Conmed Healthcare Management, Inc.

On July 16, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Correct Care Solutions, LLC, a Kansas limited liability company (“Parent”), and Hanover Merger Sub, Inc., a Delaware corporation and a wholly-owned direct subsidiary of Parent (“Purchaser”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, on July 30, 2012, Purchaser commenced a tender offer (the “Offer”) to purchase all the issued and outstanding shares (the “Shares”) of the Company’s common stock, par value $.0001 per share, at a purchase price of $3.95 per Share, net to the seller in cash, without interest thereon and less any applicable withholding taxes (the “Offer Price”). Pursuant to the Merger Agreement, following the closing of the Offer, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Purchaser will be merged with and into the Company (the “Merger”), with the Company surviving as a wholly-owned direct subsidiary of Parent. In the Merger, each Share issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”), other than (i) Shares owned by Parent, Purchaser or any other direct or indirect wholly-owned subsidiary of Parent (including as a result of an exercise of the Top-Up Option (as defined in the Merger Agreement) by Purchaser) and Shares owned by the Company or any direct or indirect wholly-owned subsidiary of the Company, and in each case not held on behalf of third parties, and (ii) Shares owned by stockholders who validly exercise appraisal rights under Delaware law with respect to such Shares, will be automatically canceled and converted into the right to receive the Offer Price, without interest thereon and less any applicable withholding taxes. Pursuant to the Merger Agreement, each outstanding option to purchase Shares will become fully vested and exercisable immediately prior to, and then shall be cancelled at, the Effective Time, with each holder thereof receiving an amount in cash equal to the excess, if any, of the Offer Price over the exercise price thereof multiplied by the number of Shares subject to such option.

Consummation of the Offer is subject to several customary closing conditions, including that there shall have been validly tendered and not withdrawn that number of Shares which, when added to the Shares already owned by Parent or any of its subsidiaries, would represent at least 90% of the outstanding Shares at such time.

On July 16, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Correct Care Solutions, LLC, a Kansas limited liability company (“Parent”), and Hanover Merger Sub, Inc., a Delaware corporation and a wholly-owned direct subsidiary of Parent (“Purchaser”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, on July 30, 2012, Purchaser commenced a tender offer (the “Offer”) to purchase all the issued and outstanding shares (the “Shares”) of the Company’s common stock, par value $.0001 per share, at a purchase price of $3.95 per Share, net to the seller in cash, without interest thereon and less any applicable withholding taxes. Pursuant to the Merger Agreement, following the closing of the Offer, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Purchaser will be merged with and into the Company, with the Company surviving as a wholly-owned direct subsidiary of Parent. See Note 9, “Subsequent Event”, for additional information.

Medical expenses for the three months ended June 30, 2012 and 2011 were $4,711,239, or 24.0% of revenue, and $3,472,272, or 20.8% of revenue, respectively, which represented an increase of $1,238,967, or 35.7%. Approximately 53.6% of the increase in spending for medical expenses in absolute dollars is related to medical services for new contracts both in- and out-of-facility as well as pharmacy services. The remainder of the increase is related to increases in medical expenses at existing facilities in which we were providing services prior to April 1, 2011. Out-of-facility expenses increased by approximately 66.5% at existing facilities and were primarily due to inpatient hospitalization expenses at Baltimore, Virginia Beach, and Loudoun counties. Pharmacy expenses at existing facilities increased by 3.7% and the increase was partially offset by favorable price negotiations with certain pharmacy vendors. In-facility medical expenses increased by approximately 12.5% at existing facilities.

Cash flow from operations for the six months ended June 30, 2012 totaled $2,423,299, reflecting a net income of $493,194 plus $1,171,837 in adjustments for non-cash expenses such as amortization of intangible assets of $77,222, amortization of long-term customer agreement of $87,500, stock-based compensation of $285,581, restricted stock compensation of $143,000, change in fair value of warrants of $307,987, depreciation of $185,589, gain on the disposal of property of $24,042 and deferred income taxes of $109,000. Changes in working capital components provided $758,268, reflective of a decrease in prepaid expenses of $530,142 and increases in accrued expenses of $1,508,214 and accounts payable of $30,948, partially offset by an increase in accounts receivable of $383,112 and deposits of $62,517 as well as decreases in deferred revenue of $159,320 and income taxes payable of $706,087. The increase in accounts payable was primarily due to the timing of vendor payments in relation to quarter end. The increase in accrued expenses resulted primarily from increases in accrued medical expenses, accrued malpractice litigation expenses and accruals for employee benefits which was partially offset by a decrease in accrued bonus expense due to the payment of annual corporate bonuses in April 2012. The decrease in income taxes payable resulted primarily from the payment of scheduled estimated taxes partially offset by accruals of estimated taxes payable. The increase in accounts receivable resulted primarily from slower collection of receivables on certain existing medical service contracts resulting in an average 16.3 days sales outstanding as of June 30, 2012 compared to an average 15.5 days sales outstanding as of December 31, 2011. The decrease in prepaid expenses resulted primarily from a reduction in prepaid professional liability insurance. We prepaid our annual professional liability insurance policy premium in October 2011 and we expense the prepaid amounts ratably during the annual policy period of October through September. The increase in deposits resulted primarily from a bid deposit required for a request for proposal which will be refunded after award of the contract. Deferred revenue decreased primarily as a result of a reduction in advance customer payments due to their fiscal year ending June 30, 2012 which prohibits them from making advance payments for services pertaining to the next fiscal year.

Cash flow from operations for the six months ended June 30, 2011 totaled $1,315,193, reflecting a net income of $254,416 plus $1,056,825 in adjustments for non-cash expenses such as amortization of intangible assets of $179,335, amortization of long-term customer agreement of $87,500, stock-based compensation of $211,332, change in fair value of warrants of $355,467, depreciation of $153,191 and deferred income taxes of $70,000. Changes in working capital components generated an additional $3,952, reflecting a decrease in prepaid expenses of $592,137 and deposits of $201 as well as an increase in accounts payable of $736,345 partially offset by an increase in accounts receivable of $339,084 as well as a decrease in deferred revenue of $445,634, income taxes payable/receivable of $505,379 and accrued expenses of $34,634. The decrease in prepaid expenses resulted primarily from a reduction in prepaid professional liability insurance. We prepaid our annual professional liability insurance policy premium in October 2010 and we expense the prepaid amounts ratably during the annual policy period of October through September. The increase in accounts payable was primarily due to the addition of new service contracts, increased payables relating to the Merger and an increase in the payables that were previously reflected in accrued expenses. The increase in accounts receivable resulted primarily from faster collection of receivables on new medical service contracts added in 2010 which was partially offset by increased receivables for stop/loss reimbursements due to out of facility medical expenditures in excess of stop/loss limits related to new service contracts. The decrease in accrued expenses resulted primarily from a decrease in accrued wages covering one fewer day as compared to the accrual at December 31, 2010 which was partially offset by increases in accruals for Merger related expenses and a non-recurring sales tax accrual. The decrease in income taxes payable/receivable resulted primarily from the payment of scheduled estimated taxes partially offset by accruals of estimated taxes payable. Deferred revenue decreased primarily as a result of a reduction in advance customer payments due to their fiscal year ending June 30, 2011 which prohibits them from making advance payments for services pertaining to the next fiscal year.