<PAGE>   1

                                   FORM 10-QSB

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

(Mark One)
[X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended September 30, 1998
                                              ------------------
                                       OR

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

    For the transition period from _________________ to ___________________.

                         Commission file number 0-16257
                                                --------

                               PACE MEDICAL, INC.
         ---------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

<TABLE>
<S>                                                <C>
           MASSACHUSETTS                              04-2867416
  ------------------------------                   ------------------
  State or other jurisdiction of                    (I.R.S. Employer
  incorporation or organization)                   identification No.)
</TABLE>

               391 TOTTEN POND ROAD, WALTHAM, MASSACHUSETTS 02451
               --------------------------------------------------
                   (Address of principal executive offices )

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

     Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X  No
                                              ---   ---

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of November 13, 1998.

         3,390,870 shares of Common Stock, par value $.01 per share


<PAGE>   2

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

        a)    Consolidated Condensed Balance Sheets

        b)    Consolidated Condensed Statements of Operations

        c)    Consolidated Condensed Statements of Cash Flows

        d)    Notes to Consolidated Condensed Financial Statements



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<PAGE>   3

                 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
                      CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                      SEPTEMBER 30, 1998  DECEMBER 31, 1997
                                      ------------------  -----------------
                                          (Unaudited)     (See note below)
<S>                                       <C>               <C>
ASSETS

Current assets:
Cash and cash equivalents                 $ 1,135,804       $ 1,318,652
Accounts receivable                           364,228           416,897
Inventories:
 Raw materials                                297,109           235,464
 Work-in-process                              163,374            77,061
 Finished goods                               177,360           117,815
                                          -----------       -----------
                                              637,843           430,340
Other current assets                           50,608            43,208
                                          -----------       -----------
   Total current assets                     2,188,483         2,209,097
Plant and equipment, net                       42,787            41,681
Other assets                                   36,607            41,080
                                          -----------       -----------
TOTAL ASSETS                              $ 2,267,877       $ 2,291,858
                                          ===========       ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable                          $    75,299       $   129,509
Due to officer                                  9,845             7,110
Accrued expenses                               31,757            26,619
                                          -----------       -----------
    Total current liabilities                 116,901           163,238
                                          -----------       -----------
Shareholders' equity:
Common stock                                   34,009            34,009
Additional paid-in capital                  3,147,151         3,147,151
Cumulative translation
 adjustment                                   110,587           102,899
Accumulated deficit                        (1,122,084)       (1,155,439)
                                          -----------       -----------
                                            2,169,663         2,128,620
                                          -----------       -----------
Less Treasury Stock, at Cost                  (18,687)                0
                                          -----------       -----------
    Total Shareholders' Equity              2,150,976         2,128,620

TOTAL LIABILITIES AND
 SHAREHOLDERS' EQUITY                     $ 2,267,877       $ 2,291,858
                                          ===========       ===========
</TABLE>


Note: The balance sheet at December 31, 1997 has been taken from the
      audited financial statements at that date.

     See accompanying notes to consolidated condensed financial statements.

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<PAGE>   4



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

                                     For the three months            For the nine months
                                      ended September 30              ended September 30
                                   ------------------------      ----------------------------
<S>                                <C>             <C>           <C>               <C>
                                     1998            1997           1998              1997
                                   ---------       --------      -----------       ----------

Net Sales                          $ 403,139       $512,807      $ 1,161,038       $1,658,021

Cost of sales                        204,439        242,899          498,122          811,262
                                   ---------       --------      -----------       ----------
                                     196,702        269,908          662,916          846,759

Other operating expenses             213,413        164,506          665,243          511,630
                                   ---------       --------      -----------       ----------

Income (loss) from operations        (14,711)       105,402           (2,327)         335,129

Other income                          12,241         10,386           35,682           30,441
                                   ---------       --------      -----------       ----------

Net income (loss)                  $  (2,470)      $115,788      $    33,355       $  365,570
                                   =========       ========      ===========       ==========
Net income (loss) per share:

           Basic                   $     .00       $    .03      $       .01       $      .11
                                   =========       ========      ===========       ==========

           Diluted                 $     .00       $    .03      $       .01       $      .10
                                   =========       ========      ===========       ==========
</TABLE>


     See accompanying notes to consolidated condensed financial statements.

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<PAGE>   5


                 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                            NINE MONTHS ENDED
                                                               SEPTEMBER 30      
                                                       -----------------------------
                                                           1998              1997
                                                       -----------       -----------
<S>                                                    <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                         $    33,355       $   365,570
    Adjustments to reconcile
      net income to net cash
      (Used in) provided by operating activities:
        Depreciation and amortization                       19,588            (1,798)
    Change in assets and
        liabilities, net:                                 (200,883)         (119,210)
                                                       -----------       -----------
    Net cash (used in) provided by
        operating activities                              (147,940)          244,562

CASH FLOWS FROM INVESTING ACTIVITIES -

    Purchases of property and equipment                    (16,221)          (40,584)

CASH FLOW FROM FINANCING ACTIVITIES -
   Purchase of treasury stock                              (18,687)               --   
                                                       -----------       -----------

NET INCREASE (DECREASE) IN CASH                        $  (182,848)      $   203,978
  AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS
  AT BEGINNING OF PERIOD                               $ 1,318,652       $ 1,029,666
                                                       -----------       -----------
CASH AND CASH EQUIVALENTS
  AT END OF PERIOD                                     $ 1,135,804       $ 1,233,644
                                                       ===========       ===========
</TABLE>

     See accompanying notes to consolidated condensed financial statements.

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<PAGE>   6


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

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

2. In the opinion of the Company, the accompanying unaudited condensed financial
statements contain all adjustments, all of which are normal and recurring,
necessary to present fairly the financial position of the Company and its
wholly-owned subsidiary as of September 30, 1998 and the results of their
operations for the three and nine months ended September 30, 1998 and September
30, 1997 and their cash flows for the nine months ended September 30, 1998 and
September 30, 1997.

3. The Company prepares its financial information using the same accounting
principles as for its annual financial statements except that no physical
inventories were taken during either of the periods ended September 30, 1998 or
1997. Cost of sales for such periods was calculated primarily using standard
cost methods.

4. The results of operations for the three and nine months ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
year.

5. The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share" for purposes of presenting basic and diluted net
income per share and has restated all periods presented to conform to the new
presentation. The denominator used to determine basic net income (loss) per
share includes the weighted average common shares outstanding during the
quarter. The denominator used to determine diluted net income per share includes
the shares used in the calculation of basic net income per share plus the
weighted average options outstanding during the period using the treasury-stock
method. The diluted net loss per share for the three months ended September 30,
1998 does not include the weighted average options outstanding for the period,
since inclusion of these options would be antidilutive. Therefore, basic and
diluted net loss per share for the three months ended September 30, 1998 are the
same.


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<PAGE>   7

<TABLE>
<CAPTION>
                                               Three Months Ended              Nine Months Ended
                                                  September 30                   September 30
                                         ----------------------------      --------------------------
                                             1998             1997            1998            1997
                                         -----------       ----------      ----------      ----------
<S>                                      <C>               <C>            <C>              <C>

Net Income (loss)                        $    (2,470)      $  115,788      $   33,355      $  365,570
                                         ===========       ==========      ==========      ==========

Weighted-average shares outstanding        3,388,567        3,400,850       3,393,166       3,400,850
Effect of dilutive securities                     --          128,594          77,255         162,133
                                         -----------       ----------      ----------      ----------
Total shares                               3,388,567        3,529,444       3,470,421       3,562,983
                                         ===========       ==========      ==========      ==========

Basic net income (loss) per share        $     (0.00)      $     0.03      $     0.01      $     0.11
                                         ===========       ==========      ==========      ==========

Diluted net income (loss) per share      $     (0.00)      $     0.03      $     0.01      $     0.10
                                         ===========       ==========      ==========      ==========
</TABLE>


           The Company has excluded 10,000 options outstanding from the
calculation of diluted net income per share for the three months ended September
30, 1997, since the inclusion of these options would be antidilutive.

6. The Company has adopted the provisions of SFAS No. 130," Reporting
Comprehensive Income". Comprehensive income includes net income (loss) and
foreign currency translation adjustments. Comprehensive income for the three and
nine months ended September 30, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                       Three Months Ended           Nine Months Ended
                                          September 30,               September 30,
                                     ----------------------       ---------------------
                                      1998           1997          1998          1997
                                     -------       --------       -------      --------
<S>                                  <C>           <C>            <C>          <C>
Net Income (loss)                    $(2,470)      $115,788       $33,355      $365,570

Currency Translation Adjustment        9,722        (29,750)        7,688       (45,033)
                                     -------       --------       -------      --------

Total                                $ 7,252       $ 86,038       $41,043      $320,537
                                     =======       ========       =======      ========
</TABLE>


7. The Company has entered into a three year employment agreement with its
chairman that provides for annual compensation of $125,000. The agreement
expires June, 2001.

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<PAGE>   8


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS.

                 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY

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

FINANCIAL CONDITION

As of September 30, 1998, the Company had cash and cash equivalents of
$1,135,804 and working capital of $2,071,582. Working capital has increased
slightly since December 31, 1997 owing to the profitable operations of the
Company over the first nine months of the year. The Company's cash position has
decreased somewhat from December 31, 1997 because of increased inventory levels
as a result of lower than expected sales.

The Company expects to maintain a sound financial base for the balance of fiscal
1998. Management continues to believe that the current level of working capital,
coupled with the flexibility of the Company's cost structure, should suffice to
ensure that on-going operations are financed adequately.

FINANCIAL RESULTS - THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS THREE MONTHS
ENDED SEPTEMBER 30, 1997

Sales in the third quarter of 1998 decreased 21% from the sales posted in the
third quarter of 1997. The decrease in sales reflects a decrease in OEM sales to
a distributor.

The Company's margins in the third quarter decreased from those seen in 1997
(from 53% in 1997 to 49% in 1998). This occurred due to a change in the product
mix. It should be noted that pricing is continuing to remain firm on all
products.

Operating expenses were higher in the three months ended September 30, 1998
versus the three months ended September 30, 1997 due to increased advertising
and marketing and ISO 9001 certification related expenditures. Management
anticipates some increase in its operating expenditures during the balance of
1998. This level will also suffice to maintain the Company's research and
development efforts in developing new products in the temporary pacing field.

No tax provision was recorded for the three months ended September 30, 1998
owing to the Company's net loss for the period.

Net loss for the quarter was $2,470 or $.00 per share. This represents a


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<PAGE>   9


substantial decline from the results achieved in the third quarter of 1997 and
reflects the decrease in OEM sales.

FINANCIAL RESULTS - NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS
ENDED SEPTEMBER 30, 1997

Sales in the nine months ended September 30, 1998 decreased from the amount
posted in the nine months ended in September 30, 1997. This decrease is
attributable to the Company's decrease in OEM sales to a distributor.

The Company's margins for the year-to-date period are slightly more than those
of last year. This occurred due to a change in the product mix.

Operating expenses were higher for the nine months ended September 30, 1998
versus the nine months ended September 30, 1997 due to increased advertising and
marketing and ISO 9001 certification related expenditures. Management
anticipates some increase in its operating expenditures during the balance of
1998. This level will also suffice to maintain the Company's research and
development efforts in developing new products in the temporary pacing field.

No tax provision was recorded for the nine months ended September 30, 1998 owing
to the Company's ability to use net operating loss carryforwards in both the
U.S. and U.K.

Net income for the nine months was $33,355 or $.01 per share, representing a
decrease of 91% from the comparable period in 1997. This is a substantial
reduction from the earnings in the first nine months of 1997 and is attributable
to the factors described above.

YEAR 2000

The Year 2000 presents potential concerns for businesses. The consequences of
this issue may include systems failures and business process interruption due to
calculation problems with the use of 2-digit date formats as the year changes
from 1999 to 2000.

The Company's products do not use date fields, therefore, the Year 2000 issue
should not affect the Company's products. All organizations dealing with the
Year 2000 must address the effect this issue will have on their third-party
supply chain. The Company is undertaking steps to identify its vendors and to
formulate a system of working with key third-parties to understand their ability
to continue providing services and products through the change to 2000. The
Company will work directly with its key vendors and distributors to avoid any
business interruptions in 2000.

                                     - 9 -
<PAGE>   10


The Year 2000 issue also affects the Company's internal systems, including
information technology (IT) and non-IT systems. The Company is assessing the
readiness of its systems for handling the Year 2000. Although the assessment is
still underway, management currently believes that all material systems will be
compliant by the Year 2000 and that the cost to address the issues is not
expected to be material.

Currently, the Company has not developed a contingency plan for certain internal
systems or for continuing to do business with key third-parties. The impact of
the Year 2000 on future revenue is difficult to discern but is a risk to be
considered.

FACTORS THAT MAY AFFECT FUTURE RESULTS

From time to time, information provided by the Company or statements made by its
employees may contain "forward-looking" information which involves risks and
uncertainties. In particular, statements contained in this report which are not
historical facts (including but not limited to the Company's expectations
regarding business strategy, pricing, anticipated operating results, operating
expenses anticipated working capital) and the impact of the year 2000 issue may
be "forward-looking" statements. The Company's actual results may differ from
those stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, risks associated with the
introduction of new products, development of markets for new products offered by
the Company, government regulation, competition, general economic conditions,
and, with respect to the year 2000 issue, the extent to which the Company's IT
and non-IT systems will be replaced due to normal obsolescence, as well as due
to the year 2000 issue.


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<PAGE>   11


                           PART II - OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)   Exhibits:  27. Financial Data Schedule

         (b)   Reports on Form 8-K:  None


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                                   SIGNATURES


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


                                                     PACE MEDICAL, INC.  
                                              ----------------------------------
                                                        (Registrant)


Date:    November 14, 1998                    /s/ Ralph E. Hanson           
       --------------------                   ----------------------------------
                                              Ralph E. Hanson, President
                                                 and Chief Executive Officer
                                                 (principal executive officer)


Date:    November 14, 1998                    /s/ Ralph E. Hanson           
       --------------------                   ----------------------------------
                                              Ralph E. Hanson, Chief
                                                 Financial Officer
                                                 (principal financial officer)
 

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