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The following is an excerpt from a 10KSB SEC Filing, filed by CONMED HEALTHCARE MANAGEMENT, INC. on 3/31/2008.
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CONMED HEALTHCARE MANAGEMENT, INC. - 10KSB - 20080331 - PART_I
PART I.
 
 
General

Conmed Healthcare Management, Inc. ("CONMED", the "Company", "we" or "us") provides healthcare services to county detention centers across the United States. As a result of the Supreme Court decision in 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 specializes in providing such services.

Corporate History

Prior to January 26, 2007, the Company formerly known as Pace Health Management Systems, Inc. ("Pace") traded under the symbol "PCES", was classified as a shell company, had no ongoing operations, minimal operating expenses and no employees.

On January 26, 2007, we acquired Conmed, Inc. ("Conmed, Inc."), a privately-owned 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. 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. For the fiscal year ended December 31, 2007, Conmed, Inc. had net revenues primarily from medical services provided to correctional institutions of $26,073,040.

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 December 31, 2007, we were in contract with, and currently providing medical services in twenty-two counties in five states including: Kansas, Maryland, Oregon, Virginia and Washington.

On March 13, 2007, the Company changed its name to Conmed Healthcare Management, Inc.

Services Provided

County Correctional Healthcare Services
 
We provide 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 that limit maximum financial exposure, and contain 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
·    Dialysis services
·    Acute care services
·    Durable medical equipment
·    Surgical services
·    Hospital services
·    Laboratory services
·    Mental health services
·    IV therapy
·    Pharmacy
·    EKG's
·    Physical and occupational therapy
·    Diagnostic imaging/radiology
·    Dental services
 
We either directly provide these services within the detention facilities or subcontract for the provision of these services within or outside the facility. We make every effort to safely provide the medical services within the facilities due to security and cost considerations.
 
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Contracting
 
We have a 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 predictive model is the basis for the cost proposals we provide 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. We have found that having predictive reliability of costs assures a higher probability of sustained profits.
 
Staffing
 
We provide staffing of healthcare professionals at each of our contracted facilities. The staffing patterns are obtained from the Request for Proposals (RFP) distributed by the counties soliciting bids on services provided and cost. The level of staffing varies depending on the size of the facility, i.e., larger facilities typically require a larger staff. The ratio of staff members to inmates varies depending on the physical structure of the facilities and the specific desire of the administration of the individual facilities and service provided. Generally, we contract with existing staff at the facility to the greatest extent possible when entering into a new contract. The on-site staffing for any facility may include RNs, LPNs, medics, medication aides, nursing assistants, physicians, psychiatrists, psychologists, social workers, physician assistants, nurse practitioners, medical records' clerks, administrative and support staff. 
 
Pharmacy
 
We provide medications for inmates within our contracted detention facilities. Medications are currently provided from two national pharmacy contractors, Diamond Pharmacy and Correct RX, which specialize in the provision of pharmaceutical services to detention centers. We have accumulated information regarding pharmacy expenses in our contracted facilities, which is useful in the cost proposal portions of our bids.
 
In-Facility Services
 
We provide 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, we are 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. Our 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 on-site x-rays, the majority of which are chest x-rays completed to discount active tuberculosis and x-rays for minor trauma .
 
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. Most of our out-of-facility services are provided through the use of a local or regional contracted network using a TPA. In addition, utilization management and utilization review services are employed.
 
1.  Case management and utilization reviews - To assure the most cost effective and medically appropriate length stays, we often utilize the services of a contracted professional utilization management and utilization review ("UM/UR") organization. When an inmate is hospitalized, the UM/UR maintains daily contact with the provider and the Medical Director for the site to assure appropriate care.
 
2.  TPA - We contract with TPAs serving most of the facilities in which we provide healthcare services. The TPAs provide a network of physicians, hospitals and ancillary services that are paid based on contracted fee schedules. These fee schedules typically include discounts that average approximately 17% over the submitted charges. The TPA is compensated based on a percent of our savings for the repriced claims.
 
 
Dental Services
 
Dental services are provided on-site for most of our contracted facilities. Such facilities maintain dental suites with equipment for conducting dental x-rays depending on the RFP requirements.

Additional Services

Value-added services that we provide to our clients include the following:
 
 
·
Healthcare services consultations - On request from the facility administration, we will provide consultations on healthcare issues such as Tuberculosis, Avian Flu, AIDS, Hepatitis, Methadone, Reentry programs and many other topics pertinent to correctional healthcare patients. These consultations typically relate to policy issues affecting multiple facilities. In many cases, we have provided expert testimony to state legislative bodies and agencies.
 
 
 
 
·
Audit compliance programs - We provide an audit compliance program as part of our core responsibility to all sites. We have 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. We comply with OSHA and provide to our 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 our employee's clothes, undergarments, skin, eyes, mouth, etc. Other procedures we implement 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 our staff's clothing and equipment.
     
 
·
Risk management - We promote 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, we are able to substantially reduce the risk of poor outcomes and/or litigation.
     
 
·
Sick call services for staff - We provide 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 - We believe it is imperative that our medical staff be well trained and equipped to handle emergencies. Thus, we ensure that our 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
 
Our sales and marketing efforts for correctional healthcare services are based on the following:
 
1.  
Market analysis - In 2004, we engaged in a national market analysis and survey searching for markets with attractive opportunities. We have designated Florida, Georgia, Kansas, Iowa, New Jersey, North Carolina, Oklahoma, Oregon, Pennsylvania, South Carolina, Texas, Virginia and Washington as early targets. The following are our 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;
 
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  c.
Facilities of 500 inmates or more where a competitor's services are not meeting the facility's expectations; and
 
  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.
 
2.
Word of Mouth – We have a contact network through our existing contracts and through strategic relationships with national pharmacy contractors. This network has provided early indications of counties considering outsourcing healthcare services, changing their current contractors or seeking proposals for other reasons.
 
3.
Online procurement services – We have a contract with an on-line government contracting research service to establish early determinations of county intentions to seek proposals.
 
4.
Trade meetings – Our 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 techniques. We often sponsor special events and awards at these meetings.
 
5.
Cold calls – We use, to a limited extent, cold calls, typically only in cases where some collateral indication of a probability of interest exists.
 
6.
Advertising in trade journals.
 
7.
Public speaking engagements for special topics on request.
 
8.
Website promotion of our capabilities and experience.
 
We currently utilize our CEO, Chief Medical Officer and Vice President of Strategic Development, as well as a network of regional consultants to implement our marketing strategy.
 
Competition
 
We are aware of four major sources of competition:

1. National contracting companies that serve both the county and state prison systems . While we are 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.

2. Local or regional companies focused on county detention centers . 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. 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. The hospital costs for these counties are often extremely high and counties seeking cost savings may seek the services of a professional medical service contractor other than the local hospital.

4. Local physicians. In some cases, our competitor is a local solo physician or group of physicians. Such contractors typically provide only the on-site sick call services and may have limited expertise in the provision of full service correctional healthcare. Such physicians are often unable to obtain cost effective and appropriate liability insurance that will cover both their primary work, as well as their correctional healthcare services.
 
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Intellectual Property
 
CONMED does not currently own and has not registered any trademarks, patents, or any other intellectual property.
 
Government Regulation
 
The industries in which we operate 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 the Company'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. Our contracts typically include reporting requirements, supervision and on-site monitoring by representatives of the contracting governmental agencies.   In addition, the doctors, nurses, pharmacists and other healthcare professionals who provide services on our behalf are, in most cases, required to obtain and maintain professional licenses and are subject to state regulation regarding professional standards of conduct. Our services are also subject to operational and financial audits by the governmental agencies with which we have 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"). We 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 healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the healthcare industry. We do not electronically file at present, but may do so in the future, subjecting us 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 we operate 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. We review, on an ongoing basis, the applicable laws in each state in which we operate and review our arrangements with our healthcare providers to ensure that these arrangements comply with all applicable laws. We have no assurance that governmental officials responsible for enforcing these laws will not assert that we, or transactions in which we are involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with our interpretations.
 
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 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. Since September 11, 2001, 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.
 
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U.S. Department of Labor, Occupational Safety and Health Administration (OSHA). In addition to state and national standards of compliance with OSHA federal regulations is mandatory. OSHA Standard 29 CFR 1910 requirements include, but are not limited to, blood borne and airborne pathogens (tuberculosis), needle stick prevention, fire safety, hazard communications, respiratory protection, program, and hazardous waste. The federal OSHA standards have been adopted by state regulatory agencies to conduct routine environmental inspections.

National Fire Protection Association (NFPA). Environmental fire safety is promulgated by the NFPA 101: Life Safety Code derived from the American Standards Institute (ANSI). Enforcement of NFPA regulation is accomplished by annual inspections conducted by the state.

Our contracts with governmental agencies often require us to comply with numerous additional requirements regarding recordkeeping 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 disbarred or suspended from obtaining future contracts for specified periods of time in the applicable location. We have never been disbarred or suspended from seeking procurements in any jurisdiction.

Major Contracts

Substantially all of our operating revenue is derived from contracts with county governmental entities. Our top five clients, Baltimore County Detention Center, Sedgwick County Detention Center, Harford County Detention Center, Yakima County Detention Center and Charles County Detention Center generated approximately fifty-seven percent (57%) of our total revenues for the twelve months ended December 31, 2007. Summaries of our largest contracts follow below.

Baltimore County Detention Center Contract. We entered into a Services Agreement with the Board of County Commissioners of Baltimore County, Maryland ("BCDC"), on March 29, 2007, for a period of approximately two (2) years and six (6) months, and BCDC, at its option, may extend the agreement annually for two (2) additional three-year terms upon written notice. BCDC pays us a base monthly fee, which may be adjusted for changes in inmate population levels. Under the agreement, we are subject to mandatory staffing requirements. The agreement also contains provisions that allow the BCDC to assess penalties if certain staffing criteria are not maintained and certain liquidated damages in the event certain performance standards are not met. We also provide, at our own expense, a performance bond for one hundred percent (100%) of the annual amount of the awarded contract, as well as a payment bond for approximately twenty-five percent (25%) of the annual amount of the awarded contract. BCDC may terminate the agreement upon ninety (90) days written notice without cause and may immediately terminate the agreement for a material breach of the agreement subject to certain cure provisions.

Sedgwick County Detention Center Contract. We 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 two (2) years. On June 1, 2007, the agreement was amended to extend the basic term through December 31, 2009, and Sedgwick County may, at its option, extend the agreement annually for two (2) additional one-year terms upon written notice. In addition, the amendment waives the previous requirement for a performance bond, increases the medical staffing, raises the base monthly fee, and provides for a cost of living increase in 2009. Sedgwick County pays us a base monthly fee, which may be adjusted for changes in inmate population levels. Sedgwick County may terminate the agreement upon thirty (30) days written notice without cause. Either party may immediately terminate the agreement for a material breach of the agreement subject to certain cure provisions.

Hartford County Detention Center Contract. We entered into a Health Services Agreement with the Sheriff of Harford County on May 31, 2007, 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 five (5) additional one (1) year terms. The HCDC pays us a base monthly fee, which may be adjusted for changes in inmate population levels. Under the agreement, we are subject to mandatory staffing requirements. HCDC may terminate the agreement with or without cause without prior written notice.

Yakima County Detention Center Contract. We entered into a Health Services Agreement with the Board of County Commissioners for Yakima County, Washington on August 12, 2006, to provide medical services to the inmates at the Yakima County Department of Correction's facilities ("Yakima County"), for an initial term of one (1) year, with Yakima County having the exclusive option to renew such agreement for four (4) additional one (1) year terms. The agreement was amended on April 3, 2007 and September 4, 2007, to provide pharmacy services and medical services for the Yakima County DOC Justice Center. Yakima County pays us an annual compensation, which is paid in equal monthly installments. Either party may terminate the agreement upon one hundred twenty (120) days written notice without cause. Yakima County may immediately terminate the agreement for a material breach of the agreement subject to certain cure provisions.
 
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Charles County Detention Center Contract. Effective July 1, 2004, we entered into a medical services agreement with the Sheriff's Office of Charles County, Maryland to provide both on-site and off-site healthcare 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 us an annual compensation, which is paid equal monthly installments. Such monthly installments are adjusted for changes in inmate population levels. Conmed may terminate the agreement upon thirty (30) days written notice in the event the CCDF fails to make timely payment due to Conmed.

Employees

As of December 31, 2007, we had approximately 360 full-time and 28 part-time employees and 79 per diem employees, and 32 position contractors. We provide all full-time employees with a comprehensive benefits package including medical insurance, education stipend, dental insurance, 401(k) and paid vacation. We believe that our relations with our employees are good. None of our employees belong to a union.
 
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An investment in our securities is extremely risky. You should carefully consider the following risks, in addition to the other information presented in this Annual Report on Form 10-KSB bef ore deciding to buy or exercise our securities. If any of the following risks actually materialize, our business and prospects could be seriously harmed, the price and value of our securities could decline and you could lose all or part of your investment.
 
Risks Related to Our Business

OUR ABILITY TO CONTINUE OR EXPAND OUR BUSINESS AND 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 and medical services to inmates in county 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.

WE PROVIDE CONTRACTED BUSINESS SERVICES. IN ANY CONTRACT BUSINESS, IT IS POSSIBLE A CONTRACT WILL BE TERMINATED, DEFAULTED UPON OR NOT RENEWED. Our top three county contracts, Baltimore County Detention Center, Sedgwick County Detention Center and Hartford County Detention Center, generated approximately fifty percent (50%) of our total revenues for the year ended December 31, 2007. These same clients generated approximately thirty-eight percent (38%) of our gross profit. If a contracted detention facility, particularly one of our primary detention facilities, terminates its contract, which generally may be effective upon ninety (90) day written notice, our business and financial performance may be seriously harmed.

MOST OF OUR CONTRACTS ARE FOR SHORT-TERMS, AND MAY NOT BE EXTENDED. Our 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, we have several smaller contracts subject to renewal in 2008, which accounted for approximately 7% of revenue and 8% of the gross profit, respectively, for the year ended December 31, 2007. We cannot assure you that these or any other contracts 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 us adequate written notice. We customarily incur significant development and start-up costs in establishing our 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, including unamortized costs for service contracts acquired and goodwill, and could have a material adverse effect upon our financial condition, results of operations and liquidity.
 
OUR CONTRACTS ARE SUBJECT TO GOVERNMENTAL FUNDING. Our 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 us. In addition, even if funds are appropriated, delays in payments may occur which could have a material adverse effect on our financial condition, results of operations and liquidity.
 
OUR INABILITY TO OBTAIN REQUIRED PERFORMANCE AND/OR PAYMENT BONDS MAY LIMIT OUR ABILITY TO MAINTAIN EXISTING CONTRACTS AND ACQUIRE ADDITIONAL CONTRACTS. In order to expand our business and obtain new facilities' contracts, as well as maintain certain existing contracts, we will need to obtain bonds in certain counties for which we provide our services. In order to obtain such bonds, or renew existing bonds, we are required to fulfill certain financial requirements and standards. To the extent we are unable to fulfill the necessary financial requirements and standards, we may not be able to acquire new facilities' contracts and could lose our existing contracts, all of which could negatively impact our business operations and financial condition.
 
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WE ARE UNCERTAIN AS TO OCCUPANCY LEVELS AT CERTAIN FACILITIES WE SERVICE. A small portion of our revenues are 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 our overall financial condition, results of operations and liquidity.

DISTURBANCES AT FACILITIES WE SERVICE WOULD IMPACT US NEGATIVELY. An escape, riot, epidemic, catastrophic or other disturbance that seriously impacts the health of a large number of inmates at one of our facilities could have a material adverse effect on our 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 81% of our healthcare services' revenues for the year ended December 31, 2007 are operated under caps which provide limits on the cost of exposure; however, multiple events with significant costs may exceed budget targets.

The remaining 19% of our correctional healthcare services' revenues from continuing operations contain no limits on our exposure for treatment costs related to catastrophic illnesses or injuries to inmates. Although we attempt to compensate for the increased financial risk when pricing contracts that do not contain catastrophic limits for facilities that have not had any catastrophic illnesses or injuries to inmates that exceeded its insurance coverage in the past, we cannot assure you that we 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 our financial condition and results of operations.

WE MAY EXPERIENCE MALPRACTICE LITIGATION AND OTHER LIABILITY SUITS. Our medical services to correctional and detention facilities exposes us 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 and 14 th amendment rights (deliberate indifference and civil rights). It is likely that as we grow, we will be exposed to additional healthcare liability issues. We currently maintain medical professional liability insurance to cover potential malpractice losses, in the amounts of $1,000,000 per incident and $5,000,000 in the aggregate, as well as $1,000,000 general liability coverage. Such insurance is expensive, subject to various coverage exclusions and deductibles and may not be obtainable in the future on terms acceptable to us, or at all. A successful claim against us in excess of our insurance coverage could materially harm our business.

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.
 
WE UTILIZE THIRD PARTY ADMINISTRATORS (TPA) AND PROVIDER NETWORKS TO OBTAIN OUT-OF-FACILITY CARE IN VARIOUS MARKETS. SHOULD THOSE NETWORKS BECOME INACCESSIBLE, OUR COSTS FOR PROVIDING THOSE SERVICES WOULD RISE 13 TO 15%. Our current profit margin is, in part, due to our ability to reduce out-of-facility costs that are defined by contracted networks. Our net costs are typically approximately 13% 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 us.

CHANGES IN STATE AND FEDERAL REGULATIONS COULD RESTRICT OUR ABILITY TO CONDUCT OUR BUSINESS. We are subject to extensive regulation by both the federal government and the states in which we conduct our business. There are numerous healthcare and other laws and regulations that we are required to comply with in the conduct of our business. These laws may be materially changed in the future or new or additional laws or regulations may be adopted with which we will be required to comply. The cost of compliance with current and future applicable laws, rules and regulations may be significant.
 
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These state and federal laws and regulations that affect our 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.
 
We believe we are operating our business in substantial compliance with all existing legal requirements material to the operation of our business. There are, however, significant uncertainties regarding the application of many of these legal requirements to our 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 our 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 our ability to conduct business or adversely affect our results of operations.
 
WE ARE SUBJECT TO HIPAA, THE FAILURE WITH WHICH TO COMPLY COULD ADVERSELY AFFECT OUR 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. Failure to do so could have an adverse effect on our business.

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 government 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.
   
THERE ARE LARGE COMPETITORS IN THE HEALTHCARE INDUSTRY THAT COULD CHOOSE TO COMPETE AGAINST US, REDUCING OUR PROFIT MARGINS OR CAUSING US TO LOSE CUSTOMERS. Existing national correctional healthcare contract companies, local and regional contracting companies, hospitals and integrated health systems are our potential competitors. These companies include well-established companies which may have greater financial, marketing and technological resources than we do, such as PHS, CMS and Wexford Health. Increased price competition could result in the loss of customers or otherwise reduce our profit margins and have a material adverse effect on us.

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. It would be possible for an investor to purchase an existing experienced company, add capital and quickly become competitive on a national scale.
 
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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.

OUR INABILITY TO REACT EFFECTIVELY TO CHANGES IN THE HEALTHCARE INDUSTRY COULD ADVERSELY AFFECT OUR 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 we provide. Other legislative or market-driven changes in the healthcare system that we cannot anticipate could also materially adversely affect our business. Our inability to react effectively to these and other changes in the healthcare industry could adversely affect our operating results and business. We cannot predict whether any healthcare reform efforts will be enacted and what effect any such reforms may have on us or our customers.

THE CONTINUED SERVICES AND LEADERSHIP OF OUR SENIOR MANAGEMENT IS CRITICAL TO OUR ABILITY TO MAINTAIN GROWTH AND ANY LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS. The future of our business depends, to a significant degree, on the skills and efforts of our senior executives, in particular, Dr. Richard Turner, our President and   Chief Executive Officer and Howard Haft, MD, MMM, CPE, our Executive Vice President and Chief Medical Officer. If we lose the services of any of our senior executives, and especially if any of our executives join a competitor or forms a competing company, our business and financial performance could be seriously harmed.

We have executed employment agreements with 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 of our issued and outstanding stock. 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 our operating plan.

AS A PUBLIC COMPANY, WE INCUR SUBSTANTIAL ADDITIONAL COSTS AND MAY BE UNABLE TO OPERATE PROFITABLY. Prior to the consummation of the Plan of Recapitalization, we were a privately-held company. As a result of becoming a publicly-traded company, we incurred significant additional costs. These costs include, among other things, the payment of a salary to our Chief Executive Officer, Dr. Richard Turner and additional legal and accounting costs incurred as a result of becoming a public company, and the additional compliance, reporting, corporate governance requirements and investor relations activities which this entails. Furthermore, the financial, administrative and managerial structures necessary to operate as a public company, or the development of such structures require a significant amount of management's time and other resources including financial resources, which may hinder our ability to operate profitably.

OUR REVENUE MARGINS MAY DECREASE DUE TO FIXED REVENUE BASE. Our existing contracts are primarily structured as fixed fee contracts. The costs of inmate healthcare may fluctuate from what we anticipated 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, we may not always have sufficient revenue to cover such increased costs. As a result, our revenue margins may fall. If our revenue margins decrease more than 1 or 2 percentage points, our ability to perform under its contracts may be limited, which could negatively impact our business operations and financial performance.

WE MAY BE UNSUCCESSFUL IN THE HIRING AND RETENTION OF SKILLED PERSONNEL. The future growth of our business depends on successful hiring and retention of skilled personnel, and we may be unable to hire and retain the skilled personnel we need 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. We face stiff competition for staffing, which may increase our labor costs and reduce profitability. We compete with other healthcare and service providers in recruiting qualified management and staff personnel for the day-to-day operations of our 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 us to enhance wages and benefits to recruit and retain qualified nurses and other healthcare professionals. Because a significant percentage of our existing contracts are structured as fixed fee contracts, we have a limited ability to pass along increased labor costs to existing customers. The failure to attract and retain sufficient skilled personnel at economically reasonable compensation levels may limit our ability to perform under our contracts, which could lead to the loss of existing contracts or our ability to gain new contracts, and may impair our ability to operate and expand our business, as well as harm our financial performance.
 
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WE MAY EXPERIENCE UNBUDGETED INCREASES IN COSTS RELATED TO THE PROVISION OF HEALTHCARE. Currently, we predict 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, and 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 healthcare 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 FACE RISKS ASSOCIATED WITH ACQUISITIONS. We intend to grow through internal expansion and through selective acquisitions. We cannot assure you that we 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 our 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 our financial condition, results of operations and liquidity.
 
THE LIABILITY OF OUR OFFICERS AND DIRECTORS IS LIMITED. On March 13, 2007, we reincorporated as a Delaware corporation and we provide our officers and directors indemnification to the fullest extent allowed under the Delaware General Corporation Law. We also carry directors and officer's liability insurance. In addition, we plan to enter into an indemnification agreement with our officers and directors in 2008 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.

WE HAVE LIMITED EXPERIENCE ATTEMPTING TO COMPLY WITH PUBLIC COMPANY OBLIGATIONS, INCLUDING SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC has adopted rules requiring public companies to include a report of management on the company's internal controls over financial reporting in their annual reports on Form 10-K. In addition, the registered certified public accounting firm auditing a public company's financial statements must attest to and report on management's assessment of the effectiveness of the company's internal controls over financial reporting. The requirement for a report of management, as currently in effect, will first apply to our annual report on Form 10-K for our fiscal year ending December 31, 2007. The requirement for our auditor to attest on management assessment will apply for the fiscal year ending December 31, 2009. If we are unable to conclude that we have effective internal controls over financial reporting, or if our independent auditors are unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities.
 
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CERTAIN STOCKHOLDERS CAN EXERT CONTROL OVER US AND MAY NOT MAKE DECISIONS THAT FURTHER THE BEST INTERESTS OF ALL STOCKHOLDERS. Our officers, directors and principal stockholders (greater than 5% stockholders) together own a majority of our issued and outstanding common stock. Consequently, these stockholders, if they act individually or together, may exert a significant degree of influence over our 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 us and might affect the market price of our 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 our interests or the interests of other stockholders, and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider.

OUR ORGANIZATIONAL DOCUMENTS AND DELAWARE LAW MAKE IT HARDER FOR US TO BE ACQUIRED WITHOUT THE CONSENT AND COOPERATION OF OUR BOARD OF DIRECTORS AND MANAGEMENT.   Provisions of our organizational documents and Delaware law may deter or prevent a takeover attempt, including a takeover attempt in which the potential purchaser offers to pay a per share price greater than the current market price of our common stock. Under the terms of our certificate of incorporation, our Board of Directors has the authority, without further action by the stockholders, to issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of such shares. The ability to issue shares of preferred stock could tend to discourage takeover or acquisition proposals not supported by our current Board of Directors. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which restricts business combinations with some stockholders once the stockholder acquires 15% or more of our common stock.
 
Risks Related to Our Securities
 
TRADING IN OUR COMMON STOCK 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 4,864 shares were traded on an average daily trading basis for the twelve (12) months ended December 31, 2007. 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. 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, WHICH MAY LEAD TO LAWSUITS AGAINST US. Our common stock is currently traded on the OTC Bulletin Board under the symbol "CMHM". 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.

The trading price of our common stock could also be subject to wide fluctuations in response to quarter-to-quarter variations in our operating results, announcements of new contracts, cancellations of existing contracts or new acquisitions by us or our competitors, changes in financial estimates by securities analysts or other events or factors. When the market price of a company's stock drops significantly, stockholders often institute securities class action lawsuits against that company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

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 us or our 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.
 
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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.
 
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 OUR COMMON STOCK AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT THE MARKET. We are authorized to issue 40,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of December 31, 2007, there are 11,943,141 shares of common stock and no shares of 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 our 2007 Stock Option Plan (the "Stock Option Plan"). In addition, under most circumstances, our Board of Directors has the right, without stockholder approval, to issue authorized but unissued and nonreserved shares of our common stock. If all of these shares were issued, it would dilute the existing stockholders and may depress the price of our common stock.
 
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As of December 31, 2007, we had outstanding warrants to purchase 1,380, 000 shares of common stock, exercisable at $0.30 per share, and expiring   5 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 . Further, we 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 expiring 5 years from the grant date and warrants to purchase 225,000 shares of common stock exercisable at $0.30 per share as converted, expiring October 24, 2010 and were issued by Pace in 2005. In addition, the Board of Directors and our stockholders have approved the Stock Option Plan which reserves up to 1,600,000 shares of our common stock for issuance under its terms, all of which have been authorized for issuance at exercise prices of $2.01 and $3.30 per share, which the Board deemed to be the fair value at the time such options were awarded .

Our Board of Directors has the authority, without stockholder approval, to create and issue additional stock options, warrants and one or more series of preferred stock and to determine the voting, dividend and other rights of the holders of such preferred stock. Depending on the rights, preferences and privileges granted when the preferred stock is issued, it may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders, may discourage bids for our common stock at a premium over the market price of the common stock and may adversely affect the market price of and voting and other rights of the holders of our common stock. As indicated above, no shares of preferred stock are currently outstanding.

To the extent shares of our common stock or preferred 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.

SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET. In addition, from time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, subject to certain limitations. Approximately 3,147,207 shares held for more than 6 months by non-affiliates may be available for public sale without regard to volume limitations and by means of ordinary brokerage transactions in the open market pursuant to Rule 144.

In general, pursuant to Rule 144, after satisfying a six-month holding period: (i) affiliated stockholder (or stockholders whose shares are aggregated) 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 and (ii) non-affiliated stockholders may sell without such limitations, provided we are current in our public reporting obligations. Rule 144 also permits the sale of securities by non-affiliates that have satisfied a one-year holding period without any limitation or restriction. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of our securities.

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. We may also incur indebtedness in the future that may prohibit or effectively restrict the payment of cash dividends on our common stock. If we determine that we will pay dividends to the holders of our common stock, there is no assurance or guarantee that such dividends will be paid on a timely basis.
 
 
As of December 31, 2007, we had leases for the following office facilities.

Hanover, Maryland. In December 2007, we entered into a five-year (5) office lease agreement for approximately 6,668 square feet of office space to house our executive and administrative offices at an annual rent of $131,693 beginning February 2008 and increasing to $148,222 in the final year of the lease, which expires on February 28, 2013, subject to a five-year renewal option.

La Plata, Maryland. In November, 2004, we entered into an office lease agreement for approximately 2,424 square feet of office space 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.
 
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We are currently involved in the following legal proceedings: 
 
(i) Linda Courtillet, et al. v. Stephen Goldberg, MD, et al. - Linda Courtillet has brought a wrongful death action against us, 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 was filed in the Circuit Court for Charles County, MD. The case is in the middle of discovery and is scheduled for trial on July 14, 2008. Currently, our previous insurer, National Fire and Marine, is providing a defense in this action.
 
(ii) Board of Nursing - In early 2005, the State of Maryland Board of Nursing ("BON") commenced an investigation (is currently ongoing) regarding whether certain of our employees licensed by the BON, or at least subject to the jurisdiction of BON, performed work at certain detention facilities in contract with us whereby such employees were not properly licensed. BON has acknowledged that it does not have jurisdiction over our actions; however, BON has threatened to take disciplinary action against ten (10) to twenty (20) of our current or former employees. Our management has fully cooperated with BON and has implemented a number of changes intended to address BON's stated concerns. To the best of our knowledge, BON has conducted all necessary employee interviews, and we are currently awaiting BON's next steps or actions relating to these employees.
 
(iii) 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, Maryland. 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 us on behalf of Mr. Rutherford. Our previous insurer, National Fire and Marine, is providing a defense of this action. The case recently settled for $115,000.00, within our policy's limits.
 
(iv) 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 negligent medical care provided by us while he was incarcerated in Dorchester County Detention Center. Mr. Simms alleged that he did not receive adequate analgesic medication from us, as he was treated for an infectious disease. Our previous insurer, National Fire and Marine is providing a defense in this action and retained Mr. Francis X. Leary to serve as our defense counsel in this matter. On December 21, 2006, Mr. Leary filed a Motion to Dismiss, or in the alternative, a Motion for Summary Judgment. The Motion was based on the failure of Mr. Simms to state a cause of action upon which relief may be granted, and the failure to state a claim for violation of his 8th and 14th Amendment rights. The Court of Appeals for the Fourth Circuit affirmed the dismissal of the 8 th Amendment claim but reversed, in part, and reinstated, the 14 th Amendment claim. The court granted Simms' request for appointment of Pro Bono counsel on November 27, 2007. Pro Bono counsel Lawrence Quinn was appointed on December 11, 2007. The case will proceed to discovery and another possible motion for summary judgment to dismiss the 14 th Amendment claim.

(v) Derek L. Simms v. Steven R. Williams, et al. , Civil Action No. WMN-07-2208. This claim was also brought in the United States District Court for the District of Maryland. Derek Simms filed a complaint asserting another 8th Amendment claim for deliberate indifference to his alleged serious medical needs. This claim seems to be duplicative of the claim that was dismissed in the related case set forth above. The crux of the claim is that Simms maintains his Anal Crohn's disease was not properly treated. We reported this case to AIG on December 18, 2007 and AIG is currently investigating Simms' claims. According to a letter dated February 15, 2008, AIG is providing a defense in this action and retained Angela W. Russell from the law firm of Wilson Elser Moskowitz Edelman & Dicker, LLP to serve as our defense counsel in this matter. AIG has provided coverage subject to a full Reservation of Rights while it is investigating Simms' claims. The matter is proceeding to discovery. As of February 8, 2008, counsel for Mr. Simms has dismissed Dr. Haft, Nurse Whitman and Warden Williams as defendants. Mr. Simms' deposition is now scheduled for February 22, 2008.

(vi) Lauren Elizabeth Gildersleeve v. Carroll County et al ., Case No. 06-C-07-048188. This claim was filed in the Circuit Court for Carroll County and alleged claims for personal injury. The law firm of Cromwell & Unglesbee represented the plaintiff but filed a motion to strike its appearance, dated October 12, 2007. The plaintiff had ten days to notify the Circuit Court of her intention to proceed with a new attorney or without an attorney. According to an Order of the Circuit Court dated December 5, 2007, the case was dismissed.
 
(vii) John Theodore Lee Sr. v. Cecil County Sheriff et al. , Case No. 07-C-07-000388. This case was filed in the Circuit Court for Carroll County, Maryland on December 10, 2007. Lee filed a complaint alleging that he suffered injuries which were caused by the denial of medical care. He also alleges that he suffered physical and mental abuse by Cecil County Sheriff's Deputies. We reported this case to AIG on January 16, 2008 and AIG is currently investigating Lee's claims. We anticipate that AIG will provide a defense to us in this action.


No matters were submitted to a vote of the shareholders of the Company in the fourth quarter of 2007.

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BROKERAGE PARTNERS