10KSB

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10–KSB

(Mark One)

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

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

For the transition period                        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 incorporation or organization)	(I.R.S. Employer Identification No.)
391 Totten Pond Road
Waltham, Massachusetts	02451
(Address of principal executive offices)	(Zip Code)

Issuer’s telephone number, including area code (781) 890-5656

Securities registered under Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
None	None

Securities registered under Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  o

State issuer’s revenues for its most recent fiscal year.  $1,546,422

State the aggregate market value of the voting stock held by non–affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 90 days.  $593,961 as of March 20, 2002.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

3,354,870 shares of Common Stock, $.01 par value, as of March 20, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10–KSB (e.g., Part I, Part II, etc.) into which the document is incorporated; (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933.          None.

PART I

Item 1.      Description of Business.

a.  Business Development.

Pace Medical, Inc. (the “Company”) is principally engaged in the design, manufacture and sale of single and dual-chamber temporary cardiac pacemakers, a dual-chamber pacing analyzer, percutaneous lead introducers, heartwires, surgical and temporary pacemaker extension cables, and related accessories.

The Company commenced operations effective March 16, 1985 when Ralph E. Hanson, the Company’s President and founder, acquired the outstanding capital stock of APC Medical Ltd. (“APC Medical”) from American Pacemaker Corporation, a subsidiary of Intermedics, Inc.  Unless otherwise specifically referenced herein, the term “Company” includes APC Medical.  Mr. Hanson was the founder of American Pacemaker Corporation and served as its president from 1975 until 1985.  American Pacemaker Corporation was acquired by Intermedics, Inc. in 1982.  The Company was incorporated in Massachusetts on May 29, 1985 and Mr. Hanson transferred the outstanding capital stock of APC Medical to the Company on January 1, 1986.

APC Medical is the successor to Devices Limited (“Devices”), a U.K. manufacturer of medical electronic equipment, permanent pacemakers and leads, and temporary pacemakers, which was a pioneer in the pacing industry.  After Devices was acquired by Johnson & Johnson Co., it was sold in 1978 to American Pacemaker Corporation and its name was changed to APC Medical Ltd.  APC Medical is a U.K. limited company with facilities located in Welwyn Garden City, Herts, England.  The Company’s acquisition of APC Medical provided the Company with a foreign based manufacturing operation and an international marketing and sales presence through a network of experienced sales representatives and distributors in the U.K., Europe, and other world markets.  A portion of the Company’s manufacturing continues to be done by APC Medical, and APC Medical markets the Company’s products outside the U. S. and Canada under the APC Medical name.  The Company is responsible for marketing in the U.S. and Canada and conducts most of its manufacturing and new product development operations in the U.S.

b.  Description of Business of Issuer.

The Company designs, manufactures and sells single and dual-chamber temporary cardiac pacemakers, a dual-chamber pacing analyzer, percutaneous lead introducers, heartwires, surgical and temporary pacemaker extension cables, and related accessories.  The Company is not engaged in the business of designing, manufacturing, or marketing permanent implantable cardiac pacemakers and, due to the high risk of liability associated with such pacemakers, does not intend to enter this business.  Temporary pacemakers

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involve some risk of liability because they may be life-supporting medical devices, but their ability to be tested, repaired and replaced without surgery diminishes the risks to the patient and the potential of liability in comparison to permanent implantable pacemakers.

A pacemaker is an electronic device which stimulates an impaired heart, thereby causing it to beat at a rate which will meet normal bodily demands.  A pacemaker consists of two elements, a pulse generator (which provides the power source and the timing circuit) and a pacing lead (which conducts the electrical impulses from the pulse generator to the heart).  Temporary pacemakers are made for temporary external applications for short-term electrical conduction and cardiac rhythm disorders and are not implanted in a patient’s body.  In contrast, permanent pacemakers are implantable and made for longer term applications.  All pacemakers, whether temporary or permanent, are connected to the heart by a lead, which consists of an insulated wire and an electrode.

Pacemakers – whether temporary or permanent – are also characterized as either asynchronous pacemakers, which supply impulses to the heart at a fixed rate on a continuous basis, or “demand” pacemakers, which supply impulses to the heart on an “as needed” basis only when the natural heartbeat is inadequate.  Demand pacemakers are either ventricular demand pacemakers which supply impulses as needed to correct a heart’s irregular beating pattern or DDD dual chamber pacemakers, which supply impulses as needed to provide heartbeat regularity and in addition increase the heart’s pumping capacity.  Pacemakers, permanent or temporary, may also either be programmable or non programmable.  Programmable pacemakers may have one or more operational modes and each mode permits the attending physician to program different pacing parameters as dictated by the patient’s conditions.  Thus, a physician may use one multiple mode pacemaker to treat a variety of patient conditions with appropriate pacing parameters.  In this manner, a multiple mode pacemaker offers a physician the versatility to treat changing patient conditions with a single pacemaker.  In addition, because temporary pacemakers are reusable external devices, one multiple mode temporary pacemaker can be used repeatedly for different patients experiencing a variety of medical conditions.

Pacing leads – whether temporary or permanent – consist of an insulated wire, an electrode, and a connector.  The lead is usually inserted through a vein into the interior of the heart.  The temporary bipolar ventricular pacing leads are radiopaque, permitting viewing on diagnostic and monitoring equipment and utilize a polyurethane material as the outer insulator, stainless steel wire as the conductor, and are offered in 4, 5 and 6 French sizes.  These are compatible with all known temporary pacemakers being sold worldwide at this time.

The Company believes, based upon industry publications, that the worldwide market for temporary pacemakers, temporary pacing leads, pacing analyzers, myocardial heartwires, lead introducers, and surgical extension cables is approximately $100 million annually.  The Company further believes based upon management’s experience that in number of units sold, percent of market and dollar volume, the programmable DDD dual

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chamber temporary pacemakers will experience the fastest rate of growth of all lines in the temporary pacemaker business during the next five years.

Current Products

The Company has several products now being marketed in the U.S. that have received marketing approval from the U.S. Food and Drug Administration (“FDA”).  In general, FDA approval can be obtained by three means:  an application for approval under statutory section 510(k), a premarket approval application (“PMA”), or a supplemental premarket approval application (“SPMA”).  See “Government Regulation”.

A 510 (k) approval is the simplest manner in which a manufacturer may bring a new product to market.  In granting 510(k) approval, the FDA is allowing the marketing of a product based on its assessment that the product is “substantially equivalent” to devices which are already in the market and presents no new issues involving safety and effectiveness.  Approval of a 510(k) application by the FDA is not approval of the device itself as it is not based on an in depth examination of the product.

A PMA is the typical means by which a new product is introduced into the market when a 510(k) is not appropriate because: 1) new issues of safety and effectiveness may be involved, 2) there is no comparable pre–enactment, substantially equivalent device for comparison, and 3) the methodologies involved in the design and manufacture of the device may present safety issues of a compelling nature requiring an in depth review by the FDA.  If the product is a Class III device, a controlled clinical study to demonstrate safety and effectiveness may be required.  When the FDA issues its approval of a PMA, it is, in fact, approving the device itself for use in specific approved circumstances.

An SPMA is a means by which a new product may be approved by the FDA, when its characteristics and indications for use are similar to a PMA device, and its methods of design, manufacture and control present no new or unusual safety and effectiveness issues.  A controlled clinical study may still be a requirement for an SPMA approval.

All new products that are to be introduced to the United States market will require FDA approval prior to being made available for commercial marketing.  See “Government Regulation”.

The products currently marketed by the Company are as follows:

Temporary Cardiac Pacemakers.  The Company’s Model 4570 MICRO-PACE, dual-chamber, temporary cardiac pacemaker, is a programmable eleven (11) mode, “state of the art”, single and dual-chamber temporary cardiac pacemaker consisting of three (3) atrial modes, AOO, AAI, AAT, four (4) ventricular modes VDD, VOO, VVI, VVT, and four (4) dual modes DOO, DVI, DDI, DDD.  The MICRO-PACE is a technically advanced dual-chamber temporary cardiac pacemaker which utilizes a copyrighted computer

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software-based microprocessor design.  See “Licenses and Proprietary Technology”.  With the MICRO-PACE unit, the physician is able to select the proper physiological parameters in accordance with each individual patient’s needs.  The MICRO-PACE unit has features that address the typical complications previously associated with advanced dual-chamber pacing modes.  The simplified keyboard operation, visual display, built-in safety features, wide selection of parameter and operation modes, size and battery operation are all features that make the MICRO-PACE unit an innovation in temporary cardiac pacing.  The Model 4570 MICRO-PACE, dual-chamber, DDD, temporary cardiac pacemaker is an enhanced version of the Company’s original MICRO-PACE unit, Model 4553, which received FDA approval in 1991.  The Model 4570 received FDA SPMA approval in August, 1995.  It has the ability to sense, pace and track in the DDD mode at high-rates, thus allowing cardiologists and surgeons to address the needs of post-operative, open-heart patients, regardless of their age.  In particular, the device will greatly assist the recovery of both infants and young children, who have very fast atrial heart rates (180-210 bpm) and have developed temporary heart block, following open-heart surgery.  To the Company’s knowledge, the Model 4570, dual-chamber, temporary pacemaker was the first device of its kind in the world with the ability to sense and pace at high rates in the DDD mode, thereby restoring A-V synchrony and improving cardiac output.

The Company also manufactures three (3) types of single-chamber temporary cardiac pacemakers.  Model EV4542 and Model EV4543 are ambulatory units that  attach comfortably to the patient and allow for ambulatory pacing, if required.  They are highly desirable due to their small size and they offer a great deal of flexibility with regard to the selection of required pacing parameters.  These miniature pacemakers are battery operated and have over a decade of reliability and performance.  Model 4170 attaches to the patient’s bed rail and is more rugged in construction.  The Company believes based upon management’s experience in the market that APC Medical and its predecessors have supplied the majority of the temporary external pacemakers sold in the United Kingdom.

Pacing Analyzer.  The Model 4800 AccuPace™, dual-chamber pacing analyzer, combines the benefits of dual-chamber multi-mode, multi-parameter pacing with testing features that evaluate, display, store, and print out the important characteristics of the patient’s lead system.  The temporary pacing feature allows the physician to perform pre-implant stimulation studies of the basic pacing parameters and functions on the patient prior to the implantation of a permanent pulse generator.  Considerable attention has been paid in the design of this product to the “user friendly” aspects of its operation.  The Company received 510(k) approval from the FDA covering the Model 4800 AccuPace™, dual-chamber, pacing analyzer in September, 1994.

Lead Introducers (Peel-Away).  The Company’s line of disposal percutaneous lead introducers provides for a temporary access to a vein so that a permanent pacing lead can be positioned within the heart.  This product line includes seven sizes consisting of 7, 8, 9, 10, 10.5, 11 and 12 French types.

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Extension Cables.  The Company manufactures a wide variety of temporary cardiac pacemaker extension cables and surgical extension cables in order to satisfy the many different applications encountered during patient pacing.  The extension cables can be used with most manufacturers’ temporary external pacemakers and pacing system analyzers currently being marketed.  Many of the cables can be resterilized after use, while others are disposable.  All have protected connector pins to prevent a potential safety hazard.

New and Proposed Products

The Company generally introduces a new product outside the United States first and, upon the receipt of FDA approval, commences marketing of the product in the United States.  Introduction of all of the Company’s new products in the United States is subject to FDA approval.  See “Current Products” and “Government Regulation”.  The Company received SPMA approval from the FDA of two proposed products in 2001.   Additional state-of-the art temporary pacing products are in development.  The Company intends to file appropriate regulatory submissions with the FDA covering these devices during the year 2002.

Marketing

The Company’s temporary cardiac pacemakers and associated accessories are sold to hospitals both domestically and abroad to OEM accounts and through independent sales representatives and independent distributors.

Domestic Sales (North America).  The Company’s domestic sales consist primarily of single and dual-chamber temporary pacemakers shipped to OEM accounts under either private labels or the Company’s name.  The Company also utilizes manufacturers’ representatives and distributors.  The Company oversees and supports the representative and distributor organizations.

International Sales.  The Company has entered into a distributor arrangement with respect to certain international markets with APC Cardiovascular Ltd., an entity controlled by Derrick Ebden, who is a director of the Company and the former managing director of APC Medical.  APC Cardiovascular sells the Company’s products directly and through a network of approximately thirty (30) distributor organizations extending from Ireland to Japan.  APC Cardiovascular and these distributors are experienced in selling medical (cardiovascular) products and well established in the territories that they cover.

The Company focuses on two major domestic and international selling markets.  These markets are as follows:

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1.  OEMs.  Original Equipment Manufacturers (companies currently manufacturing implantable pacemakers) often need a second source of supply and, in many cases, require special types of temporary cardiac pacemakers that they do not manufacture.  Purchase of such temporary cardiac pacemakers and leads from the Company enables the OEMs to expand their product lines and offer a more complete service to their customers.

2.  Representatives/Distributors.  In addition to APC Cardiovascular, the Company utilizes representative and distributor organizations in the United States and Canada.  Only those who have proven medical sales experience and integrity in making day-to-day calls on hospital purchasing directors and physicians are considered.

The Company conducts training and education programs for its sales representatives upon engagement of the representative and upon introduction of new products.  The sales representatives, in turn, provide service, training and other assistance to physicians.  The Company intends to enter into contracts with its representatives which may be terminated on short notice by either party.

The establishment of customer relationships with physicians is an important competitive factor in the industry.  Although a company’s products themselves must be competitive for a company to compete successfully, an experienced salesperson with established physician rapport may overcome small differences in products.  While the Company, therefore, depends upon the sales activities of its representatives, the Company does not believe that the loss of any one sales representative would adversely affect its business.

The Company’s distributors and sales representatives are not restricted in marketing products that compete with the Company’s products.  The Company believes that its distributors and sales representatives do not presently market competing temporary cardiac pacemakers, but do presently market competing accessory products.

During 2001, 83% of the Company’s sales were to two customers.  During 2000, 84% of the Company’s sales were to two customers.

Working Capital Practices.

In the United States, the Company sells its pacing products through independent sales representatives, OEM accounts, and distributors.  The OEM accounts and distributors buy pacemakers directly from the Company and are billed at a discounted rate, 30 days net.  Many of the Company’s products are sold on a factory direct basis or through sales representatives, and the Company bills the hospitals directly.  The Company generally pays the representative its commission during the month following the collection of funds.  The Company’s practice is to attempt to realize accounts receivable within 30 to 60 days after shipment.  The Company believes, based upon management’s experience,

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that the foregoing working capital practices are similar to those of the pacemaker industry in general.

Since in most cases an insurance company or government program, including Medicare and Medicaid programs, reimburses the hospital or patient for pacemakers, any future reductions in government funding of health insurance may limit funds available to certain government third-party payers to pay for the Company’s products, thereby adversely affecting the Company’s sales.

The nature of the Company’s pacemaker products requires that sufficient inventories of finished goods and critical components be maintained to insure that the rapid delivery requirements of its customers are met.  The Company currently maintains inventories of finished goods and of certain components to meet foreseeable requirements of several months.  See “Sources of Supply”.

Product Warranties

Temporary Cardiac Pacemakers and Pacing Analyzers.  Temporary cardiac pacemakers and pacing analyzers carry a one year warranty.  The Company warrants these products to be free from defects in materials for one (1) year from the date of delivery when operated in accordance with the written operating instructions which accompany the instrument.  The Company’s obligations under this warranty are limited to repair or replacement of parts found to be defective during the warranty period.  Expendable items, such as batteries, straps, and extension cables are not covered in this warranty.  The Company believes, based upon management’s experience, that these warranty items are consistent with practice in the pacemaker industry in general.

Product Liability and Limits of Insurance Coverage

Because the Company’s temporary cardiac pacemakers and pacing analyzers may be life-supporting medical devices, the Company’s liability for any presently unknown product design or manufacturing deficiencies could be substantial and could exceed the limits under existing product liability insurance.  The Company maintains product liability coverage outside the United States with annual limits of £1,000,000 (approximately $1,456,000 as of December 31, 2001) per occurrence and in the aggregate.  The Company does not have product liability insurance in the United States, and any claim could adversely affect the Company’s financial condition and results of operations.  The Company believes, based upon management’s experience, that its liability exposure is lessened because it does not manufacture or sell permanent implantable cardiac pacemakers or leads.  However, the cost of recalling its products upon discovery of any material defects would be substantial and could have an adverse effect on the Company and its financial condition and results of operations.

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Research and Product Development

The Company continually engages in programs of product improvement and new product development.  Research and development activities are carried on in the Company’s own laboratories by the equivalent of three full time employees.  These technically trained employees also devote part of their time to clinical evaluation and operational activities with respect to existing products.  In addition, the Company utilizes, when needed, independent high technology, engineering consultants for new product development projects.  The acquisition of new products and/or technology transfer is also available through licensing arrangements with other firms.  See “Patents and Licenses”.  The Company also has a Medical Advisory Board consisting of two physicians specializing in cardiology and surgery and utilizes its individual members for advice and consultation on development and improvement of the Company’s products.

During the years ended December 31, 2000, and December 31, 2001, the Company expended $242,007 and $197,676, respectively, on product development.

Quality Assurance

Quality control procedures begin upon the receipt of raw components and materials and continue during production and after final assembly.  The Company keeps accurate and concise quality control and production records for each temporary pacemaker and all other products manufactured.

The Company’s quality control testing of components, sub-assemblies and final products is extensive.  Approximately three employees are engaged in inspection and quality control activities.  Because of the life-enhancing function pacemakers perform, all pacing system components and related products are manufactured to precise specifications.

Sources of Supply

Many of the components incorporated by the Company in its pacemaker products are produced to its specifications by various suppliers.  While it is the Company’s policy to qualify a limited number of suppliers of components, the Company maintains a list of alternate sources of supply and intends to maintain a sufficient amount of inventory in order to minimize disruptions if conditions require selecting substitute vendors.  The Company believes, based upon management’s experience, that alternate sources of supply for most components could be qualified within sufficient time to avoid production delays.  The Company purchases approximately 80% of its component parts in the United States with the remainder being purchased in Europe.  The failure to obtain necessary

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quantities of materials or components in a timely fashion from vendors who are sole suppliers would have an adverse effect on the Company.

The Company’s products, which are primarily manufactured in the U.S., are assembled on a contract basis by outside contractors.  The Company believes that alternate contractors would be available if such contractor were to cease operation, which the Company does not anticipate happening.  However, any cessation of operations by such contractor would disrupt the Company’s U.S. production and might adversely affect the Company’s business.

Government Regulation

Since temporary pacemakers and temporary pacemaker leads are “devices” as defined by the Federal Food, Drug, and Cosmetic Act, as amended (21 U.S.C. 321 et seq.) (the “Act”), all of the Company’s pacemaker products are subject to the regulatory authority of the United States Food and Drug Administration (“FDA”).  This authority was substantially increased by the passage of the Medical Device Amendments of 1976 in May 1976.

Under the Act, the FDA has authority to: (i) set mandatory performance standards for medical devices; (ii) classify devices which need premarket clearance by the FDA to provide reasonable assurances of safety and effectiveness and require submission of proof of safety and effectiveness prior to the marketing of such devices; (iii) regulate clinical testing of new devices; (iv) establish “good manufacturing practices” which must be observed in the manufacture of devices; (v) require the registration of device manufacturers and their products; (vi) conduct periodic detailed inspections of device manufacturing establishments and, for some devices, inspections of records found in such establishments; (vii) establish record–keeping and reporting requirements; (viii) require reporting of product defects to the FDA; (ix) require defect notification and replacement or repair of defective products, or refund of their purchase price and reimbursement of certain associated cost of consumers and distributors, without relieving manufactures of tort liability for any injury resulting from the defect; (x) “ban” a device found to present substantial deception or an unreasonable or substantial risk of illness or injury; (xi) require that all labels and labeling for a device be adequate and truthful; and (xii) regulate the advertising of certain devices.  The FDA has published regulations with respect to most of the categories outlined above, including regulations establishing good manufacturing practices that apply to all of the Company’s operations, regulations classifying “devices” and regulations regarding clinical testing of new devices.

Under the FDA regulations implementing the 1976 Amendments, the Company’s pacing leads and temporary cardiac pacemakers are classified as “Class III” medical devices.  The Act requires “premarket approval” by the FDA of new “Class III” medical devices as a condition for “commercial distribution” of such devices and approval of substantial changes in current products prior to the products being commercially

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distributed.  Obtaining such approval requires the filing of applications with the FDA containing proof that the products are safe and effective.  This process can be both costly and time consuming.

Medical devices which are “substantially equivalent” to devices marketed in interstate commerce prior to May 28, 1976 may be sold commercially upon FDA determination of such substantial equivalence.  The Company has obtained favorable FDA determination letters with respect to many of its current pacemaker products.  The Company will be seeking similar FDA determination of substantial equivalence on other products.  See “Business-New and Proposed Products”.

The Company is not in a position to make a judgment as to the full impact of the FDA regulations on continuing operations, particularly the pre-market approval procedures, but it expects to have to devote substantial time and significant expense to compliance matters in the foreseeable future.  In addition, there is no assurance that changes in governmental regulations will not adversely affect the Company.

Where a device is found to be in violation of the requirements of the Act or regulations thereunder, the FDA is authorized to seek an injunction against the further manufacture and distribution of the device and to have the device seized.  The FDA may itself administratively restrain a device for up to 30 days pending institution of further regulatory action.  In addition to these remedies, the FDA may seek criminal penalties against corporations and individuals who ship or cause the shipment of prohibited devices in interstate commerce or who otherwise violate the Act.  Finally, the FDA has developed a “recall” procedure under which a manufacturer or distributor may be requested to remove a product from interstate commerce if that product violates the Act.

Pursuant to its regulatory authority, the FDA has conducted routine inspections of the Company’s manufacturing facilities, none of which has resulted in any action by the FDA to impose administrative or judicial sanctions against the Company, or in any interruption of commercial distribution of the Company’s products.

The FDA’s regulatory authority over devices continues after the product is approved for marketing, and the FDA may pursue its remedies described above if it finds that the device proves to be unsafe or ineffective.  To date, the FDA has made no such determination with respect to any of the Company’s products and the Company has no reason to believe that the FDA will do so in the future.  If there should be substantial failures in any of the Company’s products presently being sold, it is likely that such products would have to be taken off the market either pursuant to FDA action, or otherwise, and the Company’s business would be adversely affected.

Certain states may also regulate medical devices, but such state regulation, if different from federal requirements, must have prior  FDA approval.  The Company’s products are also subject to various regulations by governments outside the United States.

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Many foreign countries have regulations similar to the FDA that must be adhered to.  Also the Department of Health and Social Security in the U.K. carefully monitors the performance of U.K. manufacturing companies.  The Company believes that its products are in compliance with such other regulations.

In 1993, member countries of the European Union established minimum standards for certain medical devices which were to be sold there after June 13, 1998.  These requirements are set forth in what has become known as the “Medical Device Directive”.  Companies manufacturing such devices were required to become registered as meeting the quality system requirements for the medical products, a version of ISO 9000, known as EN 46000.  Additionally, products to be sold in the European Union had to be independently certified as meeting the requirements of the Medical Device Directive on issues involving safety, labeling and performance.  Both of these matters are handled by independent organizations known as “Notified Bodies”.  British Standards Institution (BSI) was chosen as the Company’s Notified Body in 1997.  The Company was successful in obtaining registration to EN 46001 (ISO 9001) and in obtaining certification of its products, all of which now bear the CE Mark.

Foreign Operations

For the years ended December 31, 2000 and December 31, 2001, revenues from foreign customers, including export sales, totaled $775,461 and $1,228,288, respectively (approximately 63% and 79%, respectively, of net sales).  APC Medical assembles a portion of the Company’s products in the United Kingdom for shipment to foreign and domestic customers.  APC Medical manufactures temporary pacemakers, temporary pacemaker extension cables, and surgical extension cables in its own facility for its foreign customers.  See “Notes to Consolidated Financial Statements”.

The Company’s operations can be affected by currency fluctuations.  Fluctuations between the pound and the dollar can affect the Company’s position in international competition, with a strengthening of the dollar making its products less expensive to customers in the United States and a weakening of the dollar making its products more expensive to customers in the United States.  In addition, the Company’s foreign business is subject to the usual risks incident to operating abroad, including currency restrictions, currency adjustments and changes in foreign laws.

Employees

At December 31, 2001, the total number of the Company’s full-time employees was 12.  APC Medical employed 6 of these employees.  The Company believes, based upon management’s opinion, that its relations with its employees are satisfactory.

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Licensing and Proprietary Technology

The Company does not own any significant patents covering the technology incorporated in the Company’s products.  The Company is not aware that any of its products infringe on patents owned by others, however, the Company has not conducted a formal patent search to determine whether any of its products so infringe and there can be no assurance that the technology used in the Company’s products may not be covered by an existing or future patent owned by others.  If it is determined that the Company is infringing, then it is the Company’s intention to acquire licenses covering such technology, to the extent that licenses are available under such patents.  It is the Company’s belief that the payments of additional reasonable royalties would not impair its business.  However, if the owner of such a patent refused to grant a license to the Company, then one or more of the Company’s products might be at a competitive disadvantage in the market.  If the Company should decide to incorporate such technology into its products without first obtaining a license, the Company could be enjoined from marketing the product, which would adversely affect the Company’s business.

The Company is relying on the laws governing trade secrets and copyright to protect the software embodied in its products.  Despite these precautions, it may be possible to copy or otherwise obtain and use the Company’s products and technology without authorization.  While the Company intends to vigorously prosecute any such unlawful use of its trade secrets or copyrights, there can be no assurance that it will be successful in any such prosecution.

Competition

In the temporary pacemaker market, the Company is in competition with approximately three (3) companies.

The manufacturers of temporary pacemakers market their products on a direct basis, through manufacturers’ representatives and distributors, or to OEM implantable pacemaker manufacturers.  The Company intends to expand its share of this OEM market during 2002.

Many of the Company’s competitors use direct sales people who are controlled by, and sell pacemakers and other medical products exclusively for, their employers, unlike the Company’s independent sales representatives and distributors who direct their own activities and sell medical products manufactured by other companies.  Due to its limited resources, the Company has not to date been able to render specialized customer services equivalent to those provided by such manufacturers.

There are several foreign manufacturers developing and marketing temporary pacemakers.  Foreign manufacturers may receive the benefit of national and local laws protecting them from outside competition.

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Product characteristics (including reliability, performance and longevity), design (lightness, compactness and contours), salesperson/physician relationships, warranty terms, service and price are all competitive factors in the industry.  The Company believes, based upon management’s experience, that it maintains a competitive position with respect to most of these elements.  Since the Company’s salespeople are not direct employees of the Company, the Company may have less control over salesperson/physician relationships than certain of its competitors whose salespeople are direct employees.

With the rapid progress of medical technology, and in spite of continuing research and development progress, the Company’s products are always subject to the risk of being rendered obsolete by the introduction of new products or techniques.

Some of the conditions and diseases which the Company’s pacemakers are designed to treat may, in some cases, also be treated by drug therapy.  The Company does not deem itself to be in direct competition with pharmaceutical companies because, at present, drug therapy is infrequently a viable alternative to the use of a pacemaker.  However, new drugs and methods of therapy may be developed by pharmaceutical or other health care companies which might compete with the Company’s products.  Most of such companies are larger than the Company and possess more substantial research facilities and other resources.

Environmental Laws

Due to the nature of its activities, the Company does not believe that compliance with environmental laws and regulations will have a materially adverse effect on its financial condition or operations.

Item 2.Description of Property.

The Company occupies approximately 3,500 square feet of space in Waltham, Massachusetts, which it uses for offices, engineering and inventory storage.  The Company occupies this space pursuant to a lease that expires in June, 2002, with an annual basic rent of approximately $80,500 or approximately $23.00 per square foot.  The Company anticipates that this lease will be renewed for an additional one-year term.

In addition, APC Medical leases approximately 5,000 square feet of manufacturing and office space located in Welwyn Garden City, Herts, England at a current annual rent of approximately £28,500 ($41,000) or approximately £5.70 ($8.20) per square foot.  The lease expires in 2006 and contains provisions requiring upward revision of the rent every five years.

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The Company believes, based upon management’s evaluation of its future space needs, that the Company’s facilities in Waltham and England are adequate.  In addition, in the opinion of the Company’s management, the Company’s facilities are adequately insured.

Item 3.Legal Proceedings.

Neither the Company nor APC Medical is a party to any material legal proceedings.

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

Not applicable.

PART II

Item 5.Market for Common Equity and Related Stockholder Matters.

The Company’s Common Stock is quoted on the National Association of Securities Dealers, Inc.’s OTC Bulletin Board under the symbol PMDL.  The following table sets forth, for the periods indicated, the closing quote on the OTC Bulletin Board.  Such quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not reflect actual transactions.

	Closing Quote
Fiscal Year Ended December 31, 2000 (OTC)
First Quarter	$	0.91
Second Quarter	$	0.63
Third Quarter	$	0.62
Fourth Quarter	$	0.37
Fiscal Year Ended December 31, 2001 (OTC)
First Quarter	$	0.33
Second Quarter	$	0.36
Third Quarter	$	0.30
Fourth Quarter	$	0.30

As of March 20, 2002, there were 81 record holders of the Company’s Common Stock.

The Company has never paid any dividends and does not have any intention of paying any dividends in the foreseeable future.

16

Item 6.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

As of December 31, 2001, the Company had cash and cash equivalents of $1,436,366 and working capital of $1,871,254.  This contrasts to comparable cash and working capital positions at December 31, 2000 of $1,252,352 and $1,963,822.

The increase in the Company’s liquidity since the beginning of the fiscal year is primarily attributable to an increase in cash flow from operations.  The Company’s cash flows have historically tracked its operational results.

In March, 1998, the Company announced a stock repurchase program pursuant to which the Company is authorized to acquire up to 100,000 shares of its common Stock.  As of March 15, 2002, 46,000 shares had been repurchased under the program for $31,747.

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 its on-going operations are financed adequately in fiscal 2002.  On this basis, management has no immediate plans to seek additional financing.  In the long term, however, additional equity financing may be sought to continue to fund research and development and to expand the Company’s marketing operation.

Results of Operations - Year Ended December 31, 2001 versus Year Ended   December 31, 2000

Sales increased by 30% from $1,189,588 in 2000 to $1,546,422 in 2001.  The increase was primarily attributable to an increase in the Company’s international business and favorable foreign exchange conversion rates.

Gross margins for 2001 were approximately 49% verses 57% in 2000.  The decrease was due to a change in the product mix and unfavorable production variances.   It should be noted that prices continued to remain firm on all products.

Operating expenses decreased $86,418, or 10% in 2001 to $812,012 from 2000 operating expenses of $898,430.  The decrease was attributable to lower exchange rates in 2001 (and the resulting impact on APC costs and expenses) and to lower compensation expenses.  Management anticipates some increase in its operating expenditures in 2002.

The Company has reflected a tax provision of $38,363 on its financial statements for 2001 representing taxes paid in the UK as APC income.  No US tax was provided for in 2001.  The Company has reflected no tax provision on its financial statements for 2000

17

because of its ability to utilize net operating loss carry forwards in both the U.S. and the U.K.

Net loss for 2001 was $38,669 or $(.01) per diluted share for the year ended December 31, 2001.  This contrasts with the 2000 net loss of  $159,095 or $(.05) per diluted share.  The reduction in net loss was primarily due to higher sales.

Management believes that inflation has had no impact on either net sales or income in the previous two years.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS No. 133), which the Company adopted in 2001.  SFAS No. 133 establishes standards for reporting and accounting for derivative instruments, and conforms the requirements for treatment of hedging activities across the different types of exposures hedged. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, “ and Accounting Principles Board Opinion No. 30, “Reporting Results of

Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”  The statement retains the fundamental provisions of SFAS No. 121 for recognition and measurement of impairment but amends the accounting and reporting standards for segments of a business to be disposed of.  The provisions of this statement are required to be adopted no later than fiscal years beginning after December 31, 2001.  The Company does not expect the adoption of SFAS No. 144 will have a material impact on the Company’s financial position or results of operations.

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, new product availability, pricing, anticipated operating results, market share, 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 difficulties include, but are not limited to, risks associated with the introduction of new products including supplier performance, 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.

18

Item 7.Financial Statements.

The Company’s financial statements are set forth below:

i.	Independent Auditors’ Report
ii.	Consolidated Balance Sheets
iii.	Consolidated Statements of Operations
iv.	Consolidated Statements of Changes in Shareholders’ Equity and of Comprehensive Income (Loss)
v.	Consolidated Statements of Cash Flows
vi.	Notes to Consolidated Financial Statements

19

Item 8.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

PART III

Item 9.Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.

The directors and executive officers of the Company are as follows:

Name	Age	Position
Ralph E. Hanson	73	President, Chief Executive Officer, Treasurer, and Chairman of Board of Directors
Derrick Ebden	51	Director
Drusilla F. Hays	52	Vice President and Clerk
George F. Harrington	65	Director

Each Director is elected to hold office until the next annual meeting of stockholders and until his successor is elected and qualified.  Except as noted below, no officer holds his/her office for a fixed term and the Board of Directors may terminate any officer’s term of office.  No family relationships exist among the Company’s Directors and executive officers.

Ralph E. Hanson is the Company’s founder and has been its President, Treasurer, Chief Executive Officer and a Director since the Company’s incorporation in 1985.

Derrick Ebden has been a Director of the Company since its incorporation in 1985.  Mr. Ebden has been the Managing Director of APC Cardiovascular Ltd., a distributor of medical devices, since March, 1990.  See Item 12.  Certain Relationships and Related Transactions.  Prior to that time, Mr. Ebden served as the Managing Director of the Company’s subsidiary, APC Medical Ltd., since 1982 and had been a Vice President of the Company since its incorporation.

Drusilla F. Hays has been a Vice President and Clerk of the Company since its incorporation in 1985.  Ms. Hays is married to Mr. Hanson.

20

George F. Harrington has been a Director of the Company since January, 1986.  He is President of Boston Equity Management Co., a private investment management firm, and has been involved in private investment management since 1967.

Section 16(a) Beneficial Ownership Reporting Compliance

Under the federal securities laws, the Company’s directors and executive officers and any other persons holding more than ten percent of the Company’s Common Stock are required to report their initial ownership of the Company’s Common Stock and any subsequent changes in their ownership to the Securities and Exchange Commission.  During the fiscal year ended December 31, 2001, except as set forth below, all of these filing requirements were satisfied.  In making these disclosures, the Company has relied solely on written representations of its directors, executive officers, and ten percent stockholders, and copies of reports that they have filed with the Securities and Exchange Commission.   Mr. Hanson filed a Form 4 after the date specified therefor to report one purchase in 2001.

Item 10.Executive Compensation.

1.  Summary of Annual Compensation

The table set forth below shows the annual compensation for the three fiscal years ended December 31, 2001 paid by the Company to its President and Chief Executive Officer (the “named executive officer”).  No other executive officer received a total annual salary and bonus in excess of $100,000 in any such fiscal year.

SUMMARY COMPENSATION TABLE

	Annual Compensation				Long Term Compensation
Name and Principal Position	Year	Salary($)	Bonus($)	Other Annual Compensation($)		Awards Securities Underlying Options (#)
Ralph E.Hanson,	2001	140,063	—	—		100,000
	2000	139,063	—	—		—
Chief Executive  Officer	1999	127,688	—	—		—

21

2.  Stock Options

The table set forth below shows information regarding individual grants of stock options by the Company to the named executive officer for the fiscal year ended December 31, 2001.

Option Grants in Last Fiscal Year

Name	Number of Securities Underlying Options Granted (#)(1)	% of Total Options Granted to Employees in Fiscal Year		Exercise Price ($)(2)		Expiration Date
Ralph E. Hanson	100,000	49	%	$	.32	1/03/06

(1)Represents shares of Common Stock subject to a five-year non-qualified option granted in January, 2001.

(2)The Board of Directors determined that the fair market value of the Company’s Common Stock was $.32 per share on the date of grant.

The table set forth below shows information regarding the value of unexercised stock options held by the named executive officer at December 31, 2001.

Aggregate Option Values At Fiscal Year End

	Number of Securities Underlying Unexercised Options at FY-End (#) Unexercisable		Value of Unexercised In-the- Money Options at
Name	Exercisable	Unexercisable	FY-End (1)
Ralph E. Hanson	100,000	0	0

(1)  Represents the fair market value of the Company’s Common Stock on December 31, 2001 ($0.30 per share based on the closing quote on such date on the OTC Bulletin Board) minus the exercise price per share, of the exercisable options, multiplied by the number of shares subject to the option.

Mr. Hanson did not exercise any options during the fiscal year ended December 31, 2001.

3.  Employment Contracts

On June 1, 2001, the Company entered into a three year employment agreement with Mr. Hanson.  Under the terms of this agreement, Mr. Hanson agreed to serve as the Company’s President and Chief Executive Officer at salary of not less than $139,000 per

22

annum, and the Company agreed that he would be eligible for such fringe benefits as are generally made available by the Company to its employees.  In addition, the agreement also imposes upon Mr. Hanson certain confidentiality requirements and certain restrictions regarding his ability to compete with the Company following the termination of his employment.

4.  Director Compensation

The Company’s directors receive no cash compensation in consideration for serving on the Board of Directors.  However, in January, 2001, the Company granted to each of George F. Harrington and Derrick Ebden a five year non-qualified stock option to purchase 50,000 shares of Common Stock at an exercise price of $.32 per share, which was determined by the Board of Directors to be the fair market value of the Company’s Common Stock on the date of grant.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

1.  Certain Beneficial Owners.

As of March 15, 2002, the only stockholders known to the Company to be the beneficial owners of more than 5% of the Company’s outstanding shares of Common Stock were Ralph E. Hanson, who is a director, and Paul J. LaRaia, M.D. of 45 Ravine Road, Wellesley, Massachusetts 02481, who is the beneficial owner of 331,000 shares of Common Stock or 9.9% of the outstanding Common Stock.  The number of shares owned beneficially by Mr. Hanson and the percentage of the outstanding Common Stock represented by such shares is set forth in tabular form below.

23

2.  Beneficial Ownership of Management.

Each of the persons named in the following table has furnished the respective information shown

Name, Address, & Offices Held with the Company	Shares Beneficially Owned as of March 15,2001		Percentage of Class
Ralph E. Hanson Pace Medical, Inc. 391 Totten Pond Road Waltham, MA 02154 President, Chief Executive Officer, Treasurer, and Chairman of the Company	1,053,000	(1)	30.0	%
Derrick Ebden APC Cardiovascular Ltd. 18 Macon Court Macon Way Crewe Cheshire CW1 1EA, England Managing Director of APC Cardiovascular Ltd.	124,000	(2)	3.6	%
George F. Harrington Boston Equity Management Co. 13 Waldron Court Marblehead, MA  01945 Director of the Company	127,000	(3)	3.7	%
Directors and Officers as a Group	1,304,000	(4)	36.1	%

(1)  Includes 100,000 shares of Common Stock which Mr. Hanson has a right to acquire within 60 days pursuant to the exercise of options.  Includes 73,000 shares and options to acquire 60,000 shares held by Mr. Hanson’s spouse, beneficial ownership of which is disclaimed by Mr. Hanson.

(2)  Includes 50,000 shares of Common Stock which Mr. Ebden has a right to acquire within 60 days pursuant to the exercise of options.

(3)  Includes 50,000 shares of Common Stock which Mr. Harrington has a right to acquire within 60 days pursuant to the exercise of options.

(4)  Includes 260,000 shares of Common Stock which officers and directors have a right to acquire within 60 days pursuant to the exercise of options.

24

Mr. Hanson, as beneficial owner of 30.0% of the outstanding Common Stock of the Company, Chairman of the Company’s Board of Directors, and the Company’s founder, may be deemed a controlling person of the Company under the Securities Exchange Act of 1934.

Item 12.  Certain Relationships and Related Transactions.

In March, 1990, the Company entered into an agreement with APC Cardiovascular Ltd. (“Cardiovascular”), a company in which Derrick Ebden, a Director of the Company, is Managing Director and a principal stockholder, pursuant to which Cardiovascular was appointed the sole distributor of the Company’s products outside of North and South America on normal trade terms.  Such agreement does not have a fixed term, but is terminable by either party upon one year’s advance written notice.  Prior to leaving the employment of the Company in March, 1990 in connection with the Company’s downsizing of its operations in the United Kingdom, Mr. Ebden had been in charge of the Company’s marketing efforts outside of North and Central America through the Company’s subsidiary, APC Medical Ltd.  The Company made sales to Cardiovascular of approximately $690,444  during 2000 and $1,114,888 during 2001.  All such sales were made on normal trade terms.

25

Item 13.  Exhibits and Reports on Form 8–K.

a.             Exhibits.

3.1		Restated Articles of Organization of the Registrant.
3.2		By-laws of the Registrant, as amended (filed herewith).
4.1		Specimen Certificate for shares of Common Stock, $.01  par value.
10.1		License to Assign Lease among The John Laing Pension Trust Limited, Data Design Techniques Limited and D.D.T. Maintenance Limited, and APC Medical Ltd. — (previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by this reference).
10.2		Distributor Agreement dated as of March 12, 1990 with APC Cardiovascular Ltd.
10.3	*	Form of Non-Qualified Stock Option Agreement used on January 3, 2001- (previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001 and incorporated herein by this reference).
10.4	*	Employment Agreement dated as of June 1, 2001 with Ralph E. Hanson (previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001 and incorporated herein by this reference).
22		Subsidiaries of the Registrant.

*Management contract or compensatory plan or arrangement.

Unless otherwise specified, all of the foregoing exhibits were filed as exhibits to the Company’s Registration Statement on Form S-18, No. 33-13927-B, as amended, and are incorporated herein by this reference.

b.Reports on Form 8-K.

No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this Annual Report on Form 10-KSB.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Registrant)	PACE MEDICAL, INC.
	By:	/s/ RALPH E. HANSON
		Ralph E. Hanson, President
	Date		March 27, 2002

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ RALPH E. HANSON
Ralph E. Hanson, Director, Principal
Executive, Financial, and Accounting Officer
Date	March 27, 2002
/s/ GEORGE F. HARRINGTON
George F. Harrington, Director
Date	March 27, 2002
/s/ DERRICK EBDEN
Derrick Ebden, Director
Date	March 27, 2002

27

Pace Medical, Inc. and

Wholly Owned Subsidiary

Independent Auditors’ Report

Consolidated Financial Statements

Years Ended December 31, 2001 and 2000

INDEPENDENT AUDITORS’ REPORT

To the Shareholders and Board of Directors
Pace Medical, Inc.
Waltham, Massachusetts

We have audited the accompanying consolidated balance sheets of Pace Medical, Inc. and its wholly owned subsidiary (the “Company”) as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders’ equity and of comprehensive loss, and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP

Boston, Massachusetts

March 4, 2002

F-1

PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2001 AND 2000

ASSETS	2001			2000
CURRENT ASSETS:
Cash and cash equivalents	$	1,436,366		$	1,252,352
Accounts receivable	52,010			115,186
Accounts receivable — related party	150,440			149,687
Inventories:
Raw materials	289,381			242,965
Work in process	35,495			147,547
Finished goods	114,901			214,966
Prepaid expenses	24,222			23,820
Total current assets	2,102,815			2,146,523
PROPERTY AND EQUIPMENT:
Machinery and equipment	54,719			98,874
Office furniture, equipment and improvements	49,036			31,297
Computer equipment	86,014			58,228
Total property and equipment	189,769			188,399
Less accumulated depreciation and amortization	(149,961		)	(137,747		)
Property and equipment — net	39,808			50,652
OTHER ASSETS — Net	169,624			121,051
TOTAL ASSETS	$	2,312,247		$	2,318,226
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	133,366		$	117,304
Accrued expenses	98,195			65,397
Total current liabilities	231,561			182,701
COMMITMENTS AND CONTINGENCIES (Notes 1 and 3)
SHAREHOLDERS’ EQUITY:
Common stock, $.01 par value — authorized, 5,000,000  shares; issued, 3,400,870 shares	34,009			34,009
Additional paid-in capital	3,147,151			3,147,151
Accumulated other comprehensive income	16,555			32,725
Accumulated deficit	(1,085,282		)	(1,046,613		)
Subtotal	2,112,433			2,167,272
Treasury stock, at cost (46,000 shares in 2001 and 2000)	(31,747		)	(31,747		)
Total shareholders’ equity	2,080,686			2,135,525
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,312,247		$	2,318,226

See notes to consolidated financial statements.

F-2

PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2001 AND 2000

	2001			2000
NET SALES:
Customers	$	431,534		$	499,144
Related party	1,114,888			690,444
Total net sales	1,546,422			1,189,588
COST OF SALES	783,505			512,386
GROSS PROFIT	762,917			677,202
OPERATING EXPENSES:
Selling, general and administrative	614,336			656,423
Engineering/development	197,676			242,007
LOSS FROM OPERATIONS	(49,095		)	(221,228		)
OTHER INCOME, Primarily interest	48,789			62,133
LOSS BEFORE INCOME TAX EXPENSE	(306		)	(159,095		)
INCOME TAX EXPENSE	38,363			—
NET LOSS	$	(38,669	)	$	(159,095	)
NET LOSS PER SHARE:
Basic	$	(0.01	)	$	(0.05	)
Diluted	$	(0.01	)	$	(0.05	)

See notes to consolidated financial statements.

F-3

PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 2001 AND 2000

	Common Stock			Additional Paid-in		Accumulated			Comprehensive			Accumulated Other Comprehensive			Treasury			Total Shareholders'
	Shares	Value		Capital		Deficit			Loss			Loss			Stock			Equity
BALANCES, JANUARY 1, 2000	3,400,870	$34,009		$3,147,151		$(887,518		)				$89,606			$(18,687		)	$2,364,561
Purchases of treasury stock	—	—		—		—						—			(13,060		)	(13,060		)
Net loss	—	—		—		(159,095		)	$	(159,095	)	—			—			(159,095		)
Cumulative translation adjustments	—	—		—		—			(56,881		)	(56,881		)	—			(56,881		)
Comprehensive loss									$	(215,976	)
BALANCES, DECEMBER 31, 2000	3,400,870	34,009		3,147,151		(1,046,613		)				32,725			(31,747		)	2,135,525
Net loss	—	—		—		(38,669		)	$	(38,669	)	—			—			(38,669		)
Cumulative translation adjustments	—	—		—		—			(16,170		)	(16,170		)	—			(16,170		)
Comprehensive loss									$	(54,839	)
BALANCES, DECEMBER 31, 2001	3,400,870	$	34,009	$	3,147,151	$	(1,085,282	)				$	16,555		$	(31,747	)	$	2,080,686

See notes to consolidated financial statements.

F-4

PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2001 AND 2000

	2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(38,669	)	$	(159,095	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization	23,196			28,215
Write-off of patent costs	—			9,950
Unrealized foreign exchange transaction losses	2,410			2,081
Changes in assets and liabilities:
Accounts receivable	58,645			42,477
Prepaid expenses	(916		)	16,141
Inventories	159,089			(110,165		)
Accounts payable	15,708			39,942
Accrued expenses	33,555			(554		)
Cash provided by (used in) operating activities	253,018			(131,008		)
CASH FLOWS USED IN INVESTING ACTIVITIES — Purchases of property and equipment	(61,890		)	(86,174		)
CASH FLOWS USED IN FINANCING ACTIVITIES — Purchases of U.S. Treasury stock	—			(13,060		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH	(7,114		)	(30,920		)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	184,014			(261,162		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	1,252,352			1,513,514
CASH AND CASH EQUIVALENTS, END OF YEAR	$	1,436,366		$	1,252,352

See notes to consolidated financial statements.

F-5

PACE MEDICAL, INC. AND WHOLLY OWNED SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2001 AND 2000

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation — The consolidated financial statements include the accounts of Pace Medical, Inc. and its wholly owned subsidiary APC Medical Ltd. (“APC”), a United Kingdom company (“Pace” or the “Company”).  The Company manufactures and sells temporary external pacemakers, related accessories and temporary heart pacemaker leads to various customers throughout the world.  All intercompany transactions, balances and profits are eliminated.

Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Product Liability and Limits of Insurance Coverage — Because the Company’s temporary cardiac pacemakers and pacing analyzers may be life-supporting medical devices, the Company’s liability for any presently unknown product design or manufacturing deficiencies could be substantial and could exceed the limits under existing product liability insurance.  The Company maintains product liability coverage outside the United States with annual limits of £1,000,000 (approximately $1,456,000 as of December 31, 2001) per occurrence and in the aggregate.  The Company does not have product liability insurance in the United States.  The Company believes, based upon management’s experience, that its liability exposure is lessened because it does not manufacture or sell permanent implantable cardiac pacemakers or leads.  Management does not believe that any potential claims would therefore have a material impact on the financial condition or the results of operations.

Revenue Recognition — Sales are recognized when products are shipped, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectibility is reasonably assured.  Historical experience has been such that no allowances for sales returns or bad debts are currently provided.

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid investments with remaining maturities of three months or less at date of purchase.

Inventories — Inventories are stated at the lower of cost (first-in, first-out method) or market.

Property and Equipment — Property and equipment are stated at cost.  Depreciation is recorded under the straight-line method based on the estimated useful lives of the related assets, ranging from three to seven years.  Repairs and maintenance are expensed as incurred, while costs of betterments are capitalized.  Depreciation expense approximated $18,300 and $24,100 for the years ended December 31, 2001 and 2000, respectively.

F-6

Other Assets — Other assets consist of patent and deferred tooling costs, which are amortized using the straight-line method, primarily over ten and five years, respectively.  Amortization expense for 2001 and 2000 aggregated approximately $4,880 and $4,100, respectively.  Accumulated amortization aggregated $30,280 and $25,400 at December 31, 2001 and 2000, respectively.

Long-Lived Assets — Upon occurrence of certain events or changes in circumstances, the Company reviews its long-lived assets to determine if impairment has occurred.

Translation of Foreign Currencies — Assets and liabilities of APC are translated at exchange rates in effect on reporting dates, while income and expenses are translated at rates which approximate those in effect on transaction dates (generally the average rate for the period).  Differences due to changing exchange rates are charged or credited to accumulated other comprehensive income (loss) in shareholders’ equity.  Gains and losses from foreign currency transactions are included in net income.

Income Taxes — Deferred taxes are provided for temporary differences between book and tax bases of the Company’s assets and liabilities and loss and credit carryforwards based on tax rates and laws enacted as of the balance sheet date.  The Company has provided a valuation allowance against net deferred tax assets due to uncertainty regarding the recoverability of tax carryforwards and other temporary differences.

Warranty — The Company warrants its temporary cardiac pacemakers for one year.  Historical loss experience has been such that no reserves for warranties are provided.

Loss Per Share — The Company determines basic net loss per share using the weighted-average common shares outstanding for the year.  The shares used to determine diluted net loss per share include the shares used in the calculation of basic net loss per share plus dilutive weighted-average options and warrants outstanding during the year using the Treasury stock method.

Comprehensive Loss — Comprehensive loss includes net loss and foreign currency translation adjustments.

Stock-Based Compensation — Compensation expense associated with awards of stock or options to employees is measured using the intrinsic-value method.  Compensation expense associated with awards to nonemployees is measured using the fair-value method.

Concentration of Credit Risk — The Company sells its products primarily to a limited number of distributors (see Note 7).  The Company generally requires no collateral from its distributors.

F-7

Recent Accounting Pronouncements — Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” is effective for all fiscal years beginning after June 15, 2000.  SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.  Under SFAS No. 133, certain contracts that were not formerly considered may now meet the definition of a derivative.  The Company adopted SFAS No. 133 effective January 1, 2001.  The adoption of SFAS No. 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.

2.RELATED-PARTY TRANSACTIONS

In March 1990, the Company entered into an agreement with APC Cardiovascular Ltd. (“Cardiovascular”).  This agreement specified that Cardiovascular would act as Pace’s distributor in the United Kingdom.  A director and significant shareholder of Cardiovascular is also a director of Pace.  Sales to Cardiovascular amounted to $1,114,888 and $690,444 in 2001 and 2000, respectively (Customer A, see Note 7).  Receivables from Cardiovascular at December 31, 2001 and 2000 were $150,440 and $149,687, respectively.

3.COMMITMENTS

Lease Obligations — APC leases its plant and office facility under an operating lease which expires in 2006.  The lease agreement specifies that the rent will be £28,500 ($41,026 at December 31, 2001) per year and that it may be revised every five years commencing in 1996.  The lease also requires payment of a pro rata share of insurance and maintenance costs in addition to the rental payment.  Future minimum rental payments under the lease total approximately $45,000 in each of the next five years.  Effective May 1, 2000, Pace entered into a lease agreement for its current facility in the United States for a two-year term from July 1, 2001 through June 30, 2002.  Annual rent for the first and second year is approximated at $73,500 and $80,500, respectively.

Rental expense for all operating leases, including leases with terms of less than one year, amounted to approximately $118,000 and $112,000 in 2001 and 2000, respectively.

Contracts — The Company has entered into a three-year employment agreement with its chairman that provides for annual compensation of $139,000.  The agreement expires on May 31, 2004.

F-8

4.INCOME TAXES

The provision for (benefit from) income taxes consists of the following for the years ended December 31:

	2001		2000
Current — foreign	$	38,363	$	19,000
Deferred:
Federal	—		—
State	—		—
Foreign	—		(19,000		)
Provision for income taxes	$	38,363	$	—

A reconciliation of the statutory U.S. rate to the effective rate, expressed in dollars, for the years ended December 31 is as follows:

	2001			2000
Statutory U.S. rate	$	(104	)	$	(54,092	)
State taxes, net of federal benefit	(17		)	(9,546		)
Rate difference on foreign taxes	(32,716		)	(36,662		)
Valuation allowances provided	71,200			100,300
Provision for income taxes	$	38,363		$	—

Deferred tax assets and liabilities, before valuation allowances, at December 31 were as follows:

	2001			2000
Net operating loss carryforwards	$	700,000		$	611,000
Research and development credits	173,000			175,000
Inventory	18,000			22,000
Depreciation and amortization	(23,000		)	(8,200		)
Other	4,000			1,000
	$	872,000		$	800,800

Deferred tax assets have been fully reserved.  Valuation allowances were increased by $71,200 in 2001 principally due to the generation of loss carryforwards in the United States which are unlikely to be realized.  Valuation allowances were increased by $100,300 in 2000 principally due to the generation of loss carryforwards in the United States.

F-9

At December 31, 2001, Pace has federal income tax loss carryforwards for financial and tax reporting purposes of approximately $1,641,000, which will expire in the years 2004 through 2020, and state income tax carryforwards of approximately $562,000, which will expire in the years 2001 through 2003.  Pace also has certain state and federal tax credits aggregating $175,000, which will expire in varying amounts through 2011.  Pace has no foreign loss carryforwards available to benefit income earned by APC.

5.SHAREHOLDERS’ EQUITY

Stock Options — During 2001 and 2000, by authorization of the Board of Directors, options were granted to purchase 305,000 and 20,000 shares, respectively, of common stock under nonqualified stock option agreements.  The options were granted at the fair market value of the Company’s common stock on the date of grant, vest at the date of grant, and are of a five-year duration.  A summary of all stock option activity is as follows:

	Number of Options		Weighted- Average Exercise Price		Weighted- Average Fair Value
Outstanding and exercisable, January 1, 2000	246,000		$	0.50
Granted	20,000		0.50		$	0.48
Expired	(141,000	)	0.50
Outstanding and exercisable, December 31, 2000	125,000		$	0.50
Granted	305,000		0.32		$	0.18
Expired	(50,000	)	0.50
Outstanding and exercisable, December 31, 2001	380,000		$	0.36

At December 31, 2001, the options outstanding and exercisable had weighted-average remaining contractual lives of 3.65 years.

The fair value of stock options on their grant date was measured using the Black-Scholes option-pricing model.  Key assumptions used to apply this pricing model are as follows:

	2001		2000
Risk-free interest rate	4.89	%	6.75	%
Expected life of option grants	4.5 years		4.5 years
Expected volatility of underlying stock	65	%	87	%
Expected dividend payment rate	—		—

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The option-pricing model used was designed to value readily tradable stock options with relatively short lives.  The options are not tradable with contractual lives of up to five years.  However, management believes that the assumptions used to value the options and the model applied yield a reasonable estimate of the fair value of the grants made under the circumstances.

As described in Note 1, the Company uses the intrinsic-value method to measure compensation expense associated with grants of stock options to employees.  If the Company had used the fair value method for all options to measure compensation, reported net loss and loss per share would have been as follows:

	2001			2000
Net loss:
As reported	$	(38,669	)	$	(159,095	)
Pro forma	(93,791		)	(168,702		)

If the Company had used the fair-value method, basic and diluted net loss per share would have been $(0.03) and $(0.05) for the years ended December 31, 2001 and 2000, respectively.

Stock Repurchase Program — In March 1998, the Company announced a stock repurchase program pursuant to which the Company is authorized to acquire up to 100,000 shares of its common stock.  As of December 31, 2001, 46,000 shares had been repurchased under the program for $ 31,747.

6.NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted net loss per share for the years ended December 31:

	2001			2000
Net loss	$	(38,669	)	$	(159,095	)
Weighted-average shares outstanding	3,354,850			3,367,750
Effect of dilutive securities	9,242			25,885
Total shares	3,364,092			3,393,635
Basic net loss per share	$	(0.01	)	$	(0.05	)
Diluted net loss per share	$	(0.01	)	$	(0.05	)

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7.GEOGRAPHIC, SEGMENT AND CUSTOMER DATA

The Company primarily manages its business based on geographic regions consisting of the United States and the United Kingdom through which it sells its external pacing devices and accessories.  Geographic and segment data is set forth in the following table:

	United States			United Kingdom		Eliminations			Consolidated
2001
Sales and transfers	$	600,906		$	1,228,288	$	(282,772	)	$	1,546,422
Depreciation and amortization	10,947			12,249					23,196
Net operating (loss) income	(225,164		)	133,642		4,064			(87,458		)
Other income, primarily interest	28,391			20,398					48,789
Capital expenditures	55,517			6,373					61,890
Long-lived assets	180,271			29,161					209,432
Total assets	1,155,704			1,156,543					2,312,247
2000
Sales and transfers	$	656,713		$	775,461	$	(242,586	)	$	1,189,588
Depreciation and amortization	10,527			17,688					28,215
Net operating (loss) income	(277,953		)	52,788		3,937			(221,228		)
Other income, primarily interest	45,348			16,785					62,133
Capital expenditures	68,663			17,511					86,174
Long-lived assets	135,630			36,073					171,703
Total assets	1,428,264			894,026		(4,064		)	2,318,226

Transfers between areas are valued at cost plus a markup.  Direct sales to foreign customers from domestic operations were not material.

Sales to major customers for the years ended December 31 were as follows:

	2001				2000
	Amount		Percent		Amount		Percent
Customer A (related party)	$	1,114,888	72	%	$	690,444	58	%
Customer B	168,240		11		304,830		26

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EX-3.2

Exhibit 3.2

BYLAWS

OF

PACE MEDICAL, INC.

Section 1.  ARTICLES OF ORGANIZATION

The name and purposes of the corporation shall be as set forth in the articles of organization of the corporation.  These bylaws, the powers of the corporation and of its directors and stockholders, or of any class of stockholders if there shall be more than one class of stock, and all matters concerning the conduct and regulation of the business and affairs of the corporation shall be subject to such provisions in regard thereto, if any, as are set forth in the articles of organization as from time to time in effect (the “Articles of Organization”).

Section 2.  STOCKHOLDERS

2.1.  Annual Meeting.  The annual meeting of the stockholders shall be held on such date and at such time and place (within the United States) within six months of the end of the corporation’s fiscal year as shall be designated from time to time by vote of the directors and stated in the notice of meeting.  If that day be a legal holiday at the place where the meeting is to be held, the meeting shall be held on the next succeeding day not a legal holiday at such place.  Purposes for which an annual meeting is to be held, additional to those prescribed by law, by the Articles of Organization or by these bylaws, may be specified by the President or by the directors.

2.2.  Special Meetings.  A special meeting of the stockholders may be called at any time by the President or by the directors and shall be called by the Clerk, or in the case of the death, absence, incapacity or refusal of the Clerk, by another officer upon the written request of the holders of at least ten percent (10%) of the shares of capital stock of the corporation entitled to vote at such meeting.  Each call of a meeting shall state the place, date, hour and purposes of the meeting.

2.3.  Place of Meetings.  All meetings of the stockholders shall be held at the principal office of the corporation in Massachusetts or, to the extent permitted bythe Articles of Organization and by law, at such other place within the United States as shall be fixed by the person(s) calling the meeting.  Any adjourned session of any meeting of the stockholders shall be held at the same city or town as the initial session, or within Massachusetts, in either case at the place designated in the vote of adjournment.

2.4.  Notice of Meetings.  A written notice of each meeting of stockholders, stating the place, date, and hour and the purposes of the meeting, shall be given at least seven days before the meeting to each stockholder entitled to vote thereat and to each stockholder who, by law, by the Articles of Organization or by these bylaws, is entitled to

notice, by leaving such notice with him or at his residence or usual place of business, or by mailing it, postage prepaid, addressed to such stockholder at his address as it appears in the records of the corporation.  Such notice shall be given by the Clerk or an assistant Clerk or by an officer designated by the directors or by the person(s) calling the meeting.  Whenever notice of a meeting is required to be given to a stockholder under any provision of the Business Corporation Law of the Commonwealth of Massachusetts or of the Articles of Organization or these bylaws, a written waiver thereof, executed before or after the meeting by such stockholder or his attorney thereunto authorized and filed with the records of the meeting, shall be deemed equivalent to such notice.

2.5.  Quorum of Stockholders.  At any meeting of the stockholders, a quorum shall consist of a majority in interest of all stock issued and outstanding and entitled to vote at the meeting, except when a larger quorum is required by law, by the Articles of Organization or by these bylaws and except that if two or more classes of stock are outstanding and entitled to vote as separate classes, then in the case of each such class, a quorum shall consist of the holders of a majority in interest of the stock of that class issued, outstanding and entitled to vote.  Stock owned directly or indirectly by the corporation, if any, shall not be deemed outstanding for this purpose.  Any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice.

2.6.  Action by Vote.  When a quorum is present at any meeting, a plurality of the votes properly cast for election to any office shall elect to such office, and a majority of the votes properly cast upon any question other than an election to an office shall decide the question, except when a larger vote is required by law, by the Articles of Organization or by these bylaws and except that if there are two or more classes of stock entitled to vote as separate classes, then a plurality in each such class of the shares present shall elect to such office, and a majority in each such class of the shares present shall decide any question other than an election to an office.  No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election.

2.7.  Voting.  Stockholders entitled to vote shall have one vote for each share of the stock entitled to vote held by them of record according to the records of the corporation, unless otherwise provided by the Articles of Organization.  The corporation shall not, directly or indirectly, vote any share of its own stock.

2.8.  Action by Writing.  Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders.  Such consents shall be treated for all purposes as a vote at a meeting.

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2.9.  Proxies.  To the extent permitted by law, stockholders entitled to vote may vote either in person or by proxy.  No proxy dated more than six months before the meeting named therein shall be valid.  Unless otherwise specifically limited by their terms, such proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting.  Proxies shall be filed with the Clerk of the meeting, or of any adjournment thereof, before being voted.  A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise.

Section 3.  BOARD OF DIRECTORS

3.1.  Number.  A Board of Directors of such number (not less than three or the number of stockholders of the corporation, whichever is the lesser) as shall be fixed by the stockholders at the annual or any special meeting, shall be elected by the stockholders at the annual meeting.  The number of directors may be increased at any time or from time to time either by the stockholders or by vote of a majority of the directors then in office.  The number of directors may be decreased to any number permitted by law at any time or from time to time either by the stockholders or by a vote of a majority of the directors then in office.  No director need be a stockholder.

3.2.  Tenure.  Except as otherwise provided by law, by the Articles of Organization or by these bylaws, each director shall hold office until the next annual meeting of the stockholders and until his successor is duly elected and qualified, or until he sooner dies, resigns, is removed or becomes disqualified.

3.3.  Vacancies.  Any vacancy in the Board of Directors, including a vacancy resulting from the enlargement of the board, may be filled by the stockholders or, in the absence of stockholder action, by the directors by vote of a majority of the directors then in office.  Except as otherwise provided by law, the directors shall have and may exercise all their powers notwithstanding the existence of one or more vacancies in their number.

3.4.  Powers.  Except as reserved to the stockholders by law, by the Articles of Organization or by these bylaws, the business of the corporation shall be managed by the directors who shall have and may exercise all the powers of the corporation.  In particular, and without limiting the generality of the foregoing, the directors may at any time issue all or from time to time any part of the unissued capital stock of the corporation from time to time authorized under the Articles of Organization and may determine, subject to any requirements of law, the consideration for which stock is to be issued and the manner of allocating such consideration between capital and surplus.

3.5  Committees.  The directors may, by vote of a majority of the directors, then in office, elect from their number an executive committee and other committees and delegate to any such committee or committees some or all of the powers of the directors except those which by law, by the Articles of Organization or by these bylaws

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they are prohibited from delegating.  Except as the directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the directors or such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these bylaws for the conduct of business by the directors. All members of such committees shall hold such offices at the pleasure of the directors.  Any committee to which the Board of Directors delegates any of its powers or duties shall keep records of its meetings and shall upon request report its action to the Board of Directors. The Board of Directors shall have power to rescind any action of any committee, but no such rescission shall have retroactive effect.

3.6.  Regular Meetings.  Regular meetings of the directors may be held without call or notice at such places and at such times as the directors may from time to time determine, provided that reasonable notice of the first regular meeting following any such determination shall be given to absent directors.  A regular meeting of the directors may be held without call or notice immediately after and at the same place as the annual meeting of the stockholders.

3.7.  Special Meetings.  Special meetings of the directors may be held at any time and at any place designated in the call of the meeting, when called by the President or the Treasurer or by two or more directors, reasonable notice thereof being given to each director by the secretary or an assistant secretary, or, if there be none, by the Clerk or an assistant Clerk, or by the officer or one of the directors calling the meeting.

3.8.  Notice.  It shall be sufficient notice to a director to send notice by mail at least forty–eight hours or by facsimile at least twenty–four hours before the meeting addressed to him at his usual or last known business or residence address or to give notice to him in person or by telephone at least twenty–four hours before the meeting.  Notice of a meeting need not be given to any director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him.  Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting.

3.9.  Quorum.  At any meeting of the directors a majority of the directors then in office shall constitute a quorum.  Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice.

3.10.  Action by Vote.  When a quorum is present at any meeting, a majority of the directors present may take any action, except when a larger vote is required by law, by the Articles of Organization or by these bylaws.

3.11.  Action by Writing.  Unless the Articles of Organization otherwise provide, any action required or permitted to be taken at any meeting of the directors may be taken without a meeting if all the directors consent to the action in writing and the written

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consents are filed with the records of the meetings of the directors.  Such consents shall be treated for all purposes as a vote taken at a meeting.

3.12.  Presence Through Communications Equipment.  Unless otherwise provided by the Articles of Organization, members of the Board of Directors may participate in a meeting of such board by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting.

Section 4.  OFFICERS AND AGENTS

4.1.  Enumeration; Qualification.  The officers of the corporation shall be a President, a Treasurer, a Clerk, and such other officers, if any, as the incorporators at their initial meeting, or the directors from time to time, may in their discretion elect or appoint.  The corporation may also have such agents, if any, as the incorporators at their initial meeting, or the directors from time to time, may in their discretion appoint.  Any officer may be, but none need be a director or stockholder.  The Clerk shall be a resident of Massachusetts unless the corporation has a resident agent appointed for the purpose of service of process.  Any two or more offices may be held by the same person.  Any officer may be required by the directors to give bond for the faithful performance of his duties to the corporation in such amount and with such sureties as the directors may determine.

4.2.  Vacancies.  If the office of the President or the Treasurer or the Clerk becomes vacant, the directors may elect a successor.  If the office of any  officer becomes vacant, the directors may elect or appoint a successor by vote of a majority of the directors present.  Each such successor shall hold office for the unexpired term, and in the case of the President, the Treasurer and the Clerk, until his successor is chosen and qualified, or in each case until he sooner dies, resigns, is removed or becomes disqualified.

4.3.  Powers.  Subject to the other provisions of these bylaws, each officer shall have, in addition to the duties and powers herein set forth, such duties and powers as are commonly incident to his office and such duties and powers as the directors may from time to time designate.

4.4.  Election.  The President, the Treasurer and the Clerk shall be elected annually by the directors at their first meeting following the annual meeting of the stockholders.  Other officers, if any, may be elected or appointed by the Board of Directors at said meeting or at any other time.

4.5.  Tenure.  Except as otherwise provided by law or by the Articles of Organization or by these bylaws, the President, the Treasurer and the Clerk shall hold office until the first meeting of the directors following the next annual meeting of the

5

stockholders and until their respective successors are chosen and qualified, and each other officer shall hold office until the first meeting of the directors following the next annual meeting of the stockholders unless a shorter period shall have been specified by the terms of his election or appointment, or in each case until he sooner dies, resigns, is removed or becomes disqualified.  Each agent shall retain his authority at the pleasure of the directors.

4.6.  Chief Executive Officer.  The chief executive officer of the corporation shall be the President or such other officer as is designated by the directors and shall, subject to the control of the directors, have general charge and supervision of the business of the corporation and, except as the directors shall otherwise determine, preside at all meetings of the stockholders and of the directors.  If no such designation is made, the President shall be the chief executive officer.

4.7  Chairman of the Board.  If a chairman of the Board of Directors is elected, he shall have the duties and powers specified in these bylaws and shall have such other duties and powers as may be determined by the directors.

4.8.  President and Vice Presidents.  The President shall have the duties and powers specified in these bylaws and shall have such other duties and powers as may be determined by the directors.

Any Vice Presidents shall have such duties and powers as shall be designated from time to time by the directors.

4.9.  Treasurer and Assistant Treasurers.  Except as the directors shall otherwise determine, the Treasurer shall be the chief financial and accounting officer of the corporation and shall be in charge of its funds and valuable papers, books of account and accounting records, and shall have such other duties and powers as may be designated from time to time by the directors.

Any Assistant Treasurer shall have such duties and powers as shall be designated from time to time by the directors.

4.10.  Clerk and Assistant Clerks.  The Clerk shall record all proceedings of the stockholders in a book or series of books to be kept therefor, which book or books shall be kept at the principal office of the corporation or at the office of its transfer agent or of its Clerk and shall be open at all reasonable times to the inspection of any stockholder.  In the absence of the Clerk from any meeting of stockholders, an assistant Clerk, or if there be none or he is absent, a temporary Clerk chosen at the meeting, shall record the proceedings thereof in the aforesaid book.  Unless a transfer agent has been appointed, the Clerk shall keep or cause to be kept the stock and transfer records of the corporation, which shall contain the names and record addresses of all stockholders, the amount of stock held by each and the class(es) of such stock. If no secretary is elected, the Clerk shall keep a true record of the proceedings of all meetings of the

6

directors and in his absence from any such meeting an assistant Clerk, or if there be none or he is absent, a temporary Clerk chosen at the meeting, shall record the proceedings thereof.

Any assistant Clerks shall have such other duties and powers as shall be designated from time to time by the directors.

4.11.  Secretary and Assistant Secretaries.  If a secretary is elected, he shall keep a true record of the proceedings of all meetings of the directors and in his absence from any such meeting an assistant secretary, or if there be none or he is absent, a temporary secretary chosen at the meeting, shall record the proceedings thereof.

Any assistant secretaries shall have such other duties and powers as shall be designated from time to time by the directors.

Section 5.  RESIGNATIONS AND REMOVALS

Any director or officer may resign at any time by delivering his resignation in writing to the President, the Treasurer or the Clerk or to a meeting of the directors.  Such resignation shall be effective upon receipt unless specified to be effective at some other time.  A director (including persons elected by directors to fill vacancies in the board) may be removed from office (a) with or without cause by the vote of the holders of a majority of the shares issued and outstanding and entitled to vote in the election of directors, provided that the directors of a class elected by a particular class of stockholders may be removed only by the vote of the holders of a majority of the shares of such class, or (b) with cause by the vote of a majority of the directors then in office.  The directors may remove any officer elected by them with or without cause by the vote of a majority of the directors then in office.  A director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing to remove him.  No director or officer resigning, and (except where a right to receive compensation shall be expressly provided in a duly authorized written agreement with the corporation) no director or officer removed, shall have any right to any compensation as such director or officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise; unless in the case of a resignation, the directors, or in the case of a removal, the body acting on the removal, shall in their or its discretion provide for compensation.

Section 6.  CAPITAL STOCK

6.1.  Number and Par Value.  The total number of shares and the par value, if any, of each class of stock which the corporation is authorized to issue shall be as stated in the Articles of Organization.

6.2.  Stock Certificates.  Each stockholder shall be entitled to a certificate stating

7

the number and the class and the designation of the series, if any, of the shares held by him, in such form as shall, in conformity to law, be prescribed from time to time by the directors.  Such certificate shall be signed by the President or a Vice President and by the Treasurer or an assistant Treasurer.  Such signatures may be facsimiles if the certificate is signed by a transfer agent, or by a registrar, other than a director, officer or employee of the corporation.  In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the time of its issue.

Every certificate issued for shares of stock at a time when such shares are subject to any restriction on transfer pursuant to the Articles of Organization, these bylaws or any agreement to which the corporation is a party shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction and statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge.  Every stock certificate issued by the corporation at a time when it is authorized to issue more than one class or series of stock shall set forth upon the face or back of the certificate either the full text of the preferences, voting powers, qualifications and special and relative rights of the shares of each class and series if, any, authorized to be issued, as set forth in the Articles of Organization, or a statement of the existence of such preferences, powers, qualifications, and rights, and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge.

6.3.  Loss of Certificates.  In the case of the alleged loss or destruction or the mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such conditions as the directors may prescribe.

Section 7.  TRANSFER OF SHARES OF STOCK

7.1.  Transfer on Books.  Subject to the restrictions, if any, stated or noted on the stock certificates, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with necessary transfer stamps affixed, and with such proof of the authenticity of signature as the directors or the transfer agent of the corporation may reasonably require.  Except as may be otherwise required by law, by the Articles of Organization or by these bylaws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to receive notice and to vote with respect thereto, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these bylaws. It shall be the duty of each stockholder to notify the corporation of his post office address.

8

7.2.  Record Date and Closing Transfer Books.  The directors may fix in advance a time, which shall not be more than sixty days before the date of any meeting of stockholders or the date for the payment of any dividend or making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution or the right to give such consent or dissent, and in such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the corporation after the record date; or without fixing such record date the directors may for any of such purposes close the transfer books for all or any part of such period.  If no record date is fixed and the transfer books are not closed:

(1)  The record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the date next preceding the day on which notice is given.

(2)  The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect thereto.

Section 8.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

The corporation shall, to the extent legally permissible, indemnify, each of its directors and officers (including persons who serve at its request as directors, officers or trustees of another organization in which it has any interest as a shareholder, creditor or otherwise) against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by him in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be involved or with which he may be threatened, while in office or thereafter, by reason of his being or having been such a director, officer or trustee, except with respect to any matter as to which he shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation; provided, however, that as to any matter disposed of by a compromise payment by such director or officer, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless such compromise shall be approved as in the best interests of the corporation, after notice that it involves such indemnification: (a) by a disinterested majority of the directors then in office; or (b) by a majority of the disinterested directors then in office, provided that there has been obtained an opinion in writing of independent legal counsel to the effect that such director or officer appears to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation; or (c) by the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock

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owned by any interested director or officer.  Expenses, including counsel fees, reasonably incurred by any director or officer in connection with the defense or disposition of any such action, suit or other proceeding may be paid from time to time by the corporation in advance of the final disposition thereof upon receipt of an undertaking by such director or officer to repay the amounts so paid to the corporation if it is ultimately determined that indemnification for such expenses is not authorized under this section.  If in an action, suit, or proceeding brought by or in the right of the corporation, a director of the corporation is held not liable for monetary damages, whether because that director is relieved of personal liability under the provisions of Article 6 of the Articles of Organization of the corporation or otherwise, that director shall be deemed to have met the standard of conduct set forth herein and to be entitled to indemnification for expenses reasonably incurred in the defense of such action, suit, or proceeding.  The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any director or officer may be entitled.  As used in this section, the terms “director” and “officer” include their respective heirs, executors and administrators, and an “interested” director or officer is one against whom in such capacity the proceedings in question or another proceeding on the same or similar grounds is then pending.  Nothing contained in this section shall affect any rights to indemnification to which corporate personnel other than directors and officers may be entitled by contract or otherwise under law.

Section 9.  CORPORATE SEAL

The seal of the corporation shall, subject to alteration by the directors, consist of a flat–faced circular die with the word “Massachusetts”, together with the name of the corporation and the year of its organization, cut or engraved thereon.

Section 10.  EXECUTION OF PAPERS

Except as the directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the corporation shall be signed by the President or by one of the Vice Presidents or by the Treasurer.

Section 11.  FISCAL YEAR

Except as from time to time otherwise determined by the directors, the fiscal year of the corporation shall be the twelve months ending on December 31 of each year.

Section 12.  AMENDMENTS

These bylaws may be altered, amended or repealed at any annual or special meeting of the stockholders called for that purpose, of which the notice shall specify the subject matter of the proposed alteration, amendment or repeal or the sections to be

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affected thereby, by vote of the stockholders.  These bylaws may also be altered, amended or repealed by vote of a majority of the directors then in office, except that the directors shall not take any action which provides for indemnification of directors nor any action to amend this Section 12, and except that the directors shall not take any action unless permitted by law.  Any bylaw so altered, amended or repealed by the directors may be repealed, altered, amended or reinstated by the stockholders in the above manner.  No later than the time of giving notice of the meeting of stockholders next following the alteration, amendment or repeal by the directors of these bylaws, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the bylaws.

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