<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, 1996
                                            ----------------------------

                                       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 registrant as specified in its charter)

              Massachusetts                             04-2867416
     --------------------------------               -------------------
     (State or other jurisdiction of                 (I.R.S. Employer
     incorporation or organization)                 identification No.)

               391 Totten Pond Road, Waltham, Massachusetts 02154
               --------------------------------------------------
                    (Address of principal executive offices)

                                 (617) 890-5656
                         -------------------------------
                         (Registrant's telephone number,
                              including area code)

     Indicate by check mark whether the registrant (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
                                                   -----    -----

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.    Yes       No
                             -----    -----

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of November 14, 1996.

     3,401,770 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

                                       -2-

<PAGE>   3

                 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
<TABLE>
                      CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
                                             SEPTEMBER 30, 1996   DECEMBER 31, 1995
                                             ------------------   -----------------
                                                 (Unaudited)       (See note below)
<S>                                               <C>                 <C>
ASSETS
------

Current assets:

Cash and cash equivalents                         $  976,040          $  772,006
Accounts receivable                                  417,683             380,781

Inventories:
 Raw materials                                       327,515             297,247
 Work-in-process                                     120,742              96,782
 Finished goods                                       72,274             114,039
                                                  ----------          ----------

                                                     520,531             508,068

Other current assets                                  49,572              45,489
                                                  ----------          ----------

 Total current assets                              1,963,826           1,706,344

Plant and equipment, net                              60,295              25,534
Other assets                                           6,525              47,832
                                                  ----------          ----------

TOTAL ASSETS                                      $2,030,646          $1,779,710
                                                  ==========          ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

Current liabilities:
Accounts payable                                  $  112,652          $  149,450
Accrued expenses                                      57,847              54,634
Accrued royalties                                    187,641             165,664
                                                  ----------          ----------

  Total current liabilities                          358,140             369,748

Excess of acquired net
 assets over purchase price                            3,666              14,656
</TABLE>

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<PAGE>   4

                 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
<TABLE>
                      CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>

                                         SEPTEMBER 30, 1996      DECEMBER 31, 1995
                                         ------------------      -----------------
                                            (Unaudited)           (See note below)
<S>                                         <C>                     <C>
Shareholders' equity:

Common stock                                     33,809                  33,809
Additional paid-in capital                    3,142,351               3,137,351
Cumulative translation
 adjustment                                      60,212                  57,081
Accumulated deficit                          (1,567,532)             (1,832,935)
                                            -----------             -----------

                                              1,668,840               1,395,306
                                            -----------             -----------
TOTAL LIABILITIES AND
 SHAREHOLDERS' EQUITY                       $ 2,030,646             $ 1,779,710
                                            ===========             ===========
<FN>

Note: The balance sheet at December 31, 1995 has been taken from the audited 
      financial statements at that date.
</TABLE>

See accompanying notes to consolidated condensed financial statements.

                                       -4-

<PAGE>   5

                 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
<TABLE>
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<CAPTION>
                              For the three months           For the nine months
                                ended September 30            ended September 30
                            -------------------------     -------------------------
                               1996           1995           1996           1995
                               ----           ----           ----           ----
<S>                         <C>            <C>            <C>            <C>       
Net Sales                   $  471,519     $  441,832     $1,588,298     $1,222,298

Cost of sales                  262,920        222,378        829,330        581,783
                            ----------     ----------     ----------     ----------

                               208,599        219,454        758,968        640,515

Other operating expenses       153,432        162,719        517,361        483,346
                            ----------     ----------     ----------     ----------

Income from operations          55,167         56,735        241,607        157,169

Other income                    (8,030)        (8,560)       (23,796)       (22,867)
                            ----------     ----------     ----------     ----------

Net income                  $   63,197     $   65,295     $  265,403     $  180,036
                            ==========     ==========     ==========     ==========

Net income per
 common and common
 equivalent share           $      .02     $      .02     $      .07     $      .05
                            ==========     ==========     ==========     ==========

Average number of
 common and common
 equivalent shares
 outstanding                 3,632,404      3,387,600      3,565,976      3,387,600
                            ==========     ==========     ==========     ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.

                                       -5-

<PAGE>   6



                 PACE MEDICAL, INC. AND WHOLLY-OWNED SUBSIDIARY
<TABLE>
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<CAPTION>
                                                           NINE MONTHS ENDED
                                                         ----------------------
                                                              SEPTEMBER 30
                                                         ----------------------
                                                           1996         1995
                                                           ----         ----
<S>                                                      <C>          <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                           $265,403     $ 180,036
    Adjustments to reconcile net income to net cash
      provided by operations:
        Depreciation and amortization                      (2,699)       (1,456)
    Change in assets and liabilities, net:                (21,330)     (160,595)
                                                         --------     ---------

    Net cash provided by operating activities             241,374        17,985

CASH FLOWS FROM INVESTING ACTIVITIES:
    Additions to property and equipment                    42,340        47,711
                                                         --------     ---------

    Net cash used in investing activities                  42,340        47,711

CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from exercise of options and warrants          5,000             0
                                                         --------     ---------

    Net cash provided by financing activities               5,000             0

NET INCREASE (DECREASE) IN CASH                           204,034       (29,726)

CASH AND CASH EQUIVALENTS
  AT BEGINNING OF PERIOD                                 $772,006     $ 781,110

CASH AND CASH EQUIVALENTS
  AT END OF PERIOD                                       $976,040     $ 751,384
                                                         ========     =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.

                                       -6-

<PAGE>   7

                 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, 1996, and the results of their
operations for the three and nine months ended September 30, 1996 and 1995, and
their cash flows for the nine months ended September 30, 1996 and 1995.

3.   The Company prepares its financial information using the same accounting
principles as for its annual financial statements with the following
modifications:

     a. No physical inventories were taken during either of the periods ended
September 30, 1996 or 1995. Cost of sales for such periods was calculated
primarily using standard cost methods.

4.   The Company has adopted SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", in the current
quarter. This adoption had no impact on the current quarter's financial
statements. The Company has also elected to continue to apply the measurement
provisions of APB 25, "Accounting for Stock Issued to Employees", in lieu of
adopting those described in SFAS 123, "Accounting for Stock-Based Compensation".

5.   The results of operations for the three and nine months ended September 30,
1996 and 1995 are not necessarily indicative of the results to be expected for
the full year.

                                       -7-

<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, 1996, the Company had cash and cash equivalents of $976,040
and working capital of $1,605,686. The working capital increase from the
position at December 31, 1995 is attributable almost entirely to the nine months
profit from operations of $265,403. The Company's cash flows have historically
tracked its operational results. Accordingly, the Company's working capital
position as of September 30, 1996 shows a marked improvement over that seen as
of December 31, 1995.

     The Company still maintains a sound financial base for fiscal 1996.
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, 1996 VERSUS THE THREE
MONTHS ENDED SEPTEMBER 30, 1995

Sales in the third quarter of 1996 increased approximately 7% over sales posted
in the third quarter of 1995. This increase is attributable to the Company's
ability to ship production units of its new dual-chamber pacing analyzer and to
increase its sales in the international marketplace.

The Company's margins in the third quarter are slightly lower than those seen in
1995. They reflect a slight change in product mix which included increased sales
of the Company's newly introduced pacing analyzer. In addition, production costs
are expected to decrease as production efficiencies are realized; and, it should
be noted that pricing is continuing to remain firm on the product.

Operating expenses remained relatively flat between 1996 and 1995. This relative
stability reflects management's commitment to contain costs. Also, management
does not anticipate any significant increases in its operating expenditures
during the balance of 1996. This level will also suffice to maintain the
Company's research and development efforts in developing new products in the
temporary pacing field.

                                       -8-

<PAGE>   9


There are no taxes provided for on the financial statements because of the
presence of net operating loss carryforwards in the U.S. and U.K.

The net profit for the quarter was $63,197 or $.02 per share in contrast to a
net profit of $65,295 or $.02 per share in the third quarter of 1995.

FINANCIAL RESULTS - NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS THE NINE MONTHS
ENDED SEPTEMBER 30, 1995

Sales in the nine months ended September, 1996 increased slightly over those
seen in the nine months ended in September, 1995. This increase is attributable
to the Company increasing sales of its newly introduced pacing analyzer in 1996.
The Company's sales pace for the remainder of 1996 should continue to meet that
seen in the first nine months of the year owing primarily to the increase in
orders for its new dual-chamber pacing analyzer.

The Company's cost of sales margins for the year-to-date are running slightly
lower than those of last year due to increased production start-up costs
concerning the newly introduced pacing analyzer. Increased product volumes
should continue to increase the margins since the Company does have a cost
structure that will reward higher production volumes. It should be noted that
pricing is continuing to remain firm on the products offered by the Company.

Operating expenses remained relatively flat between 1996 and 1995. This relative
stability reflects management's commitment to contain costs. Management also
does not anticipate any significant increases in its operating expenditures
during the balance of 1996. This level will also suffice to maintain the
Company's research and development efforts in developing new products in the
temporary pacing field.

There are no taxes provided for on the financial statements because of the
presence of net operating loss carryforwards in the U.S. and U.K.

The net profit for the year has increased to $.07 per share from a net profit of
$.05 per share in 1995. Management believes that the sales increase has improved
operations significantly.

                                       -9-
<PAGE>   10

                           PART II - OTHER INFORMATION


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

      (a)  Exhibits: 11. Statement re: computation of per share earnings
                     27. Financial Data Schedule

      (b)  Reports on Form 8-K: None

                                   SIGNATURES

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

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


Date: November 18, 1996                        /s/ RALPH E. HANSON
                                               --------------------------
                                               Ralph E. Hanson, President
                                                 and Principal Executive Officer

Date: November 18, 1996                        /s/ RALPH E. HANSON
                                               --------------------------
                                               Ralph E. Hanson, Principal
                                                 Financial and Accounting
                                                 Officer

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