10QSB

Securities and Exchange Commission
Washington, D. C. 20549

FORM 10-QSB

             (Mark One)

ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001

OR

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

For the transition period from ____________ to ____________.

Commission file number 0-16257

Pace Medical, Inc.

(Exact name of small business issuer as specified in its charter)

Massachusetts	04-2867416
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer identification No.)
391 Totten Pond Road, Waltham, Massachusetts	02451
(Address of principal executive offices)	(Zip Code)
(781) 890-5656
(Issuer's telephone number including area code)

             Indicate by check mark whether the issuer (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 ý No o

             Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 11, 2001.

             3,354,870 shares of Common Stock, par value $.01 per share

PART I - - FINANCIAL INFORMATION

Item 1. Financial Statements.

             a)          Condensed Consolidated Balance Sheets

             b)          Condensed Consolidated Statements of Operations

             c)          Condensed Consolidated Statements of Cash Flows

             d)          Notes to Condensed Consolidated Financial Statements

PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

			JUNE 30, 2001			DECEMBER 31, 2000
			(Unaudited)			(See note below)
ASSETS
Current assets:
Cash and cash equivalents			$	1,147,388		$	1,252,352
Accounts receivable			410,045			264,873
Inventories:
	Raw materials		314,467			242,965
	Work-in-process		129,617			147,547
	Finished goods		72,916			214,966
			517,000			605,478
Other current assets			23,017			23,820
		Total current assets	2,097,450			2,146,523
Plant and equipment, net			42,944			50,652
Other assets			144,800			121,051
TOTAL ASSETS			$	2,285,194		$	2,318,226
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable			$	145,827		$	117,304
Accrued expenses			28,892			65,397
		Total current liabilities	174,719			182,701
Shareholders' equity:
Common stock, $.01 par value			34,009			34,009
Additional paid-in capital			3,147,151			3,147,151
Cumulative translation adjustment			29,226			32,725
Accumulated deficit			(1,034,155		)	(1,046,613		)
			2,142,222			2,167,272
Less Treasury Stock, at Cost			(31,747		)	(31,747		)
		Total Shareholders' Equity	2,110,475			2,135,525
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY			$	2,285,194		$	2,318,226

Note:          The balance sheet at December 31, 2000 has been taken from the audited financial statements at that date.

                    See accompanying notes to condensed consolidated financial statements.

PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		For the three months ended June 30						For the six months ended June 30
		2000			2001			2000			2001
Net Sales		$	383,084		$	248,263		$	777,555		$	688,471
Cost of sales		206,335			103,881			401,564			283,356
		176,749			144,382			375,991			405,115
Other operating expenses		214,141			211,555			391,339			402,135
Income (loss) from operations		(37,392		)	(67,173		)	(15,348		)	2,980
Other income		14,574			14,848			27,806			29,682
Net income (loss)		$	(22,818	)	$	(52,325	)	$	12,458		$	32,662
Net income (loss) per share:
	Basic	$	(.01	)	$	(.02	)	$	.00		$	.01
	Diluted	$	(.01	)	$	(.02	)	$	.00		$	.01

See accompanying notes to condensed consolidated financial statements.

PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		SIX MONTHS ENDED
		JUNE 30
		2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:		$	12,458		$	32,662
	Net income
	Adjustments to reconcile net income to net cash
	(Used in) provided by operating activities:
	Depreciation and amortization	10,245			15,563
	Change in assets and liabilities, net:	(125,130		)	(83,649		)
	Net cash (used in) provided by operating activities	(102,427		)	(35,424		)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property and equipment	(2,537		)	(5,089		)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS		(104,964		)	(40,513		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		$	1,252,352		$	1,513,514
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,147,388		$	1,473,001

See accompanying notes to condensed consolidated financial statements.

PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.             The accompanying unaudited consolidated financial statements and these notes have been condensed and do not contain all disclosures required by generally accepted accounting principles.  See notes to audited consolidated financial statements contained in the Company's annual report.

2.             In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments, all of which are normal and recurring, necessary to present fairly the financial position of the Company and its wholly-owned subsidiary as of June 30, 2001 and the results of their operations for the three and six months ended June 30, 2001 and June 30, 2000 and their cash flows for the six months ended June 30, 2001 and June 30, 2000.

3.             The Company prepares its financial information using the same accounting principles as for its annual financial statements except that no physical inventories were taken during either of the periods ended June 30, 2001 or 2000.  Cost of sales for such periods was calculated primarily using standard cost methods.

4.             The results of operations for the three and six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year.

5.             The denominator used to determine basic net income per share includes the weighted average common shares outstanding during the quarter.  The denominator used to determine diluted net income per share includes the shares used in the calculation of basic net income per share plus the weighted average options outstanding during the period using the treasury-stock method.

	For the three months ended June 30, 2001
	Income (loss)			Shares	Per Share
	(Numerator)			(Denominator)	Amount
Net Income (loss)	$	(22,818	)
Weighted-average shares outstanding	-			3,354,870
Basic net income (loss) per share	$	(22,818	)	3,354,870	$	(0.01	)
Effect of dilutive securities	-			-
Diluted net income (loss) per share	$	(22,818	)	3,354,870	$	(0.01	)

	For the three months ended June 30, 2000
	Income (loss)			Shares	Per Share
	(Numerator)			(Denominator)	Amount
Net Income (loss)	$	(52,325	)
Weighted-average shares outstanding	-			3,375,870
Basic net income per share	$	(52,325	)	3,375,870	$	(0.02	)
Effect of dilutive securities	-
Diluted net income (loss) per share	$	(52,325	)	3,375,870	$	(0.02	)

	For the six months ended June 30, 2001
	Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
Net Income	$	12,458
Weighted-average shares outstanding	-		3,354,870
Basic net income per share	$	12,458	3,354,870	$	0.00
Effect of dilutive securities	-		13,815
Diluted net income per share	$	12,458	3,368,685	$	0.00

	For the six months ended June 30, 2000
	Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
Net Income	$	32,662
Weighted-average shares outstanding	-		3,354,870
Basic net income per share	$	32,662	3,375,870	$	0.01
Effect of dilutive securities	-		103,245
Diluted net income per share	$	32,662	3,479,115	$	0.01

6.             The Company has adopted the provisions of SFAS No. 130," Reporting Comprehensive Income".  Comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments.  Comprehensive income (loss) for the three and six months ended June 30, 2001 and 2000 is as follows:

	Three Months Ended							Six Months Ended
	June 30,							June 30,
	2001				2000			2001			2000
Net Income (loss)	$		(22,818	)	$	(52,325	)	$	12,458		$	32,662
Currency Translation Adjustment	36,667				(33,786		)	(3,499		)	(44,065		)
Total	$	13,849			$	(86,111	)	$	8,959		$	(11,403	)

Item 2.              Management's Discussion and Analysis of Financial Condition and Results of Operations.

PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY

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

Financial Condition

As of June 30, 2001, the Company had cash and cash equivalents of $1,147,388 and working capital of $1,922,731.  Working capital decreased $41,091 since December 31, 2000 owing to an increase in product development expenditures.  The Company's cash flows have historically tracked its operational results.

The Company expects to maintain a sound financial base for the balance of fiscal 2001.  Management continues to believe that the current level of working capital, coupled with the flexibility of the Company's cost structure, should suffice to ensure that on-going operations are financed adequately.

Financial Results - Three Months ended June 30, 2001 versus Three Months ended June 30, 2000

Sales in the second quarter of 2001 increased 54% from the sales posted in the second quarter of 2000.  The increase in sales was caused by higher volume of products shipped to an international distributor.

The Company's margins in the second quarter were lower than those attained in 2000 (from 58% in 2000 to 46% in 2001).  This occurred due to higher than average international sales.  It should be noted that pricing is continuing to remain firm on all products.

Operating expenses were slightly higher in the three months ended June 30, 2001 versus the three months ended June 30, 2000.  Management anticipates some increase in its operating expenditures during the balance of 2001.

No tax benefit was recorded for the three months ended June 30, 2001 owing to uncertainty regarding the Company's ability to use net operating loss carryforwards in both the U.S. and U.K.

Net loss for the quarter was $22,818 or $.01 per share, representing a decrease in the loss of $29,507 from the comparable quarter in 2000.

Financial Results - Six Months ended June 30, 2001 versus Six Months ended June 30, 2000

Sales in the six months ended June 30, 2001 increased from the amount posted in the six months ended in June 30, 2000.  The increase in sales was primarily attributed to increased shipment of products to our international distributor.

The Company's margins for the year-to-date period were lower than those achieved in the first half of 2000 (from 59% in 2000 to 48% in 2001).  This occurred due to higher than average international sales.  It should be noted that pricing continued to remain firm on all products.

Operating expenses were lower for the six months ended June 30, 2001 versus the six months ended June 30, 2000.  Management anticipates some increase in its operating expenditures during the balance of 2001.

No tax provision was recorded for the six months ended June 30, 2001 owing to the Company's ability to use net operating loss carryforwards in both the U.S. and U.K.

Net income for the six months was $12,458 or $.00 per share, representing  a decrease of $20,224 from the comparable period in 2000.

Factors That May Affect Future Results

From time to time, information provided by the Company or statements made by its employees may contain "forward-looking" information which involves risks and uncertainties.  In particular, statements contained in this report which are not historical facts (including but not limited to the Company's expectations regarding business strategy, pricing, anticipated operating results, operating expenses and anticipated working capital) may be "forward-looking" statements.  The Company's actual results may differ from those stated in any forward-looking statements.  Factors that may cause such differences include, but are not limited to, risks associated with the introduction of new products, development of markets for new products offered by the Company, the Company's relationships with distributors and OEM's, the economic health of such OEM's, government regulation, competition and general economic conditions.

PART II - OTHER INFORMATION

Item 4.              Submission of Matters to a Vote of Security Holders

             At the Company's Annual Meeting of Stockholders held on June 8, 2001, the following members were elected to the Board of Directors:

	Votes	Votes
	For	Withheld
Ralph E. Hanson	2,585,455	0
George F. Harrington	2,585,455	0
Derrick Ebden	2,585,455	0

Item 6.              Exhibits and Reports on Form 8-K

             (a)         Exhibits:

                                        10.1.     Employment Agreement with Ralph Hanson

             (b)        Reports on Form 8-K:

                                        None

SIGNATURES

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

	PACE MEDICAL, INC.
	(Registrant)
Date:  August 14, 2001	/s/ Ralph E. Hanson
	Ralph E. Hanson, President
	and Chief Executive Officer
	(principal executive officer)
Date:  August 14, 2001	/s/ Ralph E. Hanson
	Ralph E. Hanson, Chief
	Financial Officer
	(principal financial officer)

EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

                EMPLOYMENT AGREEMENT dated as of June 1, 2001 by and between PACE MEDICAL, INC., a Massachusetts corporation with a usual place of business at 391 Totten Pond Road, Waltham, Massachusetts (the "Company"), and RALPH E.  HANSON of Arlington, Massachusetts (the "Employee").

                WHEREAS, the Company wishes to assure itself of the Employee's services in the capacity and during the periods specified herein; and

                WHEREAS, the Employee wishes to enter into an Employment Agreement with the Company upon the terms and conditions set forth herein;

                NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto do hereby mutually agree as follows:

                1.  The Company hereby employs the Employee and the Employee hereby accepts employment by the Company for the period June 1, 2001 through May 31, 2004, subject to the terms and conditions hereinafter set forth.

                2.  The Employee will serve the Company as its President and Chief Executive Officer.  Nothing contained herein shall limit the right of the Employee to engage in personal investments and other activities to the extent they do not interfere with the Employee's performance under this Agreement.  The Company shall have no interest in any of the benefits generated by any of said investments or other activities.

                3.  For the services to be rendered by the Employee under this Agreement, the Company shall pay to the Employee such rate of salary as shall be fixed, from time to time, by the Board of Directors of the Company, but in no event less than One Hundred Thirty-nine Thousand Dollars ($139,000.00) per year payable in equal installments, such installments to be paid monthly or more frequently.  The Employee shall be entitled to such fringe benefits as are generally made available to employees of the Company and shall be entitled to reimbursement of all reasonable out-of-pocket expenses actually incurred by him on behalf of the Company.

                4.  During the Employee's period of employment, or at any time thereafter, he will not reveal to any person unless authorized in writing by the Company, or use against the best interests of the Company any information concerning the Company's inventions, trade secrets, processes and in general any of its business affairs of a confidential nature.

                5.  The Employee will disclose to the Company all inventions, discoveries, and improvements which he may make during his employment by the Company, whether during working hours or at any other time, and he will, on demand, assign to the Company all of his interests and do any acts which the Company may consider necessary to secure to it or to its successors or assigns any and all rights relating to such inventions, discoveries, and improvements, including patents in the United States and foreign countries.

                6.  The Employee agrees that so long as he is employed by the Company and for a period of six months thereafter, he will not in the United States or Canada, engage in any competitive activities (as hereafter defined) with the Company, or any successor or assign of the Company, nor will he own or control an interest (other than as a holder of a non-controlling investment in a company whose securities are listed on a national stock exchange or quoted in the Nasdaq National Market) in any entity which engages or will engage in such competitive activities.  As used herein, "competitive activities" shall mean the manufacturer, sale or service of (a) cardiac pacers or (b) any other product or product line manufactured by the Company, sales from which other product or product line constitute 25% or more of the gross revenues of the Company during its current or any of its preceding two fiscal years.  It is expressly covenanted and agreed that in the event of breach by the Employee of any of the covenants herein contained damage suffered by the Company will be extremely difficult to ascertain and the remedy at law for any breach or threatened breach will be by its nature inadequate; therefore, in the event of breach, in addition to such other remedies which may be provided by law, the Company (or any successor to the Company) shall be entitled to injunctive and other appropriate equitable relief and shall be entitled to the same in any court of competent jurisdiction.

                7.  This Agreement shall be binding upon and inure to the benefit of the parties hereto, their heirs, successors and assigns including without limitation any successor who acquires all or substantially all of the assets of the Company.

                IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written.

PACE MEDICAL, INC.

By: /s/ Drusilla F. Hays

Drusilla F. Hays, Vice President

/s/ Ralph E. Hanson

Ralph E. Hanson - Employee