10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

For the transition period from                  to

Commission File Number:

0-27554

Conmed Healthcare Management, Inc.

(Exact name of registrant as specified in its charter)

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

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

(410) 567-5520

(Registrant’s telephone number, including area code)

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

YES x     NO ¨

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

YES ¨     NO ¨

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

Large Accelerated filer ¨	Accelerated filer ¨
Non-Accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

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

YES ¨     NO x

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

	Number of Shares Outstanding
Class	May 14, 2009
Common Stock, $0.0001 par value per share	12,596,834

CONMED HEALTHCARE MANAGEMENT, INC.

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets
March 31, 2009 and December 31, 2008	1
Consolidated Statements of Operations
For the three months ended March 31, 2009 and 2008	2
Consolidated Statements of Cash Flows
For the three months ended March 31, 2009 and 2008	3
Consolidated Statements of Shareholders’ Equity
For the three months ended March 31, 2009	4
Notes to Consolidated Financial Statements	5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	17
ITEM 4(T). CONTROLS AND PROCEDURES	17
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	19
ITEM 1A. RISK FACTORS	19
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	19
ITEM 5. OTHER INFORMATION	19
ITEM 6. EXHIBITS	19
SIGNATURES	20

i

PART 1.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONMED HEALTHCARE MANAGEMENT, INC.

CONSOLIDATED BALANCE SHEETS

	March 31, 2009 (unaudited)			December 31,  2008
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	8,285,126		$	7,472,140
Accounts receivable		2,925,592			2,375,583
Prepaid expenses		139,021			291,599
Total current assets		11,349,739			10,139,322
PROPERTY AND EQUIPMENT, NET		511,296			529,304
DEFERRED TAXES		645,000			645,000
OTHER ASSETS
Service contracts acquired, net		1,510,000			2,004,000
Non-compete agreements, net		724,667			821,667
Goodwill		6,254,544			6,254,544
Deposits		15,408			15,408
Total other assets		8,504,619			9,095,619
	$	21,010,654		$	20,409,245
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,353,204		$	1,080,259
Accrued expenses		3,549,171			3,210,749
Taxes payable		179,283			432,380
Deferred revenue		640,295			561,734
Notes payable, current portion		52,213			170,228
Total current liabilities		5,774,166			5,455,350
NOTES PAYABLE, LONG-TERM		35,000			35,000
DERIVATIVE FINANCIAL INSTRUMENTS		2,726,360			—
SHAREHOLDERS’ EQUITY
Preferred stock, no par value; authorized 5,000,000 shares; issued and outstanding zero shares as of March 31, 2009 and December 31, 2008		—			—
Common stock, $0.0001 par value, authorized 40,000,000 shares; issued and outstanding 12,477,539 and 12,457,539 shares as of March 31, 2009 and December 31, 2008, respectively		1,248			1,246
Additional paid-in capital		34,680,263			36,875,610
Retained (deficit)		(22,206,383	)		(21,957,961	)
Total shareholders' equity		12,475,128			14,918,895
	$	21,010,654		$	20,409,245

See Notes to unaudited Financial Statements

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CONMED HEALTHCARE MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	For the Three Months Ended March 31, 2009			For the Three Months Ended March 31, 2008
Service contract revenue	$	12,419,241		$	7,836,250
HEALTHCARE EXPENSES:
Salaries, wages and employee benefits		6,987,854			4,114,027
Medical expenses		2,381,933			2,016,588
Other operating expenses		384,205			233,436
Total healthcare expenses		9,753,992			6,364,051
Gross profit	$	2,665,249		$	1,472,199
Selling and administrative expenses		1,815,527			1,589,012
Depreciation and amortization		634,821			499,450
Total operating expenses		2,450,348			2,088,462
Operating income (loss)		214,901			(616,263	)
OTHER INCOME (EXPENSE)
Interest income		28,628			65,898
Interest (expense)		(5,205	)		(1,689	)
Change in fair value of derivatives		866			—
Total other income		24,289			64,209
Income (loss) before income taxes		239,190			(552,054	)
Income tax (expense)		(121,000	)		—
Net income (loss)	$	118,190		$	(552,054	)
INCOME (LOSS) PER COMMON SHARE
Basic	$	0.01		$	(0.05	)
Diluted	$	0.01		$	(0.05	)
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic		12,471,928			11,989,473
Diluted		13,529,197			11,989,473

See Notes to unaudited Financial Statements

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CONMED HEALTHCARE MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Three  Months Ended  March 31, 2009			For the Three  Months Ended  March 31, 2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	118,190		$	(552,054	)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		43,821			13,450
Amortization		591,000			486,000
Stock-based compensation		159,269			120,055
Change in fair value of derivatives		(866	)		—
Changes in working capital components
(Increase) in accounts receivable		(550,009	)		(686,526	)
Decrease in prepaid expenses		152,578			151,064
Decrease in deposits		—			45,000
Increase in accounts payable		272,945			260,191
Increase in accrued expenses		338,422			766,839
(Decrease) in income taxes payable		(253,097	)		—
Increase (decrease) in deferred revenue		78,561			(164,038	)
Net cash provided by operating activities		950,814			439,981
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(25,813	)		(186,301	)
Asset Purchase from EMDC, P.C.		—			(245,711	)
Net cash used in investing activities		(25,813	)		(432,012	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on line of credit		(100,000	)		—
Payments on loans		(18,015	)		(1,901	)
Proceeds from exercise of warrants		6,000			—
Net cash used in financing activities		(112,015	)		(1,901	)
Net increase in cash and cash equivalents		812,986			6,068
CASH AND CASH EQUIVALENTS
Beginning		7,472,140			7,136,720
Ending	$	8,285,126		$	7,142,788
NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
Stock (81,081 Shares) for Asset Purchase from EMDC, P.C.		—			150,000
Promissory Note payable to EMDC, P.C. for Asset Purchase		—			132,275
Warrants (80,000 Shares) for Asset Purchase from EMDC		—			50,013
	$	—		$	332,288
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest	$	5,205		$	1,689
Income taxes paid		374,097			—

See Notes to unaudited Financial Statements

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CONMED HEALTHCARE MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

	Preferred  Stock		Common  Stock		Additional Paid- in Capital			Accumulated  Deficit			Total
Balance at December 31, 2008	$	—	$	1,246	$	36,875,610		$	(21,957,961	)	$	14,918,895
Cumulative effect of change in accounting principle
January 1, 2009 reclassification of embedded feature of equity-linked financial instrument to derivative liability		—		—		(2,399,538	)		(366,612	)		(2,766,150	)
Net Income		—		—		—			118,190			118,190
Stock option expense		—		—		159,269			—			159,269
Exercise of warrants		—		2		44,922			—			44,924
Balance at March 31, 2009	$	—	$	1,248	$	34,680,263		$	(22,206,383	)	$	12,475,128

See Notes to unaudited Financial Statements

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CONMED HEALTHCARE MANAGEMENT, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Nature of Business

Nature of Business

Prior to January 26, 2007, Conmed Healthcare Management, Inc. (together with its consolidated subsidiaries, “we”, “us”, “our” or the Company, unless otherwise specified or the context otherwise requires) formerly known as Pace Health Management Systems, Inc. (“Pace”) traded under the symbol “PCES”, was classified as a public shell, had no ongoing operations, minimal operating expenses and no employees.

On January 26, 2007, the Company acquired Conmed, Inc. (“Conmed, Inc.”) a provider of correctional healthcare services (the “Acquisition”). Conmed, Inc. was formed as a corporation on June 10, 1987 in the State of Maryland for the purpose of providing healthcare services exclusively to county detention centers located in Maryland. As Conmed, Inc. developed, it accepted more contracts for additional services including mental health, pharmacy and out-of-facility healthcare expenses. In 2000, Conmed, Inc. served more than 50% of the county detention healthcare services market in Maryland. In 2003, Conmed, Inc. elected to seek contracts outside of Maryland.

As a result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the Company and the business of Conmed, Inc. is now our primary business. On March 13, 2007, the Company changed its name to Conmed Healthcare Management, Inc. As of March 31, 2009, we were in contract with, and currently providing medical services in thirty-three counties in six states including:  Arizona, Kansas, Maryland, Oregon, Virginia and Washington.

NOTE 2. Significant Accounting Policies

The accompanying unaudited consolidated financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting requirements of Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, the financial information and disclosures normally included in the financial statements prepared annually in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. Readers of this report should, therefore, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on March 26, 2009.

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

Our interim results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results of operations to be expected for a full year.

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

Acquisitions

Acquisitions are recorded based on Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 141(Revised), Business Combinations (“SFAS 141R”), using the purchase method. Under purchase accounting, assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree should be stated on the financial statements at “fair value” (see definition in Fair Value of Financial Instruments section below), with limited exceptions, as of the acquisition date.  SFAS 141R requires that intangible assets be recognized as assets apart from goodwill if they meet one of two criteria, (1) the contractual-legal criterion, or (2) the separability criterion.  SFAS 141R also requires disclosure of the primary reasons for business combination and the allocation of the purchase price paid to the assets acquired and the liabilities assumed by major balance sheet caption. Goodwill is to be recognized as a residual. If the acquisition-date fair value exceeds the consideration transferred, a gain is to be recognized. The statement generally requires that acquisition costs be expensed as incurred. SFAS 141R is effective for business combinations for which the acquisition date is on or after January 1, 2009.

Page - 5 - -

Service Contracts Acquired

There are material costs in obtaining a customer list, especially customers with recurring revenue streams. The value of service contracts acquired is represented by the future revenue streams, therefore, the income approach is the most applicable fair value measurement approach to value these assets. The operating income streams of service contracts acquired are calculated based on the net present value of estimated earnings. Operating income streams are estimated on a contract by contract basis and an overall cost factor is used to estimate management expenses.  Service contracts acquired are amortized over the life of each individual contract.

Non-Compete Agreements

Non-compete agreements are generally acquired as part of our acquisition agreements.  Key considerations in estimating the value of non-compete agreements include consideration of the potential losses resulting from such competition, the enforceability of the terms of the agreement, and the likelihood of competition in the absence of the agreement. Non-compete agreements are amortized over the lives of the agreements.

Goodwill

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

Fair Value of Financial Instruments

Financial instruments include cash, receivables, accounts payable, accrued expenses, deferred revenue and long-term debt. We believe the fair value of each of these instruments approximates their carrying value in the balance sheet as of the balance sheet date. The fair value of current assets and current liabilities is estimated to approximate carrying value due to the short-term nature of these instruments. The fair value of the long-term debt is estimated based on anticipated interest rates which we believe would currently be available to us for similar issues of debt, taking into account our current credit risk and the other market factors.  The same assumptions are used to record financial instruments acquired through acquisition at fair value.

Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”). In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

· Level 1 – Quoted prices in active markets for identical assets or liabilities.

· Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of SFAS 157 did not have a material impact on our financial statements.  Details related to our adoption of this standard are discussed in Note 6, “Fair Value Measurements”.

Revenue Recognition

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

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

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Certain contracts provide for monthly fee adjustments to reflect any missed hours of work required under terms of the contract. In addition, we may incur liquidated damages related to specific performance measurements required under the contract that we have failed to meet. Reductions in monthly fees resulting from staffing adjustments and liquidated damages are recorded by us as reductions to revenue.

Certain contracts include “stop/loss” limits, which create a ceiling to our financial responsibility for an individual inmate's care or a maximum amount in the aggregate for certain categories of medical expenses, whereby we are protected from catastrophic medical losses. In circumstances where a stop/loss is reached, we are reimbursed for any costs incurred over the predetermined stop/loss amount. Any reimbursement received by us is recorded as revenue.

Accrued Medical Claims Liability

Medical expenses include the costs associated with medical services provided by off-site medical providers; pharmacy, laboratory and radiology fees; professional and general liability insurance as well as other generally related medical expenses. The cost of medical services provided, administered or contracted for are recognized in the period in which they are provided based in part on estimates for unbilled medical services rendered through the balance sheet date. The Company estimates an accrual for unbilled medical services using available utilization data including hospitalization, one-day surgeries, physician visits and emergency room and ambulance visits and other related costs, which are estimated. Additionally, Company personnel review certain inpatient hospital stays and other high cost medical procedures and expenses in order to attempt to identify costs in excess of the historical average rates. Once identified, reserves are determined which take into consideration the specific facts available at that time.

Actual payments and future reserve requirements will differ from the Company’s current estimates. The differences could be material if significant adverse fluctuations occur in the healthcare cost structure or the Company’s future claims experience. Changes in estimates of claims resulting from such fluctuations and differences between estimates and actual claims payments are recognized in the period in which the estimates are changed or the payments are made.

Stock Compensation

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

Fair Value of Derivative Financial Instruments

Effective January 1, 2009, we adopted Emerging Issues Task Force (“EITF”) Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). Details related to our adoption of this standard and its impact on our financial position and results of operations are discussed in Note 5, “Fair Value of Warrants”. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133, Accounting for Derivatives and Hedging Activities (“SFAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.

Income Taxes

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

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New Accounting Pronouncements

None.

NOTE 3. Common Stock Options

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

During the three months ended March 31, 2009 and 2008, we recorded stock-based compensation expense net of reversals for forfeited options totaling $159,269 and $118,452, respectively.

During the three months ended March 31, 2009, the Board of Directors authorized options to purchase 29,000 shares of common stock at an average exercise price of $2.35 per share.  Additionally, during the three months ended March 31, 2009, no options were forfeited and as of March 31, 2009, 307,833 shares remain available for grant.

NOTE 4. Earnings Per Share

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

	For the Three  Months Ended  March 31, 2009		For the Three  Months Ended  March 31, 2008
Numerator for basic and diluted earnings per share:
Net income (loss)	$	118,190	$	(552,054	)
Denominator:
Weighted-average basic shares outstanding		12,471,928		11,989,473
Assumed conversion of dilutive securities:
Stock options		32,904		—
Warrants		1,024,365		—
Potentially dilutive common shares		1,057,269		—
Denominator for diluted earnings per share – Adjusted weighted average shares		13,529,197		11,989,473
Earnings (loss) per common share:
Basic	$	0.01	$	(0.05	)
Diluted	$	0.01	$	(0.05	)

Common stock warrants and options outstanding totaling 3,049,898 and 4,161,167 shares, respectively, are not included in diluted earnings per common share for the three months ended March 31, 2009 and 2008, respectively, as they would have an antidilutive effect upon earnings per common share.

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NOTE 5. Fair Value of Warrants

As a result of adopting EITF 07-5 effective January 1, 2009, 1,705,000 of our issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as follows.  These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model and all changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.

Pre-Acquisition Warrants @ $0.30 per share

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

Black-Scholes assumptions	March 31, 2009			January 1, 2009
Expected life (years)		0.8			0.9
Expected volatility		84.56	%		82.51	%
Risk-free interest rate		0.9	%		0.8	%
Expected dividend yield		0.0	%		0.0	%

As of January 1, 2009, we had outstanding warrants to purchase an aggregate of 225,000 shares of common stock.  During the three months ended March 31, 2009, no warrants were exercised and as of March 31, 2009, we had outstanding warrants to purchase an aggregate of 225,000 shares of common stock.

Investor Warrants @ $0.30 per share

In connection with the private placement of $15,000,000 of units of Series B Convertible Preferred Stock and warrants completed on January 26, 2007 (the “Private Placement”), each investor received a warrant to purchase up to a number of shares of common stock equal to 25% of such investor's subscription amount, divided by the conversion price of the Series B Preferred Stock, with an exercise price equal to $0.30. As a result, we issued to investors warrants to purchase an aggregate of 1,500,000 shares of common stock, exercisable at $0.30 per share, expiring March 13, 2012.

Black-Scholes assumptions	March 31, 2009			January 1, 2009
Expected life (years)		1.9			2.0
Expected volatility		84.56	%		82.51	%
Risk-free interest rate		1.3	%		1.1	%
Expected dividend yield		0.0	%		0.0	%

As of January 1, 2009, we had outstanding warrants to purchase an aggregate of 980,000 shares of common stock.  During the three months ended March 31, 2009, warrants to purchase 20,000 shares of common stock were exercised with an aggregate fair value of $38,422 on the exercise dates resulting in the Company recognizing a loss of $502 from the change in fair value. As of March 31, 2009, we had outstanding warrants to purchase an aggregate of 960,000 shares of common stock.

Investor Warrants @ $2.50 per share

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

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Black-Scholes assumptions	March 31, 2009			January 1, 2009
Expected life (years)		1.9			2.0
Expected volatility		84.56	%		82.51	%
Risk-free interest rate		1.3	%		1.1	%
Expected dividend yield		0.0	%		0.0	%

As of January 1, 2009, we had outstanding warrants to purchase an aggregate of 500,000 shares of common stock.  During the three months ended March 31, 2009, no warrants were exercised and as of March 31, 2009, we had outstanding warrants to purchase an aggregate of 500,000 shares of common stock.

Summary

On January 1, 2009, in connection with our adoption of EITF 07-5, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $366,612 to beginning retained earnings and $2,399,538 to a long-term warrant liability to recognize the fair value of such warrants on such date.  During the three months ended March 31, 2009, warrants to purchase 20,000 shares of common stock were exercised generating $6,000 of net proceeds and having an aggregate fair value of $38,924 on the exercise dates resulting in the Company recognizing a loss of $502 from the change in fair value.  The fair value of the outstanding common stock purchase warrants as of March 31, 2009 decreased $1,368 to $2,726,360.  As such, we recognized an $866 unrealized gain from the change in fair value of these warrants for the three months ended March 31, 2009.

As of March 31, 2009, we have outstanding warrants to purchase an aggregate of 2,065,000 shares of common stock at an average exercise price of $1.25 and have reserved shares of our common stock for issuance in connection with the potential exercise thereof.

NOTE 6. Fair Value Measurements

As a result of the adoption of EITF 07-5, the Company is also required to disclose the fair value measurements required by SFAS 157.  The derivative financial instruments recorded at fair value in the balance sheet as of March 31, 2009 are categorized based upon the level of judgment associated with the inputs used to measure their fair value.

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of March 31, 2009, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:

	Total		Quoted prices in  active markets for  identical assets (Level 1)		Significant other  observable inputs (Level 2)		Significant  unobservable  inputs (Level 3)
Derivative financial instruments	$	2,726,360	$	—	$	—	$	2,726,360

Equity-linked financial instruments consist of stock warrants issued by the Company that contain a strike price adjustment feature.  In accordance with EITF 07-5, we calculated the fair value of warrants using the Black-Scholes option pricing model and the assumptions used are described in Note 5, “Fair Value of Warrants”.  During the three months ended March 31, 2009, we recognized an $866 unrealized gain related to the change in fair value of the financial instruments which is included in Other Income on the Statement of Operations.

The following table reflects the activity for liabilities measured at fair value using Level 3 inputs for the three months ended March 31, 2009:

Initial recognition of equity-linked financial instruments as of January 1, 2009	$	2,766,150
Transfers into level 3		—
Transfers out of level 3		—
Sales of equity-linked financial instruments		(38,924	)
Unrealized gains related to the change in fair value		(866	)
Balance as of March 31, 2009	$	2,726,360

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NOTE 7. Income Tax Matters

Our effective tax rate was 50.6%, which differs from the expected tax rate of 39.0% primarily due to permanent differences related to stock-based compensation.  The change in our effective tax rate from prior periods is primarily due to the increase in our pre-tax income relative to prior periods and the ability to effectively determine our annualized effective tax rate.  For the three months ended March 31, 2009, we recorded income tax expense of $121,000.  Management continues to apply a valuation allowance against certain deferred tax assets because of a limited history of taxable income, the long-term nature of the deferred tax asset and certain limitations regarding the utilization of the net operating loss carryforwards. The Company’s ability to utilize its net operating loss carryforwards and research and development credit is currently limited due to limitations on change of control under Section 382 (“Section 382”) of the IRC. Accordingly, we have fully reserved for the net operating loss carryforwards and research and development credit as we do not expect to derive any future benefit from them.

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

Information included in this section and elsewhere in this Quarterly Report on Form 10-Q contains forward-looking statements regarding the business, operations and financial condition of both Conmed Healthcare Management, Inc. (together with its consolidated subsidiaries, the “Company”, “we”, “us”, or “our” unless otherwise specified or the context otherwise requires) and Conmed, Inc. (“Conmed, Inc.”) within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from our future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, and other statements that are not historical facts, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend," “plan,” “potential” or "project" or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. We caution you not to place undue reliance on these forward-looking statements. Such forward-looking statements relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future changes make it clear that any projected results or events expressed or implied therein will not be realized. You are advised, however, to consult any further disclosures we make in future public statements and press releases. More detailed information about us and the risk factors that may affect the realization of forward-looking statements is set forth in our filings with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2008. Investors and security holders are urged to read this document free of charge on the SEC's web site at www.sec.gov.

General

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

On January 26, 2007, we acquired Conmed, Inc., a provider of correctional healthcare services since 1984 (the “Acquisition”). Conmed, Inc. was formed as a corporation on June 10, 1987 in the State of Maryland for the purpose of providing healthcare services exclusively to county detention centers located in Maryland. As Conmed, Inc. developed, it accepted more contracts for additional services including pharmacy and out-of-facility healthcare expenses. In 2000, Conmed, Inc. served more than 50% of the county detention healthcare services market in Maryland. In 2003, Conmed, Inc. elected to seek contracts outside of Maryland and by December 2006, it had secured contracts in four (4) states. In January 2007, Conmed, Inc. was in contract with and serviced 18 detention centers and facilities at the county level in the United States. As a result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the Company and the business of Conmed, Inc. is now our primary business. As of March 31, 2009 the Company was servicing detention facilities in thirty-three (33) counties and six (6) states. Our services have expanded to include the mental health offerings of our new wholly-owned subsidiary Correctional Mental Health Services, LLC (“CMHS”).

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our condensed financial statements. These condensed financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and related medical expense accruals and amortization and potential impairment of intangible assets and goodwill and stock-based compensation expense. As these are condensed financial statements, one should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Form 10-K for the year ended December 31, 2008. There have been no material changes to our critical accounting policies and estimates from the information provided in our 10-K for the year ended December 31, 2008.

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Recently Adopted Accounting Standards

Effective January 1, 2009, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 141(Revised), Business Combinations (“SFAS 141R”) and it did not have a material impact on our financial position or results of operations. SFAS 141R replaces the original SFAS No. 141. This statement applies to all transactions in which an entity obtains control of one or more businesses. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values, with limited exceptions, as of the acquisition date. Goodwill is to be recognized as a residual. If the acquisition-date fair value exceeds the consideration transferred, a gain is to be recognized. The statement generally requires that acquisition costs be expensed. SFAS 141R is effective for business combinations for which the acquisition date is on or after January 1, 2009.

Effective January 1, 2009, we adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”) and it did not have a material impact on our financial position or results of operations. SFAS 160 requires companies to report ownership interest in subsidiaries held by other parties (minority interest) to be clearly identified, labeled and presented in the consolidated statement of financial condition separately within the equity section. The amount of consolidated net income attributable to the parent company and to the noncontrolling interest is to be clearly identified and presented on the face of the consolidated statement of income. SFAS 160 is effective beginning January 1, 2009.

Effective January 1, 2009 we adopted Emerging Issues Task Force (“EITF”) Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”).  Details related to our adoption of this standard and its impact on our financial position and results of operations are discussed in more detail elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

New Accounting Pronouncements

None.

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Results of Operations

Three-Months Ended March 31, 2009 compared to Three Months Ended March 31, 2008

The following discussion of financial results below is derived from unaudited financial statements for the three months ended March 31, 2009 and 2008.

	Three Months Ended  March 31, 2009						Three Months Ended  March 31, 2008
	Amount			% of Revenue			Amount			% of Revenue
Service contract revenue	$	12,419,241			100.0	%	$	7,836,250			100.0	%
HEALTHCARE EXPENSES:
Salaries, wages and employee benefits		6,987,854			56.3	%		4,114,027			52.5	%
Medical expenses		2,381,933			19.2	%		2,016,588			25.7	%
Other operating expenses		384,205			3.1	%		233,436			3.0	%
Total healthcare expenses		9,753,992			78.5	%		6,364,051			81.2	%
Gross profit		2,665,249			21.5	%		1,472,199			18.8	%
OPERATING EXPENSES:
Selling, general & administrative expenses		1,815,427			14.6	%		1,589,012			20.3	%
Depreciation and amortization		634,821			5.1	%		499,450			6.4	%
Total operating expenses		2,450,348			19.7	%		2,088,462			26.7	%
Operating income (loss)		214,901			1.7	%		(616,263	)		(7.9	)%
OTHER INCOME (EXPENSE)
Interest income		28,628			0.2	%		65,898			0.8	%
Interest expense		(5,205	)		0.0	%		(1,689	)		0.0	%
Change in fair value of derivatives		866			0.0	%		—			0.0	%
Total other income (expense)		24,289			0.2	%		64,209			0.8	%
Income (loss) before income taxes		239,190			1.9	%		(552,054	)		(7.0	)%
Income tax expense		121,000			1.0	%		—			0.0	%
Net income (loss)	$	118,190			1.0	%	$	(552,054	)		(7.0	)%

Revenues

Net revenue from medical services provided primarily to correctional institutions for the three months ended March 31, 2009 and 2008, was $12,419,241 and $7,836,250, respectively, which represents an increase of $4,582,991 or 58.5%. Net income was $118,190 or 1.0% of revenue compared to a net loss of $(552,054) or (7.0%) of revenue for the three months ended March 31, 2009 and 2008, respectively, which represented an increased profit of $670,244.

Approximately $4,303,192 or 93.9% of the increase in revenue for the three months ended March 31, 2009 compared to the same period for the prior year resulted from the addition of new contracts since March 31, 2008: Caroline County, MD; Charles County, MD; Chesapeake City, VA; Douglas County, OR; Pima County, AZ; and Roanoke County, VA; as well as the contracts in Oregon acquired when we purchased all of the assets of Emergency Medicine Documentation Consultants, P.C. (“EMDC”) in February 2008 plus the revenue generated from the acquisition of CMHS on November 4, 2008. Revenue improvement totaling approximately $208,122, or 4.5% of the increase, resulted primarily from expansion of the services provided under a number of our existing contracts in which we were providing services prior to 2008. Price increases related to existing service requirements totaled approximately $312,253 or 6.8% of the increase. Partially offsetting the above were decreases in other volume related activities totaling $(240,576), or (5.2%) of revenue, primarily associated with a decrease in stop/loss reimbursements due to reduced out of facility medical expenditures in excess of stop/loss limits billed back to counties.

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Healthcare Expenses

Salaries and employee benefits

Salaries and employee benefits for healthcare employees were $6,987,854 or 56.3% of revenue for the three month period ended March 31, 2009, compared to $4,114,027 or 52.5% of revenue for the three months ended March 31, 2008. The increase in spending for salaries and employee benefits of $2,873,827 or 69.9% is due to the addition of new healthcare employees required to support the increased staffing requirements resulting primarily from our new medical service contracts and expansions in some of our existing agreements. The primary factors causing the increase in salaries and employee benefits as a percentage of revenue was the addition of new service contracts with Caroline County, MD and Pima County, AZ, which primarily provide staffing services. As a result, these contracts increased the mix of salaries and employee benefits as a percentage of total revenue.

Medical expenses

Medical expenses for the three months ended March 31, 2009 and 2008 were $2,381,933 or 19.2% of revenue and $2,016,588 or 25.7% of revenue, respectively, which represented an increase of $365,345 or 18.1%. The increase in spending for medical expenses in absolute dollars reflects increases for medical services both in and out of the facility plus increased expenditures for pharmacy and radiology services. The reduction in spending as a percentage of revenue results from the favorable mix factor generated from the new primarily staffing services contracts in 2008 in Caroline County, MD and Pima County, AZ, and decreased spending for hospitalization and other out of facility inmate medical visits primarily in Baltimore County, MD, Loudoun County, VA and Frederick County, MD, partially offset by the addition of pharmacy services in Calvert County, MD, Douglas County, OR and Pima County, AZ.

Other operating expenses

Other operating expenses were $384,205, or 3.1% of revenue, for the three months ended March 31, 2009, compared to $233,436, or 3.0% of revenue, for the three months ended March 31, 2008. The increase of $150,769 in spending is directly related to the increase in the number of inmates served as a result of the new service contracts and reflects increased spending for employment advertising, professional liability insurance, and performance and payment bonds.

Operating Expenses

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended March 31, 2009 and 2008 were $1,815,527 or 14.6% of revenue and $1,589,012 or 20.3% of revenue, respectively. The increased expenditures of $226,515 reflects an investment in additional management and administrative personnel required to support additional new contracts and services added in 2008, as well as to sustain the Company during anticipated future growth. Stock based compensation for the three months ended March 31, 2009 and 2008 was $159,269 and $120,055, respectively.

Depreciation and amortization

Depreciation and amortization primarily reflects the amortization of intangible assets related to the acquisition of Conmed, Inc. in January 2007, the purchase of medical service contracts from EMDC in February 2008 and the acquisition of CMHS in November 2008. Amortization of service contracts acquired was $494,000, or 4.0% of revenue, for the three months ended March 31, 2009, compared to $414,000, or 5.3% of revenue, for the three months ended March 31, 2008. The increase primarily reflects additional amortization expense for service contracts acquired in the CMHS acquisition in November 2008 partially offset by a decrease in amortization expense related to the Conmed, Inc. acquisition as certain individual contracts acquired have become fully amortized. Amortization of non-compete agreements was $97,000, or 0.8% of revenue, for the three months ended March 31, 2009, compared to $72,000, or 0.9% of revenue, for the three months ended March 31, 2008. The increase primarily reflects an additional non-compete agreement related to the acquisition of CMHS. Depreciation expense increased to $43,821 for the three months ended March 31, 2009 compared to $13,450 for the prior year period due primarily to capital expenditures associated with the new corporate office in Hanover, Maryland.

Interest income

Interest income was $28,628 for the three months ended March 31, 2009 compared to $65,898 for the same period in 2008. Cash balances in the first quarter of 2009 were higher compared to the first quarter of 2008, however the lower interest income reflects reduced short-term interest rates during the period.

Interest expense

Interest expense for the first quarter increased to $5,205 in 2009 compared to $1,689 in the same period in 2008.

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Change in fair value of derivatives

As a result of adopting EITF 07-5 effective January 1, 2009, 1,705,000 of our issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment.  These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model and all changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.  As such, on January 1, 2009, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $366,612 to beginning retained earnings and $2,399,538 to a long-term warrant liability to recognize the fair value of such warrants on such date.  During the three months ended March 31, 2009, warrants to purchase 20,000 shares of common stock were exercised generating $6,000 of net proceeds and having an aggregate fair value of $38,924 on the exercise dates resulting in the Company recognizing a loss of $502 from the change in fair value.  The fair value of the outstanding common stock purchase warrants as of March 31, 2009 decreased $1,368 to $2,726,360.  As such, we recognized an $866 unrealized gain from the change in fair value of these warrants for the three months ended March 31, 2009.

Income tax expense

Our effective tax rate was 50.6%, which differs from the expected tax rate of 39.0% primarily due to permanent differences related to stock-based compensation.  The change in our effective tax rate from prior periods is primarily due to the increase in our pre-tax income relative to prior periods and the ability to effectively determine our annualized effective tax rate.  For the three months ended March 31, 2009, we recorded income tax expense of $121,000.  Management continues to apply a valuation allowance against certain deferred tax assets because of a limited history of taxable income, the long-term nature of the deferred tax asset and certain limitations regarding the utilization of the net operating loss carryforwards. The Company’s ability to utilize its net operating loss carryforwards and research and development credit is currently limited due to limitations on change of control under Section 382 (“Section 382”) of the IRC. Accordingly, we have fully reserved for the net operating loss carryforwards and research and development credit as we do not expect to derive any future benefit from them.

LIQUIDITY AND CAPITAL RESOURCES

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

Cash flow for the three months ended March 31, 2009 compared to the three months ended March 31, 2008

Cash as of March 31, 2009 and March 31, 2008 was $8,285,126 and $7,472,140, respectively.  We believe that our existing cash balances and anticipated cash flows from future operations will be sufficient to meet our normal operating requirements and liquidity needs for at least the next twelve months.

Cash flow from operations for the three months ended March 31, 2009 totaled $950,814, reflecting a net income of $118,190 plus $793,224 in adjustments for non-cash expenses such as amortization and stock-based compensation and $39,400 in changes in working capital components because of increases in accrued expenses, accounts payable and deferred revenue and a decrease in prepaid expenses partially offset by an increase in accounts receivable and a decrease in income taxes payable.  Cash flow from operations for the three months ended March 31, 2008 totaled $439,981, reflecting a net loss of $552,054 offset by $619,505 in adjustments for non-cash expenses such as amortization and stock-based compensation and $372,530 in changes in working capital components because of increases in accrued expenses and accounts payable and a decrease in prepaid expenses partially offset by an increase in accounts receivable and a decrease in deferred revenue.

Cash flow from investing activities for the three months ended March 31, 2009 used $25,813 for purchases of property and equipment. Cash flow from investing activities for the three months ended March 31, 2008 used $432,012. The asset purchase of EMDC service contracts used $245,711 and purchases of computer and office equipment used $186,301 primarily related to the new corporate office in Hanover, Maryland.

Cash flow from financing activities for the three months ended March 31, 2009 used cash of $112,015. Payments on the line of credit were $100,000 and payment on loans were $18,015 which was partially offset by proceeds from warrant exercises of $6,000.  Cash flow from financing activities for the three months ended March 31, 2008 used cash of $1,901 for payments on a loan.

Loans

As of March 31, 2009, we had a note outstanding for a vehicle in the amount of $3,381 and two short-term notes payable for $33,831 and $50,000, respectively.

Page - 16 - -

Off Balance Sheet Arrangements

We are required to provide performance and payment guarantee bonds to county governments under certain contracts. As of March 31, 2009, we have three performance bonds totaling $7,845,325 and two payment bonds for $2,785,281, totaling $10,630,606. The surety issuing the bonds has recourse against our assets in the event the surety is required to honor the bonds.

Contractual Obligations

The following table presents our expected cash requirements for contractual obligations outstanding as of March 31, 2009:

	Total		Due as of  3/31/10		Due as of 3/31/11  and  3/31/12		Due as of 3/31/13  And  3/31/14		Due Thereafter
Automobile Loan	$	3,381	$	3,381	$	—	$	—	$	—
Note Payable		84,683		54,683		30,000		—		—
Equipment Leases		156,192		58,158		77,640		20,394		—
Automobile Leases		65,900		33,923		31,977		—		—
Office Space Leased		633,711		217,459		292,734		123,518		—
Total Contractual Cash Obligations	$	943,867	$	367,604	$	432,351	$	143,912	$	—

Effects of Inflation

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

Potential Future Service Contract Revenue

As of March 31, 2009, we have entered into 49 agreements with county governments to provide medical and healthcare services primarily to county correctional institutions. Most of these contracts are for multiple years and include option renewal periods which are, in all cases, at the county's option. The original terms of the contracts are from one to nine years. These medical service contracts have potential future service contract revenue of $154 million as of March 31, 2009, with a weighted-average term of 4.3 years, of which approximately $29 million relates to the initial contract period and approximately $125 million relates to the option renewal periods.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Our internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Page - 17 - -

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

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PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

 None

ITEM 6. EXHIBITS

10.1	Inmate Health Services Agreement, effective as of February 1, 2009, by and between Conmed, Inc. and the Western Virginia Regional Jail Authority
31.1	Section 302 Certification of Principal Executive Officer
31.2	Section 302 Certification of Principal Financial Officer
32.1	Section 906 Certification of Principal Executive Officer
32.2	Section 906 Certification of Principal Financial Officer

Page - 19 - -

SIGNATURES

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

	Conmed Healthcare Management, Inc.
May 14, 2009
	By /s/ Richard W. Turner
	Richard W. Turner, Ph.D.
	Chairman and Chief Executive Officer
	(principal executive officer)
May 14, 2009
	By /s/ Thomas W. Fry
	Thomas W. Fry
	Chief Financial Officer and Secretary
	(principal financial officer and principal accounting officer)

Page - 20 - -

EX-10.1

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Richard W. Turner, Ph.D. certify that:

1)      I have reviewed this Quarterly Report on Form 10-Q of Conmed Healthcare Management, Inc.;

2)       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) and 15d-15(f) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 14, 2009

By /s/ Richard W. Turner

Richard W. Turner, Ph.D.

Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Thomas W. Fry, certify that:

1)      I have reviewed this Quarterly Report on Form 10-Q of Conmed Healthcare Management, Inc.;

2)      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 14, 2009

By /s/ Thomas W. Fry

Thomas W. Fry

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Conmed Healthcare Management, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard W. Turner, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 14, 2009

By /s/ Richard W. Turner

Richard W. Turner, Ph.D.

Chairman and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to and will be retained by Conmed Healthcare Management, Inc. and will be furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Conmed Healthcare Management, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas W. Fry, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 14, 2009

By /s/ Thomas W. Fry

Thomas W. Fry

Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to and will be retained by Conmed Healthcare Management, Inc. and will be furnished to the Securities and Exchange Commission or its staff upon request.