SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

For the fiscal year ended June 30, 2001

[  ] 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: 0-14961

                          PRIMESOURCE HEALTHCARE, INC.
             (Exact name of registrant as specified in its charter)


        MASSACHUSETTS                                         04-2741310
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                            Identification No.)


               3700 EAST COLUMBIA STREET - TUCSON, ARIZONA - 85714
               (Address of principal executive offices) (Zip code)

               Registrant's telephone number, including area code:
                                 (520) 512-1100

           Securities registered pursuant to Section 12(b) of the Act:
                                      None


           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, $.01 PAR VALUE PER SHARE
                                (Title of class)

Indicate by checkmark  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 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 by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not 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-K or any
amendment to this Form 10-K. [ X ]

The  estimated  aggregate  market  value  of the  voting  Common  Stock  held by
non-affiliates  of the registrant was $5,414,485 as of August 31, 2001.  Because
PrimeSource's  Common  Stock  is not  listed  or  quoted  on an  exchange,  this
computation  is based on an estimated  market value of $1.00 per share of Common
Stock as of August 31, 2001.

As of August 31, 2001,  8,013,590 shares of Common stock,  $.01 par value,  were
issued and outstanding.

<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

     List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g.,  Part I, Part II,  etc.) into which the document is
incorporated:

     None.






















                                    2
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<TABLE>
<CAPTION>

                                TABLE OF CONTENTS

Part I
               <S>        <C>                                                                                         <C>
                Item 1.    Business...................................................................................  4
                Item 2.    Properties................................................................................. 19
                Item 3.    Legal Proceedings.......................................................................... 19
                Item 4.    Submission of Matters to a Vote of Security Holders........................................ 19

Part II
                Item 5.    Market for Registrant's Common Shares and related Stockholder Matters...................... 21
                Item 6.    Selected Financial Data.................................................................... 23
                Item 7.    Management's Discussion and Analysis of Financial Condition and Results.................... 26
                Item 7A.   Quantitative and Qualitative Disclosures About Market Risk................................. 35
                Item 8.    Financial Statements and Supplementary Data................................................ 36
                Item 9.    Changes In and Disagreements with Accountants on Accounting Disclosure..................... 64

Part III        Item 10.   Directors and Executive Officers of the Registrant......................................... 64
                Item 11.   Executive Compensation..................................................................... 67
                Item 12.   Security Ownership of Certain Beneficial Owners and Management............................. 72
                Item 13.   Certain Relationships and related Transactions............................................. 76

Part IV         Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 77

Signatures      ...................................................................................................... 82

Index to
Exhibits        ...................................................................................................... 84
</TABLE>















                                       3
<PAGE>
                                     PART I

When we refer to "we," "us" or "our," we mean  PrimeSource  Healthcare,  Inc., a
Massachusetts corporation formerly known as Luxtec Corporation.

This document includes various  "forward-looking  statements" within the meaning
of Section 27A of the  Securities  Act of 1933, as amended,  and Sections 21E of
the  Securities   Exchange  Act  of  1934,  as  amended,   which  represent  our
expectations  or  beliefs  concerning  future  events.   Statements   containing
expressions  such as  "believes,"  anticipates"  or "expects"  used in our press
releases and periodic  reports on Forms 10-K and 10-Q filed with the  Securities
and Exchange Commission are intended to identify forward-looking statements. All
forward-looking statements involve risks and uncertainties.  Although we believe
our expectations are based upon reasonable  assumptions within the bounds of our
knowledge and  operations,  there can be no assurances  that actual results will
not materially differ from expected  results.  We caution that these and similar
statements  included in this report and in previously  filed  periodic  reports,
including  reports  filed on  Forms  10-K and  10-Q  are  further  qualified  by
important  factors that could cause  actual  results to differ  materially  from
those  in  the  forward-looking   statements.   Such  factors  include,  without
limitation  those listed under Item 7.  "Management  Discussion  and  Analysis,"
under the subheading "Risk Factors."

We caution  readers not to place undue reliance on  forward-looking  statements,
which speak only as of the date thereof.  We undertake no obligation to publicly
release any revisions to such  forward-looking  statements to reflect  events or
circumstances after the date hereof.


ITEM 1. BUSINESS

                                     GENERAL

We are a leading specialty medical products sales, marketing,  manufacturing and
service company.  We sell a broad portfolio of specialty medical products,  some
of which we manufacture,  to hospitals and surgery centers  nationwide through a
dedicated  organization of sales and marketing  professionals.  We have expanded
rapidly through the acquisition and integration of a number of leading  regional
specialty  sales  and  marketing  organizations  and  select  specialty  medical
products  manufacturing  companies.  Since January 1998, we have acquired eleven
regional  specialty sales and marketing  organizations and one specialty medical
products  manufacturer.  We have  consolidated and integrated each of the twelve
acquired  businesses  in order to create a uniform  operational  platform and to
help facilitate  further  expansion of our business.  Today, we have two primary
businesses:  Specialty  Distribution  Services,  or SDS,  and  the  Manufactured
Products Division,  or Manufactured  Products. As of August 31, 2001, we had 205
employees  and  generated  total  revenue of $51.0  million  for the fiscal year
ending June 30, 2001.

On March 2, 2001,  we  completed a merger with  PrimeSource  Surgical,  Inc.,  a
Delaware Corporation, or PrimeSource Surgical, resulting in PrimeSource Surgical
becoming our  wholly-owned  subsidiary.  Pursuant to the  Agreement  and Plan of
Merger, dated November 27, 2000, as amended, or the Merger Agreement, the former
stockholders  of  PrimeSource  Surgical  received  capital  stock in our company
representing  approximately 80% of the fully-diluted  voting power of our common
stock in exchange for their  PrimeSource  Surgical  capital  stock.  On June 22,
2001,  our  shareholders  approved  a motion  to change  our name  from  "Luxtec
Corporation" to "PrimeSource Healthcare, Inc."

                                      4
<PAGE>

A report by our auditors,  dated October 3, 2001, raises doubt about our ability
to  continue  as a going  concern.  This  means  that there is doubt that we can
continue with our proposed business  operations for the next twelve months. To a
large  extent,  this doubt stems from our failure to be in  compliance  with the
terms of one of our credit  agreements.  We are in the process of  renegotiating
the  terms  of  this  credit   agreement   and  believe  that   following   such
renegotiation, we will have sufficient funds to carry out our operations for the
next  twelve  months.  We  cannot  assure,  however,  that  we  will  be able to
renegotiate the terms of the credit  facility on favorable  terms, or at all, or
that we will  have  sufficient  funds to carry out our  operations  for the next
twelve months even if we do. For additional  information  concerning our ability
to continue  operating  during the next twelve months,  see the discussion under
the headings  "Liquidity  and Capital  Resources"  and "Risk  Factors" in Item 7
"Management's Discussion and Analysis."

                                BUSINESS STRATEGY

Our goal is to be one of the world's  leading  suppliers  of  specialty  medical
products to hospitals and surgery centers. We intend to continue to grow by:

   * hiring experienced sales representatives;

   * hiring and training college graduates as territory sales representatives;

   * adding additional specialty product lines to our product offering;

   * and by selectively acquiring companies in three primary areas:

         * Specialty medical products  manufacturers - We expect to benefit from
           the acquisition of select specialty medical products manufacturers by
           increasing  sales of acquired product lines through use of our direct
           specialty medical products sales force.

         * Specialty  medical products  distributors - We expect to increase our
           market  share  within  the  specialty   medical  products  market  by
           acquiring  leading  local and  regional  specialty  medical  products
           distributors, primarily in the surgical and critical care areas.

         * Service  providers  - We expect to benefit  from the  acquisition  of
           select  providers of key services to the specialty  medical  products
           marketplace by increasing sales of acquired service providers through
           use of our specialty sales and marketing organizations.

We believe we are well  positioned  to  continue  to grow  within the  specialty
medical products industry. We expect to experience sales growth in the specialty
medical products industry as a result of:

                                       5
<PAGE>

   * favorable industry demographics;

   * increases in our market share;

   * the  acquisition  of  select  specialty  medical  products   manufacturers,
     distributors and service providers;

   * our  further   penetration  of  existing   customer  accounts  due  to  our
     introduction of new products and services; and

   * our entrance into new specialty  markets and expansion  into  international
     markets.

                                    INDUSTRY

The medical products  industry has grown in recent years due to the aging of the
population and the  development of new medical  products and  technologies  that
create new product  opportunities for  manufacturers  and suppliers.  Healthcare
industry  analysts  estimate  that the  overall  market  for  specialty  medical
products  and  supplies  in the United  States is in excess of $30  billion.  An
estimated  $10.0 to $12.0  billion  is  distributed  by the larger  medical  and
surgical, or med-surg  distributors,  such as Owens & Minor, Cardinal Health and
McKesson  HBOC.  It is estimated  that an  additional  $10.0 to $12.0 billion in
medical  product sales is sold directly by medical device  manufacturers  to end
customers. The remainder of the medical products and supply market in the United
States,  estimated  to be  between  $10.0 and $12.0  billion,  is  comprised  of
specialty medical products,  supplies and services.  The Company competes within
this segment of the market.

Historically,   the  specialty   medical  products   industry  has  been  highly
fragmented.  During the past decade, healthcare providers have consolidated into
larger and more  sophisticated  integrated  delivery  networks,  or IDNs,  in an
effort to reduce costs. In addition,  in order to gain purchasing power,  buyers
of medical products and supplies have consolidated  their purchases under large,
national group  purchasing  organizations,  or GPOs. With the scale added by our
completed  acquisitions,  we have begun to expand our traditional customer base,
composed primarily of hospitals and surgery centers,  to IDNs and GPOs. IDNs and
GPOs  have  expanded  in recent  years  and  currently  purchase  a  significant
percentage  of medical  products  and supplies for  hospitals.  GPO  contractors
typically  require  purchasing  volume of at least $10 million when  structuring
purchasing contracts with distributors.  By aggregating  specialty products,  we
have created an opportunity for GPOs to capture additional  administrative  fees
by bringing in non-contracted specialty medical products.  Furthermore,  because
of our access to IDNs and GPOs, we have established a compelling  advantage with
small product manufacturers (which cannot easily access the IDN and GPO customer
base) over  smaller  competitors  who are unable to satisfy  IDN and GPO minimum
volume purchasing requirements.



                                       6
<PAGE>
We believe that we are well positioned within our industry because we:

   *  provide a consultative, specialty-focused sales approach through a network
      of highly trained sales professionals;

   *  reach a national  customer  base of GPOs and IDNs that is beyond the scope
      of local and regional specialty medical products distributors;

   *  operate in a complementary niche outside the volume-driven model of large,
      national med-surg distributors; and

   *  offer a broader range of products, services, and solutions exceeding those
      of any single specialty medical product manufacturer's direct sales force.

We believe that customers seek to  consolidate  their  purchases of products and
services in the highly fragmented specialty medical products and services market
in order to reduce their procurement  costs. We help customers reduce the number
of vendors that they work with,  thereby reducing the overall  procurement costs
of products and services.

                              PRODUCTS AND SERVICES

SPECIALTY DISTRIBUTION SERVICES

Within the SDS business,  we divide our business into PrimeSource  Surgical,  or
Surgical,  and PrimeSource Critical Care, or Critical Care. The Surgical segment
is a national  sales and marketing  organization  that markets and sells a large
number  of  surgical  products   primarily  to  hospitals  and  surgery  centers
nationwide.  The  Critical  Care  segment  is a  regional  sales  and  marketing
organization  that sells a large number of products  primarily to hospitals  and
surgery centers in the southeastern and northeastern United States.

Within the Surgical segment, the primary specialties are:

   *  Cardio Vascular;

   *  Endoscopy;

   *  General Surgery; and

   *  Gynecology.

Within the Critical Care segment, the primary specialties are:

   *  Neonatal Intensive Care; and

   *  Maternal and Child Care.


                                       7
<PAGE>
Our products and services are  primarily  used in hospital  operating  rooms and
intensive care units, outpatient surgery centers and to a lesser degree doctors'
offices.  Most of our products are technologically  innovative medical products,
or specialty products,  that require hands-on training of clinicians and medical
personnel.  We  continue  to  expand  our  product  base to  include  additional
instruments and equipment thereby allowing customers to use us as a source for a
greater percentage of their specialty products needs.

The sale of specialty  disposable products and capital equipment account for the
majority of our revenues.  Our capital equipment  products are typically complex
and  require  significant  consultative  selling and  training of medical  staff
personnel.  Our  specialty  disposable  products  are often sold to support  the
growing base of installed capital  equipment  products and offer a recurring and
stable source of revenue.

THE MANUFACTURED PRODUCTS DIVISION

Through  our Luxtec  division,  we design,  manufacture  and market  fiber optic
headlight  and video camera  systems,  light  sources,  cables,  retractors  and
surgical and other custom-made  equipment for the medical and dental industries.
Luxtec has  developed a  proprietary,  fiber optic  drawing  system  designed to
manufacture  optical glass to a specified  diameter.  The fibers are utilized in
fiber optic cables,  which are  incorporated  with Luxtec's  surgical  headlight
systems  and  video  camera  systems,  as well as in an  array  of  fiber  optic
transilluminators  utilized  with  Luxtec's  surgical  instruments.  Luxtec also
markets  replacement  fiber optic cables and bulbs as well as light  sources for
use with other  manufacturers'  products,  including various  endoscopic systems
used in minimally invasive surgical procedures.

Fiber  optics allow for the  transmission  of a light or image from one place to
another through a flexible conduit of optical glass rods and tubes. The flexible
conduit  provides for an improved  ability to bend and transmit light and images
to and from places with limited or difficult access.

The technology used by Luxtec to provide  illumination  directly to the surgical
site is  facilitated by fiber optic cables  transmitting  light to an adjustable
headlight  composed  of a series of lenses and  mirrors  mounted on a  headband.
These lenses then focus the light directly on the surgical site when worn by the
surgeon.  This provides a lightweight,  low temperature  illumination  source to
enhance visualization for microsurgical and deep cavity illumination.  A summary
of the Luxtec division's specific product offerings is as follows:

HEADLIGHT  SYSTEMS:  Luxtec designs and manufactures a proprietary line of fiber
optic  headlight  systems  that assist  surgeons by  brightly  illuminating  the
surgical site.  Designed to provide maximum  performance  and comfort,  Luxtec's
patented  headlight  systems are  lightweight  and  provide  the surgeon  with a
virtually unobstructed view of the surgical area.

LIGHT SOURCES:  Luxtec manufactures a product line of high quality,  solid state
xenon and halogen fiber optic light sources. Luxtec's light sources offer a wide
range  of light  intensities  in order to  serve  the  varying  requirements  in
illuminating  surgical and diagnostic  procedures.  The lamps illuminate the end
surface of the fiber optic cable through which the light is transmitted, without
transmitting  heat.  Luxtec's  light  sources are designed and  manufactured  to

                                       8
<PAGE>

comply with  Underwriters  Laboratories  544 medical  safety  standards  and are
listed  domestically  with ETL  Laboratories.  Internationally,  Luxtec works to
achieve compliance with as many international  standards as necessary to compete
effectively on a worldwide basis (including the CE mark, which has been attained
on the present product line).

FIBER OPTIC CABLES:  Luxtec  designs and  manufactures a complete range of fiber
optic  cables and holds  patents on certain  fiber optic cable  assemblies.  See
"Patents  and  Trademarks."  Luxtec  offers  surgeons  a range of  fiber  bundle
diameters in order to optimize the use of surgical instruments. Luxtec employs a
proprietary  technology  that  enables the fiber optic  interface  to  withstand
significantly  higher  temperatures  and permits the use of higher  output light
sources. In addition,  all of Luxtec's fiber optic cables are adaptable to light
sources made by other manufacturers.

FIBER OPTIC HEADLIGHT AND VIDEO CAMERA SYSTEMS:  Luxtec manufactures and markets
a series of video  products that are  currently  being used in the United States
and in over 25 countries around the world.  Luxtec's  Microlux  headlight camera
systems are designed to televise most surgical procedures.  The system is a very
small,  lightweight,  solid state  television  camera  mounted at the front of a
headband, manufactured by Luxtec, and integrated with fiber optic illumination.

                               SALES AND MARKETING

We sell our products and services to acute care  hospitals,  clinics and surgery
centers.  In fiscal 2001,  within the SDS business,  we sold  specialty  medical
products to over 3,000 customers,  primarily in the United States and Canada. We
are not dependent on any single customer or geographic group of customers,  with
no single customer accounting for more than 4% of our sales during fiscal 2001.

We maintain an  extensive  sales  organization  that is highly  experienced  and
skilled   in   representing   clinical   products   and   services.   Our  sales
representatives  serve as a service and educational resource to the marketplace.
They assist  clinicians in selecting and  purchasing  products,  help  customers
better  manage   inventories  of  specialty  medical  products  and  direct  the
appropriate   utilization  of  our  clinically  focused  products.   Each  sales
representative works within an assigned sales territory under the supervision of
a  dedicated  regional  sales  manager.   Our  sales   representatives  are  all
PrimeSource employees and are primarily compensated on a commission basis.

Through our Partnership  Program, we offer individual  hospitals,  regional IDNs
and larger  multi-facility  hospital  purchasing  organizations  the  ability to
consolidate purchases of specialty medical products through a single source. The
Partnership  Program offers customers several important  benefits  including the
ability to better manage their specialty  medical  products  purchases  across a
span of hospitals and the opportunity to lower their cost of procuring specialty
medical  products and services by reducing the number of vendors  through  which
they  purchase  such products and  services.  Through the  Partnership  Program,
customers  designate  PrimeSource as their primary provider of specialty medical
products and services.  In exchange,  we provide those  customers  with clinical
expertise on specialty  products and services  spanning all of their  facilities
while  reducing  the costs of procuring  those  specialty  medical  products and
services.

                                       9
<PAGE>
Within  the  Manufactured  Products  business,  Luxtec is the  market  leader in
surgical  headlights with an estimated 60,000 surgeons using their products on a
worldwide  basis.   Within  the  United  States,  the  Luxtec  fiber  optic  and
illumination  products  are  primarily  distributed  through  our  sales  force,
supported by Luxtec field specialists and a customer support team located in our
West Boylston facility. Internationally, Luxtec distributes through a network of
local distributors.

                                  DISTRIBUTION

We believe that responsive  delivery of quality  specialty  medical products and
supplies is a key  element to  providing  complete  customer  satisfaction.  Our
customers  place  orders for  medical  products  and  supplies by  telephone  or
facsimile  or   electronically.   Our  customer   service  call  centers  answer
approximately  95% of all  calls by the third  ring and have a call  abandonment
rate of less than 2%. All orders are routed  through  our  centralized  computer
ordering,  shipping and inventory  management system, which is linked to each of
our  distribution  centers.  We ship our medical  products and supplies from two
primary and two secondary  distribution  centers. If an item is not available in
the distribution center nearest to the customer, the computer system facilitates
direct  shipment  of the item,  if  available  from  another  center.  Rapid and
accurate order fulfillment is a principal component of our value-added approach.
We estimate that 91% of our  disposable,  consumable  product orders are shipped
complete  within 24 hours.  We estimate that we average only one error per every
1,150 orders.

In order to assure  the  availability  of our  broad  product  lines for  prompt
delivery  to  customers,   we  must  maintain  sufficient   inventories  at  our
distribution centers.  Materials management is centralized with inventory levels
managed by a purchasing department using an integrated inventory control system.
Our inventory consists primarily of medical products and supplies.

                           MANUFACTURING AND SUPPLIERS

Vendor  relationships  are an integral part of our businesses.  Our SDS business
represents more than 150 manufacturers with over 75% of sales concentrated among
approximately 25 key manufacturers.  A majority of the SDS business is comprised
of  stocking  relationships  whereby we stock the vendors  products  and provide
substantially  all  fulfillment  services  (i.e.,  customer  service,  shipping,
returns,  etc.).  The remainder of SDS revenue is received on an "agency"  basis
whereby we do not stock the  vendor's  products  and do not provide  fulfillment
services. In the case of an agency sale, the manufacturer provides substantially
all  fulfillment  services  for  customers  and we provide  sales and  marketing
support in helping  facilitate the sale of the vendor's  product.  For providing
the sales and marketing support,  we are paid a sales commission on each sale of
the vendor's products.

Within the  Manufactured  Products  business,  Luxtec  purchases  components and
materials from more than 300 vendors and believes it can purchase  substantially
all of its product  requirements  from other  competing  vendors  under  similar
terms.  Luxtec has no long-term  contract  with any  supplier but does  maintain
long-standing relationships with certain key vendors.

Our SDS business aggressively pursues the opportunity to market and sell medical
equipment and supplies on an exclusive basis. Manufacturers of specialty medical
products and supplies  typically  offer  distribution  rights only to a selected
group of  distributors  and are  increasingly  seeking  to reduce  the number of
distributors  selling  their  products  to end users in an effort to reduce  the
overall costs associated with selling and marketing their products. We have been
successful in assisting  manufacturers in their  development and marketing plans
and in obtaining the exclusive rights to sell certain products.  We believe that
our ability to capture and retain such distribution  rights represents a barrier
to the entry of competitors.

                                       10
<PAGE>

Within the SDS business,  our network of  manufacturers  is continually  seeking
representation  and/or market  introduction  for their products,  resulting in a
growth pipeline of attractive,  innovative products to be added to our portfolio
of distributed  products.  Moreover, we have been able to enter into contractual
relationships with certain manufacturers that are typically exclusive in nature,
extend for several  years in duration,  and include a right of first  refusal on
new product introductions.

                               INFORMATION SYSTEMS

Our  SDS  business  employs  a  single,   centralized,   enterprise   management
information  system  utilized  across all  business  units via a wide-area  data
network.  We have converted all of the specialty  medical products  distribution
organizations we have acquired to a single,  centralized wide-area data network.
We aggressively pursue  standardization of our management information systems in
order to obtain the greatest value from acquired business groups.  This approach
yields significant benefits including:

   *  increased inventory utilization;

   *  greater visibility as to sales performance; and

   *  the  coordination  necessary to address the needs and  requirements  of an
      increasing  number  of IDNs  and GPOs  whose  members  are  geographically
      dispersed.

In addition to employing traditional e-business  technologies such as electronic
data  interchange,  or EDI,  to achieve  greater  efficiencies,  we also use the
inherent strengths of the internet to enhance  relationships with both customers
and   manufacturers.   Since  early  2000,   we  have   offered  our   web-based
Surg-E-Track(TM) system to our direct sales force as well as select manufacturer
partners.  Surg-E-Track  provides sales personnel and manufacturer partners with
comprehensive  customer  purchasing  data in a variety of  formats.  Through the
Surg-E-Track system we have increased our sales representative  productivity and
customer  service  levels  and  have  helped  our  manufacturer   partners  more
effectively manage their businesses.

                                   COMPETITION

We compete  with a variety of  companies  including  manufacturers  that utilize
direct sales  forces,  other  national  specialty  distributors  and a number of
significantly smaller local and regional specialty distributors. We compete to a
lesser degree with national  med/surg  distribution  companies  such as Cardinal
Health,  Inc., McKesson HBOC, Inc. and Owens & Minor, Inc. A brief discussion of
each of the Company's competitors is as follows:

   *  Product Manufacturers' Direct Sales Forces. Product Manufacturers' direct,
      internal  sales forces offer  manufacturers  direct  access to  healthcare
      providers.  Manufacturers,  however,  periodically outsource the sales and
      marketing  of some of their  products  to  specialty  sales and  marketing
      organizations such as PrimeSource.


                                       11
<PAGE>

   *  National Specialty Distributors. In addition to PrimeSource, several other
      companies serve the national  specialty  medical  products  market.  These
      national  specialty  distributors  tend to focus and  specialize  within a
      particular  segment of the specialty  medical products market.  Management
      believes  that we are the only  national  specialty  surgical  distributor
      focusing on the hospital operating room.

   *  Regional Specialty Distributors. Regional specialty distributors represent
      our primary competition in the specialty medical products market, but they
      are unable to match the  national  scope or breadth  of  products  that we
      offer.

   *  National Med/Surg  Distributors.  In most respects, we complement,  rather
      than compete,  with national  med/surg  distributors.  These larger supply
      companies,  such as McKesson HBOC, Inc., Owens & Minor, Inc., and Cardinal
      Health,  Inc., have historically  focused on distributing a broad array of
      lower-margin,  later-stage  products,  aiming to give healthcare providers
      aggressive pricing and the convenience of one-stop shopping.  As a result,
      their  core  expertise  does not reside in  creating a market for  complex
      specialty products, which often require important services such as on-site
      training and product support.  In addition,  these suppliers are generally
      not viewed by their customers as experts within specific  specialty areas.
      As a result,  specialty product  manufacturers tend to outsource sales and
      marketing   services  to   specialists   rather  than  national   med/surg
      distributors.

Within the  Manufactured  Products  Division,  Luxtec  competes with a number of
manufacturers of proprietary light source systems. Competitors within the United
States include the Cogent division of Welch Allyn,  Cuda FiberOptics and Isolux.
Some of Luxtec's competitors have historically relied on metal halide technology
rather than the  state-of-the-art  xenon technology offered by Luxtec. The xenon
technology is more widely  accepted and provides a broader  color  spectrum than
metal halide technology. Foreign competitors include Richard Wolfe, Scholly GMBH
and those companies previously mentioned above.

                             PATENTS AND TRADEMARKS

We maintain a policy of seeking  patent and  trademark  protection in connection
with certain  elements of its  technology and  brandnames.  We own the following
U.S. Patents and Trademarks:

     Patents
     -------

   *  Patent No. 4516190 for Surgical Headlight issued May 7, 1985.
   *  Patent No. 4534617 for Fiber Optic Cable issued August 13, 1985.
   *  Patent No. 4616257 for Headlight Camera System issued October 7, 1986.
   *  Patent No.  4653848 for 45 degree and 90 degree Fiber Optic Cables  issued
      March 31, 1987.
   *  Patent No. 4797736 for Videolux  Television  Fiber Optic Headlight  Camera
      System issued January 10, 1989.
   *  Patent No. 5003605 for an electronically augmented stethoscope with timing
      sound issued March 26, 1991.
   *  Patent No. 5220453 for  telescopic  spectacles  with coaxial  illumination
      issued June 15, 1993.
   *  Patent No. 5295052 for a light source assembly issued March 15 1994.

                                       12
<PAGE>

   *  Patent No. D345368 for surgical telescopes issued March 22, 1994.
   *  Patent No. 5331357 for an illumination assembly issued July 19, 1994.
   *  Patent No. D349123 for spectacles having integral illumination issued July
      26, 1994.
   *  Patent No. D350760 for an eyeglass frame temple issued September 20, 1994.
   *  Patent No.  5392781 for blood  pressure  monitoring in noisy  environments
      issued February 28, 1995.
   *  Patent No.  D415285  for  Pinhole  Headlamp  Video  Camera for Medical and
      Surgical Applications issued October 12, 1999.
   *  Patent No.  D398403 for  Headband for Surgeons  with  Removable  Headboard
      Hanger issued September 15, 1998.
   *  Patent No.  6258037 for blood  pressure  monitoring in noisy  environments
      issued July 10, 2001.

     Trademarks
     ----------

   *  LUXTEC, U.S. federal trademark  registration number 1,453,098,  registered
      August 18, 1987.
   *  LUXTEC (and design), U.S. federal trademark registration number 1,476,726,
      registered February 16, 1988.
   *  LUXTEC (stylized),  U.S. federal trademark  registration number 1,758,176,
      registered March 16, 1993.
   *  LUXTEC, U.S. federal trademark  registration number 1,956,027,  registered
      February 13, 1996.
   *  Luxtec is also the owner of the following foreign trademark  registrations
      for  its  LUXTEC  trademark:  (i)  Chile,   registration  number  452.314,
      registered  October 31, 1995; and (ii) Peru,  registration  number 016214,
      registered June 14, 1995.
   *  BIMECO, U.S. federal trademark  registration number 1,190,584,  registered
      February, 23 1981
   *  MegaTech Medical,  U.S. federal trademark  registration  number 1,930,021,
      registered October 24, 1995
   *  TMC
   *  Clearfield
   *  ValueFlex
   *  PrimeSource Healthcare
   *  PrimeSource Surgical

In addition,  we have entered into an exclusive  license agreement with InterMED
Corporation for the rights to Patent No. 5222949 ("In-Vivo Hardenable Catheter")
and No.  5334171  ("Flexible,  Noncollapsible  Catheter  Tube with Hard and Soft
Regions")  for  developing  a line of  catheters  incorporating  fiber optics to
facilitate several potential specialized applications.

In general,  we rely on our development and manufacturing  efforts,  rather than
patent protection, to establish and maintain our industry position. We treat our
design and technical data as confidential and rely on nondisclosure  agreements,
trade secrets laws and  non-competition  agreements  to protect our  proprietary
position.  We cannot  assure that these  measures  will  adequately  protect our
proprietary technologies.

                                       13
<PAGE>
                              GOVERNMENT REGULATION

The  manufacturing,  marketing,  distribution  and  sale  of  specialty  medical
products  sold by us are subject to  government  regulation in the United States
and other  countries.  Among the  federal  laws which  impact us are the Federal
Food,  Drug and Cosmetic Act, which regulates the  advertising,  record keeping,
labeling,  handling,  storage and distribution of drugs and medical devices, and
which   requires  us  to  be   registered   with  the  Federal   Food  and  Drug
Administration,  and the Safe Medical Devices Act of 1990, which imposes certain
reporting  requirements on  distributors  in the event of an incident  involving
serious  illness,  injury or death caused by a medical device.  In addition,  in
order to clinically  test,  produce and market products for human  diagnostic or
therapeutic  use, we must comply with mandatory  procedures and safety standards
established  by the  United  States  Food and Drug  Administration  ("FDA")  and
comparable state and foreign regulatory agencies.  Typically, products must meet
regulatory standards as safe and effective for their intended use prior to being
marketed for human  applications.  The  clearance  process is expensive and time
consuming,  and no assurance  can be given that any agency will grant  clearance
for the sale of our products or that the length of time the process will require
will not be extensive. We believe that we are in substantial compliance with all
of the foregoing  laws and that we possess all licenses  required in the conduct
of our business.


                                       14
<PAGE>

                                    EMPLOYEES

As  of  August  31,  2001,  we  had  approximately   205  employees,   of  which
approximately  75 are engaged in the Surgical  segment,  approximately 39 in the
Critical Care segment,  approximately 57 in the Manufactured  Products  Division
and approximately 34 in corporate and shared services. None of our employees are
covered by a collective bargaining agreement.  We believe our employee relations
are good. Executive Officers and Key Management Personnel

                EXECUTIVE OFFICERS AND KEY MANAGEMENT PERSONNNEL

Following  are the names  and  ages,  as of August  31,  2001,  of our,  and our
principal subsidiaries,  executive officers and key management personnel,  their
positions and summaries of their backgrounds and business experience.



Name                  Age   Position
----                  ---   --------

James L. Hersma       53    President and Chief Executive Officer and Director
John F. Rooney        38    EVP of Corporate Development and Chairman
Michael K. Bayley     41    EVP and Chief Financial Officer and Director
Gary L. Gregory       39    Senior Vice President of Marketing
Shaun D. McMeans      40    Vice President of Operations
Joseph H. Potenza     54    Vice President of Corporate Accounts
Patrick M. Rooney     35    Dir. of Information Technologies and Services
Margeret A. Terry     54    Manager of Human Resources
Donella J. Fones      30    Corporate Controller
Samuel M. Stein       61    General Manager, Luxtec Illumination Division
Bruce R. Hoadley      42    Regional Vice President, Surgical
Mark A. Jungers       49    Regional Vice President, Critical Care
Peter A. Miller       56    Regional Manager, Critical Care

JAMES L. HERSMA, PRESIDENT AND CHIEF EXECUTIVE OFFICER AND DIRECTOR - Mr. Hersma
has an  extensive  background  in various  sectors of the  healthcare  industry,
including  distribution,   manufacturing,   information  systems,  services  and
e-commerce.  Mr. Hersma has served as our President and Chief Executive  Officer
since December,  2000. Prior to joining PrimeSource in December 2000, Mr. Hersma
served as  Executive  Vice  President  and  Director of  Medibuy.com,  a leading
healthcare  e-commerce  firm, from February 1999 to May 2000.  Prior to Medibuy,
Mr. Hersma served as Chief Executive Officer of Novation, the largest GPO in the
United  States with over $14 billion in annual  purchases  from  January 1998 to
February  1999. He also served as President and Chief  Operating  Officer of CIS
Technologies,  a NASDAQ listed  healthcare  information  systems  company,  from
November  1993 to May 1996,  and spent 17 years at Baxter and American  Hospital
Supply in various sales, marketing and executive management roles. Mr. Hersma is
a  graduate  of  Northern  Illinois  University  and  serves on the board of its
business school.

JOHN F. ROONEY, EXECUTIVE VICE PRESIDENT OF CORPORATE DEVELOPMENT AND CHAIRMAN -
Mr. Rooney has an extensive background in the medical device industry.  Prior to
becoming our  Executive  Vice  President of Corporate  Development  in December,
2001,  Mr.  Rooney  served as the  PrimeSource  Surgical's  President  and Chief
Executive Officer.  Prior to co-founding  PrimeSource Surgical in June 1996, Mr.
Rooney served as a sales and marketing  executive at Birtcher  Medical  Systems,
Inc., a Nasdaq listed company specializing in the manufacturing and marketing of
electrosurgery  products.  Mr.  Rooney also served as an  executive  at Computer
Motion,  Inc., a leader in medical robotic  devices.  Mr. Rooney  graduated with
honors from the University of Montana in business administration.


                                       15
<PAGE>
MICHAEL K. BAYLEY,  EXECUTIVE  VICE  PRESIDENT AND CHIEF  FINANCIAL  OFFICER AND
DIRECTOR  - Mr.  Bayley  has  an  extensive  background  in the  medical  device
industry.  Mr. Bayley has served our  Company's  Chief  Financial  Officer since
1996. Prior to co-founding  PrimeSource  Surgical in June 1996, Mr. Bayley was a
Vice  President  with Chase  Manhattan  Bank in New York City. Mr. Bayley helped
establish  Chase's Health Care Services  Finance  Division and spent a number of
years in Chase's  Merchant  Banking  and  Private  Equity  Group where he helped
manage a number of the  bank's  portfolio  companies.  He has  served as a board
member of a number of privately  held  companies.  He graduated with honors from
the  University of Arizona with a bachelor's  degree in geological  engineering,
and he earned his M.B.A. from the Fuqua School of Business at Duke University.

GARY L.  GREGORY,  SENIOR  VICE  PRESIDENT  OF  MARKETING  - Mr.  Gregory has an
extensive  background in sales and marketing within the medical device industry.
Mr.  Gregory has served as our Senior Vice  President  of  Marketing  since June
2001.  Prior to joining  PrimeSource  in April 2000,  Mr.  Gregory served as the
Director of Strategic  Marketing for Health Care Systems,  a $5 billion division
of Johnson & Johnson.  Prior to Johnson & Johnson, Mr. Gregory held senior sales
and marketing  positions  with Baxter  Healthcare  and Kendall  Healthcare.  Mr.
Gregory received his bachelor's degree in economics and business  administration
from Pennsylvania State University.

SHAUN D.  MCMEANS,  VICE  PRESIDENT  OF  OPERATIONS  - Mr.  McMeans has 15 years
experience  in  manufacturing  and  distribution  businesses,   specializing  in
accounting  and financial  management.  Prior to becoming our Vice  President of
Operations  in May 2001,  Mr.  McMeans  served as the  PrimeSources's  Corporate
Controller.  Prior to joining  PrimeSource  in April 2000,  Mr.  McMeans  held a
number of  operational  and  financial  positions  with Burnham  Corporation,  a
leading  domestic  manufacturer  and  distributor of residential  and commercial
boilers for residential heating and commercial process applications.  He holds a
bachelor's  degree in accounting  from  Pennsylvania  State  University and is a
certified public accountant.

JOSEPH H. POTENZA,  VICE PRESIDENT OF CORPORATE  ACCOUNTS - Mr. Potenza has over
25 years of experience in the medical supply industry. Mr. Potenza has served as
our Vice President of Corporate  Accounts since February 2001.  Prior to joining
PrimeSource  in February  2001,  Mr.  Potenza  worked for  McKessonHBOC  as Vice
President of their  Corporate  Program and Medibuy where he was  responsible for
their National Accounts and Corporate  Program.  Mr. Potenza spent 20 years with
American Hospital Supply  Corporation / Baxter Healthcare  Corporation from 1977
to 1997  beginning  as a Sales  Representative  and  culminating  as the Eastern
Region  President,  running  a  $750  million  distribution  business  with  650
employees and seven distribution  facilities.  He received his bachelor's degree
Norwich University and an MBA from Central Michigan University.

                                       16
<PAGE>
PATRICK M.  ROONEY,  DIRECTOR OF  INFORMATION  TECHNOLOGIES  AND  SERVICES - Mr.
Rooney has an extensive background in the information technology industry. Prior
to becoming our Director of Information  Technologies  and Services in May 2001,
Mr. Rooney was Manager of  Information  Systems at  PrimeSource.  Before joining
PrimeSource  in  May  1998,  Mr.  Rooney  was a  Software  Systems  Analyst  for
Micrographic  Technology in Mountain View, CA and Product Marketing  Engineer in
the  Microprocessor  Division of Integrated Device  Technology,  a semiconductor
company of Santa  Clara,  CA. Mr.  Rooney  holds a bachelor  degree from Montana
State  University  in Electrical  Engineering.  Mr. Rooney is the brother of Mr.
John Rooney, the Company's Executive Vice President of Corporate Development.

MARGARET  A.  TERRY,  MANAGER  OF HUMAN  RESOURCES  - Ms.  Terry  has a  diverse
background in commercial  banking as well as corporate  administration and human
resources.  Ms.  Terry has served as our Manager of Human  Resources  since June
2000.  Prior to joining  PrimeSource  in 1999 she held several  corporate  legal
positions in the software  industry and most recently was Manager of HR Benefits
and Administration for MIDS, a leading  healthcare  software company.  Ms. Terry
holds a bachelor  degree in nursing  from the  University  of Arizona and one in
management from the University of Phoenix.

DONELLA J. FONES,  CORPORATE  CONTROLLER - Ms. Fones has a diverse background in
finance and accounting.  Prior to becoming our Corporate Controller in May 2001,
she served as PrimeSource's  Assistant Controller.  Prior to joining PrimeSource
in 1996,  Ms.  Fones  served  as  Controller  for  Guthrie  Latex's  subsidiary,
Envirotech  Enterprises.  Ms. Fones holds a bachelor's  degree in accounting and
finance from the University of Arizona and is a certified public accountant.

SAMUEL M. STEIN, GENERAL MANAGER,  LUXTEC ILLUMINATION  DIVISION - Mr. Stein has
an extensive  background in the development of young,  high growth,  technically
oriented companies. Prior to becoming the General Manager of the Luxtec Division
in March 2001, Mr. Stein served as Luxtec's Chief  Financial  Officer.  Prior to
joining Luxtec in 1993, Mr. Stein served as Chief  Operating and Chief Financial
Officer  of  Mitrol,  Inc.  of  which he was  also  co-founder.  He has held the
position of Chief Financial  Officer with companies ranging from young start-ups
to subsidiaries  of Fortune 500  corporations.  He holds a bachelor's  degree in
Business Administration from the University of Toledo.

BRUCE R. HOADLEY,  REGIONAL VICE PRESIDENT - PRIMESOURCE  SURGICAL - Mr. Hoadley
has an extensive  background in medical-surgical and critical care product sales
and management. Prior to becoming the Regional Vice President and Manager of our
Surgical  business in the  Southeastern  United States in June 1999, Mr. Hoadley
served as the Sales Manager for Futuretech,  a leading  distributor of specialty
medical  products to the  surgical  market in the  Southeastern  United  States.
PrimeSource  acquired  Futuretech in June 1999. Mr. Hoadley joined Futuretech in
1991. Prior to joining Futuretech,  Mr. Hoadley held sales management  positions
with Kendall  Healthcare  and Devon.  He holds a bachelor's  degree in marketing
from the University of Alabama.


                                       17
<PAGE>
MARK A.  JUNGERS,  REGIONAL  VICE  PRESIDENT -  PRIMESOURCE  CRITICAL CARE - Mr.
Jungers has an  extensive  background  in  medical-surgical  and  critical  care
product sales and management.  Prior to becoming the Regional Vice President and
Manager of our Critical Care business in the Southeastern  United States in June
1999, Mr. Jungers served as the Sales Manager for Bimeco, a leading  distributor
of specialty  medical  products to the critical care market in the  Southeastern
United  States.  PrimeSource  acquired  Bimeco in June 1999.  Mr. Jungers joined
Bimeco in 1979.  Prior to joining  Bimeco,  Mr. Jungers held sales and marketing
positions with Extracorporeal  Medical Division of Johnson & Johnson. He holds a
bachelor's degree in Business Administration from Marquette University.

PETER A. MILLER, REGIONAL MANAGER, PRIMESOURCE CRITICAL CARE - Mr. Miller has an
extensive  background and over 30 years  experience in the medical  distribution
industry.  Prior to becoming the Regional  Manager of our Critical Care business
in the  Northeastern  United  States in  December  2000,  Mr.  Miller  served as
President  of New  England  Medical  Specialties,  a company he founded in 1985.
PrimeSource  acquired New England Medical Specialties in December 2000. Prior to
founding New England Medical Specialties, Mr. Miller held positions in sales and
upper management with Foster Medical.




                                       18
<PAGE>
ITEM 2.  PROPERTIES

Our executive offices are located at 3700 East Columbia Street, Tucson, Arizona.
All of our  facilities  are leased and all of the  facilities  and  offices  are
located in the United States. A summary of the Company's  facilities and offices
is as follows:

                                                                           Lease
                                                               Square Expiration
     City, State                                                Feet        Date
     -----------                                               ------   --------
     Tucson, Arizona...................................        25,544   02/28/05
     Birmingham, Alabama...............................        25,913   12/31/01
     Atlanta, Georgia..................................         4,800   07/31/04
     Guilford, Connecticut.............................         7,300   07/31/03
     West Boylston, Massachusetts......................        31,689   10/31/05
                                                               ------
                                                               95,246
                                                               ======
We believe that the all of our  facilities  are in  satisfactory  condition  and
suitable for the particular purposes for which they were acquired or constructed
and  are  sufficient  for the  Company's  current  operations.  The  Company  is
negotiating a lease for a new facility in Birmingham,  Alabama. The new facility
will replace the existing Birmingham facility and lease expiring on December 31,
2001.  The new  facility  is  approximately  18,000  square feet in size and the
proposed lease term is five (5) years, commencing in December 2001.

ITEM 3.  LEGAL PROCEEDINGS

We are  subject  to  claims  and suits  arising  in the  ordinary  course of our
business.  We believe that  ordinary  course legal  proceedings  will not have a
material  adverse  effect on our  financial  position,  results of operations or
liquidity.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our annual  meeting of  stockholders  was held on June 22, 2001. At the meeting,
the following items were submitted to a vote of the stockholders:

      (1) the  election  of three Class I directors  for a  three-year  term was
approved  with the election of Larry H. Coleman  receiving  14,024,709  votes in
favor, 35,480 votes against, 0 abstentions and 0 broker non-votes,  the election
of William H. Lomicka receiving 14,025,634 votes in favor, 34,555 votes against,
0  abstentions  and 0 broker  non-votes,  and the  election of Nicholas C. Memmo
receiving  14,025,634 votes in favor,  34,555 votes against, 0 abstentions and 0
broker non-votes;

      (2) an  amendment  to the our  Articles  of  Organization  increasing  the
authorized  number of shares of common stock from  10,000,000 to 50,000,000  was
approved with 13,998,580 votes in favor, 60,599 votes against,1,010  abstentions
and 0 broker non-votes;


                                       19
<PAGE>
      (3) an amendment to the our Articles of Organization  creating a new class
of preferred stock, no par value, with rights,  privileges and preferences to be
determined  by our board of  directors,  consisting  of  10,000,000  shares  was
approved with 13,241,869 votes in favor, 58,360 votes against, 2,000 abstentions
and 757,960 broker non-votes;

      (4)  an   amendment  to  our   Articles  of   Organization   changing  the
Corporation's  name  to  "PrimeSource   Healthcare,   Inc."  was  approved  with
14,012,300 votes in favor, 41,804 votes against,  6,085 abstentions and 0 broker
non-votes;

      (5) an amendment to the our Articles of Organization  altering  certain of
the rights  pertaining to our Series C Convertible  Preferred Stock was approved
with  13,248,844  votes in favor,  50,645 votes against,  2,740  abstentions and
757,960 broker non-votes;

      (6) the adoption of our Tucson Medical Corporation 1997 Stock Option/Stock
Issuance Plan, as amended,  was ratified with 13,246,079 votes in favor,  52,740
votes against, 3,410 abstentions and 757,960 broker non-votes; and

      (7) the  appointment by our Board of Directors of Deloitte & Touche,  LLP,
our independent  auditors,  was ratified with 14,038,442 votes in favor,  19,957
votes against, 1,790 abstentions and 0 broker non-votes.


                                       20
<PAGE>
                                     PART II

ITEM 5.  MARKET  FOR THE  REGISTRANT'S  COMMON  EQUITY AND  RELATED  STOCKHOLDER
MATTERS

Our Common Stock was listed on the American  Stock  Exchange  (the "AMEX") under
the AMEX symbol  "LXU.EC")  from April 20, 1994 through  November  17, 2000,  at
which time it was delisted by the AMEX because it no longer continued to satisfy
the  AMEX's  listing  requirements.  On  November  16,  2000,  the  trading  day
immediately  before the  Company's  Common Stock was  delisted by the AMEX,  the
closing price was $1.00.

The following  table sets forth the high and low closing sale prices of Luxtec's
Common Stock on the AMEX during the periods indicated below:


                                                        Common Stock
                                                       ---------------
                                                       High      Low
                                                       ----      ---

            Fiscal Year Ended 10/31/99

            First Quarter                              2.88       2.00
            Second Quarter                             2.94       2.13
            Third Quarter                              2.75       1.88
            Fourth Quarter                             3.00       1.75

            Fiscal Year Ended 10/31/00

            First Quarter                              4.0        1.56
            Second Quarter                             2.75       1.50
            Third Quarter                              2.25       1.44
            Fourth  Quarter                            1.75       0.63



Our Common Stock is not currently  listed on any public  exchange or market.  We
are evaluating  various  options with respect to the trading of our Common Stock
on a  public  market  or  exchange.  We  cannot  assure  that we will be able to
establish trading of our Common Stock on a public market or exchange.

As of August 31,  2001,  there were  approximately  534 holders of record of our
Common Stock. We estimate that there are approximately  1,400 beneficial holders
of our Common Stock.

We have not paid  any  cash  dividends  since  our  inception  and the  board of
directors  does  not  contemplate  doing  so in the near  future.  The  board of
directors  currently  intends to retain any future earnings for use in expanding
our business. We are limited in our ability to pay dividends. We may not declare
or pay any dividend without the consent of the holders of at least a majority of
each of our Series C  Convertible  Preferred  Stock,  and  Series E  Convertible
Preferred Stock. In addition, we may not declare or pay any dividend without the
consent of lenders.

                                       21
<PAGE>

On July 2, 2001, we issued and sold 325,000 units (the "Units"),  each comprised
of a share of our Series E Convertible Preferred Stock and a warrant to purchase
five (5) shares of our Common Stock.  We sold 200,000 Units to GE Capital Equity
Investments,  Inc.,  100,000  Units to Coleman  Swenson  Hoffman  Booth IV L.P.,
20,000 Units to Webbmont  Holdings,  L.P. and 5,000 Units to William H. Lomicka.
The aggregate offering price for the Units was $3,250,000. Our sale of the Units
was exempt from registration with the Securities Exchange Commission pursuant to
Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder because the purchasers of the Units acquired the securities for their
own respective accounts and not with a view to distribution.

The Series E Preferred Stock is convertible, at the option of the holder thereof
at any time,  into ten shares of our Common Stock,  subject to adjustment.  Each
share of our Series E Preferred  Stock is subject to automatic  conversion  upon
our  consummation of a firm commitment  public offering or upon a date specified
by written consent of the holders of 66 2/3% of the outstanding shares of Series
E Preferred  Stock.  In addition,  the shares of Series E Preferred Stock have a
mandatory  redemption  date of June 3, 2005.  Each  share of Series E  Preferred
Stock has one vote for each  share of our  Common  Stock  into which it would be
convertible  on all  matters  submitted  to a vote of the  holders of our Common
Stock. The warrants we issued as part of the Units are exercisable by the holder
thereof at any time prior to June 28,  2011,  at an exercise  price of $1.00 per
share, subject to adjustment.


                                       22
<PAGE>
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The selected  consolidated  financial data presented below has been derived from
historical audited consolidated  financial statements of the Company for each of
the five years in the period ended June 30, 2001.  The following  data should be
read in  conjunction  with  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations"  and the Company's  consolidated  financial
statements and the notes thereto. Data is in thousands except per share data.


<TABLE>
<CAPTION>

OPERATING DATA:                                                YEAR ENDED JUNE 30
                                   --------------------------------------------------------------------------------
                                      2001(6)      2000(4)(5)             1999(3)          1998(2)         1997(1)
                                      -------      ----------             -------          -------         -------

<S>                                   <C>             <C>                 <C>               <C>               <C>
NET SALES . . . . . . . . . .         $51,032         $54,411             $15,114           $6,362            $763

NET LOSS. . . . . . . . . . .        $(4,382)        $(1,384)              $(744)           $(116)           $(75)

NET LOSS PER SHARE. . . . . .         $(1.03)          $(.41)             $(0.17)          $(0.04)               -



BALANCE SHEET DATA:                                            YEAR ENDED JUNE 30
                                   --------------------------------------------------------------------------------
                                       2001           2000                 1999             1998            1997
                                      -------      ----------             -------          -------         -------



TOTAL ASSETS. . . . . . . . . . . .   $45,450         $31,297             $30,380           $7,261            $758

LONG-TERM OBLIGATIONS. . .            $20,335         $15,968              $1,516             $776          $4,000

STOCKHOLDERS' EQUITY (CAPITAL
DEFICIENCY). . . . .                   $(562)          $(567)              $2,622           $3,646            $580

</TABLE>
(1)  Represents  financial  data for the period from July 25,  1996  (inception)
through June 30, 1997.

(2)  In  January  1998,   PrimeSource   Surgical   acquired  two  companies  for
consideration of approximately $3,556,000 and in June 1998, PrimeSource Surgical
acquired an entity for approximately  $358,000,  all of which were accounted for
using the  purchase  method of  accounting.  The  results of  operations  of the
acquired entities are included in the consolidated financial statements from the
dates of acquisition.

(3) In July 1999,  PrimeSource  Surgical acquired four entities for $17,000,000.
In March  1999,  PrimeSource  Surgical  acquired  an  entity  for  approximately
$196,000.  The  acquisitions  were  accounted  for using the purchase  method of
accounting,  and the results of  operations  of the acquired  entities have been
included in the consolidated financial statements from the date of acquisition.

                                       23
<PAGE>

(4) In June 2000, PrimeSource Surgical sold an entity for approximately $398,000
which resulted in a recorded loss of  approximately  $732,000.  In addition,  in
April  2000,   PrimeSource  Surgical  acquired  an  entity  for  $405,000.   The
acquisition  was accounted for using the purchase  method of accounting  and the
results of operations are included in the audited financial  statements from the
date of acquisition.

(5) In  fiscal  year  2000,  PrimeSource  Surgical  approved  plans  for a major
restructuring  of its  operations  with  the goal of  centralizing  distribution
facilities, eliminating unprofitable divisions and reducing costs. The aggregate
costs of the restructuring included total charges of $1,031,000.

(6) Effective March 2, 2001, PrimeSource Surgical completed a merger with Luxtec
Corporation  for aggregate  consideration  of  approximately  $4,791,000,  where
PrimeSource  Surgical assumed  liabilities,  net of assets acquired and costs of
approximately  $3,931,000.  The acquisition was accounted for using the purchase
method of accounting  and the results of operations of Luxtec have been included
in  the  financial  statements  of  PrimeSource  Surgical  as  of  the  date  of
acquisition.  In December 2000, the Company  acquired two entities for aggregate
consideration  of  $1,310,000.  The  acquisition  was  accounted  for  using the
purchase  method of  accounting  and the results of  operations  of the acquired
entities have been included in the  consolidated  financial  statements from the
date of acquisition.

                                       24
<PAGE>
OPERATING DATA:                 (In thousands, except per share data)

The  following  table  sets forth  unaudited  quarterly  consolidated  operating
results for each of our last eight quarters.  We have prepared this  information
on a basis  consistent with our audited  consolidated  financial  statements and
included all adjustments,  consisting only of normal recurring adjustments, that
we consider  necessary  for a fair  presentation  of the data.  These  quarterly
results are not  necessarily  indicative of future results of  operations.  This
information  should be read in  conjunction  with  "Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations"  and the Company's
consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>

                                    SEP-30,        DEC-31,     MAR-31,       JUN-30,     SEP-30,      DEC-31,     MAR-31,    JUN-30,
                                       1999           1999        2000          2000        2000         2000        2001       2001
                                       ----           ----        ----          ----        ----         ----        ----       ----
                                                                                 (1)
<S>                               <C>            <C>         <C>           <C>         <C>          <C>         <C>        <C>
Net Revenues                      $14,322.9      $14,153.8   $13,658.6    $ 12,275.8   $12,504.9   $ 11,436.0   $12,691.6  $14,399.1
Cost of  Sales                      9,354.9        9,333.9     9,145.8       8,728.0     8,413.7      8,524.9     8,362.8   10,153.7
                                    -------        -------     -------       -------     -------      -------     -------   --------
         Gross Profit             $ 4,968.0      $ 4,819.9   $ 4,512.8    $  3,547.8   $ 4,091.2   $  2,911.1   $ 4,328.8  $ 4,254.4
                                   ========       ========    ========      ========    ========     ========    ========   ========


Net Income (Loss)                 $   338.2      $   189.7   $  (27.3)    $(1,884.3)   $ (148.7)   $(2,702.3)   $ (639.1)  $ (892.1)
Net Income (Loss) per share       $     .10      $     .05   $   (.01)    $    (.57)   $   (.05)   $    (.94)   $   (.14)  $   (.19)


COMPUTED AS DESCRIBED IN OUR HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCORPORATED BY REFERENCE
INTO THIS FORM 10-K.

Our results of operations historically have fluctuated on a quarterly basis and can be expected to continue to be
subject to quarterly fluctuations.

(1) In the  fourth  quarter  of 2000,  PrimeSource  Surgical  sold an entity for approximately  $398,000,  which
resulted  in a recorded  loss of  approximately $732,000. In addition, in this quarter PrimeSource Surgical
approved plans for a major restructuring of its operations resulting in total charges of $1,031,000.
</TABLE>

                                       25
<PAGE>
ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This  analysis of our  financial  condition,  capital  resources  and results of
operations  should be read in  conjunction  with the  accompanying  consolidated
financial statements, including notes thereto.

In October 2001 we engaged a restructuring  agent to evaluate our operations for
possible  reorganization.  We have not  determined  the  impact  if any,  of any
possible reorganization on our financial statements.

                              RESULTS OF OPERATIONS

The  following  table  sets  forth  certain  consolidated  financial  data  as a
percentage  of net revenues  for the fiscal years ended June 30, 1999,  2001 and
1999.
<TABLE>
<CAPTION>
                                                  2001              2000               1999
                                              --------------- ------------------ ------------------
<S>                                              <C>               <C>                <C>
NET SALES                                       100.0%             100.0%             100.0%
COST OF SALES                                    69.5%              67.2%              69.0%
GROSS PROFIT                                     30.5%              32.8%              31.0%
SELLING, GENERAL AND ADMIN. EXPENSE              36.9%              31.1%              34.1%
INTEREST EXPENSE                                  1.8%               2.0%               1.6%
                                               -------             ------             ------
NET LOSS                                         (8.6%)             (2.5%)             (4.9%)
</TABLE>
                      FISCAL 2001 COMPARED WITH FISCAL 2000

NET SALES:  Net sales of  $51,031,610  for fiscal 2001 were  $3,379,445  or 6.2%
lower than the $54,411,055  reported for fiscal 2000. The reduction in net sales
in fiscal year 2001 was a result of our decision to discontinue the distribution
of  certain  non-core  product  lines  and the loss of the  exclusive  rights to
distribute certain product lines. In addition, several of our suppliers switched
from stocking distribution relationships to agency relationships thereby leading
to a reduction in reported net sales. We continue to generate  commission income
from these agency lines.

COST OF SALES:  Cost of sales  decreased to $35,455,087 for fiscal 2001 compared
to  $36,562,624  for fiscal 2000. The cost of sales for fiscal 2001 was 69.5% of
net sales  compared to 67.2% of net sales for fiscal 2000.  The increase in cost
of sales as a percentage  of net sales is  primarily  due to the loss of several
higher  margin  product  lines during  fiscal 2001 as well as an increase in the
amount of lower-margin capital equipment sales.

GROSS PROFIT:  Gross Profit  decreased to  $15,576,523 or 30.5% of net sales for
fiscal 2001, as compared to  $17,848,431  or 32.8% of net sales for fiscal 2000.
The  production  in gross profit is  primarily  due to lower sales  levels.  The
reduction in gross profit margins is primarily due to the loss of several higher
margin  product lines during fiscal 2001 as well as an increase in the amount of
lower-margin capital equipment sales.

                                       26
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and administrative
expense  increased to $18,,813,441 for fiscal 2001,  compared to $16,940,243 for
fiscal 2000,  an increase of  $1,873,198  or 11.1%.  The increase in expenses in
fiscal  2001  is due to the  hiring  of  several  additional  senior  management
personnel  including our Chief  Executive  Officer.  We also incurred  increased
severance,  recruitment  and relocation  costs as a result of several senior and
mid-level management changes.

INTEREST  EXPENSE:  Interest  expense  decreased to $920,862 during fiscal 2001,
compared to $1,104,115  during fiscal 2000, a decrease of $183,253 or 16.6%. Our
interest cost decrease was primarily the result of a reduction in interest rates
during fiscal 2001.

NET LOSS: Our net loss increased to $4,382,164  during fiscal 2001,  compared to
$1,383,654  during fiscal 2000, an increase of $2,998,510 or 215%.  Our net loss
increased  in fiscal  2001 as a result of lower net sales and gross  profits and
increased operating expenses.

                      FISCAL 2000 COMPARED WITH FISCAL 1999

NET SALES:  Net sales of  $54,411,055  for fiscal 2000 were  $39,296,818 or 260%
higher than the $15,114,237  reported for fiscal 1999. The increase in net sales
in fiscal year 2000 was primarily a result of our having completed a significant
acquisition in June 1999.

COST OF SALES:  Cost of sales  increased to $36,562,624 for fiscal 2001 compared
to  $10,427,563  for fiscal 1999. The cost of sales for fiscal 2000 was 67.2% of
net sales  compared to 69.0% of net sales for fiscal 2000.  The increase in cost
of sales in fiscal year 2000 was  primarily  a result of our having  completed a
significant  acquisition  in June 1999.  The  decrease in the cost of sales as a
percent  of  net  sales  in  fiscal  year  2000  was  largely  a  result  of the
contribution of higher margin product lines from the June 1999 acquisition.

GROSS PROFIT:  Gross Profit  increased to  $17,848,431 or 32.8% of net sales for
fiscal 2000,  as compared to  $4,686,674  or 31.0% of net sales for fiscal 1999.
The increase in gross  profit in fiscal year 2000 was  primarily a result of our
having  completed a significant  acquisition  in June 1999.  The increase in the
gross  profit as a percent of net sales in fiscal year 2000 was largely a result
of  the  contribution  of  higher  margin  product  lines  from  the  June  1999
acquisition.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and administrative
expense  increased to  $16,940,243  for fiscal 2000,  compared to $5,160,642 for
fiscal 1999. The increase in expenses in fiscal year 2000 was primarily a result
of our having completed a significant acquisition in June 1999.

INTEREST  EXPENSE:  Interest expense increased to $1,104,115 during fiscal 2000,
compared to $240,112  during fiscal 1999, an increase of $864,003.  Our interest
cost increase was primarily  the result of increased  borrowings  related to our
June 1999 acquisition.

NET LOSS: Our net loss increased to $1,383,654  during fiscal 2000,  compared to
$744,384  during  fiscal  1999,  an increase  of  $639,270 or 86%.  Our net loss
increased  in  fiscal  2000 as a result  of  increased  operating  expenses  and
interest expense.

                                       27
<PAGE>
                         LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2001, we had a working capital deficit of ($6,309,266) compared to a
deficit of  ($984,066)  at June 30, 2000.  The  increase in our working  capital
deficit was  primarily a result of the  reclassification  of all debt to current
liabilities as a result of the factors discussed below.  Operating losses during
the twelve month period  ended June 30, 2001 were  primarily  offset by proceeds
from preferred stock offerings.

On March 2, 2001,  we entered  into an Amended and  Restated  Security  and Loan
Agreement,  or, the "Luxtec Credit  Agreement," for a $2,500,000 line of credit,
or, the  "Luxtec  Line of Credit,"  with ARK CLO 2000-1  LIMITED,  or, ARK.  The
maximum amount available to borrow under the Luxtec Line of Credit is limited to
the lesser of $2,500,000  or a certain  percentage  of accounts  receivable  and
inventory,  as defined.  Borrowings  bear interest at ARK's prime rate (6.75% at
June 30, 2001) plus 2.0%.  Unused portions of the Luxtec Line of Credit accrue a
fee at an annual rate of 1.00%.  Borrowings are secured by substantially  all of
our assets,  excluding  assets held by PrimeSource  Surgical.  At June 30, 2001,
there was no availability under the Luxtec Line of Credit.  Borrowings under the
Luxtec Line of Credit are payable upon maturity on March 31, 2005.

On March 2, 2001, as part of the Luxtec Credit Agreement, we executed an Amended
and  Restated  Term Note,  or the "Luxtec  Term Note," in the amount of $300,000
with ARK. The Luxtec Term Note bears  interest at prime (6.75% at June 30, 2001)
plus 0.5% and is secured  by  substantially  all of our  assets,  excluding  the
capital  stock of,  and  assets  held by,  PrimeSource  Surgical.  The Term Note
requires monthly principal payments of $10,000 commencing on March 31, 2001. The
Luxtec Term Note matures on March 31, 2002. At June 30, 2001, we had outstanding
borrowings of $250,000 under the Luxtec Term Note.

On March 2, 2001, as part of the Luxtec Credit Agreement, we executed an Amended
and Restated  Equipment Note, or, the "Luxtec  Equipment Note," in the amount of
$131,000 with ARK.  Borrowings  bear interest at the bank's prime rate (6.75% at
June 30,  2001) plus 1.0% and are  secured by  substantially  all of our assets,
excluding the capital stock of, and assets held by,  PrimeSource  Surgical.  The
Luxtec Equipment Note requires monthly  principal  payments of $8,333 commencing
on March 31, 2001.  The Luxtec  Equipment Note matures on June 30, 2002. At June
30, 2001, we had  outstanding  borrowings of $89,191 under the Luxtec  Equipment
Note.

The Luxtec Credit Agreement  contains  covenants that require the maintenance of
defined  financial ratios and income levels and limit additional  borrowings and
capital  expenditures.  The  Company  was in  compliance  with  these  financial
covenants or had received all required  waivers as of June 30, 2001.  Subsequent
to June 30,  2001,  the Company  negotiated  and executed an amendment to revise
some of the  financial  covenants  in the Luxtec  Credit  Agreement.  Management
believes  that they will be able to meet the  revised  covenants  in the  Luxtec
Credit Agreement for the fiscal year ended June 30, 2002.

On June 14, 1999, our wholly-owned subsidiary, PrimeSource Surgical entered into
an Amended and Restated Credit  Agreement,  or the "PrimeSource  Surgical Credit
Agreement"  with  Citizens  Bank of  Massachusetts,  or  Citizens  for a line of
credit,  or the  "PrimeSource  Surgical  Line of  Credit."  The  maximum  amount
available to borrow under the PrimeSource  Surgical Line of Credit is limited to
the lesser of  $12,000,000  or a certain  percentage of accounts  receivable and

                                       28
<PAGE>

inventory,  each  as  defined  by  the  PrimeSource  Surgical  Credit  Agreement
(approximately  $7,370,000  at June  30,  2001).  Borrowings  bear  interest  at
Citizen's prime rate (6.75% at June 30, 2001) plus 0.75%. Unused portions of the
PrimeSource  Surgical  Line of Credit  accrue a fee at an annual rate of 0.375%.
Borrowings are secured by substantially  all assets directly held by PrimeSource
Surgical.  At June 30,  2001,  there  was  $843,373  of  availability  under the
PrimeSource  Surgical Line of Credit.  Borrowings under the PrimeSource Surgical
Line of Credit are payable upon maturity in June 2003.

On June  14,  1999,  as  part  of the  PrimeSource  Surgical  Credit  Agreement,
PrimeSource  Surgical  executed  an Amended  and  Restated  Term  Note,  or, the
"PrimeSource  Surgical  Term Loan" in the  original  amount of  $5,000,000  with
Citizens.  The PrimeSource Surgical Term Loan is collateralized by substantially
all of the assets directly held PrimeSource  Surgical.  The PrimeSource Surgical
Term Loan bears  interest at Citizen's  prime rate (6.75% at June 30, 2001) plus
0.75%. The PrimeSource Surgical Term Loan requires monthly principal payments of
$95,834 through June 2001, $112,500 between July 2001 and June 2002 and $133,334
between July 2002 and June 2003. The  PrimeSource  Surgical Term Loan matures on
June 1, 2003. At June 30, 2001,  PrimeSource Surgical had outstanding borrowings
of $2,904,709 under the PrimeSource Surgical Term Loan.

The PrimeSource  Surgical Credit Agreement  contains  covenants that require the
maintenance of defined  financial  ratios and income levels and limit additional
borrowings  and  capital  expenditures.  Although  PrimeSource  Surgical  was in
compliance with those financial  covenants or had received all required  waivers
as of June 30, 2001, management believes it will need to amend certain financial
covenants  under the PrimeSource  Surgical Credit  Agreement in order to avoid a
default during fiscal 2002.  Management has initiated  discussions with Citizens
concerning   restructuring   and  refinancing   PrimeSource   Surgical's  credit
facilities so that PrimeSource Surgical will not be in default. We cannot assure
that  we  will  be  successful  in  restructuring  and  refinancing  PrimeSource
Surgical's  credit  facilities  or  amending  the  PrimeSource  Surgical  Credit
Agreement.  In the  event  that  we are  not  successful  in  restructuring  and
refinancing PrimeSource Surgical's credit facilities or amending the PrimeSource
Surgical Credit Agreement, we may not be able to meet the financial covenants in
the  PrimeSource  Surgical  Credit  Agreement for the fiscal year ended June 30,
2002.

The principal source of short-term  borrowings are the Luxtec Line of Credit and
the PrimeSource  Surgical Line of Credit,  comprised of separate  $2,500,000 and
$12,000,000  revolving credit  facilities with available  borrowings at June 30,
2001 of $1,225,000 and  $7,370,000,  respectively.  The Luxtec Line of Credit is
secured by all of our assets other than those held by PrimeSource Surgical.  The
PrimeSource  Surgical Line of Credit is secured by substantially all assets held
directly by PrimeSource  Surgical and certain of its  subsidiaries.  At June 30,
2001, both lines of credit utilized a significant  portion of their  respective,
available  borrowing bases. The interest rates on the lines of credit as of June
30, 2001 were 8.75% and 7.5%,  respectively.  The balances outstanding under the
Luxtec Line of Credit and the  PrimeSource  Surgical  Line of Credit at June 30,
2001 were $1,249,667 and $6,526,627, respectively.


                                       29
<PAGE>
On July 2, 2001, we raised  $3,250,000 in additional  equity capital through the
issuance  and sale of the  Units  comprised  of  Series E  Preferred  Stock  and
warrants to purchase  Common Stock.  The proceeds from the offering were used to
pay  certain  trade  payables  and to reduce  outstanding  borrowings  under the
PrimeSource Surgical Line of Credit.

Management  is  currently  engaged in  discussions  with current  investors  and
potential  new  investors  concerning  additional   investments  in  our  equity
securities.  In addition,  management is in discussions with our lenders and new
lenders concerning a restructuring and refinancing of our credit facilities.  We
cannot  assure,  however,  that we  will  be  successful  in  restructuring  and
refinancing  our credit  facilities  or that current  investors or potential new
investors will make additional  equity  investments in us. In that event, we may
not have sufficient funds to continue our operations for the next twelve months.

                        RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the  Securities and Exchange  Commission  (SEC) released Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL  STATEMENTS.
SAB No. 101 summarizes some views of the SEC on applying  accounting  principles
generally  accepted in the United  States to revenue  recognition  in  financial
statements.  The SEC believes that revenue is realized or realizable  and earned
when  all  of  the  following  criteria  are  met:  persuasive  evidence  of  an
arrangement  exists,  delivery has occurred or services have been rendered,  the
seller's  price to the  buyer is fixed or  determinable  and  collectibility  is
reasonable  assured.  The Company believes that its current revenue  recognition
policy complies with the SEC guidelines.

In March 2000,  the FASB issued  Interpretation  No. 44,  ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AN  INTERPRETATION OF APB OPINION NO.
25. This  interpretation  provides  guidance on the  application  of  Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
including (i) the definition of an employee,  (ii) the criteria for  determining
whether  a plan  qualifies  as a  noncompensatory  plan,  (iii)  the  accounting
consequence of various  modifications  to the terms of a previously  fixed stock
option or award and (iv) the  accounting  for an exchange of stock  compensation
awards in a business  combination.  The interpretation is effective July 1, 2000
and the effects of applying the  interpretation  are recognized on a prospective
basis. The adoption of this interpretation did not have a material impact on the
Company's results of operations or financial condition.

In September  2000,  the FASB issued SFAS No. 140,  ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES,  a replacement
of SFAS No. 125. This statement provides  accounting and reporting standards for
transfers and servicing of financial assets and  extinguishments of liabilities.
The statement  provides  consistent  standards for  distinguishing  transfers of
financial assets that are sales from transfers that are secured borrowings.  The
statement is  effective  for  transfers  and  servicing of financial  assets and
extinguishments of liabilities  occurring after March 31, 2001. The statement is
effective for recognition and reclassification of collateral and for disclosures
relating to  securitization  transactions and collateral for fiscal years ending
after  December 15,  2000.  The Company does not expect the adoption of SFAS No.
140 to have a material  impact on the  results of its  operations  or  financial
position.

                                       30
<PAGE>
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS.  SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The Company is required to implement
SFAS No. 141 on July 1, 2001 and it has not determined the impact,  if any, that
this statement will have on its  consolidated  financial  position or results of
operations.

In June 2001,  the FASB also issued SFAS No. 142 GOODWILL  AND OTHER  INTANGIBLE
ASSETS,  which is  effective  for the  Company  on July 1,  2002.  SFAS No.  142
requires,  among other things, the discontinuance of goodwill  amortization.  In
addition,  the standard includes provisions for the  reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles,  reclassification of certain intangibles out of
previously  reported  goodwill and the  identification  of  reporting  units for
purposes of assessing  potential  future  impairments of goodwill.  SFAS No. 142
also requires the Company to complete a transitional  goodwill  impairment  test
six months from the date of adoption. The Company is currently assessing but has
not yet  determined  the  impact  of SFAS  No.  142 on the  Company's  financial
position and results of operations.

                                  RISK FACTORS

      OUR  AUDITORS  HAVE RAISED  DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN  BECAUSE WE MAY NOT BE ABLE TO ACHIEVE OUR OBJECTIVES AND WE MAY HAVE TO
SUSPEND  OR  CEASE  OPERATIONS.   Our  independent  auditors  have  included  an
explanatory  paragraph in their  opinion  regarding  certain  issues which raise
doubt about our ability to continue as a going concern. This means that there is
substantial  doubt that our cash flow from  operations  and cash  available from
external financing will be sufficient to meet our working capital  requirements.
Additionally,  we  expect  to  be in  default  of  covenants  contained  in  the
PrimeSource Surgical Credit Agreement during fiscal 2002. As a result,  Citizens
can terminate the PrimeSource  Surgical Term Loan and the  PrimeSource  Surgical
Line of Credit and accelerate repayment of borrowings under those facilities. We
believe that if we do not raise  additional  capital and enter into a new credit
agreement to replace,  or amend,  the  PrimeSource  Surgical  Credit  Agreement,
Citizens may  accelerate  our repayment  obligations  and we will not be able to
continue our business operations.  Moreover,  we cannot assure, even if Citizens
does not  accelerate  our repayment  obligations,  that we will have  sufficient
funds to continue our operations.

      THE INDUSTRY IN WHICH WE PARTICIPATE  IS  INCREASINGLY  COMPETITIVE  WHICH
COULD MAKE IT MORE  DIFFICULT FOR US TO IMPROVE OUR FINANCIAL  PERFORMANCE.  The
changing health-care environment in recent years has led to increasingly intense
competition  among  health-care  suppliers.  Competition  is  focused  on price,
service  and  product  performance.  Pressure  in  these  areas is  expected  to
continue. Increased competition may lead to price and other forms of competition
that could have a material  adverse  effect on our market  share,  business  and
results of operations.  Also, we may face increased  competition for acquisition
opportunities, which may inhibit our ability to consummate suitable acquisitions
on favorable terms.

                                       31
<PAGE>
      WE MAY NOT BE ABLE TO IDENTIFY  OR  INTEGRATE  ACQUISITIONS  OR MANAGE OUR
GROWTH WHICH WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.  Our strategy for
growing   our   business   includes   identifying   and   pursuing   acquisition
opportunities.  Identifying and pursuing acquisition opportunities,  integrating
acquired  products and  businesses,  and managing  growth requires a significant
amount of management time and skill. Acquisitions may expose us to the following
risks, among others:

            *   diversion of our management's attention;
            *   the  inability  to  integrate   acquired   companies'  into  our
                operations;
            *   the assumption of liabilities;
            *   an adverse affect on our liquidity; and
            *   dilution to our current stockholders.

We  cannot  assure  that we will  be  effective  in  identifying  and  effecting
attractive  acquisitions,  assimilating  acquisitions or managing future growth.
The  failure  to do so may  have a  material  adverse  effect  on our  business,
operating results and financial condition.

      OUR COMMON STOCK IS NOT LISTED ON AN EXCHANGE WHICH MAKES IT DIFFICULT FOR
OUR  STOCKHOLDERS  TO SELL  THEIR  STOCK.  Although  we are a  public  reporting
company,  our shares of capital  stock are not listed on any stock  exchange  or
quoted on any  quotation  system.  We cannot  assure that holders of our capital
stock will be able to dispose of their shares.

      PROVISIONS  IN OUR  ARTICLES OF  INCORPORATION  AND BY-LAWS  COULD MAKE IT
HARDER  FOR  A  THIRD  PARTY  TO  ACQUIRE  CONTROL  OF US  AND  COULD  DETER  AN
ACQUISITION.  Provisions of our Articles of  Organization,  as amended,  and the
Amended and Restated By-Laws of the Massachusetts Business Corporation Law could
have the effect of making it more difficult for a third party to acquire,  or of
discouraging a third party from attempting to acquire,  control of us. Our Board
of  Directors  has the  authority  to issue  shares  of  preferred  stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting  rights,  of those  shares  without  any  further  vote or  action by our
stockholders,  subject to certain limitations.  The rights of the holders of our
Common Stock may be subject to, and may be adversely  affected by, the rights of
the holders of any preferred stock that we may issue in the future. The issuance
of  preferred  stock  by us may  have  the  effect  of  delaying,  deferring  or
preventing a change of our control  without  further action by our  stockholders
and may  adversely  affect  the voting  and other  rights of the  holders of our
Common Stock. In addition, our Articles of Organization do not permit cumulative
voting.  Further, our Board of Directors is divided into three classes,  each of
which  serves  for a  staggered  three-year  term,  which  may also make it more
difficult for a third-party to gain control of our Board of Directors.

                                       32
<PAGE>
      PRIMESOURCE  SURGICAL  HAS A LIMITED  OPERATING  HISTORY,  WHICH  MAKES IT
DIFFICULT TO PREDICT ITS FUTURE PERFORMANCE.  PrimeSource  Surgical,  which is a
material subsidiary of the Company,  commenced operations in 1996, and has grown
rapidly through the acquisition of a number of specialty  medical products sales
and  marketing  organizations.  Accordingly,  PrimeSource  Surgical  has  only a
limited operating history from which to evaluate and forecast its business. As a
result of PrimeSource  Surgical's limited operating history, we may be unable to
accurately forecast financial results going forward.  Moreover,  failure to meet
our  revenue,  targets  and  financial  projections  may have an  immediate  and
negative impact on our total results of operations.

      OUR  BUSINESS  WILL  SUFFER IF WE FAIL TO ATTRACT  AND RETAIN  EXPERIENCED
SALES  REPRESENTATIVES.  The success and growth of our  business  depends on our
ability to attract and retain qualified and experienced  sales  representatives.
There is significant  competition for  experienced  specialty  medical  products
sales  representatives.  It is uncertain  whether we can continue to attract and
retain qualified personnel.  If we cannot attract, retain and motivate qualified
sales  personnel,  we will not be able to expand our business and our ability to
perform under our existing  contracts will be impaired,  which would  negatively
affect our results of operations.

      OUR BUSINESS WOULD SUFFER IF WE LOST KEY SUPPLIERS.  Our success is partly
dependent on our ability to successfully  predict and adjust production capacity
to meet demand, which is partly dependent upon the ability of external suppliers
to deliver  components at reasonable prices and in a timely manner.  Capacity or
supply constraints, as well as purchase commitments,  could adversely affect our
future operating results.  We cannot assure that we will be able to maintain our
existing supplier relationships or secure additional suppliers as needed.

      IF SUPPLIERS TERMINATE THEIR AGREEMENTS WITH US, OUR PRODUCT OFFERINGS MAY
SUFFER.  Following  an initial  one-year  term,  many of our  standard  supplier
agreements  may  be  terminated  by  either  party  on 90  days'  notice.  After
expiration  of the  initial  term,  such  suppliers  may  terminate  or  seek to
renegotiate their  agreements.  If a significant  number of suppliers  terminate
their  agreements  with us, the range of products we will be able to offer would
be adversely  affected.  The ability of suppliers to terminate their  agreements
may result in new  agreement  terms that are less  favorable  to us, which could
have a material adverse effect on our earnings.

      SALES TO LARGER  CUSTOMERS  MAY INCREASE THE LENGTH OF OUR SALES CYCLE AND
DECREASE  OUR  PROFIT  MARGINS.  Increasing  sales to larger  buyers  will be an
important  element  of our  business  strategy.  As we sell  more  sophisticated
solutions  to larger  organizations,  it is expected  that the time from initial
contact to final approval will increase.  During this sales cycle, we may expend
substantial funds and management resources without any corresponding revenue. If
approval of contracts is delayed or does not occur, our financial  condition and
operating results for a particular period may be adversely affected. Approval of
contracts may be subject to delays for reasons over which we will have little or
no control, including:

         * potential customers' internal approval processes;
         * customers'   concerns  about  implementing  a  new  method  of  doing
           business; and
         * seasonal and other timing effects.

                                       33
<PAGE>
Increased  sales to  larger  accounts  may  result in lower or  negative  profit
margins as larger  customers  typically have greater leverage in negotiating the
price  and  other  terms  of  business  relationships.  If  we do  not  generate
sufficient transaction volume to offset any lower margins, our operating results
may be materially and adversely affected.

      GOVERNMENTAL OR PRIVATE  INITIATIVES TO REDUCE HEALTHCARE COSTS COULD HAVE
A MATERIAL  ADVERSE  EFFECT ON THE  SPECIALTY  MEDICAL  PRODUCTS  INDUSTRY.  The
primary  trend  in  the  United  States  healthcare   industry  is  toward  cost
containment.  Comprehensive  government  healthcare  reform  intended  to reduce
healthcare  costs,  the growth of total  healthcare  expenditures  and  expanded
healthcare  coverage for the uninsured have been proposed in the past and may be
considered  again in the near future.  Implementation  of government  healthcare
reform may adversely affect specialty  medical products  companies,  which could
decrease the business opportunities available to us. In addition, the increasing
use of managed care,  centralized purchasing decisions and consolidations among,
and integration of, healthcare providers are continuing to affect purchasing and
usage  patterns  in  the  healthcare  system.  Decisions  regarding  the  use of
specialty  medical  products  are  increasingly  being  consolidated  into group
purchasing  organizations,  regional  integrated  delivery  systems  and similar
organizations and are becoming more economically  focused,  with decision makers
taking into  account  the cost of the product and whether a product  reduces the
cost  of  treatment.   Significant  cost  containment   initiatives  adopted  by
government  or private  entities  could have a  material  adverse  effect on the
business of the Company.

      IF WE ISSUE ADDITIONAL CAPITAL STOCK OUR CURRENT  STOCKHOLDERS  RIGHTS MAY
BE ADVERSELY AFFECTED. We may issue additional securities which would dilute the
ownership  interests of our current  stockholders.  The terms and preferences of
any  securities  we may  issue  could be  superior  to  those  of our  currently
outstanding capital stock.  Current  stockholders'  rights to dividends and upon
liquidation may be adversely  affected.  We may undertake  business  combination
transactions  wherein we would issue equity as consideration.  Such transactions
would have a dilutive effect on our stockholders.

      OUR MAJOR  STOCKHOLDER  HAS  SUBSTANTIAL  CONTROL OF US AND COULD DELAY OR
PREVENT  A CHANGE  IN  CONTROL  THAT  STOCKHOLDERS  MAY  BELIEVE  WOULD  IMPROVE
MANAGEMENT  AND/OR  OUR  BUSINESS.  As a result  of its  ownership  of  Series C
Preferred  Stock,  Series D  Preferred  Stock and Series E Preferred  Stock,  GE
Capital Equity Investments,  Inc., is able to exercise  substantial control over
the  election of our  directors  and  determine  the  outcome of most  corporate
actions requiring stockholder approval,  including a merger with or into another
company, the sale of all or substantially all of our assets and amendment to our
Articles of Organization.

      OUR LACK OF AUDITED  FINANCIAL  STATEMENTS  FOR  CERTAIN  OF OUR  INDIRECT
SUBSIDIARIES COULD, AMONG OTHER THINGS, PRECLUDE THE EXERCISE OF OPTIONS GRANTED
BY US  AND  LIMIT  OUR  ABILITY  TO  USE  OUR  STOCK  IN  ACQUISITIONS.  Because
PrimeSource  Surgical does not have stand alone audited financial statements for
the four subsidiaries it acquired in June 1999, or the "HTD  Subsidiaries,"  for
periods  prior to that  acquisition,  we will  not be able to use any  effective
registration statement or file any new registration statements until the audited
financial  statements  for the HTD  Subsidiaries  are filed with the SEC or such
financial statements are no longer required to be filed. We believe that we will

                                       34
<PAGE>
not be able to use or file a registration  statement  until after the completion
of our June 2002 audit,  although  there is a  possibility  that we could use or
file  registration  statements  after the completion of our June 2001 audit. The
inability to use or file  registration  statements,  among other  things,  would
prevent the  exercise of options  granted by us and limit our ability to use our
stock  in  acquisitions  until  the  audited  financial  statements  of the  HTD
Subsidiaries  are filed with the SEC or such financial  statements are no longer
required to be filed.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our market risk exposure relates to outstanding debt. The balance of outstanding
bank debt at June 30, 2001 is approximately $11,020,194, all of which is subject
to interest  rate  fluctuations.  A  hypothetical  10% change in interest  rates
applied  to the fair  value of debt  would  not have a  material  impact  on our
earnings or cash flows.


                                       35
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  PRIMESOURCE HEALTHCARE, INC. and Subsidiaries


                        Consolidated Financial Statements
                          as of June 30, 2001 and 2000,
               and for Each of the Three Years in the Period Ended
                               June 30, 2001, and
                          Independent Auditors' Report




Independent Auditors' Report.............................................F-1

Consolidated Balance Sheets as of June 30, 2001 and 2000..............F-2 - F-3

Consolidated  Statements of  Operations  for the Years Ended
June 30, 2001, 2000 and 1999.............................................F-4

Consolidated  Statements of  Stockholders'  Equity  (Capital
Deficiency) for the Years Ended June 30, 2001, 2000 and 1999.............F-5

Consolidated  Statements  of Cash Flows for the Years  Ended
June 30, 2001, 2000 and 1999..........................................F-6 - F-7

Notes to Consolidated Financial Statements............................F-8 - F-27





                                       36
<PAGE>
INDEPENDENT AUDITORS' REPORT


Board of Directors
PrimeSource Healthcare, Inc.
Tucson, Arizona

We have audited the  accompanying  consolidated  balance  sheets of  PrimeSource
Healthcare,  Inc. and subsidiaries (the "Company") as of June 30, 2001 and 2000,
and the related  consolidated  statements of operations,  stockholders'  capital
deficiency,  and cash flows for each of the three years in the period ended June
30, 2001.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the financial position of PrimeSource  Healthcare,  Inc. and
subsidiaries  as of June 30, 2001 and 2000, and the results of their  operations
and their  cash flows for each of the three  years in the period  ended June 30,
2001 in conformity with accounting  principles  generally accepted in the United
States of America.

The accompanying  consolidated  financial statements have been prepared assuming
the Company  will  continue as a going  concern.  As  discussed in Note 2 to the
consolidated  financial  statements at June 30, 2001, the Company would not have
been in compliance with certain  covenants of one of its loan agreements had the
lender not  temporarily  waived the  covenants.  The  Company is  attempting  to
negotiate  the terms and  covenants  of the loan  agreement  and is also seeking
other sources of long-term financing.  The Company's difficulties in meeting its
loan  agreement  covenants  and  financing  needs,  its  recurring  losses,  and
stockholders'  capital  deficiency raise  substantial doubt about its ability to
continue as a going concern.  Management's plan concerning these matters is also
described in Note 2. The  consolidated  financial  statements do not include any
adjustments that might result from the outcome of these uncertainties.


Deloitte & Touche, LLP
Phoenix, Arizona

October 11, 2001
<PAGE>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS                                                                                        2001               2000

CURRENT ASSETS:
<S>                                                                                     <C>                <C>
  Cash and cash equivalents                                                             $    622,623       $    126,690
  Accounts receivable - net of allowance for doubtful accounts
    of approximately $622,000 (2001) and $427,000 (2000)                                   8,771,207          7,396,800
  Inventories - net                                                                        9,821,232          6,268,248
  Income taxes receivable                                                                                       836,116
  Prepaid expenses and other current assets                                                  152,260            244,797
                                                                                        -------------      -------------

           Total current assets                                                           19,367,322         14,872,651

PROPERTY, PLANT, AND EQUIPMENT - net                                                       1,635,390            866,277

INTANGIBLE ASSETS - Net of accumulated amortization
  of approximately $62,000 (2001) and $42,000 (2000)                                         140,479            137,629

GOODWILL - Net of accumulated amortization
  of approximately $2,167,000 (2001) and $1,030,000 (2000)                                23,844,720         14,935,044

OTHER ASSETS                                                                                 462,043            485,628
                                                                                        -------------      -------------

TOTAL                                                                                   $ 45,449,954       $ 31,297,229
                                                                                        =============      =============


                                                                                                            (Continued)

</TABLE>
                                      F-2
<PAGE>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY                                              2001               2000

CURRENT LIABILITIES:
<S>                                                                                    <C>                 <C>
  Accounts payable                                                                     $  11,269,607       $  6,260,934
  Accrued expenses                                                                         2,783,516          1,105,096
  Customer deposits                                                                          532,557            153,101
  Income taxes payable                                                                         9,500
  Lines of credit                                                                          7,776,294          7,157,714
  Current portion of long-term debt                                                        3,259,885          1,150,003
  Current portion of capital lease obligations                                                45,229             29,869
                                                                                        -------------      -------------

           Total current liabilities                                                      25,676,588         15,856,717
                                                                                        -------------      -------------

CAPITAL LEASE OBLIGATIONS - Net of current portion                                            72,339             12,330
                                                                                        -------------      -------------

LONG-TERM DEBT - Net of current portion                                                       84,015          2,837,387
                                                                                        -------------      -------------

WARRANT PUT OBLIGATION                                                                        95,000            267,000
                                                                                        -------------      -------------

COMMITMENTS AND CONTINGENCIES

SERIES C REDEEMABLE, CONVERTIBLE PREFERRED STOCK - $1.00 par value - authorized,
  344,864 shares; issued and outstanding, 344,864 (2001) and 281,311 (2000)
  shares; aggregate liquidation preference of $17,803,482 (2001) and
  $14,206,206 (2000)                                                                      15,134,235         12,850,960
                                                                                        -------------      -------------

SERIES D EXCHANGEABLE, CONVERTIBLE PREFERRED STOCK - $1.00 par value -
  authorized, 20,000 shares; issued and outstanding, 14,008 (2001) shares;
  aggregate
  liquidation preference of $4,949,397 (2001)                                              4,949,397
                                                                                        -------------      -------------

STOCKHOLDERS' CAPITAL DEFICIENCY:
  Series B convertible preferred stock, $1.00 par value - authorized, 46,889
    shares (2000); issued and outstanding, 46,889 shares (2000);
    aggregate liquidation preference of $1,195,543 (2000)                                                     1,195,543
  Common stock, $0.01 par value - authorized, 50,000,000 shares;
    issued and outstanding, 7,959,704 (2001) and 2,874,166
    (2000) shares                                                                             79,597             28,742
  Additional paid-in capital                                                               8,434,697          1,523,186
  Accumulated deficit                                                                     (9,075,914)        (3,274,636)
                                                                                        -------------      -------------

           Total stockholders' capital deficiency                                           (561,620)          (527,165)
                                                                                        -------------      -------------

TOTAL                                                                                  $  45,449,954       $ 31,297,229
                                                                                        =============      =============

See notes to consolidated financial statements                                                               (Concluded)

                                      F-3
</TABLE>
<PAGE>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
------------------------------------------------------------------------------------------------------------------------------------


                                                                         2001                2000               1999

<S>                                                                  <C>                <C>                <C>
NET SALES                                                            $ 51,031,610       $ 54,411,055       $ 15,114,237

COST OF SALES                                                          35,455,087         36,562,624         10,427,563
                                                                     --------------     --------------       --------------

GROSS PROFIT                                                           15,576,523         17,848,431          4,686,674
                                                                     --------------     --------------       --------------

OPERATING EXPENSES:
  Selling, general, and administrative expenses                        18,813,441         16,940,243          5,160,642
  Restructuring expenses                                                                  1,031,011
                                                                     --------------     --------------       --------------

           Total operating expenses                                    18,813,441         17,971,254          5,160,642
                                                                     --------------     --------------       --------------
OPERATING LOSS                                                         (3,236,918)          (122,823)          (473,968)

INTEREST EXPENSE                                                         (920,862)        (1,104,115)          (240,112)

OTHER EXPENSE                                                             (11,184)          (115,716)           (30,304)
                                                                     --------------     --------------       --------------

LOSS BEFORE INCOME TAX PROVISION                                       (4,168,964)        (1,342,654)          (744,384)

INCOME TAX PROVISION                                                     (213,200)           (41,000)
                                                                     --------------     --------------       --------------

NET LOSS                                                               (4,382,164)        (1,383,654)          (744,384)

DIVIDENDS ON PREFERRED STOCK                                           (1,419,114)          (955,481)
                                                                     --------------     --------------       --------------

NET LOSS AVAILABLE TO COMMON
  STOCKHOLDERS                                                       $ (5,801,278)      $ (2,339,135)        $ (744,384)
                                                                     ==============     ==============       ==============

LOSS PER SHARE:
  Basic                                                                   $ (1.37)           $ (0.69)           $ (0.17)
                                                                     ==============     ==============       ==============

  Diluted                                                                 $ (1.37)           $ (0.69)           $ (0.17)
                                                                     ==============     ==============       ==============


See notes to consolidated financial statements.
</TABLE>
                                      F-4
<PAGE>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                             Series B Convertible
                                               Preferred Stock      Common Stock     Additional                       Total
                                         -------------------- ---------------------   Paid-in    Accumulated       Stockholders'
                                         Shares      Amount     Shares      Amount    Capital      Deficit     Equity (Deficiency)

<S>                                      <C>       <C>         <C>        <C>       <C>          <C>         <C>         <C>
BALANCE, JULY 1, 1998                    876,724   $ 583,571   5,838,535  $  5,839  $ 3,247,945  $ (191,117) $3,646,238  $3,646,238
 Effect of .744183-for-1 reverse stock
   split and change in par value       (850,627)              (1,493,645)   37,611      (37,611)
 Issuance of preferred stock             18,500      621,500                                                    621,500     621,500
 Exercise of preferred stock warrants     2,646          889                                                        889         889
 Issuance of common stock                                        231,837     2,318      290,707                 293,025     293,025
 Repurchase of common stock                                   (1,160,925)  (11,609)  (1,183,391)             (1,195,000  (1,195,000)
 Net loss                                                                                          (744,384)   (744,384)   (744,384)
                                         --------  ---------   ---------  --------  -----------  ----------- ------------ ---------
BALANCE, JUNE 30, 1999                    47,243   1,205,960   3,415,802    34,159    2,317,650    (935,501)  2,622,268   2,622,268
 Repurchase of preferred stock             (354)     (10,417)                                                   (10,417)    (10,417)
 Issuance of common stock                                        260,227     2,602      434,501                 437,103     437,103
 Repurchase of common stock                                   (1,036,398)  (10,364)  (1,268,220)             (1,278,584) (1,278,584)
 Exercise of stock options                                       234,535     2,345       39,255                  41,600      41,600
 Preferred stock dividends                                                                         (955,481)   (955,481)   (955,481)
 Net loss                                                                                         1,383,654) (1,383,654) (1,383,654)
                                         --------  ---------   ---------  --------  -----------  ----------- ------------ ---------
BALANCE, JUNE 30, 2000                    46,889   1,195,543   2,874,166    28,742    1,523,186  (3,274,636)   (527,165)   (527,165)
 Issuance of common stock in and
   effect of reverse merger                                    3,335,000    33,350    4,649,905               4,683,255   4,683,255
 Issuance of common stock                                        578,324     5,783    1,077,785               1,083,568   1,083,568
 Conversion of preferred stock to common(46,889)  (1,195,543)  1,172,214    11,722    1,183,821
 Preferred stock dividends                                                                       (1,419,114) (1,419,114) (1,419,114)
 Net loss                                                                                        (4,382,164) (4,382,164) (4,382,164)
                                         --------  ---------   ---------  --------  -----------  ----------- ------------ ---------
BALANCE, JUNE 30, 2001                         -   $       -   7,959,704  $ 79,597  $ 8,434,697  $9,075,914) $ (561,620)  $(561,620)
                                         ========  =========   =========  ========  ===========  =========== ============ =========


See notes to consolidated financial statements.
</TABLE>
                                      F-5
<PAGE>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                             2001             2000              1999
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                     <C>              <C>                <C>
  Net loss                                                              $(4,382,164)     $(1,383,654)       $ (744,384)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization                                         1,727,082        1,210,506           409,410
    Loss on sale of subsidiary                                                               731,947            41,594
    Change in fair value of warrant put obligation                         (172,000)         124,000
    Loss on disposal of property, plant, and equipment                        8,179
    Issuance of common stock for services                                    25,132
    Changes in operating assets and liabilities - net of
      effect of business acquisitions and dispositions:
      Accounts receivable                                                   873,575         (856,749)         (686,703)
      Inventories                                                          (822,554)        (555,764)         (632,632)
      Income taxes receivable and payable                                   859,666         (836,116)
      Prepaid expenses and other current assets                             131,166         (145,312)          (20,474)
      Other assets                                                         (381,710)                          (252,582)
      Accounts payable                                                      779,767        2,651,440        (2,040,155)
      Accrued expenses                                                      316,944       (1,502,609)        1,621,935
      Customer deposits                                                     379,456
                                                                         ----------       ----------        ----------

           Net cash used in operating activities                           (657,461)        (562,311)       (2,303,991)
                                                                         ----------       ----------        ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property, plant, and equipment                               (475,280)        (606,385)          (22,364)
  Proceeds from business disposition                                                         198,130
  Proceeds from sale of property, plant, and equipment                        7,200
  (Cash paid) purchase price refunded for business
    acquisitions - net                                                     (391,000)         945,000       (17,046,400)
  Payment of business acquisition costs                                    (685,159)
  Acquisition of other assets                                                               (210,444)
                                                                         ----------       ----------        ----------
           Net cash (used in) provided by investing activities           (1,544,239)         326,301       (17,068,764)
                                                                         ----------       ----------        ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings under lines of credit                                       28,043,512       27,583,557        12,713,211
  Repayments under lines of credit                                      (28,674,599)     (26,885,104)       (7,583,571)
  Proceeds from long-term debt                                               11,854                          4,032,380
  Repayment of long-term debt                                            (2,361,116)        (900,000)
  Repayment on capital leases                                               (31,340)         (41,716)          (57,767)
  Proceeds from issuance of common stock                                      3,261          200,000           143,025
  Proceeds from issuance of preferred stock - net of costs                5,706,061          904,360        11,772,389
  Proceeds from the exercise of options                                                       41,600
  Stock repurchases                                                                       (1,089,001)       (1,195,000)
                                                                         ----------       ----------        ----------
           Net cash provided by (used in) financing activities            2,697,633         (186,304)       19,824,667
                                                                         ----------       ----------        ----------
NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                      495,933         (422,314)          451,912
CASH AND CASH EQUIVALENTS, BEGINNING
  OF YEAR                                                                   126,690          549,004            97,092
                                                                         ----------       ----------        ----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                    $ 622,623        $ 126,690         $ 549,004
                                                                         ==========       ==========        ==========

                                                                                                            (Continued)
</TABLE>
                                      F-6
<PAGE>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                         2001               2000               1999

SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION - Cash paid during
    the year for:
<S>                                                                 <C>                <C>                   <C>
    Interest                                                        $    945,393       $  1,023,288          $    221,260
                                                                    ============       ============          ============

    Income taxes                                                    $    109,638       $  1,220,582          $         -
                                                                    ============       ============          ============


SUPPLEMENTAL DISCLOSURES OF NONCASH
  TRANSACTIONS - During the years ended
  June 30, 2001, 2000, and 1999, the Company
  acquired entities in transactions
  summarized as follows:
    Fair value of assets acquired, including
    transaction costs                                               $ 17,076,173       $    594,089          $ 21,464,702
    Issuance of common stock                                          (4,254,000)          (237,104)             (150,000)
    Issuance of series D preferred stock                              (1,456,180)
    Cash paid in business acquisition - net of refund                   (391,000)           945,000           (17,046,400)
                                                                    ============       ============          ============

           Liabilities assumed                                     $  10,974,993       $  1,301,985          $  4,268,302
                                                                    ============       ============          ============

  Equipment acquired under capital lease                           $      39,906
                                                                    ============

  Common stock issued for services in connection
    with business acquisition                                      $     100,000
                                                                    ============


See notes to consolidated financial statements.                                                               (Concluded)
</TABLE>
                                      F-7
<PAGE>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

1.    NATURE OF BUSINESS

      PrimeSource  Healthcare,   Inc.   ("PrimeSource"  or  the  "Company"),   a
Massachusetts  corporation formerly known as Luxtec Corporation,  is a specialty
medical  products sales,  marketing,  manufacturing,  and service  company.  The
Company sells a broad portfolio of specialty medical products,  some of which it
manufactures,  to hospitals and surgery centers  nationwide  through a dedicated
organization of sales and marketing professionals.

      On March 2, 2001, Luxtec Corporation ("Luxtec"),  a Massachusetts publicly
held corporation,  completed a merger (the "Merger") with PrimeSource  Surgical,
Inc., a Delaware corporation ("PrimeSource Surgical"),  resulting in PrimeSource
Surgical becoming a wholly owned subsidiary of Luxtec. Pursuant to the agreement
and Plan of Merger, dated November 27, 2000, as amended, the former stockholders
of  PrimeSource  Surgical  received  Luxtec  capital stock in exchange for their
PrimeSource Surgical capital stock. On June 22, 2001, the stockholders of Luxtec
approved a name change to PrimeSource Healthcare, Inc.

      Luxtec's  year-end  was  previously  October  31 but  changed  to June 30,
PrimeSource  Surgical's  year-end.  Luxtec was a delisted  public company at the
time of the  acquisition.  For accounting  purposes,  the  acquisition  has been
treated as the acquisition of Luxtec by PrimeSource Surgical with PrimeSource as
the acquirer (reverse acquisition). The acquisition has been accounted for using
the  purchase  method of  accounting,  and the results of  operations  have been
included from March 2, 2001, the date of acquisition.  The historical  financial
statements prior to March 2, 2001 are those of PrimeSource Surgical.  All shares
and per share data prior to the  acquisition  have been  restated to reflect the
par value and capital structure of Luxtec.

      The  Merger  between  PrimeSource  Surgical  and Luxtec  was  effected  by
acquiring 100 percent of the issued and outstanding  common stock of PrimeSource
Surgical in exchange for 3,301,239  shares of common  stock,  par value $.01 per
share (the "Common  Stock"),  46,889  shares of Series B  Convertible  Preferred
Stock,  par value  $1.00 per share  (the  "Series B Stock"),  344,864  shares of
Series C Redeemable, Convertible Preferred Stock, par value $1.00 per share (the
"Series C  Stock"),  and 9,674  shares  of  Series D  Exchangeable,  Convertible
Preferred Stock, par value $1.00 per share (the "Series D Stock") of Luxtec.  In
addition,  the Company  assumed options to purchase  2,519,542  shares of common
stock and warrants to purchase 578,088 shares of common stock. On March 3, 2001,
the Company  issued 4,334 shares of Series D Stock and 450,000  shares of common
stock in  exchange  for  10,000  shares  of the  Company's  Series A  Redeemable
Preferred Stock and warrants to purchase 450,000 shares of common stock at $3.00
per share (Note 3).

      On December 29, 2000,  PrimeSource  Surgical  acquired all the outstanding
common stock of New England Medical Specialties,  Inc. ("NEMS") and Professional
Equipment Co., Inc.  ("PEC"),  two specialty  distribution  organizations in the
northeastern United States. The transaction was accounted for using the purchase



                                      F-8
<PAGE>
method of accounting.  PrimeSource Surgical acquired the companies for aggregate
consideration of $1,310,000, of which $391,000 was paid in cash and $919,000 was
paid by issuing 390,804 shares of common stock.  An additional  21,262 shares of
common  stock with a fair value of $50,000  were issued to certain  employees of
the acquired companies.  These shares are restricted, and vest 33 percent on the
first, second, and third anniversaries of the acquisition (Note 3).

      The following unaudited pro forma combined condensed financial information
for the  fiscal  years  ended June 30,  2001 and 2000  includes  the  results of
operations  for the  Company,  presented  as if  PrimeSource  Surgical  had been
combined  with  Luxtec,  NEMS,  and PEC for all of 2001  and  2000,  along  with
adjustments  that give effect to events that are  directly  attributable  to the
transaction and expected to have a continuing impact.

                                                  2001               2000

Net sales                                    $ 58,991,021        $ 70,096,810
                                             =============       ============

Net loss                                     $ (7,834,540)       $ (2,835,332)
                                             ==============      =============

Loss per share, basic and diluted                 $ (1.22)            $ (0.47)
                                             ==============      =============


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      BASIS OF PRESENTATION - The accompanying consolidated financial statements
have been prepared on a going concern basis,  which contemplates the realization
of assets and the  satisfaction of liabilities in the normal course of business.
The   financial   statements  do  not  include  any   adjustments   relating  to
recoverability  and  classification of recorded asset amounts or the amounts and
classification  of  liabilities  that might be  necessary  should the Company be
unable to continue as a going  concern.  The Company's  continuation  as a going
concern  depends upon its ability to generate  sufficient  cash flow to meet its
obligations on a timely basis, obtain refinancing of certain of its debt, comply
with the terms and covenants of its financing agreements, and achieve profitable
operations.

      The Company has incurred losses of $4,382,164 in 2001, $1,383,654 in 2000,
and  $744,384  in  1999.  The  Company's  business  plan  continues  to focus on
improving  operations  through internal growth of its specialty medical products
lines through additional acquisitions of strategic businesses. During the fiscal
year ended June 30,  2001,  the  Company  completed  the  acquisitions  of three
additional  businesses.  One of these  acquisitions  provided  the Company  with
manufacturing capabilities to supplement the specialty medical products which it
already had available through its distribution business. The Company is focusing
its  marketing  efforts on forming  partnerships  with  other  medical  products
companies to widen the customer  base for its products.  The Company  intends to
continue with its current strategy during fiscal 2002.

      The  Company's  primary debt  financing  is provided  under loans from two
different  banks. As of June 30, 2001, the Company had $9,431,336 of outstanding
borrowings  under the PrimeSource  Surgical credit  agreement (the  "PrimeSource
Surgical Credit Agreement"),  and $1,249,667 outstanding under the Luxtec credit
agreement (the "Luxtec Credit  Agreement"),  as further discussed in Notes 6 and
7.  The  two  credit  agreements   discussed  above  include  certain  financial
covenants,  with which the Company was out of compliance  at June 30, 2001.  The

                                      F-9
<PAGE>
Company  has  received  waivers as of June 30,  2001 and for all prior  periods.
Subsequent to June 30, 2001, the Company amended the Luxtec Credit  Agreement to
revise certain financial  covenants;  however,  the Company  anticipates that it
will be out of compliance  with certain  existing  covenants of the  PrimeSource
Surgical  Credit  Agreement at its next  measurement  date, and, as a result has
reclassified this debt as a current liability.  The Company is currently seeking
refinancing from its current lender as well as other lenders.

      PRINCIPLES  OF  CONSOLIDATION  -  The  consolidated  financial  statements
include  the  accounts  of  the  Company  and  its  wholly  owned  subsidiaries:
PrimeSource  Surgical;  Ruby Merger Sub (dba NEMS and PEC); Bimeco,  Inc.; Fiber
Imaging Technologies, Inc.; CardioDyne, Inc.; and Cathtec, Inc. All intercompany
balances and transactions have been eliminated.

      CASH AND CASH  EQUIVALENTS - The Company  considers all highly liquid debt
instruments  purchased with an original maturity date of three months or less to
be cash equivalents.

      CONCENTRATIONS OF CREDIT RISK - The Company's  financial  instruments that
are exposed to  concentrations  of credit  risk  consist  primarily  of cash and
accounts  receivable.  The  Company  primarily  sells  to  hospitals  and  other
healthcare providers, and ongoing customer credit evaluations are performed with
respect to the Company's  customers.  Collateral  is generally not required.  In
addition,  the Company routinely maintains cash in excess of $100,000 in certain
banks to pay general accounts  payable,  payroll,  etc. The Company,  by policy,
places  the  investments  with  financial   institutions   evaluated  as  highly
creditworthy.  At June 30, 2001,  the Company's  uninsured  cash balances  total
approximately $465,000.

      INVENTORIES consist of raw materials, work-in-process, and finished goods,
stated at the lower of cost or market. Cost is recorded using the first in first
out method (FIFO) for Luxtec and average costing for the remaining companies.

      PROPERTY,  PLANT,  AND  EQUIPMENT are recorded at cost.  Depreciation  and
amortization  have been provided using the  straight-line  method over estimated
useful lives, generally three to ten years. Leasehold improvements are amortized
using the straight-line  method over the shorter of the estimated useful life of
the asset or the lease term.

      LONG-LIVED   ASSETS  -  The  Company   accounts  for  the  impairment  and
disposition  of  long-lived  assets in  accordance  with  Statement of Financial
Accounting  Standards  ("SFAS")  No.  121,  ACCOUNTING  FOR  THE  IMPAIRMENT  OF
LONG-LIVED  ASSETS AND FOR  LONG-LIVED  ASSETS TO BE DISPOSED OF. In  accordance
with SFAS No.  121,  long-lived  assets to be held are  reviewed  for  events or
changes in  circumstances  that  indicate that their  carrying  value may not be
recoverable.  The Company  periodically reviews the carrying value of long-lived
assets to determine whether impairment to such value has occurred.

      INTANGIBLE ASSETS consist primarily of goodwill,  which is being amortized
on a straight-line basis over 10 to 20 years.  Intangible assets are recorded at
cost, net of accumulated amortization.


                                      F-10
<PAGE>
      In June 2001, the Financial Accounting Standards Board ("FASB") issued two
new accounting standards, SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142,
GOODWILL  AND OTHER  INTANGIBLE  ASSETS.  Under SFAS No. 142,  goodwill  will no
longer be amortized but will be subjected to an annual  impairment  review.  The
standards are effective for the Company's  fiscal year  beginning  July 1, 2002;
however,  early  adoption  is  permitted.  The  Company  is in  the  process  of
evaluating  the impact these new standards  will have on its financial  position
and results of operations,  and expects to make a decision with respect to early
adoption after completing such evaluation.

      OTHER ASSETS consist principally of deposits and deferred financing costs.
Deferred  financing  costs are amortized over the life of the related debt using
the effective interest method.

      REVENUE  RECOGNITION - The Company recognizes stocking revenue at the time
of shipment  and passage of title.  The Company  also  receives  revenues  under
certain  agency  arrangements  and  recognizes  revenue  when the agency sale is
complete.   Provision  is  made  currently  for  estimated   sales  returns  and
allowances, which have historically been insignificant.  The Company accrues for
any  warranty  costs,  and total  costs for the year  ended  June 30,  2001 were
approximately   $11,000,  and  are  included  in  cost  of  goods  sold  in  the
accompanying consolidated statements of operations.  Warranty costs are provided
for Luxtec's sales of manufactured product.

      RESEARCH AND  DEVELOPMENT  COSTS are incurred by Luxtec and are charged to
operations as incurred.  Total research and development costs for the year ended
June 30, 2001 were approximately $76,000.

      INCOME TAXES - The Company  accounts for income taxes in  accordance  with
SFAS No. 109,  ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109, income taxes are
recognized  for: (a) the amount of taxes payable or  refundable  for the current
year,  and  (b)  deferred  tax   liabilities  and  assets  for  the  future  tax
consequences  of events that have been  recognized  in the  Company's  financial
statements  or tax returns.  A valuation  allowance is provided  when it is more
likely than not that some  portion or all of the  deferred tax asset will not be
realized.

      STOCK-BASED  COMPENSATION - The Company accounts for stock-based awards to
employees  using  the  intrinsic-value  method  in  accordance  with  Accounting
Principles  Board  ("APB")  Opinion  No.  25,  ACCOUNTING  FOR  STOCK  ISSUED TO
EMPLOYEES.

      FINANCIAL  INSTRUMENTS - Pursuant to SFAS No. 107,  DISCLOSURES ABOUT FAIR
VALUE OF  FINANCIAL  INSTRUMENTS,  the Company is required to estimate  the fair
value of all financial  instruments  included on its balance  sheets at June 30,
2001 and 2000.  The Company  considers the carrying value of such amounts in the
financial statements to approximate their fair value due to the relatively short
period  of time  between  origination  of the  instruments  and  their  expected
realization or the variable interest rate nature of such instruments.

      USE  OF  ESTIMATES  IN  THE  PREPARATION  OF  FINANCIAL  STATEMENTS  - The
preparation of 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  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

      COMPREHENSIVE  INCOME - The Company has  adopted  SFAS No. 130,  REPORTING
COMPREHENSIVE  INCOME. This statement establishes standards for the reporting of
comprehensive  income and its  components.  Comprehensive  income,  as  defined,
includes  all changes in equity  (net  assets)  during a period  from  non-owner
sources. There was no difference between net loss and comprehensive loss for any
year presented.

                                      F-11
<PAGE>
      LOSS PER COMMON  SHARE - SFAS No. 128,  EARNINGS  PER SHARE,  requires the
dual  presentation of basic and diluted earnings (loss) per share on the face of
the statement of operations and the disclosure of the reconciliation between the
numerators  and  denominators  of basic and  diluted  earnings  (loss) per share
calculations.  Earnings  (loss) per share  amounts  for the years ended June 30,
2001,  2000, and 1999 are  calculated  using only  weighted-average  outstanding
shares  of  4,249,494,  3,383,382,  and  4,367,399,  respectively.  Options  and
warrants to purchase common stock totaling 4,409,289,  1,951,549,  and 1,107,800
at June 30, 2001,  2000,  and 1999,  respectively,  and shares to be issued upon
conversion  of  preferred  stock were not used for  computing  diluted  earnings
(loss) per share because the result would be antidilutive. Put warrants totaling
282,022 for each of the years ended June 30, 2001,  2000, and 1999 were not used
for  computing  diluted  earnings  (loss) per share  because the result would be
antidilutive.

      RECENTLY ISSUED ACCOUNTING  PRONOUNCEMENTS - In June 2001, the FASB issued
SFAS No. 141,  BUSINESS  COMBINATIONS.  SFAS No. 141 requires  that the purchase
method of accounting be used for all business combinations  initiated after June
30, 2001.  The Company is required to implement SFAS No. 141 on July 1, 2002 and
it has not determined  the impact,  if any, that this statement will have on its
financial position or results of operations.

      In June  2001,  the FASB also  issued  SFAS No.  142,  GOODWILL  AND OTHER
INTANGIBLE ASSETS,  which is effective for the Company on July 1, 2002. SFAS No.
142 requires,  among other things, the discontinuance of goodwill  amortization.
In addition,  the  standard  includes  provisions  for the  reclassification  of
certain existing recognized intangibles as goodwill,  reassessment of the useful
lives  of  existing   recognized   intangibles,   reclassification   of  certain
intangibles out of previously reported goodwill, and identification of reporting
units for purposes of assessing  potential future impairments of goodwill.  SFAS
No. 142 also requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption.  The Company is  currently  assessing
but has not yet determined the impact of SFAS No. 142 on the Company's financial
position and results of operations.

      In March  2000,  the FASB  issued  FASB  Interpretation  ("FIN")  No.  44,
ACCOUNTING  FOR  CERTAIN   TRANSACTIONS   INVOLVING   STOCK   COMPENSATION,   an
interpretation  of APB Opinion No. 25. FIN No. 44 clarifies the  application  of
Opinion No. 25 for: (a) the  definition  of an employee for purposes of applying
Opinion No. 25, (b) the criteria for  determining  whether a plan qualifies as a
noncompensatory  plan, (c) the accounting  consequence for various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination.  FIN No.
44 became effective July 1, 2000, but certain  conclusions cover specific events
that occur after either  December  15, 1998 or January 12, 2000.  Implementation
did not have a material impact on the Company's financial position or results of
operations.

                                      F-12
<PAGE>
      In December 1999, the  Securities and Exchange  Commission  ("SEC") issued
Staff  Accounting   Bulletin  ("SAB")  101,  REVENUE  RECOGNITION  IN  FINANCIAL
STATEMENTS.  Implementation of SAB No. 101, which was delayed by the issuance of
SAB No. 101A on March 27, 2000,  and SAB No. 101B on June 26, 2000, was required
by the fourth quarter of fiscal 2001.  Implementation as of July 1, 2000 did not
have a  material  impact on the  Company's  financial  position  or  results  of
operations.

      In June 1998, the FASB issued SFAS No. 133,  ACCOUNTING FOR DERIVATIVE AND
HEDGING  ACTIVITIES.  SFAS No. 133  establishes  new  accounting  and  reporting
standards for derivative financial instruments and for hedging activities.  SFAS
No. 133  requires  the Company to measure all  derivatives  at fair value and to
recognize  them in the balance sheet as an asset or liability,  depending on the
Company's  rights or  obligations  under  the  applicable  derivative  contract.
Implementation  did  not  have a  material  impact  on the  Company's  financial
position or results of operations.

      RECLASSIFICATIONS - Certain  reclassifications  have been made to the 2000
and 1999 consolidated financial statements to conform to the 2001 presentation.

                                      F-13
<PAGE>

3.    ACQUISITIONS AND DISPOSALS

      LUXTEC  ACQUISITION  - As  discussed  in Note 1, on March 2, 2001,  Luxtec
completed a merger with  PrimeSource  Surgical for  aggregate  consideration  of
$4,791,180,  which  was  paid in  stock,  at fair  value  and by  assumption  of
liabilities.  Liabilities  assumed,  net of assets acquired,  and costs, totaled
$3,931,462.  Total goodwill arising from this transaction was $8,722,642,  which
is being  amortized over 10 years.  The  acquisition was accounted for using the
purchase method of accounting,  and the operating  results have been included in
the Company's consolidated financial statements from the date of acquisition.

      In  connection  with the Merger,  for each share of  PrimeSource  Surgical
common stock, par value $0.001 per share, the PrimeSource Surgical  stockholders
received .744183 of a share of Luxtec common stock, par value $0.01 per share.

      For each share of PrimeSource Surgical Series A preferred stock, par value
$0.001 per share,  Series B-1 preferred  stock,  par value $0.001 per share, and
Series B-2 preferred stock, par value $0.001 per share, the PrimeSource Surgical
stockholders  received  .02976732 of a share of Luxtec Series B Stock, par value
$1.00 per share.  Each share of Series B Stock was subsequently  converted to 25
shares of PrimeSource common stock, as further discussed at Note 8.

      For each share of PrimeSource  Surgical  Series B-3 preferred  stock,  par
value $0.001 per share,  Series C convertible  preferred stock, par value $0.001
per share,  Series C-2 convertible  preferred stock, par value $0.001 per share,
the PrimeSource  Surgical  stockholders  received .02976732 of a share of Luxtec
Series C Stock, par value $1.00 per share.

      For each share of PrimeSource  Surgical Series C-3 exchangeable  preferred
stock,  par value  $0.001  per  share,  the  PrimeSource  Surgical  stockholders
received  .02976732  of a share of Luxtec  Series D Stock,  par value  $1.00 per
share.

      NEMS AND PEC ACQUISITIONS - As discussed in Note 1, effective December 29,
2000,  the  Company  acquired  NEMS  and  PEC  for  aggregate  consideration  of
$1,310,000,  of which $391,000 was paid in cash and by issuing 390,804 shares of
the  Company's  common  stock with an estimated  fair value of  $919,000.  Total
goodwill arising from this transaction was $1,384,792,  which is being amortized
over 20 years.  The  acquisition  was accounted for using the purchase method of
accounting,  and the  operating  results  have been  included  in the  Company's
consolidated financial statements from the date of acquisition.

      OTHER  ACQUISITIONS  AND DISPOSALS - Effective  June 30, 2000, the Company
sold an entity for  $398,130,  of which  $198,130  was  received in cash and the
remainder  was  received as 119,069  shares of the  Company's  own stock with an
estimated fair value of $1.68 per share. The Company recorded a loss of $731,947
as a result of this transaction.

      Effective April 1, 2000, the Company  acquired an entity for $405,000,  of
which  $305,000 was paid in cash and $100,000 was recorded as a payable based on
the  holdback  provision  of the  agreement.  Total  goodwill  arising from this
transaction was $205,602 and is being  amortized over 20 years.  The acquisition
was  accounted for using the purchase  method of accounting  with the results of
operations of the acquired  entity being included in the Company's  consolidated
financial statements from the date of acquisition.

                                      F-14
<PAGE>

      Effective June 14, 1999, the Company  acquired four entities from a single
seller for a cash payment of $17,000,000,  subject to adjustment  based on final
net asset  valuations.  During  fiscal 2000,  the Company  received a $1,250,000
refund of the purchase price, which, net of incremental costs and adjustments to
net  assets  acquired,  resulted  in a $153,830  reduction  of  goodwill.  Total
goodwill  arising from this  transaction  was $13,178,836 and is being amortized
over 20 years.  The  acquisition  was accounted for using the purchase method of
accounting  with the  results  of  operations  of the  acquired  entities  being
included in the Company's consolidated financial statements from the date of the
acquisition.

      Effective March 1, 1999, the Company  acquired an entity for $196,400,  of
which $46,400 was paid in cash and $150,000 was paid by issuing  111,627  shares
of the Company's  common stock with an estimated  fair value of $1.34 per share.
Total goodwill arising from this transaction was $166,234 and is being amortized
over 20 years.  The  acquisition  was accounted for using the purchase method of
accounting,  and the  operating  results  have been  included  in the  Company's
consolidated financial statements from the date of acquisition.

4.    INVENTORIES

      Inventories consist of the following at June 30:

                                                   2001               2000

Raw materials                                  $ 1,346,752
Work-in-process                                     62,884
Finished goods                                  10,071,006        $ 7,441,599
Reserve for obsolescence                        (1,659,410)        (1,173,351)
                                              ------------       ------------

Inventories - net                              $ 9,821,232        $ 6,268,248
                                              ============       ============


5.    PROPERTY, PLANT, AND EQUIPMENT

      Property, plant, and equipment consist of the following at June 30:


                                                      2001              2000

Office equipment                                   $ 510,883         $ 489,486
Furniture and fixtures                               575,915           408,326
Machinery and equipment                              563,710           196,898
Automobiles                                          151,843            30,216
Leasehold improvements                               407,487            75,913
                                                 ------------      ------------

Total                                              2,209,838         1,200,839
Less accumulated depreciation and amortization      (574,448)         (334,562)
                                                 ------------      ------------

Property, plant, and equipment - net             $ 1,635,390         $ 866,277
                                                 ============      ============


      Depreciation expense totaled $355,313,  $285,237 and $44,552 in 2001, 2000
and 1999,  respectively.  Property  and  equipment  held  under  capital  leases
amounted to $191,107 and $93,427,  less  accumulated  amortization of $9,817 and
$24,376, at June 30, 2001 and 2000, respectively.

                                      F-15
<PAGE>

6.    LINES OF CREDIT

      PrimeSource  Surgical  has a line of credit with a bank (the  "PrimeSource
Surgical Line of Credit") in connection  with the  PrimeSource  Surgical  Credit
Agreement,  which allows for maximum  borrowings up to the lesser of $12,000,000
or certain eligible accounts receivable and eligible inventories, as defined. As
of June 30, 2001, total borrowing availability was approximately  $7,370,000, of
which  $6,526,627 was  outstanding.  Amounts due under the PrimeSource  Surgical
Line of Credit bear  interest at the bank's  prime rate (6.75% at June 30, 2001)
plus 0.75 percent per annum. Unused portions of the PrimeSource Surgical Line of
Credit  accrue  a fee  at an  annual  rate  of  0.375  percent.  Borrowings  are
collateralized  by  substantially  all assets of  PrimeSource  Surgical  and are
payable upon maturity in June 2003.

      The PrimeSource  Surgical Credit Agreement contains covenants that require
the maintenance of certain defined  financial ratios and income levels and limit
additional borrowings and capital expenditures.  PrimeSource Surgical was not in
compliance with the covenants at June 30, 2001;  however, it received waivers as
of  June  30,  2001  and for all  prior  periods.  Management  is  currently  in
negotiation  with the lender and potential  other lenders to modify or refinance
the Company's credit facilities.

      On March 2,  2001,  the  Company  entered  into an  amended  and  restated
security and loan agreement for a $2,500,000 line of credit (the "Luxtec Line of
Credit")  with a bank in  connection  with the Luxtec  Credit  Agreement,  which
allows  for  maximum  borrowings  up to the  lesser of  $2,500,000  or a certain
percentage of eligible accounts receivable and eligible inventories, as defined.
There was approximately  $1,225,000 of borrowing  availability at June 30, 2001,
of  which  $1,249,667  was  outstanding.   Borrowings  in  excess  of  borrowing
availability at June 30, 2001 were repaid in July 2001. Borrowings bear interest
at the bank's  prime rate  (6.75% at June 30,  2001)  plus 2.0  percent.  Unused
portions  of the Luxtec  Line of Credit  accrue a fee at an annual  rate of 1.00
percent.  Borrowings  are  collateralized  by  substantially  all  assets of the
Company,  excluding  the assets of  PrimeSource  Surgical,  and are payable upon
maturity at March 1, 2005.

      The Luxtec Credit Agreement  contains  certain  covenants that require the
maintenance  of certain  defined  financial  ratios and income  levels and limit
additional  borrowings  and  capital  expenditures.   The  Company  was  not  in
compliance  with the loan  covenants  at June 30,  2001;  however,  it  received
waivers as of June 30, 2001 and for all prior  periods.  Subsequent  to June 30,
2001,  the Company  negotiated  and  executed  an  amendment  to revise  certain
financial  covenants in the Luxtec Credit  Agreement.  The Company's  management
believes  it will be able to meet the  revised  covenants  for the  fiscal  year
ending June 30, 2002.


                                      F-16
<PAGE>
7.    LONG-TERM DEBT

      Long-term debt at June 30 consists of the following:


                                                        2001            2000

Term loan payable to bank - PrimeSource Surgical     $ 2,904,709   $ 3,987,390
Term note payable to bank - Luxtec                       250,000
Equipment note - Luxtec                                   89,191
Other note payable                                       100,000
                                                     ------------

Total                                                  3,343,900      3,987,390
Less current portion                                  (3,259,885)    (1,150,003)
                                                     ------------  ------------

Total                                                   $ 84,015    $ 2,837,387
                                                       =========    ============

      PrimeSource  Surgical  has a  term  loan  with a  bank  (the  "PrimeSource
Surgical Term Loan") with an original  amount of $5,000,000.  The borrowings are
collateralized  by substantially  all of PrimeSource  Surgical's assets and bear
interest at the bank's prime rate (6.75% at June 30, 2001) plus 0.75 percent per
annum,  and is due in June  2003.  The  PrimeSource  Surgical  Credit  Agreement
contains  certain  covenants,   with  which  PrimeSource  Surgical  was  not  in
compliance  at June 30, 2001.  The Company has  received  waivers as of June 30,
2001 and for all prior periods and is currently in  negotiation  with the lender
and  potential  other lenders to modify or refinance  the  PrimeSource  Surgical
Credit Agreement. The Company anticipates that it will be out of compliance with
certain existing  covenants of the PrimeSource  Surgical Credit Agreement at the
next measurement date and have therefore presented the PrimeSource Surgical Term
Loan totaling $2,904,709 as a current liability as of June 30, 2001.

      In  connection  with the  credit  facility  from the  current  PrimeSource
Surgical lender,  PrimeSource  Surgical issued  detachable  warrants to purchase
282,022 shares of the Company's  common stock at $1.01 per share.  The estimated
fair  value  of the  warrants,  $143,000  (determined  using  the  Black-Scholes
option-pricing model using a zero-dividend yield, a volatility of 50 percent, an
option life of five years, and an risk free rate of 5.5 percent),  was allocated
to the promissory  note as a debt discount,  which is being  amortized using the
effective  interest  method  over the  five-year  term of the  promissory  note.
Amortization of the debt discount totaled $28,500,  $28,500, and $28,500 for the
years ended June 30, 2001, 2000, and 1999, respectively.

      Additionally,  the holder of the  warrants  has the right to  require  the
Company to repurchase  any  unexercised  warrants  through  February 2003 at the
difference between the warrants' exercise price and the fair market price of the
stock at the date of  repurchase.  The  estimated  fair value of the warrant put
obligation was $95,000 and $267,000 as of June 30, 2001 and 2000,  respectively.
Changes in such fair value are  included  in other  expense in the  accompanying
consolidated financial statements.

      On March 2, 2001,  as part of the Luxtec  Credit  Agreement,  the  Company
executed  an Amended  and  Restated  Term Note (the  "Luxtec  Term Note") in the
amount of  $300,000  with a bank.  The Luxtec  Term Note bears  interest  at the
bank's   prime  rate  (6.75%  at  June  30,   2001)  plus  0.5  percent  and  is
collateralized by substantially all assets of the Company,  excluding the assets
of PrimeSource  Surgical.  The Luxtec Term Note contains certain  covenants with

                                      F-17
<PAGE>
which the Company was not in compliance at June 30, 2001;  however,  the Company
has received  waivers as of June 30, 2001 and for all prior periods.  Subsequent
to June 30,  2001,  the Company  negotiated  and executed an amendment to revise
certain financial covenants in the Luxtec Term Note. At June 30, 2001, there was
$250,000 outstanding under this agreement,  which was due upon maturity on March
31, 2002.

      In  addition,  on March 2, 2001,  in  connection  with the  Luxtec  Credit
Agreement,  the Company  executed an amended and  restated  Equipment  Note (the
"Luxtec Equipment Note") in the amount of $131,000 with a bank.  Borrowings bear
interest at the bank's  prime rate (6.75% at June 30, 2001) plus 1.0 percent and
are  collateralized  by substantially  all assets of the Company,  excluding the
assets of PrimeSource  Surgical.  The Luxtec Credit  Agreement  contains certain
covenants  with  which  the  Company  was not in  compliance  at June 30,  2001;
however,  the Company has received waivers as of June 30, 2001 and for all prior
periods.  Subsequent  to June 30, 2001,  the Company  negotiated an amendment to
revise certain financial  covenants in the Luxtec Credit Agreement.  At June 30,
2001,  the  Company  had  outstanding  borrowings  of  $89,191  under the Luxtec
Equipment Note, which are due and payable upon maturity on May 30, 2002.

      Other  note  payable  consists  of a  $100,000  note  payable  for  tenant
improvements  to Luxtec's leased  premises,  which bears interest at 9.5 percent
and is due  September  19, 2005.  Payments  are  interest  only for the first 12
months.  Future minimum payments total $15,985 (2002),  $23,157 (2003),  $25,456
(2004), $27,982 (2005), and $7,420 (2006).

8.    CAPITAL STOCK

      SERIES B  CONVERTIBLE  PREFERRED  STOCK - Series B Stock was issued in the
Merger and was  convertible  into 25 shares of common stock  automatically  upon
amendment of the Company's  articles of  organization to increase the authorized
number of shares of common  stock to  50,000,000.  In June 2001,  the  Company's
stockholders  approved the amendment to increase the Company's authorized number
of common shares to 50,000,000. As a result, the 46,889 shares of Series B Stock
automatically converted into 1,172,214 shares of common stock.

      SERIES C REDEEMABLE,  CONVERTIBLE  PREFERRED STOCK - Series C Stock issued
in the Merger is convertible into approximately 28 shares of common stock at the
option of the holder at any time,  based upon the  conversion  ratio at June 30,
2001,  as  defined.  Each share of Series C Stock has one vote for each share of
common stock into which it would be  convertible.  In  addition,  Series C Stock
ranks senior to Series B Stock and common stock and ranks junior to the Series D
Stock.  Series C Stock accrues  dividends at 8 percent per annum of the original
issue  price of $42.76 per share.  Series C Stock has a  liquidation  preference
equal to the greater of (i) $50.50 per share plus an amount in cash equal to all
accrued but unpaid  dividends or (ii) the amount the holders would have received
had the  holders  converted  their  shares of Series C Stock into  common  stock
immediately  prior to a  liquidation  event.  The Series C Stock has a mandatory
redemption  date of June 3, 2005,  and is redeemable at the original issue price
of $42.76 per share plus  accrued but unpaid  dividends.  Due to the  redemption
feature,  the Series C Stock has been excluded from  stockholders'  equity.  The
Series C Stock also has  special  consent  rights to  certain  of the  Company's
activities,  including,  but not limited to, amendment of the Company's articles
or bylaws and merger or consolidation of the Company.  Accrued dividends for the
year ended June 30, 2001 totaled $387,850.


                                      F-18
<PAGE>
      SERIES D EXCHANGEABLE, CONVERTIBLE PREFERRED STOCK - Series D Stock issued
in the Merger is exchangeable for equity  securities of the Company to be issued
in the future and is  convertible  into 200 shares of common stock at the option
of the  holder.  Each  share of  Series D Stock  has one vote for each  share of
common stock into which it would be  convertible.  In  addition,  Series D Stock
ranks  senior  to  Series C Stock  and  common  stock.  Series  D Stock  accrues
dividends at the rate of 10 percent per year of the stated  liquidation value of
$342.08 per share and has a  liquidation  preference  equal to $342.08 per share
plus an amount in cash equal to all accrued but unpaid  dividends.  The Series D
Stock will be  exchanged  for equity  securities  of the  Company  issued in the
future upon the earlier of a qualified equity financing,  as defined, or January
23, 2002. Based on the exchange feature, and management's intent to exchange the
Series D Stock for equity  securities  with a redemption  feature,  the Series D
Stock has been excluded from  stockholders'  equity.  Accrued  dividends for the
year ended June 30, 2001 totaled $157,540. Series D stockholders are entitled to
receive  warrants to purchase common stock dependent upon when and at what price
the Company  consummates a qualified equity financing,  as defined.  At June 30,
2001,  the  number  of  warrants  was not  determined,  as no  qualified  equity
financing had been completed.

      SERIES E REDEEMABLE,  CONVERTIBLE  PREFERRED STOCK - On June 29, 2001, the
Company  created a new stock  class,  Series E  preferred  stock (the  "Series E
Stock"),  with 1,000,000  authorized shares and a par value of $10.00 per share.
In  July  2001,  the  Company  issued  325,000  shares  for  gross  proceeds  of
$3,250,000.  Warrants to purchase five shares of common stock at $1.00 per share
were issued with each share of Series E Stock. These warrants vested immediately
and expire June 28, 2011. Series E Stock is convertible into 10 shares of common
stock at the option of the holder at any time.  Each share of Series E Stock has
one  vote for  each  share of  common  into  which it would be  convertible.  In
addition,  Series E Stock ranks senior to all other stock of the Company. Series
E Stock  accrues  dividends  at the rate of 8 percent  per year of the  original
issuance  price of $10.00 per share and has a  liquidation  preference  equal to
$30.00 per share plus an amount equal to all accrued but unpaid  dividends.  The
Series  E  Stock  has a  mandatory  redemption  date of  June  3,  2005,  and is
redeemable  at the  original  issue  price of $10.00 per share plus  accrued but
unpaid dividends.  The Series E Stock also has special consent rights to certain
of the Company's  activities,  including,  but not limited to,  amendment of the
Company's  articles or bylaws and merger or  consolidation  of the Company.  The
Series  E Stock  has  detachable  warrants  and  certain  beneficial  conversion
features, which will be separately accounted for in the first quarter of 2002.

      REVERSE STOCK SPLIT - In connection  with the Merger  described in Note 1,
the Company had a reverse stock split, resulting in the exchange of .744183 of a
share of Luxtec  common  stock for each  share of  PrimeSource  Surgical  common
stock. In addition,  certain  PrimeSource  Surgical stock classes were exchanged
for Luxtec  stock  classes,  as  discussed  in Note 3. The effect of the reverse
stock split and exchange of stock classes has been reflected  retroactively  for
all periods presented.

9.    STOCK OPTIONS AND WARRANTS

      STOCK  OPTIONS - In January  1997,  PrimeSource  Surgical  adopted a stock
option plan (the "1997 Plan") for the grant of stock options and other awards to
certain officers,  key employees,  or other persons affiliated with the Company.
The maximum number of shares of common stock that may be issued  pursuant to the
1997 Plan is  8,000,000.  Options have been  granted with an exercise  price not
less than the  estimated  fair market value of the  underlying  common stock and
vest 25 percent  one year from the grant date and 75  percent  ratably  over the
next 36 months.  The vested  options may be exercised at any time and  generally
expire 10 years from the date of grant.


                                      F-19
<PAGE>
      In addition to the 1997 Plan, the Company has adopted several stock option
plans  sponsored by Luxtec.  The 1992 stock plan (the "1992 Plan")  provides for
the grant of incentive stock options,  nonqualified stock options, stock awards,
and direct stales of stock. Under the 1992 Plan,  incentive stock options may be
granted  at an  exercise  price  not  less  than the  fair  market  value of the
Company's  common  stock on the date of  grant.  The Board of  Directors  at its
discretion may grant nonqualified  options. The 1992 Plan also provides that the
options are  exercisable  at varying  dates,  as determined by the  compensation
committee  of the  Board of  Directors,  and have  terms not to exceed 10 years.
Under the 1992 Plan, 500,000 total shares are authorized for issuance.

      The 1993 plan, previously sponsored by Luxtec, is available to issue up to
an aggregate of 25,000 shares of common stock in semiannual offerings.  Stock is
sold at 5 percent of fair market value, as defined. No shares were subscribed to
and issued under the 1993 Plan in the period from March 2, 2001 through June 30,
2001.

      The 1995  directors'  plan (the  "1995  Director  Plan") was  adopted  for
non-employee  directors  and  provides  that  an  aggregate  of  up  to  200,000
nonqualified options may be granted to non-employee  directors, as determined by
the  compensation  committee of the Board of  Directors.  Under the terms of the
1995 Director  Plan,  options are granted at not less than the fair market value
of the Company's  common stock on the date of grant. The 1995 Director Plan also
provides that the options are exercisable at varying dates, as determined by the
compensation committee, and that they have terms not to exceed 10 years. At June
30, 2001,  there were 88,000  shares  available  for future grant under the 1995
Director Plan.

      WARRANTS - During  the years  ended June 30,  1999 and 1998,  the  Company
granted to two  employees  warrants to purchase  63,787 (at $1.18 per share) and
74,418 (at $1.01 per share) shares of the Company's common stock,  respectively,
which the  Board of  Directors  deemed to be the fair  value of the stock at the
date of grant. The warrants vested immediately and expire in February 2003.

      In connection  with a private  placement of preferred  stock,  the Company
issued  warrants  to purchase  2,646  shares of Series B Stock  (convertible  to
66,139 shares of common stock) at $0.01 per share of common stock  acquired.  In
December 1998, the warrants were exercised.

      Additionally,  as  discussed  in Note 7,  the  Company  issued  detachable
warrants to purchase  282,022 shares of the Company's  common stock at $1.01 per
share. The warrants vested immediately and expire in 2003.

      Related to a private  placement of its preferred stock, in September 2000,
the Company granted  warrants to purchase 157,861 shares of the Company's common
stock at $1.68  per  share.  The  warrants  vested  immediately  and  expire  in
September 2011.

      Prior to the merger with PrimeSource  Surgical,  Luxtec issued warrants to
certain lenders and other  purchasers of Luxtec's  stock.  Total warrants issued
entitled the holders to purchase  438,171 shares of the Company's  common stock,
at exercise prices of $3.00 to $6.00 per share. The warrants expire December 31,
2001.

                                      F-20
<PAGE>
      Changes in shares under options and warrants, in common stock equivalents,
for the years ended June 30 are as follows:
<TABLE>
<CAPTION>

                                                             Options                       Warrants
                                                  ---------------------------   ---------------------------

                                                                   Weighted                       Weighted
                                                                    Average                        Average
                                                     Shares        Exercise        Shares         Exercise
                                                   Outstanding      Price        Outstanding       Price

<S>                                                  <C>           <C>              <C>           <C>
Balance, July 1, 1998                                640,007       $ 0.73           356,441       $ 1.01

  Grants                                             147,100         1.05           129,925         1.18
  Canceled                                           (99,534)        1.30
  Exercised                                                                         (66,139)
                                                  ----------                     ----------

Balance, June 30, 1999                               687,573         0.78           420,227         1.03

  Grants                                           1,212,981         1.76
  Canceled                                          (134,697)        1.56
  Exercised                                         (234,535)
                                                  ----------                     ----------

Balance, June 30, 2000                             1,531,322         1.63           420,227         1.03

  Grants                                           1,903,210         1.58           157,861         1.68
  Options assumed in acquisition                     454,500         3.03           438,171         5.70
  Canceled                                          (496,002)
                                                  ----------                     ----------

Balance, June 30, 2001                             3,393,030        $ 1.81        1,016,259        $ 3.15
                                                  ==========                     ==========

Vested and exercisable, June 30, 2001              1,182,204                      1,016,259
                                                  ==========                     ==========

Vested and exercisable, June 30, 2000                477,611                        420,227
                                                  ==========                     ==========

Vested and exercisable, June 30, 1999                139,601                        420,227
                                                  ==========                     ==========

</TABLE>
      The  weighted-average  fair value of option and  warrant  grants in fiscal
2001, 2000, and 1999 was $972,000, $1,020,000, and $68,000, respectively.

                                      F-21
<PAGE>
     Outstanding  stock  options and  warrants  at June 30, 2001  consist of the
following:
<TABLE>
<CAPTION>


                                          Options                                     Warrants
                          -------------------------------------------   -------------------------------------------
                                               Weighted                                    Weighted
                                               Average      Weighted                       Average     Weighted
                                              Remaining     Average                       Remaining    Average
    Range of                                 Contractual    Exercise                     Contractual   Exercise
  Exercise Prices             Shares         Life (Years)    Price          Shares       Life (Years)   Price

<S>                          <C>               <C>        <C>             <C>              <C>       <C>
  $1.00 - $1.35                785,475           6.48       $ 1.04          420,227          1.75      $ 1.03
  $1.68 - $2.50              2,361,055           6.85       $ 1.83          157,861          5.05      $ 1.68
  $2.63 - $6.00                246,500           4.86       $ 4.02          438,171          0.34      $ 5.70
                            ----------                                   ----------

                             3,393,030           6.62       $ 1.81        1,016,259          2.31      $ 3.15
                            ==========                                   ==========
</TABLE>
      SFAS No. 123,  ACCOUNTING FOR STOCK-BASED  COMPENSATION,  encourages,  but
does not require,  companies to record compensation cost based on the fair value
of employee stock option and warrant grants.  The Company has chosen to continue
to account for employee  option and warrant grants using  intrinsic  value under
APB Opinion No. 25. Accordingly, no compensation expense has been recognized for
employee  stock  option and warrant  grants.  Had  compensation  expense for the
employee stock option and warrant grants been determined based on the fair value
at the grant dates, consistent with SFAS No. 123, the Company's net loss for the
years ended June 30, 2001,  2000,  and 1999 would have been increased to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                   2001               2000               1999

Net loss:
  <S>                                                         <C>                 <C>                <C>
  As reported                                                 $ (4,352,883)       $ (1,383,654)      $ (744,384)
  Pro forma                                                     (4,964,219)         (1,523,459)        (829,056)
  Pro forma loss per share - basic and diluted                     $ (1.17)            $ (0.45)         $ (0.19)

</TABLE>
      The fair value of each option and warrant  grant is  estimated on the date
of grant  using  the  Black-Scholes  option-pricing  model,  with the  following
weighted-average assumptions:
<TABLE>
<CAPTION>
                                                                  2001                2000               1999

<S>                                                              <C>                    <C>                <C>
Risk-free interest rate                                          5.28%                  6%                 6%
Expected dividend yield                                             0%                  0%                 0%
Expected lives                                                 7 years            10 years           10 years
Expected volatility                                                50%                 50%                50%
</TABLE>


                                      F-22
<PAGE>
10.   401(k) RETIREMENT PLAN

      Luxtec and  PrimeSource  Surgical  separately  maintain  qualified  401(k)
retirement plans. The plans cover  substantially all employees who have over six
months  of  service  and  have  attained  ages  18  and 21 for  the  Luxtec  and
PrimeSource  Surgical  plans,  respectively.  The  401(k)  plans  provide  for a
contribution by the Company each year, at the Company's discretion.  The Company
match totaled $148,959, $129,400, and $22,860 for the years ended June 30, 2001,
2000, and 1999, respectively.

11.   INCOME TAXES

      The provision for income taxes for the years ended June 30 is based on the
following components:
<TABLE>
<CAPTION>


                                                               2001              2000            1999

Current income taxes -
<S>                                                      <C>                <C>              <C>
  State                                                  $    213,200       $   41,000       $       -
                                                         ------------       ------------     ------------

Deferred income taxes:
  Federal                                                  (1,269,400)        (248,400)        (169,400)
  State                                                      (217,900)         (49,200)         (30,900)
                                                         ------------       ------------     ------------

Total deferred                                             (1,487,300)        (297,600)        (200,300)
                                                         ------------       ------------     ------------

Change in valuation allowance                               1,487,300          297,600          200,300
                                                         ------------       ------------     ------------

Total                                                    $    213,200       $   41,000       $       -
                                                         ============       ============     ============
</TABLE>
      A reconciliation of the provision for income taxes to the amount of income
tax expense that would result from applying the federal  statutory rate (35%) to
loss before income tax provision is as follows:
<TABLE>
<CAPTION>

                                                               2001              2000            1999

<S>                                                      <C>                <C>              <C>
Income tax benefit at statutory rate                     $ (1,459,100)      $ (469,900)      $ (252,900)
Nondeductible warrant (income) expense                        (60,200)          43,400
State tax expense, net of federal benefit                      (3,100)          26,600          (20,100)
Meals and entertainment                                        22,800           29,600            5,700
Nondeductible goodwill                                        225,500           79,000           67,000
Change in valuation allowance                               1,487,300          297,600          200,300
Other                                                                           34,700
                                                         ------------       ------------     ------------

Total                                                    $    213,200       $   41,000       $       -
                                                         ============       ============     ============

</TABLE>

                                      F-23
<PAGE>

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows at June 30:

                                                        2001              2000
Current:
  Accrued vacation                              $     51,400       $    25,900
  Inventory valuation adjustment                     858,500           736,400
  Bad debt reserve                                   256,300           175,100
  State taxes                                        (89,600)          (51,000)
  Accrued distributor costs                          410,000
  Other                                              165,600            83,400
                                                --------------     -------------

  Total current                                    1,652,200           969,800
                                                --------------     -------------

Long-term:
  Depreciation and amortization                      (24,700)           (2,900)
  State taxes                                       (235,100)          (51,400)
  Credit carryforward                                301,900
  Capital loss carryforward                          300,100           300,100
  Net operating loss carryforward                  5,066,000           660,700
                                                --------------     -------------

  Total long-term                                  5,390,200           906,500
                                                --------------     -------------

Total                                              7,042,400         1,876,300
Valuation allowance                             $ (7,042,400)      $(1,876,300)
                                                --------------     -------------

Total                                                     -                -
                                                ==============     =============

      At June 30,  2001,  the Company has federal and state net  operating  loss
carryforwards of  approximately  $12,843,200 and $9,512,800,  respectively.  The
Company's federal and state net operating losses will begin to expire in the tax
years ending June 30, 2017 and 2002,  respectively.  The Company has federal and
state credit carryforwards of approximately $189,800 and $112,100, respectively.
The  Company's  federal and state  credits  will both begin to expire in the tax
year  ended  June  30,  2001.  The  Company  also  has a  federal  capital  loss
carryforward  of  approximately  $732,000.  The Company's  federal  capital loss
carryforward will begin to expire in the tax year ending June 30, 2005.

      A full  valuation  allowance  has  been  provided  against  the  Company's
deferred tax assets as of June 30, 2001 and 2000,  as it is more likely than not
that sufficient  taxable income will not be generated to realize these temporary
differences.  Any future reduction of the valuation allowance established at the
dates of the  acquisitions  (Note 3) will  reduce the  goodwill  related to such
acquisition.

                                      F-24
<PAGE>
12.   COMMITMENTS AND CONTINGENCIES

      LEASES - The Company  leases office space and certain  computer  equipment
and software under capital and noncancelable  operating leases. Rent expense for
the years  ended June 30,  2001,  2000,  and 1999 was  $584,944,  $475,037,  and
$100,940,  respectively.   Minimum  annual  lease  payments  under  capital  and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
                                                             Capital               Operating
                                                              leases                 leases

     <S>                                                   <C>                  <C>
     2002                                                  $  54,526            $   631,243
     2003                                                     51,965                532,099
     2004                                                     27,158                477,077
     2005                                                      2,102                384,591
     2006                                                                            87,928
                                                           ----------           -------------

Total minimum lease payments                                 135,751            $ 2,112,938
                                                           ----------           =============
Amount representing interest                                 (18,183)
                                                           ----------

Present value of future minimum lease payments               117,568
Less current portion of capital lease obligations            (45,229)
                                                          -----------
Capital lease obligations - net of current portion            72,339
                                                          ===========
</TABLE>
      EXECUTIVE  COMPENSATION  - In  May  2001,  the  Company  entered  into  an
employment  agreement  with its  President  and  Chief  Executive  Officer.  The
employment  agreement commits the Company to a minimum  compensation,  severance
amounts, and future equity-based  incentives.  Two other executive officers have
employment agreements that provide for compensation and severance amounts.

      LITIGATION  - The  Company is  involved in  litigation  incidental  to its
business.   Management  does  not  believe  the  ultimate  disposition  of  this
litigation  will have a material  adverse  effect on the Company's  consolidated
financial statements.

13.   BUSINESS SEGMENTS

      The Company is organized into three operating  segments based on operating
criteria. These segments are Specialty Medical Products Manufacturing, Specialty
Distribution Services - Surgical, and Specialty Distribution Services - Critical
Care. A description of each segment and principal products and operations are as
follows:

               SPECIALTY MEDICAL PRODUCTS  MANUFACTURING - This segment includes
         the  Luxtec  division   acquired  in  March  2001,  which  designs  and
         manufactures  fiber optic  headlight  and video camera  systems,  light
         sources,  cables,   retractors,  and  custom-made  and  other  surgical
         equipment  for  the  medical  and  dental  industries.  There  were  no
         operations for this segment in either 2000 or 1999.

               SPECIALTY  DISTRIBUTION  SERVICES  -  PRIMESOURCE  SURGICAL - The
         surgical  segment is a national sales and marketing  organization  that
         markets and sells surgical products  primarily to hospitals and surgery
         centers  nationwide.  The primary  specialty areas include  gynecology,
         cardiovascular,  endoscopy,  and general  surgery.  These  products and
         services  are  primarily  used  in  hospital  operating  rooms  and  in
         outpatient  surgery centers.  This segment does business as PrimeSource
         Surgical.

                                      F-25
<PAGE>
               SPECIALTY DISTRIBUTION SERVICES - PRIMESOURCE CRITICAL CARE - The
         critical care segment is a regional  sales and  marketing  organization
         that sells products  primarily to hospitals and surgery  centers in the
         southeastern  and  northeastern  United States and includes the Bimeco,
         Inc.,  NEMS,  and PEC  operations.  Within  this  segment,  the primary
         specialties include maternal and childcare and neonatal intensive care.

               Operations  that  are not  included  in any of the  segments  are
         included in the  category  "Other" and consist  primarily  of corporate
         staff  operations,   including  selling,  general,  and  administrative
         expenses of $5,838,381,  $2,011,185,  and $372,192 for 2001,  2000, and
         1999, respectively.

               Operating  income for each segment  consists of net revenues less
         cost  of   products   sold,   operating   expense,   depreciation   and
         amortization,  and the  segment's  selling  general and  administrative
         expenses. The sales between segments are made at market prices. Cost of
         products sold reflects current costs adjusted,  where appropriate,  for
         lower of cost or market inventory adjustments.

               The  total  assets  of  each  segment  consist  primarily  of net
         property, plant, and equipment,  inventories,  accounts receivable, and
         other assets directly associated with the segments operations. Included
         in the total assets of the  corporate  staff  operations  are property,
         plant, and equipment and other assets.

               Following the Merger,  certain products of the Specialty  Medical
         Products  Manufacturing segment were sold to the Specialty Distribution
         -  Surgical  segment.   Total  sales  between  these  segments  totaled
         approximately $1,480,000 for the year ended June 30, 2001.

               Disclosures  regarding  the  Company's  reportable  segments with
         reconciliations to consolidated totals are presented below.
<TABLE>
<CAPTION>
                                                                       2001
                               -------------------------------------------------------------------------------
                                Distribution -     Distribution -
                                 PrimeSource       PrimeSource                     Corporate/
                                  Surgical         Critical Care   Manufacturing      Other        Total
<S>                               <C>               <C>            <C>            <C>              <C>
Net sales                         $33,698,000       $ 14,453,934   $ 2,879,676                    $ 51,031,610
                                  ===========       =============  ============                   =============

Net (loss)
  income                          $(1,339,461)      $    977,917   $ 1,817,761    $(5,838,381)    $ (4,382,164)
                                  ===========       =============  ============   =============   =============

Total assets                      $32,846,222       $  8,017,389   $ 4,113,415    $   472,928     $ 45,449,954
                                  ===========       =============  ============   =============   =============

Depreciation and
  amortization                    $ 1,061,475       $     79,961   $   324,743    $   138,652     $  1,604,831
                                  ===========       =============  ============   =============   =============

Interest expense                  $   527,003       $    325,425   $    68,434                    $    920,862
                                  ===========       =============  ============                   =============
</TABLE>
                                      F-26
<PAGE>
         PrimeSource  Surgical and its subsidiaries have no significant sales to
         foreign companies;  however, Luxtec has several foreign customers.  The
         Company's  external sales,  based upon the customer's country of origin
         by  geographic  area  for  the  year  ended  June  30,  2001,   totaled
         $50,401,000  and  $631,000  for sales in the  United  States  and other
         foreign  companies,  respectively.  There were no significant  sales to
         foreign companies in the years ended June 30, 2000 or 1999.
<TABLE>
<CAPTION>
                                                               2000
                               ------------------------------------------------------------------
                                Distribution -     Distribution -
                                 PrimeSource       PrimeSource      Corporate/
                                  Surgical         Critical Care      Other        Total
<S>                               <C>               <C>            <C>            <C>
Net sales                         $43,096,162       $ 11,314,893                  $  54,411,055
                                  ===========       =============                 =============

Net (loss) income                 $ (800,210)       $ 1,427,741    $ (2,011,185)  $  (1,383,654)
                                  ===========       =============  ============   =============

Total assets                      $26,840,890       $ 3,908,566    $    547,773   $  31,297,229
                                  ===========       =============  ============   =============

Depreciation and
  amortization                    $   959,252       $    96,254    $    142,619   $  1,198,125
                                  ===========       =============  ============   =============

Interest expense                  $   901,963       $   202,152                   $  1,104,115
                                  ===========       =============                 =============
</TABLE>
14.   RESTRUCTURING

      In fiscal  year  2000,  PrimeSource  Surgical  approved  plans for a major
restructuring  of its  operations,  with the goal of  centralizing  distribution
facilities,   eliminating   unprofitable  divisions,  and  reducing  costs.  The
aggregate costs of the  restructuring  included a loss of $732,000 from the sale
of a division, facility closure and lease termination costs of $24,000, employee
severance and related costs of $258,000,  and professional service fees directly
related  to the  above  of  $17,000.  As of June  30,  2000,  remaining  accrued
restructuring  costs amounted to approximately  $65,000.  The  restructuring was
substantially completed in the first quarter of fiscal 2001.

15.   SUBSEQUENT EVENTS

      In  October  2001  we  engaged  a  restructuring  agent  to  evaluate  our
operations for possible  reorganization.  We have not determined the impact,  if
any, of any possible reorganization on our financial statements.

                                     ******
                                      F-27
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

           None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    (a) Directors of the Company

                               Board of Directors
<TABLE>
<CAPTION>

Name                      Age   Director Since                   Position                    Term Ends
----                      ---   --------------                   --------                    ---------
<S>                      <C>        <C>               <C>                                           <C>

Larry H. Coleman, Ph.D    58         2001       Director                                        2004
William H. Lomicka        64         2001       Director                                        2004
Nicholas C. Memmo         39         2001       Director                                        2004
Michael K. Bayley         41         2001       Director, Executive Vice President, Chief       2002
                                                Financial Officer
James J. Goodman          42         1996       Director                                        2002
John F. Rooney            38         2001       Chairman of the Board, Executive Vice           2002
                                                President, Corporate Development
James Berardo             41         1995       Director                                        2003
James L. Hersma           53         2001       Director, Chief Executive Officer and           2003
                                                President
James W. Hobbs            52         1993       Director                                        2003
</TABLE>


                        CLASS I DIRECTORS SERVING A TERM
                       EXPIRING AT THE 2004 ANNUAL MEETING

LARRY H. COLEMAN,  PH.D.,  DIRECTOR--  Dr. Coleman was appointed to our Board of
Directors on March 2, 2001,  pursuant to our merger with  PrimeSource  Surgical.
Dr. Coleman is the founder and Managing General Partner of Coleman Swenson Booth
Inc., a private venture capital fund  established in 1986. Dr. Coleman began his
venture  capital  career in 1983 as  President of HCA  Capital,  a  wholly-owned
subsidiary of Columbia/HCA Healthcare  Corporation.  Dr. Coleman has served as a
director on the boards of over 20  companies  and is currently a board member of
MediSphere  Health Partners,  Inc.,  LifeMetrix,  Inc.,  ClearTrack  Information
Network,  Inc., and Active Services Corporation.  Dr. Coleman graduated from the
University  of  North  Carolina  with an A.B.  and  earned  his  Ph.D.  from the
University of South Dakota.

WILLIAM  H.  LOMICKA,  DIRECTOR--  Mr.  Lomicka  was  appointed  to our Board of
Directors on March 2, 2001,  pursuant to our merger with  PrimeSource  Surgical.
Mr. Lomicka is the Chairman of Coulter Ridge Capital, a private investment firm.
From 1989 to 1998,  Mr.  Lomicka was  President  of Mayfair  Capital,  a private
investment firm. Mr. Lomicka,  formerly the Senior V.P. Finance of Humana, Inc.,
presently serves on the boards of numerous  companies,  both public and private.
Representative  companies  include:  Pomeroy  Computer  Resources,  Spectracare,
Medventure Technologies, Broadband Laboratories and Franklin Health. Mr. Lomicka
graduated  from the College of Wooster in Wooster,  Ohio,  and earned his M.B.A.
from the Wharton Graduate School of the University of Pennsylvania.

                                       64
<PAGE>
NICHOLAS C. MEMMO,  DIRECTOR-- Mr. Memmo was appointed to our Board of Directors
on March 2, 2001, pursuant to our merger with PrimeSource Surgical. Mr. Memmo is
a Partner  with Kline  Hawkes & Co., a venture  capital  firm with  interests in
information technology,  telecommunications and services.  Previously, Mr. Memmo
was a founding  executive  and member of the Board of Directors  of U.S.  Filter
Corporation,  a Fortune 300 company and the leading global provider of water and
wastewater treatment systems, products and services. Mr. Memmo received his B.S.
degree in chemical  engineering from Drexel  University and his M.B.A.  from the
Anderson School at U.C.L.A.

                        CLASS II DIRECTORS SERVING A TERM
                       EXPIRING AT THE 2002 ANNUAL MEETING

MICHAEL K. BAYLEY, EXECUTIVE VICE PRESIDENT,  CHIEF FINANCIAL OFFICER, CLERK AND
DIRECTOR -- Mr. Bayley was appointed as our Chief Financial Officer, Clerk and a
Director on March 2, 2001,  pursuant to our merger  with  PrimeSource  Surgical.
From June 1996 until our merger with PrimeSource Surgical,  Mr. Bayley was Chief
Financial   Officer  of  PrimeSource   Surgical,   a  leading   distributor  and
manufacturer  of specialty  surgical and  critical  care  products in the United
States. Prior to co-founding PrimeSource Surgical in June 1996, Mr. Bayley was a
Vice  President  with Chase  Manhattan  Bank in New York City. Mr. Bayley helped
establish  Chase's Health Care Services  Finance  Division and spent a number of
years in Chase's  Merchant  Banking  and  Private  Equity  Group where he helped
manage a number of the  bank's  portfolio  companies.  He has  served as a board
participant  or board member of a number of companies.  He graduated with honors
from  the  University  of  Arizona  with  a  bachelor's   degree  in  geological
engineering,  and he earned his M.B.A. from the Fuqua School of Business at Duke
University.

JAMES J.  GOODMAN,  DIRECTOR--  Mr.  Goodman has been on our Board of  Directors
since 1996.  Mr.  Goodman is President of Gemini  Investors  LLC, a private firm
based in Wellesley,  MA that invests in emerging growth  companies across a wide
range of  industries.  Gemini (and its  predecessor)  has raised  three  private
equity  funds and  invested in more than 35  companies  over the last six years.
Prior to founding Gemini, Mr. Goodman was Vice President at Berkshire  Partners,
a leading private equity firm, from 1989 to 1993. Mr. Goodman  currently  serves
on the board of  directors  of nine other  companies in addition to our board of
directors.   He  received  his  A.B.,  J.D.  and  M.B.A.  degrees  from  Harvard
University.

JOHN F.  ROONEY,  CHAIRMAN OF THE BOARD,  EXECUTIVE  VICE  PRESIDENT,  CORPORATE
DEVELOPMENT  -- Mr.  Rooney was  appointed to our board of directors on March 2,
2001, pursuant to our merger with PrimeSource Surgical. From June 1996 until our
merger with PrimeSource  Surgical,  Mr. Rooney was President and Chief Executive
Officer of PrimeSource  Surgical,  a leading  distributor  and  manufacturer  of
specialty  surgical and critical  care products in the United  States.  Prior to
co-founding  PrimeSource Surgical in June 1996, Mr. Rooney served as a sales and
marketing  executive at Birtcher Medical Systems,  Inc., a Nasdaq listed company
specializing in the manufacturing and marketing of electrosurgery  products. Mr.
Rooney also served as an executive at Computer Motion, Inc., a leader in medical
robotic devices. Mr. Rooney graduated with honors from the University of Montana
in Business Administration.

                                       65
<PAGE>
                       CLASS III DIRECTORS SERVING A TERM
                       EXPIRING AT THE 2003 ANNUAL MEETING

JAMES BERARDO,  DIRECTOR-- Mr. Berardo has been on our Board of Directors  since
1995. Mr. Berardo  currently serves as President of Darlco,  Inc., a real estate
development  and  investment  management  company.  Mr. Berardo joined Darlco in
1986,  serving in various  financial  capacities  prior to assuming  his current
position in March, 1995.

JAMES L.  HERSMA,  PRESIDENT  AND CHIEF  EXECUTIVE  OFFICER AND  DIRECTOR -- Mr.
Hersma was appointed as our President and Chief Executive Officer and a Director
on March 2, 2001, pursuant to our merger with PrimeSource  Surgical.  Mr. Hersma
served as  executive  vice  president  and  director of  Medibuy.com,  a leading
healthcare e-commerce firm, from February,  1999 to May, 2000. Prior to Medibuy,
Mr. Hersma served as CEO of Novation, the largest group purchasing  organization
in the United  States with over $14 billion in annual  purchases  from  January,
1998 to February, 1999. He also served as president and COO of CIS Technologies,
a Nasdaq-listed  healthcare information systems company, from November,  1993 to
May, 1996, and spent 17 years at Baxter and American  Hospital Supply in various
sales,  marketing and executive  management  roles.  Mr. Hersma is a graduate of
Northern Illinois University and serves on the board of its Business School.

JAMES W. HOBBS,  DIRECTOR--  Mr. Hobbs has been on our Board of Directors  since
1993. From March,  1993, to March 1, 2001, Mr. Hobbs served as our President and
Chief  Executive  Officer.  Prior to that,  Mr.  Hobbs was the  Chief  Executive
Officer of Graylyn  Associates from 1992 to 1993,  where he currently  serves as
Chairman.  Graylyn is an investment firm founded by Mr. Hobbs to invest in early
stage medical  technology.  Prior to Graylyn,  Mr. Hobbs served as the President
and Chief  Executive  Officer of Genica  Pharmaceutical  Inc. from 1989 to 1992.
Acquired by Elan  Corporation,  Genica  Pharmaceutical  Inc.  was a  corporation
engaged in providing new diagnostic assays and conducting  therapeutic  research
for neurological  disorders.  Mr. Hobbs was with Johnson and Johnson as the Vice
President and General  Manager of Johnson and Johnson  Professional  Diagnostics
from  1985 to  1989.  Mr.  Hobbs  received  his B.S.  degree  from  Wake  Forest
University and earned his M.B.A. from the University of North Carolina.

    (b) Executive Officers of the Company

        Reference is made to "Executive Officers of the Registrant" in Part I.

             SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Under  Section 16(a) of the  Securities  Exchange Act of 1934, as amended,
our directors, some of our officers and persons holding more than ten percent of
our Common Stock are required to report their  ownership of our Common Stock and
any changes in such ownership to the Securities and Exchange  Commission and us.
To our knowledge,  based solely on a review of copies of those reports furnished
to us, all Section  16(a) filing  requirements  applicable to these persons were
complied with during our fiscal year ended June 30, 2001, other than as follows:
our Chief Executive Officer filed a Statement of Changes in Beneficial Ownership
on July 31, 2001,  relating to  acquisitions  of our Common Stock on December 4,
2000 and May 4, 2001.

                                       66
<PAGE>
ITEM 11.  EXECUTIVE COMPENSATION

        The  following  table sets forth,  for the period from  November 2000 to
June 30, 2001,  and the fiscal year ended October 31, 2000 and October 31, 1999,
the  compensation  of our  Chief  Executive  Officer,  and the  other  executive
officers  of the  Company  as of June 30,  2001,  or,  collectively,  the "Named
Executive Officers":
<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE
                                                                                                                      Long Term
                                                                         Annual Compensation                         Compensation
                                                                         -------------------                            Awards
                                                                                                                        ------
                                                                                                                      Securities
                                                                                                                      Underlying
                                           Fiscal                                   Other Annual                     Options (#) /
                                            Year                                     Compensation                  Restricted Stock
Name and Principal Position               Ended(2)      Salary($)      Bonus($)         ($)(1)       Severance         Awards ($)
---------------------------            -------------   -----------     --------     -------------    ---------     -----------------
<S>                                    <C>              <C>            <C>            <C>            <C>          <C>
James L. Hersma(3)                     June 30, 2001     $159,359          0            $8,868                     1,166,274/59,535
President, Chief Executive Officer     Oct. 31, 2000       N/A            N/A             N/A                             N/A
and Director                           Oct. 31, 1999       N/A            N/A             N/A                             N/A

James W. Hobbs(4)                      June 30, 2001     127,144           0             3,250        54,490               0
Former President and Chief Executive   Oct. 31, 2000     183,374           0             7,800                             0
Officer, current Director              Oct. 31, 1999     178,148        18,000           7,800                             0

John F. Rooney(5)                      June 30, 2001     134,500        105,809          3,600                             0
Executive Vice President, Corporate    Oct. 31, 2000       N/A            N/A             N/A                             N/A
Development                            Oct. 31, 1999       N/A            N/A             N/A                             N/A
and Chairman

Michael K. Bayley(6)                   June 30, 2001     134,500        105,809          3,600                             0
Executive Vice President, Chief        Oct. 31, 2000       N/A            N/A             N/A                             N/A
Financial Officer and Director         Oct. 31, 1999       N/A            N/A             N/A                             N/A

Samuel M. Stein                        June 30, 2001      81,834           0             5,200                          125,000
General Manager, Luxtec Illumination   Oct. 31, 2000     106,110           0             7,800                             0
Division                               Oct. 31, 1999      99,680        18,000           7,800                             0

Shaun D. McMeans                       June 30, 2001      77,500           0               0                             50,000
Vice President of Operations           Oct. 31, 2000       N/A            N/A             N/A                             N/A
                                       Oct. 31, 1999       N/A            N/A             N/A                             N/A
</TABLE>
---------
(1)  Automobile allowance for all listed employees. For Mr. Hersma also includes
     a monthly living allowance pursuant to Mr. Hersma's Employment Agreement.
(2)  Effective  March 2, 2001,  we changed  our fiscal  year end to June 30 from
     October 31. Accordingly, our last three fiscal year ends are June 30, 2001,
     October 31, 2000 and October 31, 1999.
(3)  We hired and appointed  Mr.  Hersma as our  President  and Chief  Executive
     Officer on March 2, 2001.
(4)  Mr. Hobbs served as our President and Chief  Executive  Officer from March,
     1993, to March 1, 2001.
(5)  We  hired  and  appointed  Mr.  Rooney  as our  Executive  Vice  President,
     Corporate Development on March 2, 2001.
(6)  We hired and appointed Mr. Bayley as our Executive  Vice  President,  Chief
     Financial Officer on March 2, 2001.

                                       67
<PAGE>
         The  following  table sets forth the stock options that were granted to
the Named Executive Officers during the our fiscal year ended June 30, 2001:

                OPTION GRANTS IN FISCAL YEAR ENDED JUNE 30, 2001
<TABLE>
<CAPTION>
                                                                                     GRANT DATE
                                                INDIVIDUAL GRANTS                      VALUE
                           -----------------------------------------------------------------------
                            NUMBER OF    % OF TOTAL   EXERCISE
                           SECURITIES      OPTIONS     OR BASE
                           UNDERLYING    GRANTED TO PRICE / FAIR
                             OPTIONS      EMPLOYEES MARKET VALUE                       GRANT DATE
                             GRANTED      IN FISCAL ON GRANT DATE     EXPIRATION      PRESENT VALUE
     NAME                      (#)          YEAR       ($/SH)              DATE             $
     ----                  ----------    -------     ------------  ----------------   ------------
   <S>                    <C>            <C>         <C>           <C>               <C>
     James L. Hersma       1,166,274     63.35%          (1)       December 4, 2010    $1,141,800
                                                                                           (2)
                           59,535(3)      3.23%     $.01 / $1.25      May 4, 2011      $99,605(4)
     Samuel M. Stein        125,000       6.80%         $1.00         May 2, 2011      $72,843(5)
     Shaun D. McMeans       50,000        2.72%         $1.00         May 1, 2011      $29,137(5)

</TABLE>
----------
(1)  The  exercise  price per share per share is equal to the lesser of $1.68 or
     the fair market  value on the date of grant as  determined  by our board of
     directors.  The  exercise  price may be repriced  to a lower  amount if the
     price of our Common Stock on the earlier of January 23, 2002 or the date of
     a  "qualified  equity  financing"  as  defined  in the  Company's  Series D
     Preferred Stock Agreement, is lower than $1.68 per share.
(2)  The grant date present value has been  calculated  using the  Black-Scholes
     stock option valuation methodology.  The applied model used a grant date of
     December 4, 2000 and an option price of $1.68 per share.  It also assumed a
     risk-free rate of return of 5.28%, a dividend yield of 0% and a stock price
     volatility of 50% and an expected life of seven years.  The options have an
     exercise period of ten years from the date of grant.
(3)  Effective  December 4, 2001,  Mr.  Hersma was entitled to a grant of 59,535
     shares of our Common Stock,  with a purchase  price per share of $.01.  The
     stock is subject to repurchase by us, with our repurchase  right lapsing as
     to 50% of the initial grant on the anniversary of the date of grant, and as
     to the remaining 50% on the second  anniversary  of the date of grant.  If,
     upon the  earlier of January 23,  2002 or the date of a  "qualified  equity
     financing,"  the  price of the our  Common  Stock is lower  than  $1.25 per
     share, Mr. Hersma is entitled to purchase, at the same terms of his initial
     grant,  additional  shares of our Common Stock such that the total value of
     stock purchasable by Mr. Hersma is equal to $74,419.
(4)  The grant date present value has been  calculated  using the  Black-Scholes
     stock option valuation methodology.  The applied model used a grant date of
     May 4,  2001 and an  option  price of $1.25 per  share.  It also  assumed a
     risk-free rate of return of 5.28%, a dividend yield of 0% and a stock price
     volatility  of 50%. The options  have an exercise  period of ten years from
     the date of grant.
(5)  The grant date present value has been  calculated  using the  Black-Scholes
     stock option valuation methodology.  The applied model used a grant date of
     May 1, 2001  (McMeans) and May 2, 2001 (Stein) and an option price of $1.00
     per share.  It also assumed a risk-free rate of return of 5.28%, a dividend
     yield  of 0% and a stock  price  volatility  of 50%.  The  options  have an
     exercise period of ten years from the date of grant.


                                       68
<PAGE>
         The following table sets forth  information  with respect to options to
purchase our Common Stock granted to the Named Executive Officers:
<TABLE>
<CAPTION>
                                                             NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                           SHARES                           UNDERLYING UNEXERCISED       IN-THE-MONEY OPTIONS
                         ACQUIRED ON                        OPTIONS AT YEAR-END(#)        AT YEAR-END($)(1)
                        EXERCISE (#)   VALUE REALIZED($)   EXERCISABLE/UNEXERCISABLE  EXERCISABLE/UNEXERCISABLE
                        ------------   -----------------   -------------------------  -------------------------
NAME
<S>                      <C>              <C>                <C>                        <C>
James L. Hersma               0                $0              437,364 / 728,910             $73,823 / 0
James W. Hobbs                0                0                60,300 / 63,700                 0 / 0
John F. Rooney                0                0               111,626 / 186,048                0 / 0
Michael K. Bayley             0                0               111,626 / 186,048                0 / 0
Samuel M. Stein               0                0                25,000 / 100,000                0 / 0
Shaun D. McMeans              0                0                 9,302 / 27,907                 0 / 0
</TABLE>
(1)  Value is based on an  estimated  fair market  value of our Common  Stock on
     June 30, 2001 of $1.00 minus the exercise price under such options.

                     COMPENSATION OF NON-EMPLOYEE DIRECTORS

     We pay our  non-employee  directors  $500 for attendance at each meeting of
the board of directors,  $250 for each meeting of a committee  thereof ($150 for
each meeting of a committee if such meeting is concurrent  with a meeting of the
board of directors) and $100 for each meeting held by telephone  conference.  We
also pay  expenses  for  attendance  at meetings of the board of  directors  and
committees  thereof.  In addition,  non-employee  directors are compensated with
options to purchase  shares of our Common  Stock,  in  accordance  with the 1995
Stock Option Plan for Non-Employee Directors, or the "Directors Plan." Under the
terms of the Directors Plan, we grant our non-employee  directors  non-qualified
stock  options to purchase a total of 12,000  shares of Common  Stock upon their
election or appointment to the board of directors, with 4,000 options vesting on
the date of grant,  and 4,000 shares vesting  annually  thereafter  provided the
individual  continues to serve on the board of  directors.  The options  granted
pursuant to the 1995 Director Plan have an exercise  price equal to  one-hundred
percent of the fair market  value per share of our Common  Stock on the date the
option is granted.

                              EMPLOYMENT CONTRACTS

HERSMA EMPLOYMENT AGREEMENT

     On May 4,  2001,  we entered  into an  employment  agreement  with James L.
Hersma,  our President,  Chief Executive Officer,  and Director,  or the "Hersma
Agreement." The initial term of the Hersma  Agreement will expire on December 3,
2001, but will be extended automatically for successive one-year terms unless we
notify Mr. Hersma that we will not renew the Hersma Agreement.

                                       69
<PAGE>
     Mr.  Hersma is entitled to a base salary of $275,000 per year for the first
year of his employment and a base salary of $325,000 his second year,  should we
choose to extend the Hersma  Agreement.  Mr.  Hersma's  base  salary  beyond the
second year shall be determined by the Board of Directors,  but will not be less
than  $325,000 per year.  Mr. Hersma is also entitled to receive an annual bonus
of up to 55% of his base salary.

     The Hersma  Agreement  entitles Mr. Hersma to receive an option to purchase
1,166,274  shares of our  Common  Stock for an  exercise  price per share of the
lesser  of $1.25  per  share or the  fair  market  value on the date of grant as
determined  by our board of directors.  The exercise  price may be repriced to a
lower amount if the price of our Common Stock on the earlier of January 23, 2002
or the date of a  "qualified  equity  financing"  is lower than $1.25 per share.
Twenty-five percent (25%) of Mr. Hersma's stock options are vested upon the date
of grant,  and the  remaining  75% of his stock options vest in 36 equal monthly
installments  beginning with the completion of Mr.  Hersma's first full month of
employment  after December 4, 2001. If Mr. Hersma is terminated by us other than
for death,  disability or cause, stock options that would have vested within the
365 days following his  termination  shall become vested.  Additionally,  upon a
change in control of us (as defined in the Hersma Agreement), all unvested stock
options will become vested.

     The Hersma  Agreement  also entitles Mr. Hersma to a grant of 59,535 shares
of our Common Stock. Mr. Hersma must pay par value ($0.01 per share, or $595.35)
for this stock.  The stock is subject to repurchase  by us, with our  repurchase
right lapsing as to 50% of the initial grant on the  anniversary  of the date of
grant,  and as to the  remaining  50% on the second  anniversary  of the date of
grant.  If Mr. Hersma is  terminated  by us other than for death,  disability or
cause,  our repurchase right shall lapse with respect to shares of stock that we
would have otherwise  been entitled to repurchase  within the 365 days following
his termination. Additionally, upon a change in control of us (as defined in the
Hersma  Agreement),  our repurchase right as to all shares of stock shall lapse.
If,  upon the earlier of January  23,  2002 or the date of a  "qualified  equity
financing,"  the price of our Common  Stock is lower  than $1.25 per share,  Mr.
Hersma  shall be entitled to purchase,  at the same terms as his initial  grant,
additional  shares  of our  Common  Stock  such  that the  total  value of stock
purchasable by Mr. Hersma is equal to $74,419.

     If we terminate  Mr. Hersma for any reason other than for cause (as defined
in the Hersma Agreement), or we do not renew the Hersma Agreement, Mr. Hersma is
entitled to continuation of base salary and medical  benefits for 18 months.  If
such  termination or non-renewal is made within 18 months  following a change in
control (as defined in the Hersma  Agreement),  Mr. Hersma is entitled to a lump
sum  payment  equal to 2.99  times  his base  salary in lieu of the 18 months of
salary continuation.

     If Mr. Hersma's  employment  with us terminates for any reason,  Mr. Hersma
may not compete  with us or solicit our  employees  for a period of one (1) year
from his date of  termination  or during  any period he is  receiving  severance
payments from us.

BAYLEY EMPLOYMENT AGREEMENT

     Michael K. Bayley,  our Executive Vice President,  Chief Financial Officer,
Clerk  and  Director,  entered  into  a  three-year  employment  agreement  with
PrimeSource  Surgical,  dated as of July 1, 1999, or the "Bayley Agreement." The
Bayley  Agreement  was  assumed  by us in  connection  with our  acquisition  of
PrimeSource  Surgical.  Under the Bayley  Agreement,  Mr.  Bayley is entitled to
receive an annual base  salary of  $225,000  for the 2001  calendar  year.  This
amount may be increased by our board of directors  beginning on January 1, 2002.
Mr.  Bayley is entitled to an annual bonus in an amount  determined by our board
of  director's  Compensation  Committee  and upon our  achievement  of specified
management objectives.

                                       70
<PAGE>
     Mr.  Bayley  is  entitled  to  severance  benefits  if  he  terminates  his
employment with us due to our breach of a material term in the Bayley Agreement,
if we terminate him without  cause (as defined in the Bayley  Agreement) or upon
expiration of the term of the Bayley Agreement.  Under these circumstances,  Mr.
Bayley  would be entitled to  continued  payment of his base salary and employee
benefits  (including  health  insurance)  for  one  year  from  the  date of his
termination  of  employment.  If  Mr.  Bayley  obtains  other  employment  while
receiving  severance  benefits,  unless his termination was in connection with a
change in control (as defined in the Bayley  Agreement),  Mr. Bayley's severance
benefits  will  terminate on the later of (1) the date six months  following his
date of  termination  with us or (2) the date he obtains  employment at a salary
level  greater  than or equal to his  salary  with us.  Mr.  Bayley  will not be
entitled to any severance benefits,  however, if, in connection with a change in
control,  he is terminated  following an offer to continue  employment  with the
surviving  company at the same location,  in the same position and with the same
salary as provided in the Bayley Agreement.

     If Mr.  Bayley's  employment with us terminates in such a manner that he is
not  entitled to  severance  benefits,  Mr.  Bayley may not  compete  with us or
solicit  our  employees  for a  period  of  two  (2)  years  from  his  date  of
termination.

ROONEY EMPLOYMENT AGREEMENT

     John F. Rooney,  our Executive Vice  President,  Corporate  Development and
Chairman of the Board,  entered  into a  three-year  employment  agreement  with
PrimeSource  Surgical,  dated as of July 1, 1999, or the "Rooney Agreement." The
Rooney  Agreement  was  assumed  by us in  connection  with our  acquisition  of
PrimeSource  Surgical.  Under the Rooney  Agreement,  Mr.  Rooney is entitled to
receive an annual base  salary of  $225,000  for the 2001  calendar  year.  This
amount may be increased by the Board of Directors  beginning on January 1, 2002.
Mr.  Rooney is entitled to an annual bonus in an amount  determined by our board
of  director's  Compensation  Committee  and upon our  achievement  of specified
management objectives.

     Mr.  Rooney  is  entitled  to  severance  benefits  if  he  terminates  his
employment with us due to our breach of a material term in the Rooney Agreement,
if we terminate him without  cause (as defined in the Rooney  Agreement) or upon
expiration of the term of the Rooney Agreement.  Under these circumstances,  Mr.
Rooney  would be entitled to  continued  payment of his base salary and employee
benefits  (including  health  insurance)  for  one  year  from  the  date of his
termination  of  employment.  If  Mr.  Rooney  obtains  other  employment  while
receiving  severance  benefits,  unless his termination was in connection with a
change in control (as defined in the Rooney  Agreement),  Mr. Rooney's severance
benefits  will  terminate on the later of (1) the date six months  following his
date of  termination  with us or (2) the date he obtains  employment at a salary
level  greater  than or equal to his  salary  with us.  Mr.  Rooney  will not be
entitled to any severance benefits,  however, if, in connection with a change in
control,  he is terminated  following an offer to continue  employment  with the
surviving  company at the same location,  in the same position and with the same
salary as provided in the Rooney Agreement.

                                       71
<PAGE>
     If Mr.  Rooney's  employment with us terminates in such a manner that he is
not  entitled to  severance  benefits,  Mr.  Rooney may not  compete  with us or
solicit our employees for a period of two years from his date of termination.

     In addition,  the Company has entered into  Employment  Agreements with Mr.
Samuel M.  Stein,  the  Company's  General  Manager of the  Luxtec  Illumination
Division,  Mr. Peter A. Miller a Regional  Manager within  PrimeSource  Critical
Care, and Mr. Peter M. Eule, a Regional Manager with Primesource Critical Care.

           COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      During our last fiscal year ended June 30, 2001,  James Berardo,  James J.
Goodman,  William  H.  Lomicka  and Louis C.  Wallace  served as  members of the
Company's  Compensation  Committee  of the Board of  Directors.  None of Messrs.
Berardo, Goodman, Lomicka or Wallace have ever been an officer or employee of us
or any of our  subsidiaries,  nor have they ever had any relationship with us or
any officers requiring disclosure.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                   BENEFICIAL OWNERSHIP OF COMPANY SECURITIES

      The following  tables  furnish  certain  information as of August 31, 2001
(except as otherwise noted), as to our equity securities  beneficially  owned by
each  of  our  directors,  by  each  of the  individuals  named  in the  Summary
Compensation  Table and by all of our  directors  and  executive  officers  as a
group,  and, to our knowledge,  by any  beneficial  owner of more than 5% of any
class or series of our outstanding equity securities.
<TABLE>
<CAPTION>
----------------------------------------- --------------- --------------- -------------- -------------- --------------- ------------
Name of Beneficial Owner                  Number of       Number of       Number of      Number of      Aggregate       Percent of
                                          Shares of       Shares of       Shares of      Shares of      Number of       Class Voting
                                          Common Stock    Series C        Series D       Series E       Shares of       Power
                                          Beneficially    Convertible     Exchangeable   Convertible    Common Stock    Presently
                                          Owned           Preferred       Preferred      Preferred      Beneficially    Held(5)
                                                          Stock           Stock          Stock          Owned or
                                                          Beneficially    Beneficially   Beneficially   Underlying
                                                          Owned(1)        Owned(2)       Owned(3)       Preferred
                                                                                                        Stock
                                                                                                        Beneficially
                                                                                                        Owned(4)
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
<S>                                           <C>             <C>             <C>              <C>           <C>             <C>
GE Capital Equity Investments, Inc.(6)        1,000,930(7)    208,371.24      5,953.464        200,000       9,938,501(8)    33.43%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Coleman Swenson  Booth IV L.P.(9)              504,930(10)     89,301.96      2,976.732        100,000       4,563,224(8)    15.35%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Webbmont Holdings L.P.(11)                     912,929(12)   38,612.44(13)      595.346         20,000       2,296,929(8)     7.73%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Geneva Middle Market
Investors, SBIC,L.P.(14)                         450,000               0       4,333.87              0       1,316,774(8)     4.43%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Michael K. Bayley                              831,283(15)             0              0              0          831,283       2.80%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
James Berardo                                  180,520(16)             0              0              0          180,520           *
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Larry H. Coleman, Ph.D. (17)                   504,930(10)     89,301.96      2,976.732        100,000      4,563,224(8)     15.35%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
James J. Goodman                               470,000(18)             0     4,333.87(19)            0      1,336,774(8)      4.50%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
James L. Hersma                                351,117(20)             0              0              0          351,117        1.2%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
James W. Hobbs                                 147,039(21)             0              0              0          147,039           *
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
William H. Lomicka                             638,935(22)       425.256        148.837          5,000         730,430(8)     2.46%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Nicholas C. Memmo                               85,729(23)       850.512              0              0          109,186           *
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Samuel M. Stein                                 34,198(24)             0              0              0           34,198           *
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
John F. Rooney                                 848,173(25)      446.51(26)            0              0          860,487        2.9%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
All directors and executive officers as
a group (10 persons)
                                               4,091,924      91,024.238      7,459.439          5,000        9,144,258      30.76%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
</TABLE>
                                       72
<PAGE>
------------------------------
Unless  otherwise  indicated,  the address of each person is care of PrimeSource
Healthcare,  Inc. 3700 E. Columbia  Street,  Tucson,  Arizona  85714.  Shares of
Common  Stock  subject to options or warrants  exercisable  within sixty days of
August 31, 2001, are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options or warrants but are not outstanding
for purposes of computing the percentage of any other person.

*        Less than 1%.

1        Each share of Series C Convertible  Preferred Stock entitles its holder
         to approximately 27.58 votes, subject to adjustment, in any vote of the
         holders of our Common  Stock and may be  converted  into  approximately
         27.58 shares of our Common Stock, subject to adjustment.

2        Each share of Series D Exchangeable Preferred Stock entitles its holder
         to  two-hundred  votes in any vote of the holders of our Common  Stock.
         Each share of Series D Exchangeable  Preferred  Stock will be exchanged
         for a number of our  shares of a yet to be issued  series of  preferred
         stock,  that, in the aggregate,  will be convertible into 200 shares of
         our Common Stock.

3        Each share of Series E Convertible  Preferred Stock entitles its holder
         to ten votes, subject to adjustment,  in any vote of the holders of our
         Common Stock and may be converted  into ten shares of our Common Stock,
         subject to adjustment.

4        Includes Common Stock,  Common Stock  underlying the Series C Preferred
         Stock,  Series D Preferred Stock and the Series E Preferred Stock owned
         as of August 31, 2001 and Common Stock underlying  options and warrants
         that are exercisable within sixty days of August 31, 2001.

5        Based  upon  the  aggregate  number  of  shares  of  our  Common  Stock
         outstanding,  underlying  outstanding  shares of the Series C Preferred
         Stock,  Series D Preferred Stock and the Series E Preferred Stock owned
         as of August 31, 2001 and options and warrants exercisable within sixty
         days of August 31, 2001 to acquire our Common Stock.

6        The address of GE Capital  Equity  Investments  is 120 Long Ridge Road,
         Stamford, Connecticut 06927.

7        Includes  930 shares of our Common  Stock  underlying  options that are
         exercisable  within  sixty  days of  August  31,  2001.  Also  includes
         1,000,000  shares of our Common Stock  subject to purchase  pursuant to
         warrants that are exercisable within sixty days of August 31, 2001.


8        Excludes  an  undetermined  number of  shares  underlying  warrants  to
         purchase  shares of our  Common  Stock in an  amount  equal to a number
         based  upon the time  between  the  issuance  of the  warrants  and our
         completion of an equity financing that satisfies  certain  requirements
         set forth in the  warrants,  or if such  financing is not  completed by
         January  19,  2002,  based upon the value of our  Common  Stock at that
         time.

9        The  address  of Coleman  Swenson  Booth IV L.P.  is 237 Second  Avenue
         South, Franklin, Tennessee 37064-2649.

                                       74
<PAGE>
10       Includes 4,930 shares of our Common Stock  underlying  options that are
         exercisable within sixty days of August 31, 2001. Also includes 500,000
         shares of our Common  Stock  subject to  purchase  pursuant to warrants
         that are exercisable within sixty days of August 31, 2001.

11       The address of Webbmont Holdings L.P. is 1355 Peachtree  Street,  Suite
         1100, Atlanta, Georgia 30309.

12       Includes  236,079  Shares  of our  Common  Stock  subject  to  purchase
         pursuant to warrants that are  exercisable  within sixty days of August
         31, 2001.  Includes  7,016 shares of our Common Stock held of record by
         Robert Neale Fisher, 3,508 shares of our Common Stock held of record by
         Virginia A. Fisher,  290,179  shares of our Common Stock held of record
         by Investors  Equity,  Inc. and 190,713 shares of our Common Stock held
         of record  by  Webbmont  Holdings,  L.P.,  all of which are  considered
         beneficially  held by Robert W. Fisher.  Mr. Fisher is the President of
         Woodcrest  Associates,  Ltd., the general partner of Webbmont Holdings,
         L.P. Also includes 5,581 shares of our Common Stock underlying  options
         held by Mr. Fisher that are exercisable within sixty days of August 31,
         2001.

13       Includes  322.975 shares of Series C Preferred  Stock held of record by
         Robert Neale Fisher and  2,279.343  shares of Series C Preferred  Stock
         held of record by Investors Equity, Inc.

14       The address of Geneva Middle  Market  Investors  SBIC,  L.P. is care of
         Gemini  Investors  LLC,  20 William  Street,  Wellesley,  Massachusetts
         02481.

15       Includes  167,440 shares of our Common Stock  underlying  options which
         are  exercisable  within sixty days of August 31, 2001.  Also  includes
         69,102  shares  of  our  Common  Stock  underlying  warrants  that  are
         exercisable within sixty days of August 31, 2001.

16       Includes  154,520  shares of our Common Stock held by various trusts of
         which Mr.  Berardo  is a trustee  and over  which  Mr.  Berardo  shares
         investment  and  voting  control.   Mr.  Berardo  disclaims  beneficial
         ownership of such shares.  Also  includes  24,000  shares of our Common
         Stock  underlying  options  that are  exercisable  within sixty days of
         August 31, 2001.

17       Dr. Coleman is the Managing  General  Partner of CSHB Ventures IV L.P.,
         the General Partner of Coleman Swenson Booth IV, L.P.

18       Consists of 450,000 shares of our Common Stock held of record by Geneva
         Middle Market  Investors SBIC, L.P., of which Mr. Goodman is President.
         Also includes 20,000 shares of Common Stock underlying options that are
         exercisable within sixty days of August 31, 2001.

19       Consists of  4,333.87  shares held by Geneva  Middle  Market  Investors
         SBIC, L.P., of which Mr. Goodman is President.

20       Includes 291,582 shares of our Common Stock underlying options that are
         exercisable  within sixty days of August 31, 2001. Also includes 59,535
         shares of our Common Stock that Mr.  Hersma may purchase  pursuant to a
         Restricted Stock Agreement.

21       Includes 60,300 shares of our Common Stock underlying  options that are
         exercisable  within sixty days of August 31, 2001. Also includes 33,334
         shares of our Common Stock  underlying  warrants  that are  exercisable
         within sixty days of August 31, 2001.

22       Includes 15,162 shares of our Common Stock underlying  options that are
         exercisable  within sixty days of August 31, 2001. Also includes 29,253
         shares of our Common Stock  underlying  warrants  that are  exercisable
         within sixty days of August 31, 2001.

23       Includes 12,371 shares of our Common Stock underlying  options that are
         exercisable  within sixty days of August 31, 2001.  Also includes 8,505
         shares of our Common Stock  underlying  warrants  that are  exercisable
         within sixty days of August 31, 2001.

24       Includes 25,000 shares of our Common Stock underlying  options that are
         exercisable within sixty days of August 31, 2001.

25       Includes 167,440 shares of our Common Stock underlying options that are
         exercisable  within sixty days of August 31, 2001. Also includes 69,102
         shares of our Common Stock  underlying  warrants  that are  exercisable
         within sixty days of August 31, 2001.

26       Includes  446.51  Shares  of  Series  C  Preferred  Stock  owned by BAM
         Enterprises,  LLC, an entity in which Mr. Rooney  exercises  investment
         and voting power.

                                       75
<PAGE>
ITEM 13.  CERTAIN RELATIONSHIPS AMD RELATED TRANSACTIONS


                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Mr. Louis C. Wallace was a member of our board of directors from 1989 until
March 2, 2001.  Mr.  Wallace is the founder and President of Specialty  Surgical
Instrumentation,  Inc.,  or "SSI," a surgical  distributor  in ten  southeastern
states. SSI is one of our largest customers, representing approximately 12.6% of
our net sales  during our fiscal  year ended June 30,  2001.  We operate at arms
length with SSI pursuant to a contract with terms and  conditions  substantially
the same as our other domestic distributors.

     PrimeSource  Surgical, a distributor and manufacturer of specialty surgical
and critical  care  products,  was our largest  customer  during our fiscal year
ended June 30, 2001, representing  approximately 24.1% of our net sales for that
period. Messrs. Bayley,  Coleman,  Memmo, Lomicka and Rooney, who each currently
serve on our board of directors, were directors of PrimeSource Surgical prior to
our Merger with PrimeSource  Surgical.  Messrs. Rooney and Bayley also served as
President and Chief Executive Officer and Chief Financial Officer, respectively,
of PrimeSource  Surgical.  During the period June 30, 2000 through March 2, 2001
(the date that  PrimeSource  Surgical became our  wholly-owned  subsidiary),  we
operated at arms length with PrimeSource Surgical.


                                       76
<PAGE>
                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K


(a) The following documents are filed as part of this report:

1.     Consolidated Financial Statements
       ---------------------------------

       Independent Auditor's Report

       Consolidated Balance Sheets as of June 30, 2001 and June 30, 2000.

       Consolidated Statements of Operations
       for the years ended June 30, 2001, June 30, 2000 and June 30, 1999.

       Consolidated  Statements of Stockholders' Equity (Capital Deficiency) for
       the years ended June 30, 2001, June 30, 2000 and June 30, 1999.

       Consolidated  Statements of Cash Flows for the years ended June 30, 2001,
       June 30, 2000 and June 30, 1999

       Notes to Consolidated Financial Statements

2.    Financial Statement Schedules
      -----------------------------

      No schedules are submitted  because they are not applicable,  not required
      or because the information is included elsewhere herein.


                                       77
<PAGE>
3.    Exhibits
      --------

Each exhibit set forth below in the Index to Exhibits is filed as a part of this
report. All exhibits not filed herewith are incorporated  herein by reference to
a prior filing as indicated.

           2.1   Agreement and Plan of Merger,  dated  November 27, 2000, by and
                 between  Luxtec   Corporation,   Laser  Merger  Sub,  Inc.  and
                 PrimeSource Surgical,  Inc.  (Incorporated by reference to Form
                 8-K, File No. 0-14961, filed on November 30, 2000).

           2.2   Amendment  No. 1 to the  Agreement  and Plan of  Merger,  dated
                 February 8, 2001,  by and  between  Luxtec  Corporation,  Laser
                 Merger Sub, Inc. and PrimeSource Surgical,  Inc.  (Incorporated
                 by reference to Form 8-K, File No. 0-14961,  filed on March 16,
                 2001).

           3.1   Articles of  Organization.  (Incorporated  by reference to Form
                 S-18, File No. 33-5514B, declared effective on July 7, 1986).

           3.2   Amendment,  dated March 30, 1982, to Articles of  Organization.
                 (Incorporated  by  reference to Form S-18,  File No.  33-5514B,
                 declared effective on July 7, 1986).

           3.3   Amendment,  dated August 9, 1984, to Articles of  Organization.
                 (Incorporated  by  reference to Form S-18,  File No.  33-5514B,
                 declared effective on July 7, 1986).

           3.4   Amendment,  dated April 10, 1992, to Articles of  Organization.
                 (Incorporated  by  reference  to Form 10-K,  File No.  0-14961,
                 filed for the fiscal year ended October 31, 1993).

           3.5   Amendment, dated October 20, 1995, to Articles of Organization.
                 (Incorporated  by  reference  to Form 10-K,  File No.  0-14961,
                 filed for the fiscal year ended October 31, 1995).

           3.6   Amendment, dated October 20, 1995, to Articles of Organization.
                 (Incorporated  by  reference  to Form 10-K,  File No.  0-14961,
                 filed for the fiscal year ended October 31, 1995).

           3.7   Amendment,   dated   September   16,   1996,   to  Articles  of
                 Organization. (Incorporated by reference to Form 10-K, File No.
                 0-14961, filed for the fiscal year ended October 31, 1996).

           3.8   Certificate  of Vote of  Directors  Establishing  a Series of a
                 Class of Stock  dated  September  16,  1996.  (Incorporated  by
                 reference to Form 10-K, File No. 0-14961,  filed for the fiscal
                 year ended October 31, 1996).

           3.9   Certificate of Correction dated October 4, 1996.  (Incorporated
                 by  reference  to Form 10-K,  File No.  0-14961,  filed for the
                 fiscal year ended October 31, 1996).


                                  78
<PAGE>
           3.10  Certificate of Correction dated October 4, 1996.  (Incorporated
                 by  reference  to Form 10-K,  File No.  0-14961,  filed for the
                 fiscal year ended October 31, 1996).

           3.11  Certificate  of Vote of  Directors  Establishing  a Series or a
                 Class of Stock,  dated  February 27, 2001 (Series B Convertible
                 Preferred Stock).  (Incorporated by reference to Form 8-K, File
                 No. 0-14961, filed on March 16, 2001).

           3.12  Certificate  of Vote of  Directors  Establishing  a Series or a
                 Class of Stock,  dated  February 27, 2001 (Series C Convertible
                 Preferred Stock).  (Incorporated by reference to Form 8-K, File
                 No. 0-14961, filed on March 16, 2001).

           3.13  Certificate  of Vote of  Directors  Establishing  a Series or a
                 Class of Stock,  dated February 27, 2001 (Series D Exchangeable
                 Preferred Stock).  (Incorporated by reference to Form 8-K, File
                 No. 0-14961, filed on March 16, 2001).

           3.14  Certificate  of  Correction  dated  March  2,  2001  (Series  C
                 Convertible  Preferred  Stock).  (Incorporated  by reference to
                 Form 8-K, File No. 0-14961, filed on March 16, 2001).

           3.15  Certificate of Correction dated March 2, 2001. (Incorporated by
                 reference  to Form 8-K,  File No.  0-14961,  filed on March 16,
                 2001).

           3.16  Articles of Amendment to Articles of Organization,  dated as of
                 June 27, 2001. (Incorporated by reference to Form 8-K, File No.
                 0-14961, filed on July 11, 2001).

           3.17  Certificate  of Vote of  Directors  Establishing  a Series or a
                 Class of Stock,  dated  June 28,  2001  (Series  E  Convertible
                 Preferred Stock).  (Incorporated by reference to Form 8-K, File
                 No. 0-14961, filed on July 11, 2001).

           3.18  Certificate of Correction dated July 13, 2001.

           3.19  Amended and Restated By-Laws (Incorporated by reference to Form
                 10-Q, File No. 0-14961, filed May 21, 2000).

           4.1   Specimen  of  Common  Stock   Certificate.   (Incorporated   by
                 reference to Form S-18, File No. 33-5514B,  declared  effective
                 on July 7, 1986).

           4.2    Registration Rights Agreement made as of June 3, 1996, between
                  the   Company   and   the   Purchasers   identified   therein.
                  (Incorporated  by  reference to Form 10-Q,  File No.  0-14961,
                  filed September 13, 1996).

           4.3   Amended and Restated  Registration Rights, dated June 28, 2001,
                 by and  among  PrimeSource  Healthcare,  Inc.  and the  persons
                 listed as Stockholders therein.

           4.4   Amended and Restated Co-Sale Agreement, dated June 28, 2001, by
                 and among PrimeSource  Healthcare,  Inc. and the persons listed
                 as Stockholders therein.


                                       79
<PAGE>
           10.1  Amended and Restated Employment  Agreement,  entered into as of
                 July 1,  1999,  by and  among  PrimeSource  Surgical,  Inc.,  a
                 Delaware corporation,  and Michael K. Bayley.  (Incorporated by
                 reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).

           10.2  Amended and Restated Employment  Agreement,  entered into as of
                 July 1,  1999,  by and  among  PrimeSource  Surgical,  Inc.,  a
                 Delaware  corporation,  and John F.  Rooney.  (Incorporated  by
                 reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).

           10.3  Employment  Agreement  entered into between James L. Hersma and
                 Luxtec Corporation,  a Massachusetts  corporation,  dated as of
                 May 4, 2001.  (Incorporated by reference to Form 10-Q, File No.
                 0-14961, filed May 21, 2001).

           10.4  Third Amendment to Amended and Restated Credit Agreement, dated
                 as of March 2, 2001, by and among PrimeSource Surgical,  Inc, a
                 Delaware corporation, Bimeco, Inc., a Florida corporation, Ruby
                 Merger Sub, Inc., a Delaware corporation, Luxtec Corporation, a
                 Massachusetts  corporation and Citizens Bank of  Massachusetts.
                 (Incorporated  by  reference  to Form 10-Q,  File No.  0-14961,
                 filed May 21, 2001).

           10.5  Amended and Restated Loan and Security  Agreement,  dated March
                 2,  2001,  by  and  among  Luxtec  Corporation,  Fiber  Imaging
                 Technologies, Inc., Cathtec Incorporated,  CardioDyne, Inc. and
                 ARK CLO 2000-1,  Limited.  (Incorporated  by  reference to Form
                 10-Q, File No. 0-14961, filed May 21, 2001).

           10.6  Luxtec  Corporation 1992 Stock Plan, as amended.  (Incorporated
                 by reference to Form 10-K, File No. 0-14961,  filed January 28,
                 1994).

           10.7  Luxtec  Corporation  1995 Stock  Option  Plan for  Non-Employee
                 Directors.  (Incorporated  by reference to Form 10-K,  File No.
                 0-14961, filed January 27, 1996).

           10.8  Tucson Medical  Corporation  1997 Stock Option / Stock Issuance
                 Plan, as amended.  (Incorporated  by reference to Schedule 14A,
                 File No. 0-14961, filed June 1, 2001).

           10.9  Unit Purchase Agreement among PrimeSource Healthcare,  Inc. and
                 the  Purchasers  named in Schedule I thereto,  dated as of June
                 28, 2001.  (Incorporated  by  reference  to Form 8-K,  File No.
                 0-14961, filed July 11, 2001).

           10.10 Form of Warrant.  (Incorporated  by reference to Form 8-K, File
                 No. 0-14961, filed July 11, 2001).

           10.11 Lease  Agreement,  dated as of March 1,  2000,  by and  between
                 Holualoa   Butterfield   Industrial,   L.L.C.  and  PrimeSource
                 Surgical, Inc.

           21.1  Subsidiaries of the Registrant.

                                       80
<PAGE>
           (b)   Reports on Form 8-K:

                 The Company  filed a current  report on Form 8-K dated July 11,
                 2001,  announcing  under  Item 5 the  issuance  of the Series E
                 Preferred Stock and warrants to purchase Common Stock.


                                       81
<PAGE>
                                   SIGNATURES
                                   ----------

      Pursuant  to the  requirements  of Section  13 or 15(d) 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.

                                                  PRIMESOURCE HEALTHCARE, INC.

                                                  by   s/James L. Hersma
                                                    ---------------------
                                                  James L. Hersma, President and
                                                  Chief Executive Officer


October 11, 2001
        --
                                       82
<PAGE>
      Pursuant to the requirements of 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.

Signature                       Title                                Date
<TABLE>
<CAPTION>
<S>                            <C>                                       <C>
s/Michael K. Bayley             Chief Financial Officer,                  October 11, 2001
----------------------          Secretary and Treasurer, Director
Michael K. Bayley


s/James Berardo                 Director                                  October 11, 2001
----------------------
James Berardo


s/Larry H. Coleman              Director                                  October 11, 2001
----------------------
Larry H. Coleman


s/James J. Goodman              Director                                  October 11, 2001
----------------------
James J. Goodman


s/James L. Hersma               President, Chief                          October 11, 2001
----------------------          Executive Officer, Director
James L. Hersma


s/James W. Hobbs                Director                                  October 11, 2001
----------------------
James W. Hobbs


s/William H. Lomicka            Director                                  October 11, 2001
----------------------
William H. Lomicka


s/Nicholas C. Memmo             Director                                  October 11, 2001
-------------------
Nicholas C. Memmo


s/John F. Rooney                Executive Vice President,                 October 11, 2001
---------------------------     Chairman of the Board
John F. Rooney

</TABLE>
                                       83
<PAGE>
                                  Exhibit Index
                                  -------------

    2.1          Agreement and Plan of Merger,  dated  November 27, 2000, by and
                 between  Luxtec   Corporation,   Laser  Merger  Sub,  Inc.  and
                 PrimeSource Surgical,  Inc.  (Incorporated by reference to Form
                 8-K, File No. 0-14961, filed on November 30, 2000).

    2.2          Amendment  No. 1 to the  Agreement  and Plan of  Merger,  dated
                 February 8, 2001,  by and  between  Luxtec  Corporation,  Laser
                 Merger Sub, Inc. and PrimeSource Surgical,  Inc.  (Incorporated
                 by reference to Form 8-K, File No. 0-14961,  filed on March 16,
                 2001).

    3.1          Articles of  Organization.  (Incorporated  by reference to Form
                 S-18, File No. 33-5514B, declared effective on July 7, 1986).

    3.2          Amendment,  dated March 30, 1982, to Articles of  Organization.
                 (Incorporated  by  reference to Form S-18,  File No.  33-5514B,
                 declared effective on July 7, 1986).

    3.3          Amendment,  dated August 9, 1984, to Articles of  Organization.
                 (Incorporated  by  reference to Form S-18,  File No.  33-5514B,
                 declared effective on July 7, 1986).

    3.4          Amendment,  dated April 10, 1992, to Articles of  Organization.
                 (Incorporated  by  reference  to Form 10-K,  File No.  0-14961,
                 filed for the fiscal year ended October 31, 1993).

    3.5          Amendment, dated October 20, 1995, to Articles of Organization.
                 (Incorporated  by  reference  to Form 10-K,  File No.  0-14961,
                 filed for the fiscal year ended October 31, 1995).

    3.6          Amendment, dated October 20, 1995, to Articles of Organization.
                 (Incorporated  by  reference  to Form 10-K,  File No.  0-14961,
                 filed for the fiscal year ended October 31, 1995).

    3.7          Amendment,   dated   September   16,   1996,   to  Articles  of
                 Organization. (Incorporated by reference to Form 10-K, File No.
                 0-14961, filed for the fiscal year ended October 31, 1996).

    3.8          Certificate  of Vote of  Directors  Establishing  a Series of a
                 Class of Stock  dated  September  16,  1996.  (Incorporated  by
                 reference to Form 10-K, File No. 0-14961,  filed for the fiscal
                 year ended October 31, 1996).

    3.9          Certificate of Correction dated October 4, 1996.  (Incorporated
                 by  reference  to Form 10-K,  File No.  0-14961,  filed for the
                 fiscal year ended October 31, 1996).

    3.10         Certificate of Correction dated October 4, 1996.  (Incorporated
                 by  reference  to Form 10-K,  File No.  0-14961,  filed for the
                 fiscal year ended October 31, 1996).


                                       84
<PAGE>
    3.11         Certificate  of Vote of  Directors  Establishing  a Series or a
                 Class of Stock,  dated  February 27, 2001 (Series B Convertible
                 Preferred Stock).  (Incorporated by reference to Form 8-K, File
                 No. 0-14961, filed on March 16, 2001).

    3.12         Certificate  of Vote of  Directors  Establishing  a Series or a
                 Class of Stock,  dated  February 27, 2001 (Series C Convertible
                 Preferred Stock).  (Incorporated by reference to Form 8-K, File
                 No. 0-14961, filed on March 16, 2001).

    3.13         Certificate  of Vote of  Directors  Establishing  a Series or a
                 Class of Stock,  dated February 27, 2001 (Series D Exchangeable
                 Preferred Stock).  (Incorporated by reference to Form 8-K, File
                 No. 0-14961, filed on March 16, 2001).

    3.14         Certificate  of  Correction  dated  March  2,  2001  (Series  C
                 Convertible  Preferred  Stock).  (Incorporated  by reference to
                 Form 8-K, File No. 0-14961, filed on March 16, 2001).

    3.15         Certificate of Correction dated March 2, 2001. (Incorporated by
                 reference  to Form 8-K,  File No.  0-14961,  filed on March 16,
                 2001).

    3.16         Articles of Amendment to Articles of Organization,  dated as of
                 June 27, 2001. (Incorporated by reference to Form 8-K, File No.
                 0-14961, filed on July 11, 2001).

    3.17         Certificate  of Vote of  Directors  Establishing  a Series or a
                 Class of Stock,  dated  June 28,  2001  (Series  E  Convertible
                 Preferred Stock).  (Incorporated by reference to Form 8-K, File
                 No. 0-14961, filed on July 11, 2001).

    3.18         Certificate of Correction dated July 13, 2001.

    3.19         Amended and Restated By-Laws (Incorporated by reference to Form
                 10-Q, File No. 0-14961, filed May 21, 2000).

    4.1          Specimen  of  Common  Stock   Certificate.   (Incorporated   by
                 reference to Form S-18, File No. 33-5514B,  declared  effective
                 on July 7, 1986).

    4.2          Registration  Rights Agreement made as of June 3, 1996, between
                 the   Company   and   the   Purchasers    identified   therein.
                 (Incorporated  by  reference  to Form 10-Q,  File No.  0-14961,
                 filed September 13, 1996).

    4.3          Amended and Restated  Registration Rights, dated June 28, 2001,
                 by and  among  PrimeSource  Healthcare,  Inc.  and the  persons
                 listed as Stockholders therein.

    4.4          Amended and Restated Co-Sale Agreement, dated June 28, 2001, by
                 and among PrimeSource  Healthcare,  Inc. and the persons listed
                 as Stockholders therein.

    10.1         Amended and Restated Employment  Agreement,  entered into as of
                 July 1,  1999,  by and  among  PrimeSource  Surgical,  Inc.,  a
                 Delaware corporation,  and Michael K. Bayley.  (Incorporated by
                 reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).


                                       85
<PAGE>
    10.2         Amended and Restated Employment  Agreement,  entered into as of
                 July 1,  1999,  by and  among  PrimeSource  Surgical,  Inc.,  a
                 Delaware  corporation,  and John F.  Rooney.  (Incorporated  by
                 reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).

    10.3         Employment  Agreement  entered into between James L. Hersma and
                 Luxtec Corporation,  a Massachusetts  corporation,  dated as of
                 May 4, 2001.  (Incorporated by reference to Form 10-Q, File No.
                 0-14961, filed May 21, 2001).

    10.4         Third Amendment to Amended and Restated Credit Agreement, dated
                 as of March 2, 2001, by and among PrimeSource Surgical,  Inc, a
                 Delaware corporation, Bimeco, Inc., a Florida corporation, Ruby
                 Merger Sub, Inc., a Delaware corporation, Luxtec Corporation, a
                 Massachusetts  corporation and Citizens Bank of  Massachusetts.
                 (Incorporated  by  reference  to Form 10-Q,  File No.  0-14961,
                 filed May 21, 2001).

    10.5         Amended and Restated Loan and Security  Agreement,  dated March
                 2,  2001,  by  and  among  Luxtec  Corporation,  Fiber  Imaging
                 Technologies, Inc., Cathtec Incorporated,  CardioDyne, Inc. and
                 ARK CLO 2000-1,  Limited.  (Incorporated  by  reference to Form
                 10-Q, File No. 0-14961, filed May 21, 2001).

    10.6         Luxtec  Corporation 1992 Stock Plan, as amended.  (Incorporated
                 by reference to Form 10-K, File No. 0-14961,  filed January 28,
                 1994).

    10.7         Luxtec  Corporation  1995 Stock  Option  Plan for  Non-Employee
                 Directors.  (Incorporated  by reference to Form 10-K,  File No.
                 0-14961, filed January 27, 1996).

    10.8         Tucson Medical  Corporation  1997 Stock Option / Stock Issuance
                 Plan, as amended.  (Incorporated  by reference to Schedule 14A,
                 File No. 0-14961, filed June 1, 2001).

    10.9         Unit Purchase Agreement among PrimeSource Healthcare,  Inc. and
                 the  Purchasers  named in Schedule I thereto,  dated as of June
                 28, 2001.  (Incorporated  by  reference  to Form 8-K,  File No.
                 0-14961, filed July 11, 2001).

    10.10        Form of Warrant.  (Incorporated  by reference to Form 8-K, File
                 No. 0-14961, filed July 11, 2001).

    10.11        Lease  Agreement,  dated as of March 1,  2000,  by and  between
                 Holualoa   Butterfield   Industrial,   L.L.C.  and  PrimeSource
                 Surgical, Inc.

    21.1         Subsidiaries of the Registrant.

                                       86