company contained herein;

(ii)all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed in all material respects;

(iii)the acquisition transaction by and among the Company and CONMED Healthcare Solutions, Inc. (“CONMED”) (the “Reverse Acquisition”) shall be consummated on terms and conditions agreed to prior to the date hereof simultaneously with the Closing, and the closing conditions set forth in that certain Stock Purchase Agreement, dated as of August 2, 2006, by and among the Company, CONMED and the stockholders of CONMED, shall have been satisfied in their entirety;

(iv)the Company shall have obtained directors and officers insurance with a reputable U.S. based insurer acceptable to Lehman with coverage at least equal to $5 million;

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(v)the Company shall have been named as an additional insured on the medical malpractice liability insurance held by CONMED immediately prior to the closing of the Reverse Acquisition, as set forth on Schedule 3.1(p);

(vi)the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement;

(vii)there shall have been no Material Adverse Effect with respect to the Company since the date hereof; and

(viii)from the date hereof to the Closing Date, trading in the Common Stock shall not have been suspended by the Commission or the Company’s principal Trading Market (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to the Closing), and, at any time prior to the Closing Date, trading in securities generally as reported by Bloomberg L.P. shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on any Trading Market, nor shall a banking moratorium have been declared either by the United States or New York State authorities nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of each Purchaser, makes it impracticable or inadvisable to purchase the Preferred Stock at the Closing.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

3.1 Representations and Warranties of the Company and CONMED. Except as set forth under the corresponding section of the disclosure schedules which Disclosure Schedules shall be deemed a part hereof and to qualify any representation or warranty otherwise made herein to the extent of such disclosure, the Company hereby makes the following representations and warranties to each Purchaser. All representations and warranties made hereunder by the Company assume that the Reverse Acquisition has been completed and such assets and any liabilities of CONMED resulting therefrom are consolidated with the Company.

(a)Subsidiaries. All of the direct and indirect subsidiaries of the Company, including CONMED, are set forth on Schedule 3.1(a). The Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any Liens, and all of the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities.

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(b)Organization and Qualification. The Company and each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted, except where the failure, except where the failure to have such power or authority cannot reasonably be expected to have a Material Adverse Effect (as defined below). Neither the Company nor any Subsidiary is in violation or default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in (i) a material adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

(c)Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, its board of directors or its stockholders in connection therewith other than in connection with the Required Approvals. Each Transaction Document has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

(d)No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company, the sale and issuance of the Securities and the consummation by the Company of the other transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.

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(e)Filings, Consents and Approvals. The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) filings required pursuant to Section 4.6, (ii) the filing with the Commission of the Registration Statement, (iii) the notice and/or application(s) to each applicable Trading Market for the issuance and sale of the Securities and the listing of the Underlying Shares for trading thereon in the time and manner required thereby, (iv) the filing of Form D with the Commission and such filings as are required to be made under applicable state securities laws and (v) Shareholder Approval and all filings and consents required in connection therewith (collectively, the “Required Approvals”).

(f)Issuance of the Securities. The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Underlying Shares, when issued in accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company.

(g)Capitalization. The capitalization of the Company immediately prior to Closing and following the consummation of the Reverse Merger is as set forth on Schedule 3.1(g) (which schedule shall also include the number of shares of Common Stock owned by Affiliates of the Company and the number of shares of Common Stock owned by non-Affiliates of the Company). The Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other than pursuant to the exercise of employee stock options under the Company’s stock option plans, the issuance of shares of Common Stock to employees pursuant to the Company’s employee stock purchase plan and pursuant to the conversion or exercise of Common Stock Equivalents outstanding as of the date of the most recently filed periodic report under the Exchange Act. No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities, there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock or Common Stock Equivalents. Other than as set forth on Schedule 3.1(g), the issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Securities. Other than an agreement to vote in favor of the Reverse Merger, there are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.

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(h)SEC Reports; Financial Statements. The Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Reports”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The audited financial statements of the Company and its Subsidiaries, as well as the separate financial statements for CONMED) for the past two fiscal years and unaudited financial statement for the most recent fiscal quarter are attached hereto as Schedule 3.1(h). Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries, or CONMED, as applicable, as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.

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(i)Material Changes. Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in a subsequent SEC Report filed prior to the date hereof, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and in connection with this Agreement and the acquisition of CONMED and the Reverse Merger and the transactions related thereto, a reasonable estimate of such costs and expenses are set forth on Schedule 3.1(i) attached hereto and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock option plans. The Company does not have pending before the Commission any request for confidential treatment of information. Except for the issuance of the Securities contemplated by this Agreement or as set forth on Schedule 3.1(i), no event, liability or development has occurred or exists with respect to the Company or its Subsidiaries or their respective business, properties, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws at the time this representation is made that has not been publicly disclosed at least 1 Trading Day prior to the date that this representation is made.

(j)Litigation. Other than as set forth on Schedule 3.1(j), there is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act.

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(k)Labor Relations. No material labor dispute exists or, to the knowledge of the Company or any Subsidiary, is imminent with respect to any of the employees of the Company which could reasonably be expected to result in a Material Adverse Effect. None of the Company’s or its Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company, and neither the Company or any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that their relationships with their employees are good. No executive officer, to the knowledge of the Company, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters. The Company and its Subsidiaries are in compliance with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(l)Compliance. Neither the Company nor any Subsidiary (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business and all such laws that affect the environment, except in each case as could not have or reasonably be expected to result in a Material Adverse Effect.

(m)Regulatory Permits. The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the Super 8-K, except where the failure to possess such permits could not have or reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.

(n)Title to Assets. The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them that is material to the business of the Company and the Subsidiaries and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries and Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to penalties. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with which the Company and the Subsidiaries are in compliance.

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(o)Patents and Trademarks. The Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual property rights and similar rights necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could have a Material Adverse Effect (collectively, the “Intellectual Property Rights”). Neither the Company nor any Subsidiary has received a notice (written or otherwise) that the Intellectual Property Rights used by the Company or any Subsidiary violates or infringes upon the rights of any Person. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights. The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(p)Insurance. The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged, including, but not limited to, directors and officers insurance coverage at least equal to the aggregate Subscription Amount and a medical malpractice insurance coverage as set forth on Schedule 3.1(p). Neither the Company nor any Subsidiary has any reason to believe it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business.

(q)Transactions with Affiliates and Employees. Except as set forth in the SEC Reports, none of the officers or directors of the Company or any Subsidiary and, to the knowledge of the Company, none of the employees of the Company or any Subsidiary is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $10,000 other than (i) for payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company or Subsidiary and (iii) for other employee benefits, including stock option agreements under any stock option plan of the Company or any Subsidiaries.

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(r)Sarbanes-Oxley; Internal Accounting Controls. A summary of the Company’s compliance with the provisions of the Sarbanes-Oxley Act of 2002 as of the date hereof along with a timetable for estimated compliance in the next 9 months is set forth on Schedule 3.1(r) attached hereto. The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

(s)Certain Fees. All brokerage or finder’s fees or commissions that are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents are as set forth on Schedule 3.1(s). The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Transaction Documents.

(t)Private Placement. Assuming the accuracy of the Purchasers representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchasers as contemplated hereby. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Trading Market.

(u)Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended. The Company shall conduct its business in a manner so that it will not become subject to the Investment Company Act of 1940, as amended.

(v)Registration Rights. Other than each of the Purchasers and Maxim, no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company.

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(w)Listing and Maintenance Requirements. The Company’s Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration. The Company has not, in the 12 months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

(x)Application of Takeover Protections. The Company and its board of directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s certificate of incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation as a result of the Company’s issuance of the Securities and the Purchasers’ ownership of the Securities.

(y)Disclosure. Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, the Company confirms that neither it nor any other Person acting on its behalf has provided any of the Purchasers or their agents or counsel with any information that it believes constitutes or might constitute material, non-public information. The Company understands and confirms that the Purchasers will rely on the foregoing representation in effecting transactions in securities of the Company. Attached hereto as Schedule 3.1(y) is a draft copy of a Current Report on Form 8-K that the Company will file with the Commission in connection with the Reverse Merger on or prior 8:30 AM (EST) on the 4^th Trading Day following the Closing Date (which Current Report contains, among other information, risk factors concerning the Company and financial statements required to be filed therewith) (“Super 8-K”).All disclosure furnished by or on behalf of the Company to the Purchasers regarding the Company, its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The press releases disseminated by the Company during the twelve months preceding the date of this Agreement taken as a whole do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements, in light of the circumstances under which they were made and when made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.

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(z)No Integrated Offering. Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the Securities Act or any applicable shareholder approval provisions of any Trading Market on which any of the securities of the Company are listed or designated.

(aa)Solvency. Based on the financial condition of the Company as of the Closing Date after giving effect to the receipt by the Company of the proceeds from the sale of the Securities hereunder, (i) the fair saleable value of the Company’s assets exceeds the amount that will be required to be paid on or in respect of the Company’s existing debts and other liabilities (including known contingent liabilities) as they mature; (ii) the Company’s assets do not constitute unreasonably small capital to carry on its business as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the business conducted by the Company, and projected capital requirements and capital availability thereof; and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date. Schedule 3.1(aa) sets forth as of the dates thereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” means (a) any liabilities for borrowed money or amounts owed in excess of $10,000 (other than trade accounts payable incurred in the ordinary course of business), (b) all guaranties, endorsements and other contingent obligations in respect of Indebtedness of others, whether or not the same are or should be reflected in the Company’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (c) the present value of any lease payments in excess of $10,000 due under leases required to be capitalized in accordance with GAAP. Neither the Company nor any Subsidiary is in default with respect to any Indebtedness.

(bb)Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and each Subsidiary has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon, and the Company has no knowledge of a tax deficiency which has been asserted or threatened against the Company or any Subsidiary.

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(cc)No General Solicitation. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to the Purchasers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.

(dd)Anti Corrupt Practices. Neither the Company nor any Subsidiary, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company or Subsidiary has (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) or any Subsidiary which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended, or any other applicable anti-bribery/kickback law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject.

(ee)Accountants. The Company’s accounting firm is McGladrey & Pullen. To the knowledge and belief of the Company, such accounting firm (i) is a registered public accounting firm as required by the Exchange Act and (ii) shall express its opinion with respect to the financial statements to be included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006.

(ff)Seniority. As of the Closing Date, no Indebtedness or other claim against the Company is senior to the Preferred Stock in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise, other than indebtedness secured by purchase money security interests (which is senior only as to underlying assets covered thereby) and capital lease obligations (which is senior only as to the property covered thereby).

(gg)No Disagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers.

(hh)Acknowledgment Regarding Purchasers’ Purchase of Securities. The Company acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated thereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any Purchaser or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to the Purchasers’ purchase of the Securities. The Company further represents to each Purchaser that the Company’s decision to enter into this Agreement and the other Transaction Documents has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.

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(ii)Acknowledgement Regarding Purchasers’ Trading Activity. Anything in this Agreement or elsewhere herein to the contrary notwithstanding (except for Sections 3.2(f) and 4.16 hereof), it is understood and acknowledged by the Company (i) that none of the Purchasers have been asked to agree, nor has any Purchaser agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Securities for any specified term; (ii) that past or future open market or other transactions by any Purchaser, including Short Sales, and specifically including, without limitation, Short Sales or “derivative” transactions, before or after the closing of this or future private placement transactions, may negatively impact the market price of the Company’s publicly-traded securities; (iii) that any Purchaser, and counter-parties in “derivative” transactions to which any such Purchaser is a party, directly or indirectly, presently may have a “short” position in the Common Stock; and (iv) that each Purchaser shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction. The Company further understands and acknowledges that (a) one or more Purchasers may engage in hedging activities at various times during the period that the Securities are outstanding and (b) such hedging activities (if any) could reduce the value of the existing stockholders' equity interests in the Company at and after the time that the hedging activities are being conducted.  The Company acknowledges that such aforementioned hedging activities do not constitute a breach of any of the Transaction Documents.

(jj)Regulation M Compliance.  The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the securities of the Company, or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company, other than, in the case of clauses (ii) and (iii), compensation paid to the Company’s placement agent in connection with the placement of the Securities.

(kk)FDA. Neither the Company nor its Subsidiaries manufacture, package, label, test, distribute, sell and/or market any products subject to the jurisdiction of the U.S. Food and Drug Administration under the Federal Food, Drug and Cosmetic Act, as amended, and the regulations thereunder.

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(ll)Manufacturing and Marketing Rights. The Company and its Subsidiaries provide medical services and neither the Company nor its Subsidiaries manufacture, produce, assemble, license, market or sell any products to any Person.

(mm)Obligations of Management. Other than as set forth on Schedule 3.1(mm), each officer and key employee of the Company and its Subsidiaries is currently devoting substantially all of his or her business time to the conduct of business of the Company and its Subsidiaries. Other than as set forth on Schedule 3.1(mm), neither the Company nor any of its Subsidiaries is aware that any officer or key employee of the Company or any Subsidiary is planning to work less than full time at the Company or any Subsidiary, as applicable, in the future. No officer or key employee is the currently working or, to the Company’s knowledge, plans to work for a competitive enterprise, whether or not such officer of key employee is or will be compensated by such enterprise.

(nn)Minute Books. The minute books of the Company and its Subsidiaries made available to the Purchasers contain a complete summary of all meetings of directors and stockholders since the time of incorporation.

(oo)Elections. To the Company’s knowledge, all elections and notices permitted by Section 83(b) of the Internal Revenue Code and any analogous provisions of applicable state tax laws have been timely filed by all employees who have purchased shares of the Common Stock under agreements that provide for the vesting of such shares of Common Stock.

(pp)Accounts Receivable. All accounts receivable of the Company and its Subsidiaries that are reflected on the Company’s and its Subsidiaries’ balance sheets or interim balance sheets or on the accounting records of the Company and its Subsidiaries as of the Closing Date (collectively, the “Accounts Receivable”) represent or will represent valid obligations arising from sales actually made or services actually performed in the ordinary course of business. Unless paid prior to the Closing Date, the Accounts Receivable are or will be as of the Closing Date current and collectible net of the respective reserves shown on the balance sheet or interim balance sheet or on the accounting records of the Company and its Subsidiaries as of the Closing Date (which reserves are adequate and calculated consistent with past practice and, in the case of the reserve as of the Closing Date, will not represent a greater percentage of the Accounts Receivable as of the Closing Date than the reserve reflected in the interim balance sheet represented of the Accounts Receivable reflected therein and will not represent a material adverse change in the composition of such Accounts Receivable in terms of aging). Subject to such reserves, each of the Accounts Receivable either has been or will be collected in full without any set-off, within ninety days after the day on which it must become due and payable. There is no contest, claim, or right of set-off, other than returns in the ordinary course of business, under any agreement and/or contract with any obligor of an Accounts Receivable relating to the amount or validity of such Accounts Receivable. Schedule 3.1(pp) contains a complete and accurate list of all Accounts Receivable as of the date of the interim balance sheet, which list sets forth the aging of such Accounts Receivable.

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(qq)Inventory. All inventory of the Company and the Subsidiaries, whether or not reflected in the balance sheet or interim balance sheet, consists of a quality and quantity usable and salable in the ordinary course of business, except for obsolete items and items of below standard quality, all of which have been written off or written down to net realizable value in the balance sheet or interim balance sheet or on the accounting records of the Company and the Subsidiaries as of the Closing Date, as the case may be. All inventories not written off have been priced at the lower of cost or market on the last in, first out basis. The quantities of each item of inventory (whether raw materials, work-in-process, or finished goods) are not excessive, but are reasonable in the present circumstances of the Company and the Subsidiaries.

(rr)Complaints. Neither the Company nor any Subsidiary has received any material client complaints concerning its services.

(ss)Employee Benefits. Except as set forth on Schedule 3.1(ss), neither the Company nor any Subsidiary has (nor for the two years preceding the date hereof has had) any plans which are subject to ERISA. “ERISA” means the Employee Retirement Income Security Act of 1974 or any successor law and the regulations and rules issued pursuant to that act or any successor law.

3.2Representations and Warranties of the Purchasers

. Each Purchaser hereby, for itself and for no other Purchaser, represents and warrants as of the date hereof and as of the Closing Date to the Company as follows:

(a)Organization; Authority. Such Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with full right, corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution, delivery and performance by such Purchaser of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate or similar action on the part of such Purchaser. Each Transaction Document to which it is a party has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

(b)Own Account. Such Purchaser understands that the Securities are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Securities (this representation and warranty not limiting such Purchaser’s right to sell the Securities pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws) in violation of the Securities Act or any applicable state securities law. Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business.

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(c)Purchaser Status. At the time such Purchaser was offered the Securities, it was, and at the date hereof it is, and on each date on which it converts any shares of Preferred Stock or exercises any Warrants, it will be either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act. Such Purchaser is not required to be registered as a broker-dealer under Section 15 of the Exchange Act.

(d)Experience of Such Purchaser. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment.

(e)General Solicitation. Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

(f)Short Sales and Confidentiality Prior To The Date Hereof. Other than the transaction contemplated hereunder, such Purchaser has not directly or indirectly, nor has any Person acting on behalf of or pursuant to any understanding with such Purchaser, executed any disposition, including Short Sales, in the securities of the Company during the period commencing from the time that such Purchaser first received a term sheet (written or oral) from the Company or any other Person setting forth the material terms of the transactions contemplated hereunder until the date hereof (“Discussion Time”). Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser's assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser's assets, the representation set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment decision to purchase the Securities covered by this Agreement. Other than to other Persons party to this Agreement, such Purchaser has maintained the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction); provided, further, with respect to LB I Group Inc., this Section 3.2(f) shall only apply to the Global Trading Strategies group, as currently configured, of Lehman Brothers Holding Inc., and shall not apply to any other Person, Affiliate, subsidiary thereof, business unit, area group or division of Lehman Brothers Holding Inc.

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ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

4.1Transfer Restrictions.

(a)The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of a Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement and the Registration Rights Agreement.

(b)The Purchasers agree to the imprinting, so long as is required by this Section 4.1, of a legend on any of the Securities in the following form:

[NEITHER] THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS [EXERCISABLE] [CONVERTIBLE]] HAS BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION] OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and the Registration Rights Agreement and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the appropriate Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including, if the Securities are subject to registration pursuant to the Registration Rights Agreement, the preparation and filing of any required prospectus supplement under Rule 424(b)(3) under the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of Selling Stockholders thereunder.

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(c)Certificates evidencing the Underlying Shares shall not contain any legend (including the legend set forth in Section 4.1(b) hereof): (i) while a registration statement (including the Registration Statement) covering the resale of such security is effective under the Securities Act, or (ii) following any sale of such Underlying Shares pursuant to Rule 144, or (iii) if such Underlying Shares are eligible for sale under Rule 144(k), or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company shall cause its counsel to issue a legal opinion to the Transfer Agent promptly after the Effective Date if required by the Transfer Agent to effect the removal of the legend hereunder. If all or any shares of Preferred Stock are converted or any portion of a Warrant is exercised at a time when there is an effective registration statement to cover the resale of the Underlying Shares, or if such Underlying Shares may be sold under Rule 144(k) or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission) then such Underlying Shares shall be issued free of all legends. The Company agrees that following the Effective Date or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than three Trading Days following the delivery by a Purchaser to the Company or the Transfer Agent of a certificate representing Underlying Shares, as applicable, issued with a restrictive legend (such third Trading Day, the “Legend Removal Date”), deliver or cause to be delivered to such Purchaser a certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section. Certificates for Underlying Shares subject to legend removal hereunder shall be transmitted by the Transfer Agent to the Purchasers by crediting the account of the Purchaser’s prime broker with the Depository Trust Company System.

(d)In addition to such Purchaser’s other available remedies, the Company shall pay to a Purchaser, in cash, as partial liquidated damages and not as a penalty, for each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on the date such Securities are submitted to the Transfer Agent) delivered for removal of the restrictive legend and subject to Section 4.1(c), $10 per Trading Day (increasing to $20 per Trading Day 5 Trading Days after such damages have begun to accrue) for each Trading Day after the second Trading Day following the Legend Removal Date until such certificate is delivered without a legend. Nothing herein shall limit such Purchaser’s right to pursue actual damages for the Company’s failure to deliver certificates representing any Securities as required by the Transaction Documents, and such Purchaser shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief.

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(e)In addition to such Purchaser’s other available remedies, if the Company fails to cause its transfer agent to transmit to such Purchaser a certificate or certificates representing the Shares in the form required under this Section 4.1(c) on or before the second Trading Day after the applicable Legend Removal Date, and if after such date such Purchaser is required by its broker to purchase (in an open market transaction or otherwise) or the Purchaser’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Purchaser of the Shares which the Purchaser anticipated receiving pursuant to this Section 4.1(c) in the form required (a “Buy-In”), then the Company shall pay in cash to such Purchaser the amount by which (x) such Purchaser’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Shares at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed. For example, if the Purchaser purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to Shares with an aggregate sale price giving rise to such purchase obligation of $10,000, the Company shall be required to pay the Purchaser $1,000. The Purchaser shall provide the Company written notice indicating the amounts payable to the Purchaser in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Purchaser’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing Shares as required pursuant to the terms hereof.

(f) Each Purchaser, severally and not jointly with the other Purchasers, agrees that the removal of the restrictive legend from certificates representing Securities as set forth in this Section 4.1 is predicated upon the Company’s reliance that the Purchaser will sell any Securities pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom, and that if Securities are sold pursuant to a Registration Statement, they will be sold in compliance with the plan of distribution set forth therein.

4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance of the Securities may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligation to issue the Underlying Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against any Purchaser and regardless of the dilutive effect that such issuance may have on the ownership of the other stockholders of the Company.

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4.3 Furnishing of Information. As long as any Purchaser owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. As long as any Purchaser owns Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) such information as is required for the Purchasers to sell the Securities under Rule 144. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, to the extent required from time to time to enable such Person to sell such Securities without registration under the Securities Act within the requirements of the exemption provided by Rule 144.

4.4 Integration. The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchasers or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market such that it would require shareholder approval prior to the closing of such other transaction unless shareholder approval is obtained before the closing of such subsequent transaction.

4.5 Conversion and Exercise Procedures. The form of Notice of Conversion included in the Certificate of Designation and the form of Notice of Exercise included in the Warrants set forth the totality of the procedures required of the Purchasers in order to convert the Preferred Stock and exercise the Warrants. No additional legal opinion or other information or instructions shall be required of the Purchasers to convert their Preferred Stock or exercise their Warrants. The Company shall honor conversions of the Preferred Stock and exercise of the Warrants and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth in the Transaction Documents.

4.6 Securities Laws Disclosure; Publicity. The Company shall, by 5:30 p.m. New York City time on the fourth (4^th) Trading Day immediately following the date hereof, issue a Current Report on Form 8-K, disclosing the material terms of the transactions contemplated hereby and including the Transaction Documents as exhibits thereto. The Company and each Purchaser shall consult with each other in issuing any other press releases with respect to the transactions contemplated hereby, and neither the Company nor any Purchaser shall issue any such press release or otherwise make any such public statement without the prior consent of the Company, with respect to any press release of any Purchaser, or without the prior consent of each Purchaser, with respect to any press release of the Company, which consent shall not unreasonably be withheld or delayed, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission or any regulatory agency or Trading Market, without the prior written consent of such Purchaser, except (i) as required by federal securities law in connection with (A) any registration statement contemplated by the Registration Rights Agreement and (B) the filing of final Transaction Documents (including signature pages thereto) with the Commission and (ii) to the extent such disclosure is required by law or Trading Market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure permitted under this subclause (ii).

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4.7Shareholder Rights Plan. No claim will be made or enforced by the Company or, with the consent of the Company, any other Person, that any Purchaser is an “Acquiring Person” under any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or similar anti-takeover plan or arrangement in effect or hereafter adopted by the Company, or that any Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the Transaction Documents or under any other agreement between the Company and the Purchasers.

4.8 Non-Public Information. Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, at any time after the date of the filing of the Super 8-K, the Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company.

4.9Use of Proceeds. Except as set forth on Schedule 4.9 attached hereto, the Company shall use the net proceeds from the sale of the Securities hereunder for working capital purposes and shall not use such proceeds for the satisfaction of any portion of the Company’s debt (other than payment of trade payables in the ordinary course of the Company’s business and prior practices), or to redeem any Common Stock or Common Stock Equivalents or to settle any outstanding litigation.

4.10Reimbursement. If any Purchaser becomes involved in any capacity in any Proceeding by or against any Person who is a stockholder of the Company (except as a result of sales, pledges, margin sales and similar transactions by such Purchaser to or with any other stockholder), solely as a result of such Purchaser’s acquisition of the Securities under this Agreement, the Company will reimburse such Purchaser for its legal and other expenses (including the cost of any investigation preparation and travel in connection therewith) incurred in connection therewith, as such expenses are incurred. The reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of the Purchasers who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Purchasers and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchasers and any such Affiliate and any such Person. The Company also agrees that neither the Purchasers nor any such Affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any Person asserting claims on behalf of or in right of the Company solely as a result of acquiring the Securities under this Agreement, except if such claim arises primarily from a breach of such Purchaser’s representations, warranties or covenants under the Transaction Documents or any agreements or understandings such Purchaser may have with any such stockholder or any violations by the Purchaser of state or federal securities laws or any conduct by such Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance.

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4.11Indemnification of Purchasers. Subject to the provisions of this Section 4.11, the Company will indemnify and hold each Purchaser and its directors, officers, shareholders, members, partners, employees and agents (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title), each Person who controls such Purchaser (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, shareholders, agents, members, partners or employees (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title) of such controlling person (each, a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (b) any action instituted against a Purchaser, or any of them or their respective Affiliates, by any stockholder of the Company who is not an Affiliate of such Purchaser, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Purchaser’s representations, warranties or covenants under the Transaction Documents or any agreements or understandings such Purchaser may have with any such stockholder or any violations by the Purchaser of state or federal securities laws or any conduct by such Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to the Purchaser Party. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party, in which case the Company shall be responsible for the reasonable fees and expenses of no more than one such separate counsel. The Company will not be liable to any Purchaser Party under this Agreement (i) for any settlement by a Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by such Purchaser Party in this Agreement or in the other Transaction Documents.

4.12Reservation and Listing of Securities.

(a)The Company shall hold a special meeting of shareholders (which may also be at the annual meeting of shareholders) at the earliest practical date after the date hereof, but in any event on or prior to April 30, 2007, for the purpose of obtaining Shareholder Approval, with the recommendation of the Company’s Board of Directors that such proposal be approved, and the Company shall solicit proxies from its shareholders in connection therewith in the same manner as all other management proposals in such proxy statement and all management-appointed proxyholders shall vote their proxies in favor of such proposal. Each Purchaser hereby agrees to vote in favor of all matters which comprise the Shareholder Approval being sought. If the Company does not obtain Shareholder Approval at the first meeting, the Company shall call a meeting every four months thereafter to seek Shareholder Approval until the earlier of the date Shareholder Approval is obtained or the Preferred Stock is no longer outstanding. After Shareholder Approval, the Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations in full under the Transaction Documents.

(b)The Company shall, if applicable: (i) in the time and manner required by the principal Trading Market, prepare and file with such Trading Market an additional shares listing application covering a number of shares of Common Stock at least equal to the Required Minimum on the date of such application, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on such Trading Market as soon as possible thereafter, (iii) provide to the Purchasers evidence of such listing, and (iv) maintain the listing of such Common Stock on any date at least equal to the Required Minimum on such date on such Trading Market or another Trading Market if such other Trading Market becomes the principal Trading Market hereafter.

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4.13Participation in Future Financing.

(a)From the date hereof until the date that is the 12 month anniversary of the Effective Date, upon any issuance by the Company or any of its Subsidiaries of Common Stock or Common Stock Equivalents for cash consideration (a “Subsequent Financing”), each Purchaser who originally purchased at least 30% of Preferred Stock issued hereunder shall have the right to participate in up to an amount of the Subsequent Financing equal to 100% of the Subsequent Financing (the “Participation Maximum”) on the same terms, conditions and price provided for in the Subsequent Financing.

(b)At least 5 Trading Days prior to the closing of the Subsequent Financing, the Company shall deliver to each Purchaser a written notice of its intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask such Purchaser if it wants to review the details of such financing (such additional notice, a “Subsequent Financing Notice”). Upon the request of a Purchaser, and only upon a request by such Purchaser, for a Subsequent Financing Notice, the Company shall promptly, but no later than 1 Trading Day after such request, deliver a Subsequent Financing Notice to such Purchaser. The Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder and the Person or Persons through or with whom such Subsequent Financing is proposed to be effected and shall include a term sheet or similar document relating thereto as an attachment.

(c)Any Purchaser desiring to participate in such Subsequent Financing must provide written notice to the Company by not later than 5:30 p.m. (New York City time) on the 5^th Trading Day after all of the Purchasers have received the Pre-Notice that the Purchaser is willing to participate in the Subsequent Financing, the amount of the Purchaser’s participation, and that the Purchaser has such funds ready, willing, and available for investment on the terms set forth in the Subsequent Financing Notice. If the Company receives no notice from a Purchaser as of such 5^th Trading Day, such Purchaser shall be deemed to have notified the Company that it does not elect to participate.

(d)If by 5:30 p.m. (New York City time) on the 5^th Trading Day after all of the Purchasers have received the Pre-Notice, notifications by the Purchasers of their willingness to participate in the Subsequent Financing (or to cause their designees to participate) is, in the aggregate, less than the total amount of the Subsequent Financing, then the Company may effect the remaining portion of such Subsequent Financing on the terms and with the Persons set forth in the Subsequent Financing Notice.

(e)If by 5:30 p.m. (New York City time) on the 5^th Trading Day after all of the Purchasers have received the Pre-Notice, the Company receives responses to a Subsequent Financing Notice from Purchasers seeking to purchase more than the aggregate amount of the Participation Maximum, each such Purchaser shall have the right to purchase the greater of (a) their Pro Rata Portion (as defined below) of the Participation Maximum and (b) the difference between the Participation Maximum and the aggregate amount of participation by all other Purchasers. “Pro Rata Portion” is the ratio of (x) the Subscription Amount of Securities purchased on the Closing Date by a Purchaser participating under this Section 4.13 and (y) the sum of the aggregate Subscription Amounts of Securities purchased on the Closing Date by all Purchasers participating under this Section 4.13.

(f)The Company must provide the Purchasers with a second Subsequent Financing Notice, and the Purchasers will again have the right of participation set forth above in this Section 4.13, if the Subsequent Financing subject to the initial Subsequent Financing Notice is not consummated for any reason on the terms set forth in such Subsequent Financing Notice within 30 Trading Days after the date of the initial Subsequent Financing Notice.

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(g)Notwithstanding the foregoing, this Section 4.13 shall not apply in respect of (i) an Exempt Issuance or (ii) an underwritten public offering of Common Stock.

4.14Subsequent Equity Sales.

(a)From the date hereof until 90 days after the Effective Date, neither the Company nor any Subsidiary shall issue shares of Common Stock or Common Stock Equivalents; provided, however, the 90 day period set forth in this Section 4.14 shall be extended for the number of Trading Days during such period in which (i) trading in the Common Stock is suspended by any Trading Market, or (ii) following the Effective Date, the Registration Statement is not effective or the prospectus included in the Registration Statement may not be used by the Purchasers for the resale of the Underlying Shares.

(b)From the date hereof until such time as (i) less than 3,000 shares of Preferred Stock, in the aggregate, remains outstanding and (ii) no Purchaser holds more than 2,000 shares of Preferred Stock, the Company shall be prohibited from effecting or entering into an agreement to effect any Subsequent Financing involving a Variable Rate Transaction. The term “Variable Rate Transaction” means a transaction in which the Company issues or sells (i) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock or (ii) enters into any agreement, including, but not limited to, an equity line of credit, whereby the Company may sell securities at a future determined price. Any Purchaser shall be entitled to obtain injunctive relief against the Company to preclude any such issuance, which remedy shall be in addition to any right to collect damages.

(c)Notwithstanding the foregoing, this Section 4.14 shall not apply in respect of an Exempt Issuance, except that no Variable Rate Transaction shall be an Exempt Issuance.

4.15Equal Treatment of Purchasers. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration is also offered to all of the parties to the Transaction Documents. For clarification purposes, this provision constitutes a separate right granted to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended for the Company to treat the Purchasers as a class and shall not in any way be construed as the Purchasers acting in concert or as a group with respect to the purchase, disposition or voting of Securities or otherwise.

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4.16Short Sales and Confidentiality After The Date Hereof. Each Purchaser severally and not jointly with the other Purchasers covenants that neither it nor any Affiliate acting on its behalf or pursuant to any understanding with it will execute any Short Sales during the period commencing at the Discussion Time and ending at the time that the transactions contemplated by this Agreement are first publicly announced as described in Section 4.6.Each Purchaser, severally and not jointly with the other Purchasers, covenants that until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company as described in Section 4.6, such Purchaser will maintain the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction). Each Purchaser understands and acknowledges, severally and not jointly with any other Purchaser, that the Commission currently takes the position that coverage of short sales of shares of the Common Stock “against the box” prior to the Effective Date of the Registration Statement with the Securities is a violation of Section 5 of the Securities Act, as set forth in Item 65, Section A, of the Manual of Publicly Available Telephone Interpretations, dated July 1997, compiled by the Office of Chief Counsel, Division of Corporation Finance. Notwithstanding the foregoing, no Purchaser makes any representation, warranty or covenant hereby that it will not engage in Short Sales in the securities of the Company after the time that the transactions contemplated by this Agreement are first publicly announced as described in Section 4.6. Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser's assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser's assets, the covenant set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment decision to purchase the Securities covered by this Agreement; provided, further, with respect to LB I Group Inc., this Section 4.16 shall only apply to the Global Trading Strategies Group, as currently configured, of Lehman Brothers Holding Inc., and shall not apply to any other Person, Affiliate, subsidiary, business unit, area, group or division of Lehman Brothers Holding Inc.

4.17Form D; Blue Sky Filings. The Company agrees to timely file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof, promptly upon request of any Purchaser. The Company shall take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for, or to qualify the Securities for, sale to the Purchasers at the Closing under applicable securities or “Blue Sky” laws of the states of the United States, and shall provide evidence of such actions promptly upon request of any Purchaser.

4.18Capital Change. Other than as contemplated by the Reverse Acquisition, until the one year anniversary of the Effective Date, the Company shall not undertake a reverse or forward stock split or reclassification of the Common Stock without the prior written consent of the Purchasers holding a majority in interest of the shares of Preferred Stock.

4.19Anti-Corrupt Practices. Neither the Company nor any Subsidiary, nor any agent or other person acting on behalf of the Company or a Subsidiary, shall (i) directly or indirectly, use any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) make any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) fail to disclose fully any contribution made by the Company or Subsidiary (or made by any person acting on its behalf of which the Company or Subsidiary is aware) which is in violation of law, or (iv) violate in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended, or any other applicable anti-bribery/kickback law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is or will be subject.

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4.20Insurance. The Company and the Subsidiaries shall maintain insurance by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged, including, but not limited to, directors and officers insurance coverage for the Company at least equal to $5 million and a medical malpractice insurance coverage at least equal to the amounts set forth on Schedule 3.1(p) or such greater amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged.

4.21Appointment of an Additional Director. Until such time as Lehman holds less than 50% of the Securities (whether Preferred Stock, Warrants or Underlying Shares) purchased hereunder (or via an exercise of the Warrants) (the “Appointment Period”), the Company shall appoint (or cause its board of directors to appoint) or nominate for shareholder approval one Person selected by Lehman, at Lehman’s sole discretion, as a member of the Company’s board of directors, which appointment shall be effective within 10 calendar days following the Closing Date. Such director shall be subject to shareholder approval at the Company’s first annual meeting after the date of this Agreement. The Company shall use best efforts to nominate, solicit proxies and recommend that shareholders vote in favor of such Persons, or replacement directors as selected by Lehman in Lehman’s sole discretion, for re-election as directors of the Company at each annual meeting or special meeting of the shareholders of the Company at which the election of directors is a matter to be acted upon. The Company shall take all further actions reasonably necessary to satisfy the covenants herein. During the Appointment Period, the Company shall not increase the number of directors to more than 5 members (which shall include the Lehman director) without the consent of Lehman.

4.22Sarbanes-Oxley Compliance. The Company shall be in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it at the 9 month anniversary of the date hereof.

4.23Management Incentives. On or before the reorganization contemplated by the Shareholder Approval, the Company and the Subsidiaries shall have issued all of the securities to be issued to management as set forth in Schedule 3.1(g) attached hereto.

ARTICLE V

MISCELLANEOUS

5.1 Termination.  This Agreement may be terminated by any Purchaser, as to such Purchaser’s obligations hereunder only and without any effect whatsoever on the obligations between the Company and the other Purchasers, by written notice to the other parties, if the Closing has not been consummated on or before January 31, 2007; provided, however, that such termination will not affect the right of any party to sue for any breach by the other party (or parties).

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5.2 Fees and Expenses. At the Closing, the Company has agreed to reimburse Lehman the non-accountable sum of $30,000, for its legal fees and expenses. Accordingly, in lieu of the foregoing payments, the aggregate amount that Lehman is to pay for the Securities at the Closing shall be reduced by $30,000 in lieu thereof. Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the delivery of any Securities to the Purchasers.

5.3 Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.

5.4Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the 2^nd Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto.

5.5Amendments; Waivers. No provision of this Agreement may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Company and Purchasers holding 67% of the Securities or, in the case of a waiver, by the party against whom enforcement of any such waived provision is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.

5.6Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.

5.7Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Purchaser (other than by merger). Any Purchaser may assign any or all of its rights under this Agreement to any Person to whom such Purchaser assigns or transfers any Securities, provided such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions of the Transaction Documents that apply to the “Purchasers”.

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5.8No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.11.

5.9Governing Law. All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. The parties hereby waive all rights to a trial by jury. If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

5.10Survival. The representations and warranties shall survive the Closing and the delivery of Securities for the applicable statue of limitations.

5.11Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

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5.12Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

5.13Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) any of the other Transaction Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights; provided, however, in the case of a rescission of a conversion of the Preferred Stock or rescission of an exercise of the Warrants, the Purchaser shall be required to return any shares of Common Stock subject to any such rescinded conversion or exercise notice.

5.14Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction. The applicant for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs (including customary indemnity) associated with the issuance of such replacement Securities.

5.15Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations contained in the Transaction Documents and hereby agrees to waive and not to assert in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

5.16Payment Set Aside. To the extent that the Company makes a payment or payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

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5.18Independent Nature of Purchasers’ Obligations and Rights. The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance or non-performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel in their review and negotiation of the Transaction Documents. For reasons of administrative convenience only, Purchasers and their respective counsel have chosen to communicate with the Company through FWS. FWS does not represent any of the Purchasers but Lehman. The Company has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers.

5.19Liquidated Damages. The Company’s obligations to pay any partial liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such partial liquidated damages or other amounts are due and payable shall have been canceled.

5.20Construction. The parties agree that each of them and/or their respective counsel has reviewed and had an opportunity to revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of the Transaction Documents or any amendments hereto.

5.21Exculpation Among Purchasers. Each Purchaser acknowledges that it is not relying upon any Person (including without any limitation, any other Purchaser), other than the Company and its officers and directors (acting in their capacity as representatives of the Company), in deciding to invest and in making its investment in the Company. Each Purchaser agrees that no other Purchaser nor the respective controlling Persons, officers, directors, partners, agents or employees (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title) of any other Purchaser shall be liable to such Purchaser for any losses incurred by such Purchaser in connection with its investment in the Company.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

PACE HEALTH MANAGEMENT SYSTEMS, INC.		Address/Facsimile Number/E-mail
By:	/s/ John Pappajohn
	Name: John Pappajohn Title: President and Chief Executive Officer

With a copy to (which shall not constitute notice):

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

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[PURCHASER SIGNATURE PAGES TO PACE SECURITIES PURCHASE AGREEMENT]

IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

Name of Purchaser: ____________________________________________________

Signature of Authorized Signatory of Purchaser: __________________________

Name of Authorized Signatory: ____________________________________

Title of Authorized Signatory: _____________________________________

Email Address of Authorized Signatory: ___________________________________________

Fax Number of Authorized Signatory: _________________________________________

Address for Notice of Purchaser:

Address for Delivery of Securities for Purchaser (if not same as above):

Subscription Amount:____________

Shares of Preferred Stock:____________

Warrants @ $0.30: _____________

Warrants @ $2.50: _____________

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

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Annex A

Purchaser	Subscription Amount	Securities
LB I Group Inc.

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EX-10.6

EXHIBIT B

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (this “Agreement”) is made and entered into as of January 26, 2007 among Pace Health Management Systems, Inc., an Iowa corporation (the “Company”), and the several purchasers signatory hereto (each such purchaser is a “Purchaser” and collectively, the “Purchasers”).

This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof between the Company and each Purchaser (the “Purchase Agreement”).

The Company and each Purchaser hereby agrees as follows:

1. Definitions.Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings:

“Advice” shall have the meaning set forth in Section 6(d).

“Effectiveness Date” means, with respect to the initial Registration Statement required to be filed hereunder, June 1, 2007 and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 90^th calendar day following the date on which the Company first knows, or reasonably should have known, that such additional Registration Statement is required hereunder; provided, however, that in the event the Company is notified by the Commission that one of the above Registration Statements will not be reviewed or is no longer subject to further review and comments, the Effectiveness Date as to such Registration Statement shall be the fifth Trading Day following the date on which the Company is so notified if such date precedes the dates required above.

“Effectiveness Period” shall have the meaning set forth in Section 2(a).

“Event” shall have the meaning set forth in Section 2(b).

“Event Date” shall have the meaning set forth in Section 2(b).

“Filing Date” means, with respect to the initial Registration Statement required hereunder, April 1, 2007 and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 30^th calendar day following the earlier of: (i) the date on which the Company first knows, or reasonably should have known that such additional Registration Statement is required hereunder and (ii) the date any such additional Registration Statement is permitted to be filed with the Commission.

“Holder” or “Holders” means the holder or holders, as the case may be, from time to time of Registrable Securities.

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“Indemnified Party” shall have the meaning set forth in Section 5(c).

“Indemnifying Party” shall have the meaning set forth in Section 5(c).

“Losses” shall have the meaning set forth in Section 5(a).

“Plan of Distribution” shall have the meaning set forth in Section 2(a).

“Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

“Registrable Securities” means, as of the date in question, (i) all of the shares of Common Stock issuable upon conversion in full of the shares of Preferred Stock, (ii) all Warrant Shares, (iii) any additional shares issuable in connection with any anti-dilution provisions associated with the Preferred Stock and Warrants (in each case, without giving effect to any limitations on conversion set forth in the Certificate of Designation or limitations on exercise set forth in the Warrant) and (iv) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing.

“Registration Statement” means the registration statements required to be filed hereunder and any additional registration statements contemplated by Section 3(c), including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

“Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

“Rule 424” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

“Selling Shareholder Questionnaire” shall have the meaning set forth in Section 3(a).

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2. Shelf Registration

(a)On or prior to each Filing Date, the Company shall prepare and file with the Commission a “Shelf” Registration Statement covering the resale of the Registrable Securities on such Filing Date for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith) and shall contain (unless otherwise directed by at least an 85% majority in interest of the Holders) substantially the “Plan of Distribution” attached hereto as Annex A. Subject to the terms of this Agreement, the Company shall use its best efforts to cause a Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the applicable Effectiveness Date, and shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until all Registrable Securities covered by such Registration Statement have been sold, or may be sold without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders (the “Effectiveness Period”). The Company shall telephonically request effectiveness of a Registration Statement as of 5:00 pm Eastern time on a Trading Day. The Company shall immediately notify the Holders via facsimile of the effectiveness of a Registration Statement on the same Trading Day that the Company telephonically confirms effectiveness with the Commission, which shall be the date requested for effectiveness of a Registration Statement. The Company shall, by 9:30 am Eastern time on the second Trading Day after the Effective Date (as defined in the Purchase Agreement), file a final Prospectus with the Commission as required by Rule 424. Failure to so notify the Holder within two Trading Days of such notification of effectiveness or failure to file a final Prospectus as aforesaid shall be deemed an Event under Section 2(b). All selling shareholders included on the applicable Registration Statement shall be given notice of the effectiveness of such Registration Statement substantially at the same time.

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(b)If: (i) a Registration Statement is not filed on or prior to the 15^th day following its Filing Date (if the Company files a Registration Statement without affording the Holders the opportunity to review and comment on the same as required by Section 3(a) herein, the Company shall be deemed to not have satisfied this clause (i)), or (ii) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that a Registration Statement will not be “reviewed,” or not subject to further review, or (iii) prior to the 30^th day following its Effectiveness Date, the Company fails to file a pre-effective amendment and otherwise respond in writing to comments made by the Commission in respect of such Registration Statement within 15 calendar days after the receipt of comments by or notice from the Commission that such amendment is required in order for a Registration Statement to be declared effective, or (iv) a Registration Statement filed or required to be filed hereunder is not declared effective by the Commission by its Effectiveness Date, or (v) after the Effectiveness Date, a Registration Statement ceases for any reason to remain continuously effective as to all Registrable Securities for which it is required to be effective, or the Holders are otherwise not permitted to utilize the Prospectus therein to resell such Registrable Securities for more than 20 consecutive calendar days or more than an aggregate of 30 calendar days during any 12-month period (which need not be consecutive calendar days) (any such failure or breach being referred to as an “Event”, and for purposes of clause (i) or (iv) the date on which such Event occurs, or for purposes of clause (ii) the date on which such five Trading Day period is exceeded, or for purposes of clause (iii) the date which such 15 calendar day period is exceeded, or for purposes of clause (v) the date on which such 20 or 30 calendar day period, as applicable, is exceeded being referred to as “Event Date”), then in addition to any other rights the Holders may have hereunder or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the aggregate purchase price paid by such Holder pursuant to the Purchase Agreement for any Registrable Securities then held by such Holder and not then registered for resale pursuant to an effective Registration Statement (calculated as calculated as if all convertible securities had been fully converted). The parties agree that (1) in no event shall the Company be liable for liquidated damages under this Agreement in excess of 1.0% of the aggregate Subscription Amount of the Holders in any 30-day period and (2) the maximum aggregate liquidated damages payable to a Holder under this Agreement shall be 10.0% of the aggregate Subscription Amount paid by such Holder pursuant to the Purchase Agreement. Notwithstanding anything herein to the contrary and subject to the payment of liquidated damages as set forth above, in the event the Commission determines any Registration Statement filed pursuant hereto constitutes a primary offering of securities by the Company and/or requires any Holder to be named as an underwriter, or otherwise restricts the number of Registrable Securities that can be registered in a given Registration Statement citing the percentage of Registrable Securities to be registered as compared to the then-current public float or market capital of the Company (“SEC Caused Event”), Holders understand and agree that the Company may reduce, on a pro-rata basis, the total number of Registrable Securities to be registered on behalf of each such Holder. Notwithstanding anything herein to the contrary, the Company will not be liable for liquidated damages under this Agreement with respect to any Warrants or Warrant Shares. In the event of such reduction, the affected Holders shall have demand registration rights during the term of the Effectiveness Period and the Holders acknowledge and agree the provisions of this paragraph may apply to more than one Registration Statement and that the Commission may limit or condition any subsequent Registration Statement. If the Company fails to pay any partial liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms hereof shall apply on a daily pro-rata basis for any portion of a month prior to the cure of an Event.

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3. Registration Procedures.

In connection with the Company’s registration obligations hereunder, the Company shall:

(a)Not less than five Trading Days prior to the filing of each Registration Statement and not less than one Trading Day prior to the filing of any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall, (i) furnish to each Holder copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to each Holder to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file a Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities shall reasonably object in good faith, provided that, the Company is notified of such objection in writing no later than 5 Trading Days after the Holders have been so furnished copies of a Registration Statement or 1 Trading Day after the Holders have been so furnished copies of any related Prospectus or amendment or supplement thereto. Each Holder agrees to furnish to the Company a completed Questionnaire in the form attached to this Agreement as Annex B (a “Selling Shareholder Questionnaire”) not less than two Trading Days prior to the Filing Date or by the end of the fourth Trading Day following the date on which such Holder receives draft materials in accordance with this Section.

(b)(i) Prepare and file with the Commission such amendments, including post-effective amendments, to a Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement (subject to the terms of this Agreement), and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to a Registration Statement or any amendment thereto and as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to a Registration Statement (provided that the Company may excise any information contained therein which would constitute material non-public information as to any Holder which has not executed a confidentiality agreement with the Company); and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by a Registration Statement during the applicable period in accordance (subject to the terms of this Agreement) with the intended methods of disposition by the Holders thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented.

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(c)If during the Effectiveness Period, the number of Registrable Securities at any time exceeds the number of shares of Common Stock then registered in a Registration Statement, then the Company shall file as soon as reasonably practicable but in any case prior to the applicable Filing Date, an additional Registration Statement covering the resale by the Holders of not less than 100% of the number of such Registrable Securities.

(d)Notify the Holders of Registrable Securities to be sold (which notice shall, pursuant to clauses (iii) through (vi) hereof, shall also be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) as promptly as reasonably possible (and, in the case of (i)(A) below, not less than 1 Trading Day prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement; and (C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of a Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (vi) the occurrence or existence of any pending corporate development with respect to the Company that the Company believes may be material and that, in the determination of the Company, makes it not in the best interest of the Company to allow continued availability of a Registration Statement or Prospectus; provided that any and all of such information shall remain confidential to each Holder until such information otherwise becomes public, unless disclosure by a Holder is required by law; provided, further, that notwithstanding each Holder’s agreement to keep such information confidential, the Holders make no acknowledgement that any such information is material, non-public information.

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(e)Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of a Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.

(f)Furnish to each Holder, without charge, at least one conformed copy of each such Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference to the extent requested by such Person, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission.

(g)Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto, except after the giving of any notice pursuant to Section 3(d).

(h)The Company shall effect a filing with respect to the public offering contemplated by the Registration Statement (an “Issuer Filing”) with the National Association of Securities Dealers, Inc. (“NASD”) Corporate Financing Department pursuant to NASD Rule 2710(b)(4) within one Trading Day of the date that the Registration Statement is first filed with the Commission and pay the filing fee required by such Issuer Filing. The Company shall use commercially reasonable efforts to pursue the Issuer Filing until the NASD issues a letter confirming that it does not object to the terms of the offering contemplated by the Registration Statement.

(i)Prior to any resale of Registrable Securities by a Holder, use its commercially reasonable efforts to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from the Registration or qualification) of such Registrable Securities for the resale by the Holder under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder reasonably requests in writing, to keep each registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by each Registration Statement; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction.

(j)If requested by the Holders, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the Purchase Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request.

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(k)Upon the occurrence of any event contemplated by this Section 3, as promptly as reasonably possible under the circumstances taking into account the Company’s good faith assessment of any adverse consequences to the Company and its stockholders of the premature disclosure of such event, prepare a supplement or amendment, including a post-effective amendment, to a Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither a Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.If the Company notifies the Holders in accordance with clauses (iii) through (vi) of Section 3(d) above to suspend the use of any Prospectus until the requisite changes to such Prospectus have been made, then the Holders shall suspend use of such Prospectus. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable. The Company shall be entitled to exercise its right under this Section 3(k) to suspend the availability of a Registration Statement and Prospectus, subject to the payment of partial liquidated damages pursuant to Section 2(b), for a period not to exceed 60 calendar days (which need not be consecutive days) in any 12 month period.

(l)Comply with all applicable rules and regulations of the Commission.

(m)The Company may require each selling Holder to furnish to the Company a certified statement as to the number of shares of Common Stock beneficially owned by such Holder and, if required by the Commission, the natural persons thereof that have voting and dispositive control over the Shares. During any periods that the Company is unable to meet its obligations hereunder with respect to the registration of the Registrable Securities solely because any Holder fails to furnish such information within three Trading Days of the Company’s request, any liquidated damages that are accruing at such time as to such Holder only shall be tolled and any Event that may otherwise occur solely because of such delay shall be suspended as to such Holder only, until such information is delivered to the Company.

4. Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with any Trading Market on which the Common Stock is then listed for trading, (B) in compliance with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions of the Registrable Securities) and (C) if not previously paid by the Company in connection with an Issuer Filing, with respect to any filing that may be required to be made by any broker through which a Holder intends to make sales of Registrable Securities with NASD Regulation, Inc. pursuant to the NASD Rule 2710, so long as the broker is receiving no more than a customary brokerage commission in connection with such sale, (ii) printing expenses of the Company (including, without limitation, expenses of printing certificates for Registrable Securities, (iii) messenger, telephone and delivery expenses of the Company, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. In no event shall the Company be responsible for any broker or similar commissions of any Holder or, except to the extent provided for in the Transaction Documents, any legal fees or other costs of the Holders.

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5. Indemnification

(a)Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, members, partners, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title) of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, members, shareholders, partners, agents and employees (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title) of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable attorneys’ fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating to (1) any untrue or alleged untrue statement of a material fact contained in a Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, or (2) any violation or alleged violation by the Company of the Securities Act, Exchange Act or any state securities law, or any rule or regulation thereunder, in connection with the performance of its obligations under this Agreement, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (ii) in the case of an occurrence of an event of the type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding arising from or in connection with the transactions contemplated by this Agreement of which the Company is aware.

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(b)Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons (and any other Persons with a functionally equivalent role of a Person holding such titles, notwithstanding a lack of such title or any other title, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, to the extent arising out of or based solely upon: (x) such Holder’s failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading (i) to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or (ii) to the extent that such information relates to such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (iii) in the case of an occurrence of an event of the type specified in Section 3(d)(iii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.

(c)Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall have the right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have prejudiced the Indemnifying Party.

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An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and counsel to the Indemnified Party shall reasonably believe that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of no more than one separate counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld or delayed. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

Subject to the terms of this Agreement, all reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party; provided, that the Indemnified Party shall promptly reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is judicially determined to be not entitled to indemnification hereunder.

(d)Contribution. If the indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party or insufficient to hold an Indemnified Party harmless for any Losses, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

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The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the net proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, except in the case of fraud by such Holder.

The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

6. Miscellaneous

(a)Remedies. In the event of a breach by the Company or by a Holder, of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall not assert or shall waive the defense that a remedy at law would be adequate.

(b)No Piggyback on Registrations. Except as set forth on Schedule 6(b) attached hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in any Registration Statement other than the Registrable Securities. The Company shall not file any other registration statements until there is an effective Registration Statement(s) pursuant to which the Holders are permitted to utilize a Prospectus to resell all Registrable Securities or such Registrable Securities may be resold by the Holders pursuant to Rule 144(k), provided that this Section 6(b) shall not prohibit the Company from filing amendments to registration statements filed prior to the date of this Agreement.

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(c)Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to a Registration Statement.

(d)Discontinued Disposition. Each Holder agrees by its acquisition of Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(d)(iii) through (vi), such Holder will forthwith discontinue disposition of such Registrable Securities under a Registration Statement until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus (as it may have been supplemented or amended) may be resumed. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as it practicable. The Company agrees and acknowledges that any periods during which the Holder is required to discontinue the disposition of the Registrable Securities hereunder shall be subject to the provisions of Section 2(b).

(e)Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with the stock option or other employee benefit plans, then the Company shall send to each Holder a written notice of such determination and, if within fifteen days after the date of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Holder requests to be registered; provided, however, that, the Company shall not be required to register any Registrable Securities pursuant to this Section 6(e) that are eligible for resale pursuant to Rule 144(k) promulgated under the Securities Act or that are the subject of a then effective Registration Statement.

(f)Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and Holders holding at least 67% of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of all of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence.

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(g)Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be delivered as set forth in the Purchase Agreement.

(h)Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign (except by merger) its rights or obligations hereunder without the prior written consent of all of the Holders of the then-outstanding Registrable Securities. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement.

(i)No Inconsistent Agreements. Neither the Company nor any of its Subsidiaries has entered, as of the date hereof, nor shall the Company or any of its Subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities, that would have the effect of impairing the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as set forth on Schedule 6(i), neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been satisfied in full.

(j)Execution and Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

(k)Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be determined in accordance with the provisions of the Purchase Agreement.

(l)Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any other remedies provided by law.

(m)Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

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(n)Headings. The headings in this Agreement are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.

(o)Independent Nature of Holders’ Obligations and Rights. The obligations of each Holder hereunder are several and not joint with the obligations of any other Holder hereunder, and no Holder shall be responsible in any way for the performance of the obligations of any other Holder hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holders as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Holders are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Holder shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Holder to be joined as an additional party in any proceeding for such purpose.

********************

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IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.

PACE HEALTH MANAGEMENT SYSTEMS, INC.
By:	/s/ John Pappajohn
	Name: John Pappajohn
	Title: President and Chief Executive Officer

[SIGNATURE PAGE OF HOLDERS FOLLOWS]

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[SIGNATURE PAGE OF HOLDERS TO PACE RRA]

Name of Holder: __________________________

Signature of Authorized Signatory of Holder: __________________________

Name of Authorized Signatory: _________________________

Title of Authorized Signatory: __________________________

[SIGNATURE PAGES CONTINUE]

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ANNEX A

Plan of Distribution

Each Selling Stockholder (the “Selling Stockholders”) of the common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the OTC Bulletin Board or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods when selling shares:

·   ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

·   block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

·   purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

·   an exchange distribution in accordance with the rules of the applicable exchange;

·   privately negotiated transactions;

·   settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;

·   broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;

·   through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

·   a combination of any such methods of sale; or

·   any other method permitted pursuant to applicable law.

The Selling Stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with NASDR Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASDR IM-2440.

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In connection with the sale of the common stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the Common Stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).

The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

Because Selling Stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Stockholders.

We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the Selling Stockholders without registration and without regard to any volume limitations by reason of Rule 144(k) under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

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Annex B

PACE HEALTH MANAGEMENT SYSTEMS, INC.

Selling Securityholder Notice and Questionnaire

The undersigned beneficial owner of common stock (the “Registrable Securities”) of Pace Health Management Systems, Inc., an Iowa corporation (the “Company”), understands that the Company has filed or intends to file with the Securities and Exchange Commission (the “Commission”) a registration statement (the “Registration Statement”) for the registration and resale under Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”), of the Registrable Securities, in accordance with the terms of the Registration Rights Agreement (the “Registration Rights Agreement”) to which this document is annexed. A copy of the Registration Rights Agreement is available from the Company upon request at the address set forth below. All capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Registration Rights Agreement.

Certain legal consequences arise from being named as a selling securityholder in the Registration Statement and the related prospectus. Accordingly, holders and beneficial owners of Registrable Securities are advised to consult their own securities law counsel regarding the consequences of being named or not being named as a selling securityholder in the Registration Statement and the related prospectus.

NOTICE

The undersigned beneficial owner (the “Selling Securityholder”) of Registrable Securities hereby elects to include the Registrable Securities owned by it in the Registration Statement.

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The undersigned hereby provides the following information to the Company and represents and warrants that such information is accurate:

QUESTIONNAIRE

1.Name.

(a) Full Legal Name of Selling Securityholder

(b) Full Legal Name of Registered Holder (if not the same as (a) above) through which Registrable Securities are held:

(c) Full Legal Name of Natural Control Person (which means a natural person who directly or indirectly alone or with others has power to vote or dispose of the securities covered by the questionnaire):

2. Address for Notices to Selling Securityholder:

Telephone: 

Fax:

Contact Person:

3. Broker-Dealer Status:

(a) Are you a broker-dealer?

Yes o  No o

(b) If “yes” to Section 3(a), did you receive your Registrable Securities as compensation for investment banking services to the Company.

Yes o No o

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Note: If no, the Commission’s staff has indicated that you should be identified as an underwriter in the Registration Statement.

(c) Are you an affiliate of a broker-dealer?

Yes o No o

(d) If you are an affiliate of a broker-dealer, do you certify that you bought the Registrable Securities in the ordinary course of business, and at the time of the purchase of the Registrable Securities to be resold, you had no agreements or understandings, directly or indirectly, with any person to distribute the Registrable Securities?

Yes o No o

Note: If no, the Commission’s staff has indicated that you should be identified as an underwriter in the Registration Statement.

4. Beneficial Ownership of Other Securities of the Company Owned by the Selling Securityholder.

Except as set forth below in this Item 4, the undersigned is not the beneficial or registered owner of any securities of the Company other than the securities issuable pursuant to the Purchase Agreement.

(a) Type and Amount of other securities beneficially owned by the Selling Securityholder:

5. Relationships with the Company:

Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (owners of 5% of more of the equity securities of the undersigned) has held any position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years.

 

State any exceptions here:

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The undersigned agrees to promptly notify the Company of any inaccuracies or changes in the information provided herein that may occur subsequent to the date hereof at any time while the Registration Statement remains effective.

By signing below, the undersigned consents to the disclosure of the information contained herein in its answers to Items 1 through 5 and the inclusion of such information in the Registration Statement and the related prospectus and any amendments or supplements thereto. The undersigned understands that such information will be relied upon by the Company in connection with the preparation or amendment of the Registration Statement and the related prospectus.

IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this Notice and Questionnaire to be executed and delivered either in person or by its duly authorized agent.

Dated:	Beneficial Owner:
	By:
		Name:
		Title:

PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:

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SCHEDULE 6(b)

Securities to be included in the Registration Statement:

(i)   Holders of Series B Preferred Stock and Warrants purchased pursuant to that certain Private Placement Memorandum of the Company dated January 16, 2007 have registration rights with respect to the shares of Common Stock underlying such Series B Preferred Stock and Warrants.

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SCHEDULE 6(i)

The following persons have registration rights:

(i)   Holders of Series B Preferred Stock and Warrants purchased pursuant to that certain Private Placement Memorandum of the Company dated January 16, 2007 have registration rights with respect to the shares of Common Stock underlying such Series B Preferred Stock and Warrants;

(ii)   Holders of the placement agent warrants issued to Maxim Group, LLC pursuant to the transactions contemplated herein, have registration rights with respect to the Common Stock underlying such placement agent warrants; and

(iii)   Holders of 250,000 Company warrants have piggy-back registration rights with respect to the shares of Common Stock underlying such warrants.

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EX-23.1

EXHIBIT 23.1

 

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in this Form 8-K of Pace Health Management Systems, Inc. of our report, dated March 25, 2006, relating to our audit of the financial statements which appear in the Annual Report on Form 10 KSB of Pace Health Management Systems, Inc. for the year ended December 31, 2005.

 

Des Moines, Iowa

February, 1 2007

EX-23.2

Consent of Independent Accountant

We consent to the incorporation in this Form 8-K of Pace Health Management Systems, Inc. of our report, dated April 7 , 2006, relating to our audit of the financial statements of Conmed, Incorporated for the years ended December 31, 2005 and 2004.

Des Moines, Iowa

February, 1 2007

McGladrey & Pullen, LLP is an independent member firm of RSM International,

an affiliation of separate and independent legal entities.

EX-99.1

EXHIBIT 99.1

Conmed, Incorporated

Financial Report

December 31, 2005

  

Contents

Independent Auditor’s Report	1
Financial Statements
Balance Sheets	2
Statements of Income	3
Statements of Retained Earnings (Deficit)	4
Statements of Cash Flows	5
Notes to Financial Statements	6 - 9

Independent Auditor’s Report

To the Board of Directors

Conmed, Incorporated

La Plata, Maryland

We have audited the balance sheets of Conmed, Incorporated as of December 31, 2005 and 2004, and the related statements of income, retained earnings (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Conmed, Incorporated as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Des Moines, Iowa

April 7, 2006

1

Conmed, Incorporated

Balance Sheets

December 31, 2005 and 2004

	2005		2004
ASSETS
CURRENT ASSETS
Cash	$	487,029	$	44,461
Accounts receivable		547,250		362,269
Prepaid expenses		100,973		15,652
Total current assets		1,135,252		422,382
PROPERTY AND EQUIPMENT, net		123,492		98,793
OTHER		2,424		2,424
	$	1,261,168	$	523,599
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable	$	475,284	$	212,389
Accrued expenses		437,131		241,644
Deferred revenue		112,998		27,507
Notes payable, current portion		17,200		15,407
Total current liabilities		1,042,613		496,947
NOTES PAYABLE, LONG-TERM		54,618		72,387
STOCKHOLDERS’ EQUITY (DEFICIT)
Common stock, no par value, 1,000 shares authorized and issued		300		300
Retained earnings (deficit)		163,637		(46,035	)
		163,937		(45,735	)
	$	1,261,168	$	523,599

See Notes to Financial Statements.

2

Conmed, Incorporated

Statements of Income

Years Ended December 31, 2005 and 2004

	2005		2004
Revenue	$	11,669,322	$	6,677,886
Operating expenses:
Salaries and employee benefits		6,991,780		4,205,068
Lab fees and medical supplies		2,989,838		1,259,967
Other operating expenses		1,101,599		914,919
Total operating expenses		11,083,217		6,379,954
Interest expense		4,433		12,772
Net income	$	581,672	$	285,160

See Notes to Financial Statements.

3

Conmed, Incorporated

Statements of Retained Earnings (Deficit)

Years Ended December 31, 2005 and 2004

	2005			2004
Balance, beginning	$	(46,035	)	$	(259,195	)
Distributions to stockholders		(372,000	)		(72,000	)
Net income		581,672			285,160
Balance, ending	$	163,637		$	(46,035	)

See Notes to Financial Statements.

4

Conmed, Incorporated

Statements of Cash Flows

Years Ended December 31, 2005 and 2004

	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	581,672		$	285,160
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		42,830			42,046
Loss on disposal of property and equipment		-			106,265
Changes in working capital components:
(Increase) decrease in accounts receivables		(184,981	)		111,871
(Increase) decrease in prepaid expenses		(85,321	)		19,979
(Increase) in deposits		-			(1,674	)
Increase (decrease) in accounts payable		262,895			(98,056	)
Increase in accrued expenses		195,487			27,952
Increase in deferred revenue		85,491			27,507
Net cash provided by operating activities		898,073			521,050
CASH FLOWS FROM INVESTING ACTIVITIES, purchase of property
and equipment		(67,529	)		(12,790	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit		50,000			-
Payments on line of credit		(50,000	)		(250,001	)
Payments on loans payable		(15,976	)		(145,405	)
Distributions to stockholders		(372,000	)		(72,000	)
Net cash (used in) financing activities		(387,976	)		(467,406	)
Net increase in cash		442,568			40,854
CASH
Beginning		44,461			3,607
Ending	$	487,029		$	44,461
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION, cash payments for interest	$	4,433		$	12,772
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES, property and equipment acquired
through issuance of long-term debt	$	-		$	90,287

See Notes to Financial Statements.

5

Conmed, Incorporated

Notes to Financial Statements

Note 1. Organization

Conmed, Incorporated (a Maryland corporation) was formed in 1987 to provide limited medical health care services to correctional detention centers (jails). Conmed, Incorporated (the Company) provides its services primarily to local governments in the State of Maryland.

In connection with its normal contract activities, the Company may be required to acquire performance bonds. The surety issuing the bonds has recourse against certain of the Company’s assets in the event the surety is required to honor the bonds. The length of the Company’s contracts varies. Most contracts are one year or less, but periodically contracts are obtained which exceed one year.

Note 2. Summary of Significant Accounting Polices

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

The Company’s contracts call for either a fixed monthly fee or a fixed fee per average daily population of the correctional facility. The timing of each payment varies per contract. Revenues from contracts is recognized ratably, for fixed fees, or monthly for contracts with fixed fees per average daily population.

Receivables: Receivables are carried at original invoice amount less payments received and an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Receivables are generally considered past due 30 days after invoice date. Management determines the allowance for doubtful amounts by regularly evaluating individual receivables and considering a creditor’s financial condition, credit history and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received.

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

Income taxes: The Company has elected under the Internal Revenue Code to be taxed as an S Corporation effective July 1987. The stockholders of an S Corporation are taxed on their proportionate share of the Company’s taxable income. Therefore, no provision or liability for federal income taxes has been included in the financial statements.

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

Concentration of credit risk: The Company maintains cash in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.

6

Conmed, Incorporated

Notes to Financial Statements

Note 3. Property and Equipment

A summary of property and equipment at December 31, 2005 and 2004 is as follows:

	2005			2004
Furniture	$	13,900		$	9,448
Equipment		8,911			2,940
Computers		28,830			27,007
Vehicles		132,146			76,863
Total		183,787			116,258
Accumulated depreciation and amortization		(60,295	)		(17,465	)
Property and equipment, net	$	123,492		$	98,793

Note 4. Line of Credit

The Company has a $1,000,000 line of credit which expires September 2006. Interest is paid monthly at the prime rate as listed in The Wall Street Journal plus .5% per annum (7.75% at December 31, 2005). In addition, the Company has $500,000 available for letters of credit, which reduces the amount available on the line of credit. The outstanding balance is due on demand and is guaranteed by the Company’s stockholders and spouses. The line of credit is collateralized by the accounts receivable of the Company. In addition, the line of credit has certain financial and other covenants which the Company must meet to maintain the credit facility. There were no borrowings on the line of credit at December 31, 2005 or 2004.

Note 5. Notes Payable

The Company owns certain vehicles which have been financed through financial institutions. At December 31, 2005 and 2004, the amounts outstanding under these notes totaled $71,818 and $87,794, respectively, due in various amounts of principal and interest payments and bearing interest at 4.9% and 5.9%, respectively. These notes are collateralized by the vehicles. Scheduled maturities are approximately as follows:

Year ending December 31:
2006	$	17,000
2007		18,000
2008		19,000
2009		18,000
	$	72,000

 

7

Conmed, Incorporated

Notes to Financial Statements

Note 6.  401(k) Plan

The Company has a 401(k) plan for the benefit of substantially all the employees. The contributions to the plan include employee voluntary salary reductions, which can be no greater than the maximum deduction allowable for federal income tax reporting purposes. The Company provides a safe harbor matching contribution of each participant’s contribution up to 5% of eligible compensation. The Company also can provide a profit sharing contribution at its discretion. Expenses related to this plan totaled approximately $58,000 and $47,000 for the years ended December 31, 2005 and 2004, respectively.

Note 7. Welfare Benefit Plan

During 2003, the Company adopted a single employer welfare benefit plan providing death benefits for certain key employees based on a levelized term rate over the term of their expected working years, funded through three life insurance contracts. The Company makes annual contributions to these policies which are owned by the key employees who are also the beneficiaries. For the years ended December 31, 2005 and 2004, approximately $232,000 was contributed to the plan.

Note 8. Operating Leases

The Company entered into a lease for office space expiring November 30, 2009. The office lease includes annual escalation clauses and an allocation of operating expenses related to the leased property. Office rent expense was approximately $29,000 and $13,000, respectively, for the years ending December 31, 2005 and 2004.

The Company also has vehicle leases which expire in 2006. Lease expense for vehicles was approximately $58,000 and none, respectively, for the years ended December 31, 2005 and 2004. The approximate future minimum lease obligations as of December 31, 2005 are as follows:

Year ending December 31:
2006	$	70,000
2007		31,000
2008		32,000
2009		30,000
	$	163,000

8

Conmed, Incorporated

Notes to Financial Statements

Note 9.  Major Customers

During the years ended December 31, 2005 and 2004, the Company had approximate sales with major customers and related approximate accounts receivable as follows:

	2005				2004
			Accounts				Accounts
	Revenue		Receivable		Revenue		Receivable
Company A	$	1,172,000	$	-	$	1,036,000	$	-
Company B		1,442,000		11,000		997,000		126,000
Company C		1,823,000		148,000		1,695,000		146,000
Company D		2,855,000		278,000		-		-
Company E		*		*		666,000		59,000

* Revenue was not in excess of 10% of total revenue for the year.

9

EX-99.2

EXHIBIT 99.2

Conmed, Incorporated

Condensed Financial Report

(Unaudited)

September 30, 2006

Contents

Financial Statements
Condensed Balance Sheets (Unaudited)	1
Condensed Statements of Income (Unaudited)	2
Condensed Statements of Cash Flows (Unaudited)	3
Notes to Condensed Financial Statements (Unaudited)	4 - 5

Conmed, Incorporated

Condensed Balance Sheets

September 30, 2006 and December 31, 2005

	September 30,		December 31,
	2006		2005
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	564,032	$	487,029
Accounts receivable		1,092,885		547,250
Prepaid expenses		151,137		100,973
Total current assets		1,808,054		1,135,252
PROPERTY AND EQUIPMENT, net		46,601		123,492
OTHER ASSETS
Other		2,424		2,424
Deposit		137,742		-
Total other assets		140,166		2,424
	$	1,994,821	$	1,261,168
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,001,773	$	475,284
Accrued expenses		739,940		437,131
Deferred revenue		91,381		112,998
Notes payable, current portion		7,220		17,200
Total current liabilities		1,840,314		1,042,613
NOTES PAYABLE, LONG-TERM		15,108		54,618
STOCKHOLDERS’ EQUITY
Common stock, no par value, 1,000 shares authorized and issued		300		300
Retained earnings		139,099		163,637
		139,399		163,937
	$	1,994,821	$	1,261,168

See Notes to Unaudited Condensed Financial Statements. 

1

Conmed, Incorporated

Condensed Statements of Income (Unaudited)

Nine Months Ended September 30, 2006 and 2005

	2006		2005
Revenue	$	11,117,051	$	8,255,161
Operating expenses:
Salaries and employee benefits		6,421,376		4,752,434
Lab fees and medical supplies		3,140,173		2,120,739
Other operating expenses		1,198,318		782,155
Total operating expenses		10,759,867		7,655,328
Interest expense		6,722		2,058
Net income	$	350,462	$	597,775
Basic earnings per share	$	350.46	$	597.78
Diluted Earnings Per Share	$	350.46	$	597.78
Weighted average shares outstanding		1,000		1,000

See Notes to Unaudited Condensed Financial Statements.

2

Conmed, Incorporated

Condensed Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2006 and 2005

	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	350,462		$	597,775
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		33,322			29,768
Loss on disposal of property and equipment		9,734			-
Changes in working capital components:
(Increase) in accounts receivables		(545,635	)		(543,647	)
(Increase) in prepaid expenses		(50,164	)		(82,005	)
(Increase) in deposits		(137,742	)		-
Increase in accounts payable		526,489			698,026
Increase in accrued expenses		302,809			207,840
Increase (decrease) in deferred revenue		(21,617	)		164,481
Net cash provided by operating activities		467,658			1,072,238
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(19,787	)		(67,529	)
Proceeds from sale of property and equipment		28,000			-
Net cash provided by (used in) investing activities		8,213			(67,529	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit		400,000			-
Payments on line of credit		(400,000	)		-
Payments on loans payable		(23,868	)		(12,147	)
Distributions to stockholders		(375,000	)		(372,000	)
Net cash (used in) financing activities		(398,868	)		(384,147	)
Net increase in cash		77,003			620,562
CASH
Beginning		487,029			44,461
Ending	$	564,032		$	665,023
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION, cash payments for interest	$	6,721		$	2,058
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Fixed asset exchanged for extinguishment long term debt	$	25,622		$	-

See Notes to Unaudited Condensed Financial Statements.

3

Conmed, Incorporated

Notes to Condensed Financial Statements (Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited interim condensed financial statements as of September 30, 2006 and 2005 have been prepared in accordance with generally accepted accounting principles (GAAP). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in these interim financial statements.

In the opinion of management, the accompanying unaudited condensed financial statements as of September 30, 2006 and 2005 and for the nine month periods ended September 30, 2006 and 2005 contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented.

Management is required to make certain estimates and assumptions which affect the amount of assets, liabilities, revenues and expenses the Company has reported and its disclosure of contingent assets and liabilities as of the date of the financial statements. The results of the interim periods are not necessarily indicative of the results for the full year.

Significant Accounting Policies:

Basic and diluted loss per share: The Company has 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 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).

Recently issued accounting standards: In July 2006 the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This interpretation provides that the financial statement effects of a tax position shall initially be recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. This interpretation also may require additional disclosures related to tax positions taken.

The provisions of FIN 48 are effective as of the beginning of fiscal year 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of retained earnings. Management is currently evaluating the impact of adopting FIN 48 on the Company’s financial statements, but does not expect the adoption of this statement to be significant to the financial statements.

Note 2. Line of Credit

The Company has a $1,000,000 line of credit which expires December 2006. Interest is paid monthly at the prime rate as listed in The Wall Street Journal plus .5% per annum (8.75% at September 30, 2006). In addition, the Company has $500,000 available for letters of credit, which reduces the amount available on the line of credit. The outstanding balance is due on demand and is guaranteed by the Company’s stockholders and spouses. The line of credit is collateralized by the accounts receivable of the Company. In addition, the line of credit has certain financial and other covenants which the Company must meet to maintain the credit facility. There were no borrowings, respectively on the line of credit at September 30, 2006 and 2005.

4

Conmed, Incorporated

Notes to Condensed Financial Statements (Unaudited)

Note 3. 401(k) Plan

The Company has a 401(k) plan for the benefit of substantially all the employees. The contributions to the plan include employee voluntary salary reductions, which can be no greater than the maximum deduction allowable for federal income tax reporting purposes. The Company provides a safe harbor matching contribution of each participant’s contribution up to 4% of eligible compensation. The Company also can provide a profit sharing contribution at its discretion. Expenses related to this plan totaled approximately $58,000 and $41,000 for the nine months ended September 30, 2006 and 2005, respectively.

Note 4. Welfare Benefit Plan

During 2003, the Company adopted a single employer welfare benefit plan providing death benefits for certain key employees based on a levelized term rate over the term of their expected working years, funded through three life insurance contracts. The Company makes annual contributions to these policies which are owned by the key employees who are also the beneficiaries. For the nine months ended September 30, 2006 and 2005, approximately $174,000 was expended.

Note 5. Stock Purchase Agreement

On August 2, 2006, Pace Health Management Systems, Inc., an Iowa corporation (Pace) entered into a Stock Purchase Agreement (Agreement) with ConMed, Inc., a Maryland corporation (ConMed) and certain stockholders of ConMed (the ConMed Stockholders), pursuant to which Pace will purchase all the issued and outstanding capital stock of ConMed from the ConMed Stockholders (the “Acquisition”). Following completion of the Acquisition, ConMed will effectively become the operating public company.

As consideration in full for the sale of the Conmed capital stock, Pace will pay to the Conmed stockholders an aggregate of $10,000,000 consisting of (i) $8,000,000 in cash, minus the Additional Cash Deposit (as defined below) and (ii) 8,000 shares of Pace’s Series C Convertible Preferred Stock (convertible into 800,000 post-split shares of Pace’s common stock, no par value).

Pace paid to Conmed a nonrefundable cash deposit of $250,000 upon execution of the Agreement, which was released to the Conmed stockholders due to the expiration of the original offering period of October 31, 2006. Thereafter, an amendment to the Stock Purchase Agreement was executed on January ____, 2007 to extend the closing date to January 31, 2007. As a result of such extension, and upon execution of such amendment, Pace paid to Conmed an additional nonrefundable cash deposit of $250,000, which is being held in escrow; provided, however, that such amount shall be released from escrow and returned to Pace in the event Conmed and the Conmed stockholders fail to fully satisfy the closing conditions and any other required obligations under the Agreement. In the event the closing of the Transaction is consummated on or before January 31, 2007, the Additional Cash Deposit shall be deducted from the $8,000,000 cash payment owed to the Conmed stockholders at the closing of the Transaction.

Notwithstanding anything to the contrary, in the event the closing of the Stock Purchase transaction does not occur by January 31, 2007, unless the parties agree otherwise, the Agreement shall, among other things, become null and void.

5

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Set forth below are the following unaudited pro forma financial statements:

• the unaudited pro forma condensed combined balance sheet as of September 30, 2006 assuming the merger between Pace and CONMED occurred as of the balance sheet date presented;

• the unaudited pro forma condensed combined statement of operations for the nine months ended September 30. 2006, assuming the merger between Pace and CONMED occurred as of January 1, 2006; and

• the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2005, assuming the merger between PATY and CCS Consolidated occurred as of January 1, 2005.

The unaudited pro forma condensed combined financial statements give effect to the transaction between Pace and CONMED. The purchase price has been allocated among the fair values of the assets and liabilities of CONMED, while the historical results of Pace are reflected in the results of the combined company. The transaction has been accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” Under the purchase method of accounting, the total estimated purchase price, calculated as described in Notes to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible and intangible assets acquired and liabilities assumed in connection with the transaction, based on their estimated fair values as of the completion of the transaction. Management has made a preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed based on various preliminary estimates. A final determination of these estimated fair values will be based on the actual net tangible and intangible assets of CONMED that exist as of the date of completion of the transaction.

The unaudited pro forma condensed combined financial statements are presented for informational purposes only, are based on certain assumptions that Pace and CONMED believe to be reasonable, and do not purport to represent the companies’ combined financial condition nor results of operations had the merger occurred on or as of the dates noted above or to project results for any future date or period. In the opinion of management, all adjustments have been made that are needed to present fairly the unaudited pro forma condensed combined financial information. The information is subject to a number of uncertainties, relating to the merger and related matters, including among other things, estimates, assumptions and uncertainties regarding the amount of accruals for direct acquisition costs and the amount of expenses and other costs relating to the merger and the actual amount of identified intangible assets and goodwill that will result from the merger. Accordingly, the unaudited pro forma condensed combined financial information does not purport to be indicative of the actual results of operations or financial condition that would have been achieved had the merger in fact occurred on the dates indicated, nor does it purport to be indicative of the results of operations or financial condition that may be achieved in the future.

These unaudited pro forma condensed combined financial statements have been prepared based on preliminary estimates of fair values. Amounts preliminarily allocated to intangible assets with definite lives may change, which could result in a material change in amortization of intangible assets. Therefore, the actual amounts recorded as of the completion of the transaction may differ materially from the information presented in these unaudited pro forma condensed combined financial statements.

The unaudited pro forma condensed combined financial information should be read in conjunction with CONMED’s audited financial statements and unaudited condensed financial statements and related attached notes included in this Form 8-K and Pace’s audited financial statements and unaudited condensed financial statements and related attached notes included in Pace’s Form 10-KSB for the year ended December 31, 2005 and its Form 10-QSB for the quarter ended September 30, 2006.

1

PACE Health Management Systems, Inc. and CONMED, Inc.

Pro Forma Condensed Combined Balance Sheet

As of September 30, 2006

The unaudited pro forma balance sheet and pro forma operating statements have been prepared assuming the Acquisition of CONMED and the Pipe Financing had been completed on September 30, 2006 but do not reflect the Plan of Recapitalization. The pro forma financial data is presented for illustrative purposes only and is not necessarily indicative of any future results of opera-tions or the results that might have occurred if the Acquisition and Pipe Financing had actually occurred on September 30, 2006.

	CONMED as Reported 9/30/06			PACE as Reported 9/30/06			Private Placement Accounting Entries				Acquisition Accounting Entries				Pro forma 9/30/06 after Closing
ASSETS
CURRENT ASSETS
Cash	$	564,032		$	1,090,641		$	13,105,000		a)	$	(8,053,000	)	c)	$	6,706,673
Accounts receivable		1,092,885			566			-				-				1,093,451
Prepaid expenses		151,137			23,252			-				-				174,389
Cash held in escrow		-			250,000			-				(250,000	)			-
Total current assets		1,808,054			1,364,459			13,105,000				(8,303,000	)			7,974,513
PROPERTY AND EQUIPMENT, net		46,601			-			-				-				46,601
OTHER ASSETS
Deferred tax asset		-			-			-				297,000		d)		297,000
Service contracts acquired		-			-			-				4,500,000		e)		4,500,000
Non-compete agreements		-			-			-				1,000,000		f)		1,000,000
Goodwill		-			-			-				6,071,700		h)		6,071,700
Other		-			277,975			-				(213,000	)	c)		64,975
Deposit		140,166			-			(125,000	)	a)		-				15,166
Total other assets		140,166			277,975			(125,000	)			11,655,700				11,948,841
	$	1,994,821		$	1,642,434		$	12,980,000			$	3,352,700			$	19,696,955
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,001,773		$	57,916		$	-			$	-			$	1,059,689
Accrued expenses		739,940			-			-				-				739,940
Deferred revenue		91,381			-			-				-				91,381
Notes payable, current portion		7,220			-			-				-				7,220
Total current liabilities		1,840,314			57,916			-				-				1,898,230
NOTES PAYABLE, LONG-TERM		15,108			-			-				-				15,108
DEFERRED TAXES		-			-			-				2,145,000		h)		2,145,000
REDEEMABLE WARRANTS		-			-			2,918,011		a)						2,918,011		j)
SERIES B REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK		-			-			9,907,049		a)						9,907,049		j)
STOCKHOLDERS' EQUITY
Series A convertible participating preferred stock		-			2,875,000			(2,875,000	)	b)		-				-
Series C convertible preferred stock		-			-			-				1,347,099		c)		1,347,099		j)
Common stock		300			17,065,136			2,875,000		b)		(300	)	i)		19,940,136
Additional pain-in capital		-			683,486			154,940		a)		-				838,426
Retained earnings (deficit)		139,099			(19,039,104	)		-				(139,399	)	i)		(19,039,104	)
Total stockholders' equity		139,399			1,584,518			154,940				1,207,700				3,086,557
	$	1,994,821		$	1,642,434		$	12,980,000			$	3,352,700			$	19,969,955
Key Data Elements
Cash		564,032			1,090,641											6,706,673
Working capital		(32,260	)		1,306,543											6,076,283
Net tangible assets		139,399			1,584,518											(6,637,143	)
Debt		15,108			-											9,922,157

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Footnotes to the Pro forma Condensed Combined Balance Sheet on the previous page

Entries related to the Financing

a) To give effect to the issuance of $15,000,000 Series B, Redeemable Preferred Stock with warrants less deal expenses of $2,174,940.

b) The conversion of Series A preferred stock into common stock

Entries related to the Acquisition of CONMED

c) Purchase price of $8,000,000 cash plus 8,000 shares of Series C Preferred Stock convertible into 800,000 shares of common stock, less deal expenses of $266,000, including $213,000 paid prior to September 30, 2006, and an adjustment in the minimum equity requirement of CONMED estimated at the time of closing to be $260,901. The value of the shares issued is estimated as follows:

800,000 shares at $2.01 per share	$	1,068,000
Less: equity adjustment (129,901 shares)		260,901
Total equity issued	$	1,347,099

d) Reflects adjustments of deferred tax assets. As of December 31, 2005, PACE had recorded deferred tax assets for net operating loss carryforwards, R&D credit carryforwards and warrants totaling $6,957,000, which were offset by a valuation allowance of $6,957,000. The Company believes that 382 Change of Control Limitations will apply to this transaction and the deferred tax asset will be reduced to an amount equal to approximately $297,000.

e) Records the value of service contracts acquired based on the estimated operating profit for the remaining life of existing contracts plus option renewal periods

f) Records the value of non-compete agreements and employment agreements for the principal shareholders of CONMED as part of the Acquisition.

g) Deferred tax liability related to the projected amortization of the service contracts and non-compete/employment agreements acquired

h) Reflects the value of goodwill acquired based the following purchase price allocation.

Cash purchase price	$	8,000,000
Escrow deposit forfeited		250,000
Deal expenses		266,000
Stock issued		1,347,099
Total purchase price		9,863,099
Historical net book value		139,399
Change in valuation allowance		297,000
Identified intangibles		5,500,000
Deferred taxes on intangibles		(2,145,000	)
Fair value of net identified assets acquired		3,791,399
Goodwill	$	6,071,700

i) Eliminate the equity of CONMED

Entries related to the Plan of Recapitalization

j) All of the Series A, B and C preferred shares automatically convert into common shares following the Plan of Recapitalization.

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PACE Health Management Systems, Inc. and CONMED, Inc.

Pro forma Statement of Operations

For the Nine Months Ended September 30, 2006

The following pro forma Condensed Combined Statement of Operations is prepared to reflect financial results as if the agreement occurred prior to the beginning of the financial period being presented and after giving effect to the Acquisition and Private Placement but before giving effect to the Plan of Recapitalization. The pro forma financial data is presented for illustrative purposes only and is not necessarily indicative of any future results of operations or the results that might have occurred if the Acquisition and Private Placement had actually occurred before January 1, 2006.

	PACE as Reported 9/30/06			CONMED as Reported 9/30/06		Entries Related to the Acquisition				Pro forma 9/30/06
Revenue	$	-		$	11,117,051	$	-			$	11,117,051
OPERATING EXPENSES:
Salaries and employee benefits		-			6,421,376		-				6,421,376
Lab fees and medical supplies		-			3,140,173		-				3,140,173
Other operating expenses		225,312			1,198,318		-				1,423,630
Amortization of service contracts		-			-		1,492,000		a)		1,492,000
Amortization of employment contracts		-			-		201,000		b)		201,000
Total operating expenses		225,312			10,759,867		1,693,000				12,678,179
Operating income (loss)		(225,312	)		357,184		(1,693,000	)			(1,561,128	)
Interest (income) /expense		(55,752	)		6,722		-				(49,030	)
Income (loss) before income taxes		(169,560	)		350,462		(1,693,000	)			(1,512,098	)
Provision for income taxes (benefits)		-			-		(590,000	)	c)		(590,000	)
Net income (loss)		(169,560	)		350,462		(1,103,000	)			(922,098	)
Preferred dividends in arrears		215,625			-		-				215,625
Net loss attributable to common shareholders	$	(385,185	)	$	350,462	$	(1,103,000	)		$	(1,137,723	)
LOSS PER COMMON SHARE
Basic and diluted	$	(0.07	)							$	(0.14	)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted		5,716,074									8,316,074

a) Amortization of the capitalized value of acquired service contracts for the first nine months from the date of acquisition based on the life of individual contracts.

b) Amortization of the capitalized value of acquired employment and non-compete agreements for the first nine months from the date of acquisition.

c) Based an on estimated federal and state effective tax rate of 39% of pro forma loss.

d) Options, warrants, and convertible preferred stock were excluded from the computation of diluted loss per share because the effect of their inclusion would be antidilutive. Weighted shares include the conversion of 50% of the accrued dividends related to the Series A Convertible Preferred Stock, which occurred in connection with the Private Placement.

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PACE Health Management Systems, Inc. and CONMED, Inc.

Pro forma Statement of Operations

For the Years Ended December 31, 2005

The following pro forma Condensed Combined Statement of Operations is prepared to reflect financial results as if the agreement occurred prior to the beginning of the financial period being presented and after giving effect to the Acquisition and Private Placement but before giving effect to the Plan of Recapitalization. The pro forma financial data is presented for illustrative purposes only and is not necessarily indicative of any future results of operations or the results that might have occurred if the Acquisition and Private Placement had actually occurred on January 1, 2005.

	PACE as Reported 12/31/05			CONMED as Reported 12/31/05		Adjustments				Pro forma 12/31/05
Revenue	$	-		$	11,669,322	$	-			$	11,669,322
OPERATING EXPENSES:
Salaries and employee benefits		-			6,991,780		-				6,991,780
Lab fees and medical supplies		-			2,989,838		-				2,989,838
Other operating expenses		119,394			1,101,599		-				1,220,993
Amortization of service contracts		-			-		1,909,000		a)		1,909,000
Amortization of employment contracts		-			-		269,000		b)		269,000
Total operating expenses		119,394			11,083,217		2,178,000				13,380,611
Operating income (loss)		(119,394	)		586,105		(2,178,000	)			(1,711,289	)
Interest (income) /expense		(47,963	)		4,433		-				(43,530	)
Income (loss) before income taxes		(71,431	)		581,672		(2,178,000	)			(1,667,759	)
Provision for income taxes (benefits)		-			-		(650,000	)	c)		(650,000	)
Net income (loss)		(71,431	)		581,672		(1,528,000	)			(1,017,759	)
Preferred dividends in arrears		287,500			-		-				287,500
Net loss attributable to common shareholders	$	(358,931	)	$	581,672	$	(1,528,000	)		$	(1,305,259	)
LOSS PER COMMON SHARE
Basic and diluted	$	(0.06	)							$	(0.16	)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted		5,716,074									8,316,074

a) Amortization of the capitalized value of acquired service contracts for the first nine months from the date of acquisition based on the life of individual contracts.

b) Amortization of the capitalized value of acquired employment and non-compete agreements for the first nine months from the date of acquisition.

c) Based an on estimated federal and state effective tax rate of 39% of pro forma net loss.

d) Options, warrants, and convertible preferred stock were excluded from the computation of diluted loss per share because the effect of their inclusion would be antidilutive. Weighted shares include the conversion of 50% of the accrued dividends related to the Series A Convertible Preferred Stock, which occurred in connection with the Private Placement.

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