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, 2004
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 of 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:

	Name of each exchange on
Title of each class	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  o  No  ý

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.   ý

State issuer’s revenues for its most recent fiscal year $1,216,624

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 60 days.  $137,890 as of May 31, 2005

(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 May 31, 2005.

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.

Transitional Small Business Disclosure Format: Yes o  No ý

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PART I

Item 1.Description of Business.

a.  The Company.

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, surgical and temporary pacemaker extension cables, and related accessories.

The Company was incorporated in 1985 and commenced operations on January 1, 1986 following the acquisition of APC Medical Ltd (“APC Medical”) which is now a wholly-owned subsidiary of the Company.  Unless otherwise specifically referenced herein, the term “Company” includes APC Medical.

APC Medical is the successor to Devices Limited (a former unit of Johnson & Johnson), a U.K. manufacturer of medical electronic equipment, permanent pacemakers and leads, and temporary pacemakers, which was a pioneer in the pacing industry.   APC Medical is a U.K. limited company with facilities located in Welwyn Garden City, Herts, England.  APC Medical provides 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 the Company.

The Company designs, manufactures and sells single and dual-chamber temporary cardiac pacemakers, a dual-chamber pacing analyzer, 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 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

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

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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, 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 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

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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 which 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.

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.

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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 currently has three new temporary pacemaker products under development.       The Company currently intends to file appropriate regulatory submissions with the FDA covering these devices during the year 2005.   The new products include a single chamber device and two dual chamber devices.

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:

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.

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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 2004 and 2003, 90% and 93%, respectively, of the Company’s sales were to one customer.

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.  When the Company’s products are sold on a factory direct basis or through sales representatives, 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, 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, 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.  Over the last several years, the Company has not been able to maintain a satisfactory inventory of finished goods due

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to component shortages. This has affected both our international and domestic sales.  See “Sources of Supply”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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 $1,916,000 as of December 31, 2004).  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.

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 two full time employees.  These technically trained employees also devote part of their time to clinical evaluation and operational activities with respect to existing products.  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.

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During the years ended December 31, 2003 and December 31, 2004, the Company expended $202,511 and $117,191, 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.  The Company maintains a list of alternate sources of supply in order to minimize disruptions if conditions require selecting substitute vendors.  However, some components of products and products under development are purchased from sole suppliers.  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 quantities of materials or components in a timely fashion from vendors who are sole suppliers has materially impacted the Company’s ability to complete the development of new products.   The lack of finished goods has affected both our international and domestic sales.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

The Company’s products, which are primarily manufactured in the U.S., are partly assembled on a contract basis by outside contractors.  The Company believes that alternate contractors would be available if such contractor were to cease operations.  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.

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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 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

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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.  Many foreign countries have regulations similar to the FDA that must be adhered to.  Also the Medicines and Healthcare products Regulatory Agency (MHRA) 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.

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Foreign Operations

For the years ended December 31, 2003 and December 31, 2004, revenues from export sales totaled $1,290,397 and $1,165,904, respectively (approximately 98% and 96%, 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 international and domestic distribution.  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, 2004, 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.

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

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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.  The Company has two registered trademarks bifocal® and unifocal® covering its next generation temporary cardiac pacemakers.

Competition

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

The manufacturers of temporary pacemakers market their products on a direct basis, through manufacturers’ representatives and distributors, or to OEM implantable pacemaker manufacturers.

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.

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.

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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 on a tenancy at will basis with an annual rent of approximately $63,000 or approximately $18.00 per square foot.

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 £29,550 ($56,618) or approximately £5.90 ($11.30) per square foot.  The lease expires in 2006 and contains provisions requiring upward revision of the rent every five years.

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

Item 3.Legal Proceedings.

The Company is engaged in legal proceedings arising in the ordinary course of business.  We believe the ultimate outcome of these proceedings will not have a material adverse impact on our consolidated financial position, results of operations or cash flows.

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

Not applicable.

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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.

Fiscal Year Ended December 31, 2003 (OTC)

	Closing Quote
First Quarter	$	0.25
Second Quarter	$	0.27
Third Quarter	$	0.32
Fourth Quarter	$	0.29

Fiscal Year Ended December 31, 2004 (OTC)

First Quarter	$	0.29
Second Quarter	$	0.26
Third Quarter	$	0.28
Fourth Quarter	$	0.28

As of May 31, 2005, there were 85 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.

Recent Sales of Unregistered Securities

None

16

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

General

Over the past two years the Company’s business has been adversely affected on account of three factors.  First, the Company has experienced a shortage of components due to single source suppliers going out of business.  Second, it voluntarily suspended shipments of its Model 4170 in the second quarter of 2004 in response to a medical issue raised by the Products Regulatory Agency (England) in May, 2004, which was resolved in January, 2005.  Finally, sales in the United States were adversely affected as a result of consolidation in the OEM market resulting in fewer U.S. distributors.   The Company has taken steps to address each of these issues.  Assuming it is able to remain on schedule with the release of its new products under development, it expects improved results in 2005 and in future years.

Liquidity and Capital Resources

As of December 31, 2004, the Company had cash and cash equivalents of $902,198 and working capital of $1,268,231 This contrasts to comparable cash and working capital positions at December 31, 2003 of $1,060,791  and $1,464,578, respectively.

The decrease in the Company’s liquidity since the beginning of the fiscal year is primarily attributable to a decrease 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 May 31, 2005, 46,000 shares had been repurchased under the program for $31,747.

Management believes that its 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 the short term, however, additional equity and or debt financing may be sought to continue to fund research and development, capital equipment, inventories, and to expand the Company’s marketing operation.  There can be no guarantee that the Company will be successful in obtaining capital or that such capital can be obtained on favorable terms.  In addition, the obtaining of additional capital through the issuance of equity securities may also result in dilution of existing shareholders’ interests.

Results of Operations - Year Ended December 31, 2004 versus Year Ended December 31, 2003

Sales decreased by 8% from $1,319,642 in 2003 to $1,216,624 in 2004.  The decrease was primarily due to lower sales of the Company’s Bedside Temporary

17

Pacemakers in the United Kingdom since May, 2004 as described above, offset in part by higher shipments of other products.

Gross margins for 2004 were approximately 45% verses 37% in 2003.  The increase was due to repairs and product updates.   It should be noted that prices continued to remain firm on all products.

Operating expenses increased $19,025, or 2% in 2004 to $870,857 from 2003 operating expenses of $851,832.  The increase was primarily due to an increase in administration expenses.  Management anticipates some increase in its operating expenditures in 2005.

The Company has reflected tax provisions of $14,751 and $32,163 on its financial statements for 2004 and 2003, respectively, representing taxes paid in the UK on APC income.  No US tax was provided for in either year.

Net loss for 2004 was $(309,632) or $(0.10) per basic and diluted share for the year ended December 31, 2004.  This contrasts with the 2003 net loss of $(377,107) or $(0.11) per basic and diluted share.  The reduction in the net loss was primarily due to the higher margins.

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

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, sales levels, 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, including, without limitation, compliance with FDA requirements, competition, and general economic conditions.

18

Item 7.Financial Statements.

The Company’s financial statements are set forth below:

a.	Report of Independent Registered Public Accounting Firm
b.	Report of Independent Registered Public Accounting Firm
c.	Consolidated Balance Sheets as of December 31, 2004 and 2003
d.	Consolidated Statements of Operations for the Years ended December 31, 2004 and 2003
e.	Consolidated Statements of Changes in Shareholders’ Equity and of Comprehensive Loss for the Years ended    December 31, 2004 and 2003
f.	Consolidated Statements of Cash Flows for the Years ended December 31, 2004 and 2003
f.	Notes to Consolidated Financial Statements

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

Not applicable.

Item 8A.Controls and Procedures

As of December 31, 2004, Ralph E. Hanson, who then served as the Company’s President and Chief Executive Officer conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based on that evaluation, Mr. Hanson concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to him in a timely fashion. There have been no significant changes in internal control over financial reporting, or in factors that could significantly affect internal control over financial reporting, subsequent to the date Mr. Hanson completed his evaluation.

Item 8B.Other Information

None

19

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	76	Chairman of Board of Directors; Treasurer
Steven E. Hanson	51	President and Chief Executive Officer
Derrick Ebden	54	Director
Drusilla F. Hays	55	Vice President and Clerk
George F. Harrington	68	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.

Ralph E. Hanson is the Company’s founder and presently serves as the Company’s Chairman of the Board of Directors and as Treasurer of the Company.  He has been a director of the Company since 1985.  From 1985 until January 3, 2005, he served as the Company’s President and Chief Executive Officer.  He is the father of Steven Hanson and is married to Drusilla Hays.

Steven E. Hanson was elected as President and Chief Executive Officer of the Company on January 3, 2005.  He has been a director of APC Medical since 1979.  From 1992 until May, 2004, Steven Hanson served as President of Centerpulse Dental, a division of Sulzermedica, which was acquired by Zimmer Dental, Inc.  During the period 1982 to 1992, Steven served in various positions with Intermedics, Inc. (later called Sulzer Intermedics, Inc.), also a division of Sulzermedica.  He initially served as Director - International, and later, as Vice President - International.  From 1977 to 1982, Steven served as Vice President – Sales and Marketing, of American Pacemaker Corporation until its acquisition by Intermedics, Inc.  Steven E. Hanson is the son of Ralph E Hanson.

Derrick Ebden has been a Director of the Company since 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, since 1982 and had been a Vice President of the Company since its incorporation.

20

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

George F. Harrington has been a Director of the Company since 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, 2004, 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.

Code of Ethics

The Company has a Chief Executive and Senior Financial Officer Code of Ethics.   This code satisfies the requirements set forth in Item 406 of Regulation S-B and applies to all relevant persons set forth therein.   The Company will mail to interested parties a copy of the Code of Ethics upon written request and without charge.  Such request shall be made to the Corporate Clerk, c/o Pace Medical, Inc., 391 Totten Pond Road, Waltham, Massachusetts 02451.

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, 2004 paid by the Company to Ralph E. Hanson, who served as the Company’s President and Chief Executive Officer during such period (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.

21

SUMMARY COMPENSATION TABLE

	Annual Compensation				Long Term Compensation Awards
Name and Principal Position	Year	Salary	Bonus($)	Other Annual Compensation ($)	Securities Underlying Options(#)
Ralph E. Hanson, Chief Executive Officer	2004	144,412	—	—	—
	2003	139,064	—	—	—
	2002	144,412	—	—	—

2.  Stock Options

The table set forth below shows information regarding the value of unexercised stock options held by the named executive officer at December 31, 2004.

Aggregate Option Values At Fiscal Year End

	Number of Securities Underlying Unexercised Options at FY-End (#)		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, 2004 ($0.28 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.

.Ralph Hanson was not granted any options or other equity based compensation during the fiscal year ended December 31, 2004 and did not exercise any options during such fiscal year.

3.  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 $0.32 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.

22

Item 11.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

PRINCIPAL STOCKHOLDERS AND

STOCKHOLDINGS OF MANAGEMENT

The following table shows, as of May 31, 2005, the number of shares beneficially owned (i) by those stockholders who are known to the Company to own beneficially more than five percent of the outstanding Common Stock of the Company, (including their addresses) (ii) by each director and nominee for director of the Company, (iii) by each named executive officer, and (iv) by all directors and executive officers as a group.

Name	Shares Beneficially Owned as of May 31, 2005		Percentage of Class
Ralph E. Hanson Pace Medical, Inc. 391 Totten Pond Road Waltham, MA 02154	1,053,000	(1)	30.0	%
Steven E. Hanson Pace Medical, Inc. 391 Totten Pond Road Waltham, MA 02154	435,000	(2)	11.5	%
Paul J. LaRaia, M.D. 45 Ravine Road Wellesley, MA 02481	331,000		9.9	%
Derrick Ebden	124,000	(3)	3.6	%
George F. Harrington	127,000	(4)	3.7	%
Directors and Officers as a Group	1,739,000	(5)	43.0	%

(1)  Includes 100,000 shares of Common Stock which Ralph E. 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 425,000 shares of Common Stock which Steven E. Hanson has a right to acquire within 60 days pursuant to the exercise of options.  Includes 10,000 shares held by Mr. Hanson as custodian for his children, beneficial ownership of which is disclaimed by Mr. Hanson.

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

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

23

(5)  Includes 685,000 shares of Common Stock which officers and directors have a right to acquire within 60 days pursuant to the exercise of options.

Ralph Hanson, as beneficial owner of 30% 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.

3.Equity Compensation Plan Information

The following table provides information as of December 31, 2004 with respect to shares of Company common stock that may be issued under compensation plans or individual compensation arrangements under which equity securities of the Company are authorized for issuance:

Plan category	Number of Securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options warrants and rights	Number of securities remaining available for future issuance
	(a)	(b)	(c)
Equity compensation plans (or arrangements) approved by security holders	0	0	0
Equity compensation plans (or arrangements) not approved by security holders (1)	340,000	0.32	0
Total	340,000	0.32	0

(1)Consists of options to acquire shares of Common Stock, $.01 par value granted to certain members of management and to outside directors in 2000, 2001 and 2003 pursuant to individual written option agreements, not pursuant to a written plan.  In each case, the option was granted at the market price on the date of grant, had a term of five years and was exercisable in full on the date of grant.

Item 12.  Certain Relationships and Related Transactions.

In 1990 the Company entered into an agreement with APC Cardiovascular Ltd. (“APC Cardiovascular”), a company in which Derrick Ebden, a Director of the Company, is Managing Director and a principal stockholder, pursuant to which APC Cardiovascular was appointed the sole distributor of the Company’s products outside of North America on normal trade terms.  Such agreement does not have a fixed term, but

24

is terminable by either party upon one year’s advance written notice.  Prior to leaving the employment of the Company in 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 APC Cardiovascular of approximately $1,229,939 during 2003 and $1,095,767 during 2004.  All such sales were made on normal trade terms.

Item 13.  Exhibits

Exhibits.

3.1		Restated Articles of Organization of the Registrant.
3.2		By-laws of the Registrant, as amended – (previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2002 and incorporated herein by this reference).
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).
21		Subsidiaries of the Registrant.
31.1		Certification pursuant to Rule 13a-14(a) (included herewith)
31.2		Certification pursuant to Rule 13a-14(a) (included herewith)
32.1		Certification pursuant to 18 U.S.C. Section 1350 (included herewith)
32.2		Certification pursuant to 18 U.S.C. Section 1350 (included herewith)

*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.

25

Item 14.  Principal Accountant Fees and Services

On March 17, 2005 Deloitte & Touche LLP, and its UK affiliate (collectively “Deloitte &Touche”) resigned as the principal independent registered public accounting firm for the Company and for APC Medical, Ltd, the Registrant’s UK subsidiary.  On March 17, 2005 the Registrant engaged Vitale, Caturano & Company, Ltd. (“Vitale Caturano”) as the Registrant’s independent registered public accounting firm to audit the financial statements of the Registrant, and Maidment Judd, Chartered Accountants, of Harpenden (Hertfordshire) England, to audit the financial statements of APC Medical, Ltd., the Company’s UK subsidiary.

The following table presents fees for audit services rendered for the audit of the Company’s annual financial statements for the years ended December 31, 2004 and 2003, and fees billed for other services rendered during those periods.

	Fiscal Year 2004		Fiscal Year 2003
Audit Fees (1)	$	35,500	$	35,500
Audit-related Fees (2)	0		0
Tax Fees (3)	6,900		6,900
Total	$	42,400	$	42,400

(1)Audit Fees – Audit fees billed to the Company for auditing the Company’s annual financial statements and reviewing the financial statements included in the Company’s Quarterly Reports on Form 10-QSB.

(2)Audit-Related Fees – Audit-related fees billed to the Company for services related to the audit of the Company’s financial statements, that are not reported under Audit Fees, and include due diligence assistance in connection with accounting consultations (including consultations concerning compliance with provisions of the Sarbanes-Oxley Act).

(3)Tax Fees – Tax fees include fees related to tax compliance and review regarding the accounting treatment of various tax matters.

Pre-Approval Policy of Audit and Non-Audit Services of Independent Auditors

The Board of Directors’ policy is to pre-approve all audit and non-audit services provided by the independent auditors.  These services may include audit services, audit-related services, tax services and other services.  Any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget.  The Board of Directors may delegate pre-approval authority to one or more of its members when expedition of services is necessary.  The independent auditors and management are required to periodically report to the Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date.

26

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/ Steven E. Hanson
		Steven E. Hanson, President
	Date		June 9, 2005

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/ Steven E. Hanson
Steven E. Hanson, President and Chief Executive Officer
(Principal Executive Officer)
Date	June 9, 2005
/s/ Ralph E. Hanson
Ralph E. Hanson, Director and Treasurer
(Principal Financial and Accounting Officer)
Date	June 9, 2005
/s/ George F. Harrington
George F. Harrington, Director
Date	June 9, 2005
/s/ Derrick Ebden
Derrick Ebden, Director
Date	June 9, 2005

27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Pace Medical, Inc. and subsidiary (the “Company”) as of December 31, 2004, and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive loss, and cash flows for the year 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 audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Vitale Caturano & Company, Ltd.

May 31, 2005

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Pace Medical, Inc. and subsidiary (the “Company”) as of December 31, 2003, and the related consolidated statement of operations, changes in shareholders’ equity and comprehensive loss, and cash flows for the year 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

March 22, 2004

F-2

PACE MEDICAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2004 and 2003

ASSETS	2004			2003
CURRENT ASSETS:
Cash and cash equivalents	$	902,198		$	1,060,791
Accounts receivable	12,500			13,973
Accounts receivable—related party	203,004			250,845
Inventories:
Raw materials	271,812			257,019
Work in process	119,876			179,766
Finished goods	79,707			112,804
Total inventories	471,395			549,589
Prepaid expenses	39,309			41,651
Total current assets	1,628,406			1,916,849
PROPERTY AND EQUIPMENT:
Machinery and equipment	63,117			55,516
Office furniture, equipment, and improvements	73,926			65,746
Computer equipment	95,890			93,281
Total property and equipment	232,933			214,543
Less accumulated depreciation and amortization	(214,121		)	(193,416		)
Property and equipment—net	18,812			21,127
OTHER ASSETS—Net	248,626			249,097
TOTAL ASSETS	$	1,895,844		$	2,187,073

LIABILITIES AND SHAREHOLDERS’ EQUITY	2004			2003
CURRENT LIABILITIES:
Accounts payable	$	241,779		$	326,419
Accrued expenses	118,396			125,852
Total current liabilities	360,175			452,271
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS’ EQUITY:
Common stock, $.01 par value—authorized, 5,000,000 shares; issued and and outstanding, 3,400,870 shares	34,009			34,009
Additional paid-in capital	3,147,151			3,147,151
Accumulated other comprehensive income	355,011			244,512
Accumulated deficit	(1,968,755		)	(1,659,123		)
Total shareholders’ equity	1,567,416			1,766,549
Treasury stock, at cost (46,000 shares in 2003 and 2004)	(31,747		)	(31,747		)
Shareholders’ equity—net	1,535,669			1,734,802
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,895,844		$	2,187,073

The accompanying notes are an integral part of these consolidated financial statements.

F-3

PACE MEDICAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2004 AND 2003

	2004			2003
NET SALES:
Customers	$	120,857		$	89,703
Related party	1,095,767			1,229,939
Total net sales	1,216,624			1,319,642
COST OF SALES	664,402			835,275
GROSS PROFIT	552,222			484,367
OPERATING EXPENSES:
Selling, general, and administrative	753,666			649,321
Engineering and product development	117,191			202,511
LOSS FROM OPERATIONS	(318,635		)	(367,465		)
OTHER INCOME—net	23,754			22,521
LOSS BEFORE INCOME TAX PROVISION	(294,881		)	(344,944		)
INCOME TAX PROVISION	14,751			32,163
NET LOSS	$	(309,632	)	$	(377,107	)
NET LOSS PER SHARE—Basic and diluted	$	(0.10	)	$	(0.11	)

The accompanying notes are an integral part of these consolidated financial statements.

F-4

PACE MEDICAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

YEARS ENDED DECEMBER 31, 2004 AND 2003

	Common Stock			Additional Paid-In		Accumulated			Comprehensive			Accumulated Other Comprehensive		Treasury			Total Shareholders’
	Shares	Value		Capital		Deficit			Loss			Income		Stock			Equity
BALANCE—January 1, 2003	3,400,870	$	34,009	$	3,147,151	$	(1,282,016	)	—			$	119,114	$	(31,747	)	$	1,986,511
	—	—		—
Net loss	—	—		—		(377,107		)	$	(377,107	)	—		—			(377,107		)
Cumulative translation adjustments	—	—		—		—			125,398			125,398		—			125,398
Comprehensive loss	—					—			$	(251,709	)	—		—			—
BALANCE—December 31, 2003	3,400,870	$	34,009	$	3,147,151	(1,659,123		)	—			244,512		(31,747		)	1,734,802
Net loss	—	—		—		(309,632		)	$	(309,632	)	—		—			(309,632		)
Cumulative translation adjustments	—	—		—		—			110,499			110,499		—			110,499
Comprehensive loss	—	—		—		—			$	(199,133	)	—		—			—
BALANCE—December 31, 2004	3,400,870	$	34,009	$	3,147,151	$	(1,968,755	)	—			$	355,011	$	(31,747	)	$	1,535,669

The accompanying notes are an integral part of these consolidated financial statements.

F-5

PACE MEDICAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2004 AND 2003

	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(309,632	)	$	(377,107	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	21,176			17,332
Unrealized foreign exchange transaction gain (loss)	—			8,780
Loss on disposal of fixed asset	—			804
Changes in assets and liabilities:
Accounts receivable	49,314			115,772
Prepaid expenses	2,342			(14,336		)
Inventories	78,194			1,994
Accounts payable	(84,640		)	98,028
Accrued expenses	(7,456		)	27,361
Cash used in operating activities	(250,702		)	(121,372		)
CASH FLOWS USED IN INVESTING ACTIVITIES—
Purchase of Property and Equipment	(18,390		)	(11,790		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH	110,499			78,263
DECREASE IN CASH AND CASH EQUIVALENTS	(158,593		)	(54,899		)
CASH AND CASH EQUIVALENTS—Beginning of year	$	1,060,791		1,115,690
CASH AND CASH EQUIVALENTS—End of year	$	902,198		$	1,060,791

The accompanying notes are an integral part of these consolidated financial statements.

F-6

PACE MEDICAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2004 AND 2003

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation—The consolidated financial statements include the accounts of Pace Medical, Inc. and its 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 inter-company 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 $1,916,000 as of December 31, 2004). 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 is 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.

Accounts Receivable—Accounts receivable are stated at the amount management expects to collect from outstanding balances.  An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and management’s evaluation of outstanding accounts receivable at the end of the year. Historical experience has been such that no allowances for bad debts is currently provided.

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 was $20,705 and $15,178 for the years ended December 31, 2004 and 2003, respectively.

F-7

Other Assets—Other assets consist of deferred tooling costs, including tooling costs for several new products.  Such costs are amortized using the straight-line method, primarily over five years from the period of initial sale. Amortization expense for 2004 and 2003 aggregated approximately $471 and $2,154, respectively.  Accumulated amortization aggregated $37,862 and $37,391 at December 31, 2004 and 2003, respectively. The Company expects to fully amortize the balance of deferred tooling costs over the next five years.

Long-Lived Assets—The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the assets.  If such assets are considered to by impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the assets

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.  The Company records a liability for specific warranty matters when they become known and are reasonably estimable.  The Company’s product warranty obligations are included in accrued expenses.

The changes in the reserves for product warranties for the year ended December 31, 2003 and 2004, are approximately as follows:

	2003		2004
Balance at January 1	—		$	100,000
Provision charged to income	$	100,000	—
Usage	—		(55,000		)
Balance at December 31	$	100,000	$	45,000

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.

F-8

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 non-employees is measured using the fair-value method. No stock based compensation expense was recorded in 2004 and 2003.  If the Company had used the fair value method to measure compensation, pro forma net loss and pro forma basic and diluted net loss per share would not have materially differed from reported net loss for the years ended December 31, 2004 and 2003, respectively.  The Company did not grant any stock options in 2004.

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 in 2004:  risk-free interest rate, 2.27%; expected life of the option grants, 4.5 years; expected volatility of underlying stock, 58%; and no expected dividend payment.

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.

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.

New Accounting Pronouncements—In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R Share-Based Payment.  This standard replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.  SFAS No. 123R requires companies to recognize the compensation cost related to share-based payment transactions with employees in the financial statements.  The compensation cost is measured based upon the fair value of the instrument issued.  Share-based compensation transactions with employees covered within SFAS 123R include share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.  SFAS No. 123 included a fair-value-based method of accounting for share-based payment transactions with employees, but allowed companies to continue to apply the guidance in APB 25 provided that they disclose in the footnotes of the financial statements the pro forma net income if the fair-value-based method had been applied.  The Company is currently reporting share-based payment transactions with employees in accordance with APB 25 and provides the required disclosures.  SFAS No. 123R will become effective in the Company’s fiscal 2006.

Under SFAS No. 123R, the pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition.  The Company will need to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption.  The Company plans to adopt SFAS No. 123R using the modified-prospective method.  Accordingly, the adoption of SFAS No. 123R’s fair value method may have a significant impact on the Company’s results of operations, although it will have no impact on the overall financial position.  The impact of the adoption of SFAS No. 123R cannot be determined at this time because it will depend on the levels of share-based payments granted in the future.  However, had the Company adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) above.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of VariableInterest Entities, an interpretation of ARB No. 51.  In December 2003, the FASB revised FIN 46 by issuing Interpretation No. 46R.  FIN 46R clarifies the requirements for consolidation of certain entities in which

F-9

equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  FIN 46R applies immediately to variable interest entities created after December 31, 2003.  It applies in the first fiscal year beginning after December 15, 2004, to all variable interest entities that are subject to this Interpretation.  The Company does not believe the adoption of FIN 46R will have a material impact to its consolidated financial statements.

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 $1,095,767 and $1,229,939 in 2004 and 2003, respectively (see Note 7). Receivables from Cardiovascular at December 31, 2004 and 2003 were $203,004 and $250,845, respectively.

3.COMMITMENTS AND CONTINGENCIES

Lease Obligations—APC leases its plant and office facility under a renewable operating lease which expires in 2006. The annual rent is £29,550 (approximately $56,618 at December 31, 2004). The lease requires payment of a pro-rata share of insurance and maintenance costs in addition to the rental payment. Assuming the maximum is renewed at current rates, future minimum rental payments under the lease will total approximately $57,000 in each of the next two years.

On November 1, 2002, Pace entered into a lease agreement for its facility in the United States.  The lease agreement was for a one-year term, from November 1, 2002 through October 31, 2003. On November 1, 2003, Pace became a tenant-at-will.  Annual rent is approximately $63,000.

Rental expense for all operating leases, including leases with terms of less than one year, amounted to approximately $120,000 and $115,000 in 2004 and 2003, respectively.

Contingencies—The Company is engaged in legal proceedings arising in the ordinary course of business.  We believe that the ultimate outcome of these proceedings will not have a material adverse impact on our consolidated financial position, results of operations or cash flows.

F-10

4.INCOME TAXES

The provision for income taxes consists of the following for the years ended December 31:

	2004		2003
Current—foreign	$	14,751	$	32,163
Deferred:
Federal	—		—
State	—		—
Foreign	—		—
Provision for income taxes	$	14,751	$	32,163

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

	2004			2003
Statutory U.S. rate	$	(100,260	)	$	(62,070	)
State taxes—net of federal benefit	(15,206		)	(11,450		)
Rate difference on foreign taxes	(10,355		)	(76,870		)
Valuation allowances provided	140,231			182,553
Other	341			0
Provision for income taxes	$	14,751		$	32,163

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

	2004			2003
Net operating loss carryforwards	$	1,147,398		$	1,029,800
Research and development credits	181,086			180,400
Inventory	29,956			25,200
Depreciation and amortization	(76,509		)	(57,700		)
Other	8,541			3,803
Deferred tax assets	$	1,290,472		$	1,181,503
Valuation allowance	(1,290,472		)	(1,181,503		)
Net Deferred Tax Asset	$	—		$	—

Deferred tax assets have been fully reserved. Valuation allowances were increased by $140,231and $182,553 in 2004 and 2003, respectively, principally due to the generation of loss carryforwards in the United States which are unlikely to be realized.

At December 31, 2004, Pace has federal income tax loss carryforwards for financial and tax reporting purposes of $3,040,973, which will expire in the years 2005 through 2025, and state income tax loss carryforwards of $1,809,682, which will expire in the years 2005 through 2010. Pace has no foreign loss carryforwards available to benefit income earned by APC.

F-11

5.SHAREHOLDERS’ EQUITY

Stock Options—During 2003, by authorization of the Board of Directors, options were granted to purchase 35,000 shares of common stock under nonqualified stock option agreements. During 2004, no options were granted. 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 January 1, 2003	380,000		$	0.36
Granted in 2003	35,000		0.24			$	0.11
Expired in 2003	(35,000	)	(0.36		)
Outstanding December 31, 2003	380,000		$	0.36
Outstanding January 1, 2004	380,000		$	0.36
Granted in 2004	—		—
Expired in 2004	(40,000	)	(0.36		)
Outstanding December 31, 2004	340,000		$	0.36
Outstanding and exercisable—December 31, 2004	340,000		$	0.36
Outstanding and exercisable—December 31, 2003	380,000		$	0.36

At December 31, 2004, the options outstanding and exercisable had weighted-average remaining contractual lives of 2.12 years.

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, 2004, 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:

	2004			2003
Net loss	$	(309,632	)	$	(377,107	)
Weighted-average shares outstanding	3,354,850			3,354,850
Basic and diluted net loss per share	$	(0.10	)	$	(0.11	)

The impact of stock options have been excluded from the calculation of the weighted-average shares outstanding as they are anti dilutive due to the Company’s net loss position at December 31, 2004 and 2003.

F-12

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
2004
Sales and transfers	$	414,054		$	1,165,904	$	(363,334	)	$	1,216,624
Depreciation and amortization	2,697			18,479		—			21,176
Net income (loss)	(368,721		)	59,089		—			(309,632		)
Other income—primarily interest	1,937			21,817		—			23,754
Capital expenditures	—			18,390		—			18,390
Long-lived assets	252,036			15,400		—			267,436
Total assets	598,195			1,297,649		—			1,895,844
2003
Sales and transfers	$	333,030		$	1,297,007	$	(310,395	)	$	1,319,642
Depreciation and amortization	5,831			11,501		—			17,332
Net income (loss)	(396,572		)	19,465		—			(377,107		)
Other income—primarily interest	4,507			18,014		—			22,521
Capital expenditures	11,790			—		—			11,790
Long-lived assets	254,735			15,489		—			270,224
Total assets	776,504			1,410,569		—			2,187,073

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:

	2004				2003
	Amount		Percent		Amount		Percent
APC Cardiovascular Ltd. (related party)	$	1,095,767	90	%	$	1,229,939	93	%

During 2004 and 2003, only sales to the one customer accounted for more than 10% of the net sales.

F-13

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Steven E. Hanson, President and Chief Executive Officer of Pace Medical, Inc., certify that:

1.I have reviewed this annual report on Form 10-KSB of Pace Medical, Inc.;

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

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

4.I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small business issuer and have:

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

b)evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based such evaluation; and

c)Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons

performing the equivalent functions):

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

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

Date: June 9, 2005

/s/ Steven E. Hanson

Steven E. Hanson,

President and Chief Executive
Officer

(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Ralph E. Hanson, Treasurer of Pace Medical, Inc., certify that:

1.I have reviewed this annual report on Form 10-KSB of Pace Medical, Inc.;

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

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

4.I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small business issuer and have:

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

b)evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based such evaluation; and

c)Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

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

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

Date: June 9, 2005

/s/ Ralph E. Hanson

Ralph E. Hanson,

Treasurer

(principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Pace Medical, Inc. (the “Company”) on Form 10-KSB for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven E. Hanson, President and Chief Executive Officer of the Company, being the chief executive officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Steven E. Hanson

Steven E. Hanson

President and

Chief Executive Officer

June 9, 2005

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Pace Medical, Inc. (the “Company”) on Form 10-KSB for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ralph Hanson, Treasurer of the Company, being the chief financial officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Ralph Hanson

Ralph Hanson

Treasurer

June 9, 2005