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, 2003

[  ] 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 organizatio                            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 ]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|


<PAGE>
The  estimated  aggregate  market  value  of the  voting  common  stock  held by
non-affiliates of the registrant was $1,978,880 as of September 1, 2003. Because
PrimeSource's  common  stock  is not  listed  or  quoted  on an  exchange,  this
computation  is based on an  estimated  market value of $.32 per share of common
stock as of September 1, 2003.

As of September 1, 2003, 22,375,094 shares of common stock, $.01 par value, were
issued and outstanding.

                       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
<PAGE>
<TABLE>
<CAPTION>
                                TABLE OF CONTENTS

Part I
                 <S>       <C>                                                                                     <C>
                 Item 1.    Business.........................................................................          4
                 Item 2.    Properties.......................................................................         15
                 Item 3.    Legal Proceedings................................................................         16
                 Item 4.    Submission of Matters to a Vote of Security Holders..............................         16

Part II
                 Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters............         17
                 Item 6.    Selected Financial Data..........................................................         19
                 Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations     23
                 Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.......................         34
                 Item 8.    Financial Statements and Supplementary Data......................................         36
                 Item 9.    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure      64
                 Item 9A.   Controls and Procedures..........................................................         64
Part III         Item 10.   Directors and Executive Officers of the Registrant...............................         64
                 Item 11.   Executive Compensation...........................................................         66
                 Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related
                            Stockholder Matters..............................................................         70
                 Item 13.   Certain Relationships and Related Transactions...................................         73

Part IV          Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................         74

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

Index to
Exhibits         ............................................................................................         88

</TABLE>
                                       3

<PAGE>
                                     PART I

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

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's Discussion and Analysis of
Financial  Condition  and Results of  Operations,"  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.  Today,  we  have  two  primary  businesses:
Specialty  Medical  Distribution  and  the  Manufactured  Products  Division  or
Manufactured  Products.  As of June 30, 2003, we had 142 employees and generated
total revenue of $46.4 million for the fiscal year ending June 30, 2003.

On March 2, 2001,  we completed a merger with  PrimeSource  Surgical,  Inc.,  or
PrimeSource  Surgical,  resulting in  PrimeSource  Surgical  becoming our wholly
owned subsidiary. Subsequent to the merger with PrimeSource Surgical, we changed
our name from "Luxtec Corporation," or Luxtec, to "PrimeSource Healthcare, Inc."

In  October  2001,  we  engaged   Corporation   Revitalization   Partners  as  a
restructuring agent to evaluate our operations for possible  reorganization.  In
November 2001, we commenced with a restructuring  plan which involved  narrowing
the focus of our operations,  consolidation  of certain under  performing  sales
regions,  reduction of  corporate  overhead  through  workforce  reductions  and
facility   consolidation,   restructuring  of  our  balance  sheet  through  the
recapitalization of equity and refinancing of our senior bank debt and reduction
of debt levels through cost reductions and improved efficiency of operations.


                                       4
<PAGE>
On September 20, 2002,  Ruby Merger Sub,  Inc.,  the Company's  indirect  wholly
owned  subsidiary  ("Ruby"),  sold all of the assets of the former  Professional
Equipment Co., Inc. ("PEC") line of business in exchange for the cancellation of
previously  issued  stock to the  founder of PEC and the  assumption  of certain
liabilities with respect to the PEC line of business.

On June 30, 2003, PrimeSource Surgical,  Inc.  ("PrimeSource"),  a subsidiary of
PrimeSource  Healthcare,  Inc.  ("the  Company"),  sold  all of the  issued  and
outstanding capital stock of Ruby for cash proceeds of $1,000,000 to New England
Medical  Specialties,  Inc., a newly formed entity  ("NMSI").  Peter  Miller,  a
stockholder of NMSI, was the Regional  Manager of Ruby prior to the  disposition
of the capital stock of Ruby.  In connection  with the sale of the capital stock
of Ruby, Mr. Miller concluded his employment relationship with PrimeSource.  The
cash  proceeds  were used to payoff  the  PrimeSource  Term Note and  reduce the
revolving line of credit with Citizens Bank of Massachusetts  ("Citizens").  The
loss on the disposal of the  operation  of $73,830 was included as  discontinued
operations in the fourth quarter of 2003, and the related  results of operations
for the operation were re-classified as discontinued operations.

                                BUSINESS STRATEGY

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

     o    hiring experienced territory sales representatives;

     o    securing additional  specialty product lines to our product offerings;
          and

     o    selectively  acquiring  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.

Our  Manufactured  Products  Division  continues to lead the  surgical  headlamp
illumination  industry and focuses its research and  development  budget on new,
innovative products.

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

     o    favorable industry demographics;

     o    sustaining or increasing our market share;

     o    the acquisition of other specialty medical products manufacturers;

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

     o    entrance into new specialty  markets and expansion into  international
          markets.

                                    5
<PAGE>
                                    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 medical  products and
supplies in the United  States is in excess of $45  billion.  An  estimated  $15
billion  is  distributed  by  the  larger  medical  and  surgical,  or  med-surg
distributors,  such as Owens & Minor,  Cardinal Health and McKesson HBOC.  These
distributors   primarily  market  commodity   products  and  supplies  to  group
purchasing  organizations ("GPOs") and integrated delivery networks ("IDNs"). It
is estimated  that an  additional  $25 billion in medical  product sales is sold
directly by medical device  manufacturers  to end customers.  Local and regional
distributors  account for an estimated $5 billion of specialty  medical products
sold to hospitals,  clinics and  physicians.  PrimeSource  competes  within this
highly fragmented segment of the medical products and supplies market.

Historically,   the  specialty   medical  products   industry  has  been  highly
fragmented.  During the past decade, healthcare providers have consolidated into
larger and more 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  through large,  national GPOs. In addition to our  traditional
customer  base,  composed  primarily of hospitals and surgery  centers,  we also
market  (on a  limited  basis)  to IDNs  and  GPOs.  IDNs and  GPOs  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.

We believe that we are well positioned within our industry because we:

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

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

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

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

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 costs of products
and services.

                                       6
<PAGE>
                             PRODUCTS AND SERVICES

SPECIALTY MEDICAL DISTRIBUTION

Within the Specialty Medical Distribution  business, we divide our business into
PrimeSource  Surgical,  or Surgical,  and PrimeSource Critical Care, or Critical
Care. The Surgical segment is a regional sales and marketing  organization  that
markets and sells a large number of surgical products primarily to hospitals and
surgery centers in the midwestern,  mid-atlantic and southeastern United States.
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:

     o    Cardio Vascular;

     o    Endoscopy;

     o    General Surgery; and

     o    Gynecology.

Within the Critical Care segment, the primary specialties are:

     o    Neonatal Intensive Care; and

     o    Maternal and Child Care.

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

We operate the Manufactured Products business through our Luxtec division, which
designs,  manufactures  and  markets  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

                                       7
<PAGE>
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 into an array of fiber optic transilluminators utilized with Luxtec's
surgical instruments. Luxtec also markets replacement fiber optic cables, bulbs,
and 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
comply with  Underwriters  Laboratories  544 medical  safety  standards  and are
listed  domestically with ETL Laboratories.  Internationally,  Luxtec strives to
achieve  compliance  with all  applicable  international  standards  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  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.

                                       8
<PAGE>
                               SALES AND MARKETING

We sell our  products  and  services to  hospitals,  IDNs,  surgery  centers and
physician  offices.  In fiscal  year ended June 30,  2003,  within the  Surgical
Medical Distribution  business, we sold specialty medical products to over 3,000
customers,  primarily in the United  States.  We are not dependent on any single
customer or geographic group of customers.  Our largest  customer  accounted for
3.3% of our gross profit during our fiscal year ended June 30, 2003.

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 primarily
compensated on a commission basis.

Within the surgical illumination business,  Luxtec is the domestic market leader
in surgical  headlight systems with over 50,000 surgeons using their products on
a  worldwide  basis.  Within  the United  States,  the  Luxtec  fiber  optic and
illumination products are primarily  distributed through PrimeSource  Surgical's
sales force,  supported by Luxtec field  specialists and a customer support team
located in our West  Boylston  facility.  Luxtec also  distributes  domestically
through   a  number   of  other   regional   specialty   medical   distributors.
Internationally, Luxtec distributes through a network of local distributors. Our
external sales,  based upon the customer's  country of origin by geographic area
for  the  year  ended  June  30,  2003,  2002  and  2001,  totaled  $44,015,000,
$51,688,000 and  $47,771,000,  respectively,  for sales in the United States and
$2,345,000,   $2,008,000  and  $631,000,  respectively,  for  sales  to  foreign
companies.

                                  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, facsimile
or via EDI. All orders are routed  through our  centralized  computer  ordering,
shipping and inventory  management  system,  which is linked to our distribution
centers.  Rapid and accurate order  fulfillment is a principal  component of our
value-added approach.

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. Our inventory levels are centralized with and managed by a
purchasing   department  using  an  integrated  inventory  control  system.  Our
inventory consists primarily of medical products and supplies.

                           MANUFACTURING AND SUPPLIERS

Manufacturer relationships are an integral part of our businesses. Our Specialty
Medical  Distribution  business represents more than 125 manufacturers with over
90% of sales  concentrated  among  approximately  30 of these  manufacturers.  A
majority of the business is comprised of stocking relationships whereby we stock
the vendor's products and provide  substantially all fulfillment services (i.e.,
customer  service,  shipping,  returns,  etc.).  The remainder of the revenue is

                                       9
<PAGE>
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 200 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 vendors.

Our Specialty Medical Distribution 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.

Within the Specialty Medical Distribution business, our network of manufacturers
is continually seeking representation or market introduction for their products,
resulting in a growth pipeline of attractive,  innovative  products accretive 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  Specialty  Medical  Distribution  business  employs a single,  centralized,
enterprise management  information system utilized across all business units via
a wide-area data network. This approach yields significant benefits including:

     o    increased inventory utilization;

     o    greater visibility as to sales performance; and

     o    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  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.

                                       10
<PAGE>

                                   COMPETITION

We compete  with a variety of  companies  including  manufacturers  that utilize
direct  sales  forces,   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:

     o    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.

     o    NATIONAL SPECIALTY DISTRIBUTORS.  Several 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.

     o    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.

     o    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  business,  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.

                                       11
<PAGE>
                             PATENTS AND TRADEMARKS

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

     Patents
     -------
     o    Patent No. 4516190 for Surgical Headlight issued May 7, 1985.
     o    Patent No. 4616257 for Headlight Camera System issued October 7, 1986.
     o    Patent No.  4653848  for 45 degree and 90 degree  Fiber  Optic  Cables
          issued March 31, 1987.
     o    Patent No.  4797736 for  Videolux  Television  Fiber  Optic  Headlight
          Camera System issued January 10, 1989.
     o    Patent No. 5003605 for an  electronically  augmented  stethoscope with
          timing sound issued March 26, 1991.
     o    Patent No. 5220453 for telescopic spectacles with coaxial illumination
          issued June 15, 1993.
     o    Patent No. 5295052 for a light source assembly issued March 15 1994.
     o    Patent No. D345368 for surgical telescopes issued March 22, 1994.
     o    Patent No. 5331357 for an illumination assembly issued July 19, 1994.
     o    Patent No. D349123 for spectacles having integral  illumination issued
          July 26, 1994.
     o    Patent No. D350760 for an eyeglass  frame temple issued  September 20,
          1994.
     o    Patent No. 5392781 for blood pressure monitoring in noisy environments
          issued February 28, 1995.
     o    Patent No.  D415285 for Pinhole  Headlamp Video Camera for Medical and
          Surgical Applications issued October 12, 1999.
     o    Patent No. D398403 for Headband for Surgeons with Removable  Headboard
          Hanger issued September 15, 1998.
     o    Patent No. 6258037 for blood pressure monitoring in noisy environments
          issued July 10, 2001.

     Trademarks
     ----------
     o    LUXTEC,   U.S.  federal  trademark   registration   number  1,453,098,
          registered August 18, 1987.
     o    LUXTEC  (and  design),  U.S.  federal  trademark  registration  number
          1,476,726, registered February 16, 1988.
     o    LUXTEC  (stylized),   U.S.  federal  trademark   registration   number
          1,758,176, registered March 16, 1993.
     o    LUXTEC,   U.S.  federal  trademark   registration   number  1,956,027,
          registered February 13, 1996.
     o    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.
     o    BIMECO,   U.S.  federal  trademark   registration   number  1,190,584,
          registered February, 23 1981
     o    MegaTech   Medical,   U.S.  federal  trademark   registration   number
          1,930,021, registered October 24, 1995
     o    TMC

                                       12
<PAGE>
     o    Clearfield
     o    ValueFlex
     o    PrimeSource Healthcare
     o    PrimeSource Surgical

We terminated our agreement with InterMed,  Inc. in May 2002,  pursuant to which
we were  previously  granted an exclusive  license  agreement  for the rights to
Patent No. 5222949 ("In-Vivo  Hardenable  Catheter") and No. 5334171 ("Flexible,
Noncollapsible Catheter Tube with Hard and Soft Regions"). The agreement allowed
Luxtec to develop a product  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.

                              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.

                                    EMPLOYEES

As of September 1, 2003, we had 142  employees,  of which  approximately  46 are
engaged in the Surgical segment,  approximately 18 in the Critical Care segment,
approximately 56 in the Manufactured  Products  business and approximately 22 in
corporate and shared services.  We believe that our continued success depends on
our  ability  to attract  and retain  highly  qualified  personnel.  None of our
employees are covered by a collective bargaining agreement.

                                       13
<PAGE>
                 EXECUTIVE OFFICERS AND KEY MANAGEMENT PERSONNEL

Following  are the names and ages,  as of  September 1, 2003,  of our  executive
officers and key management  personnel,  their  positions and summaries of their
backgrounds and business experience.
<TABLE>
<CAPTION>
           Name                Age                                    Position
           ----                ---                                    --------
<S>                            <C>    <C>
Joseph H. Potenza              56     President
Shaun D. McMeans               41     Chief Operating Officer and Chief Financial Officer
Samuel M. Stein                63     Vice President & General Manager, Manufacturing Division
Mark A. Jungers                51     Regional Vice President, Distribution Division
Bruce R. Hoadley               44     Regional Vice President, Distribution Division
Scott F. Billman               47     Regional Vice President, Distribution Division
Jason M. Fowler                32     Treasurer & Vice President
</TABLE>


JOSEPH H. POTENZA, PRESIDENT: Prior to joining PrimeSource in February 2001, Mr.
Potenza held senior management positions with McKesson HBOC as Vice President of
the Corporate Program and with Medibuy where he was responsible for the National
Accounts and Corporate  Program.  From 1977 to 1997, Mr.  Potenza  developed his
career with American Hospital Supply Corporation/Baxter  Healthcare Corporation,
culminating as Eastern  Region  President,  running a $750 million  distribution
business  with 650 employees and seven  distribution  facilities.  He received a
Bachelor of Arts degree in English from Norwich  University and a Master of Arts
degree in Management from Central Michigan University.

SHAUN D. MCMEANS, CHIEF OPERATING OFFICER & CHIEF FINANCIAL OFFICER: Mr. McMeans
has 20  years  of  experience  in  manufacturing  and  distribution  businesses,
specializing  in  operations,  accounting  and  financial  management.  Prior to
becoming the Company's Chief Financial  Officer,  he served as Vice President of
Operations and Corporate Controller. Prior to joining the Company in April 2000,
Mr. McMeans held  operational  and financial  management  positions with Burnham
Corporation,  a leading domestic manufacturer and distributor of residential and
commercial  boilers.  Mr.  McMeans  earned  a  Bachelor  of  Science  degree  in
accounting  from The  Pennsylvania  State  University and is a certified  public
accountant.  He began his  career in public  accounting  with the  former  Peat,
Marwick, Mitchell and Company.

SAMUEL M. STEIN, VICE PRESIDENT & GENERAL MANAGER,  MANUFACTURING  DIVISION: Mr.
Stein's  career  has  focused  on high  growth  technology  companies.  Prior to
becoming General Manager of the Company's  Luxtec Division,  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 served as Chief Financial Officer with companies
ranging from start-ups to  subsidiaries of Fortune 500  corporations.  Mr. Stein
earned  a  Bachelor  of  Science  degree  in  Business  Administration  from the
University of Toledo and a Master of Science degree from Rensselaer  Polytechnic
Institute.

MARK A. JUNGERS,  REGIONAL VICE PRESIDENT - DISTRIBUTION  DIVISION:  Mr. Jungers
has an extensive  background  in med-surg and  critical  care product  sales and
management.  Mr.  Jungers  joined  PrimeSource  through its 1999  acquisition of
Bimeco, a leading distributor of specialty medical products to the critical care
market in the  southeastern  United States,  where he served as a Sales Manager.

                                       14
<PAGE>
Prior to joining Bimeco in 1979, he held sales and marketing  positions with the
Extracorporeal  Medical  Division  of Johnson & Johnson.  Mr.  Jungers  earned a
Bachelor of Science degree in Business Administration from Marquette University.

BRUCE R. HOADLEY,  REGIONAL VICE PRESIDENT - DISTRIBUTION  DIVISION: Mr. Hoadley
has  worked  for 20 years in the  sales and  management  of  specialty  surgical
products.  He was the Sales Manager for  Futuretech,  a leading  distributor  of
specialty  medical  products to the surgical market in the  southeastern  United
States, from 1991 until its acquisition by PrimeSource in 1999. Prior to joining
Futuretech,  Mr. Hoadley held sales management positions with Kendall Healthcare
and Devon.  He earned a Bachelor of Arts degree in Marketing from the University
of Alabama.

SCOTT F. BILLMAN,  REGIONAL VICE PRESIDENT - DISTRIBUTION  DIVISION: Mr. Billman
has spent his entire career in sales, marketing,  and operations management.  He
has worked  for  nearly 20 years in the  healthcare  industry,  holding  several
management  positions  primarily  focused on the sales and marketing of surgical
products.  He most recently served as Senior Vice President of Product Marketing
for Medi-buy,  Inc. Mr.  Billman earned a Bachelor of Science degree in Business
Administration and an MBA from Bowling Green State University.

JASON M. FOWLER, TREASURER & VICE PRESIDENT: Mr. Fowler has a diverse background
in corporate finance, consulting, and mergers and acquisitions. Prior to joining
PrimeSource,  Mr. Fowler was a Senior Financial  Analyst and Production  Manager
for TouchStar  Technologies,  a division of The Williams Companies. At Williams,
he worked in mergers and acquisitions and managed  divisional  operations in the
U.S.,  England,  Poland,  and  Australia.  In 1996-97,  he also served as a U.S.
government-sponsored  consultant  in  Poland.  Mr.  Fowler  earned a  Master  of
International Management degree from Thunderbird as well as Bachelor of Arts and
MBA degrees from the University of Arizona.

ITEM 2.  PROPERTIES

PrimeSource's  corporate  headquarters  is located at 99 Hartwell  Street,  West
Boylston,  Massachusetts.  All of our  facilities  are leased and located in the
United States. A summary of the Company's  facilities,  as of September 1, 2003,
and offices is as follows:

                                                  Square              Lease
   City, State                                     Feet          Expiration Date
   -----------                                     ----          ---------------
   Tucson, Arizona..............................  25,544             02/28/05
   Birmingham, Alabama..........................  18,356             11/30/06
   Atlanta, Georgia.............................   2,950             09/30/04
   West Boylston, Massachusetts.................  31,689             10/31/05
                                                 -------
                                                  78,539
                                                 =======

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 in the
process of either  sub-leasing a portion of its Tucson  facility  (approximately
16,500  square feet of idle  warehouse and office  space) or  renegotiating  the
current  lease for only a portion  of the  current  facility.  A portion of this
space became vacant subsequent to the 2002 restructuring.

                                       15
<PAGE>
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.

On  September  5, 2002,  John F.  Rooney  and  Michael K.  Bayley,  each  former
executive officers and directors of PrimeSource, filed a complaint against us in
Arizona Superior Court,  County of Pima. The complaint alleges a breach by us of
the  severance  agreements  with each of Messrs.  Rooney and Bayley and seeks an
aggregate of at least $1.2 million in compensatory  damages.  We believe that we
have  meritorious  defenses and we intend to defend our position with respect to
this  complaint.

During the quarter ended September 30, 2002, the Company resolved an outstanding
matter  relating  to  alleged  non-compete  violations  with a former  employee.
Pursuant to the terms of the settlement,  the former employee paid the Company a
cash settlement in the amount of $168,099, net of costs of $71,901, and returned
for cancellation 132,963 shares of Company common stock valued at $42,548.

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

Our  annual  meeting of  stockholders  was held on  December  17,  2002.  At the
meeting, the following items were submitted to a vote of the stockholders:

     (1) the  election  of two  Class II  directors  for a  three-year  term was
approved  with the election of Larry H. Coleman  receiving  16,024,720  votes in
favor,  0 votes against,  38,411 votes  withheld and 0 broker  non-votes and the
election  of Bradford C. Walker  receiving  16,024,635  votes in favor,  0 votes
against, 38,496 votes withheld and 0 broker non-votes.

     (2) an amendment to our Articles of Organization  increasing the authorized
number of shares of common stock from 50,000,000 to 75,000,000 was approved with
15,681,817 votes in favor, 375,134 votes against, 6,180 abstentions and 0 broker
non-votes;

     (3) an amendment to our Tucson Medical  Corporation 1997 Stock Option/Stock
Issuance Plan, as amended,  was ratified with 14,728,539 votes in favor, 440,940
votes against, 119,707 abstentions and 773,945 broker non-votes; and

     (4) the appointment by our Board of Directors of Deloitte & Touche LLP, our
independent auditors,  was ratified with 16,017,262 votes in favor, 41,180 votes
against, 4,689 abstentions and 0 broker non-votes.



                                       16

<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 our common stock was delisted by the AMEX, the closing price
was $1.00.

Our common stock is not currently listed on any public exchange or market. There
is no  established  public  trading  market for our  common  stock and we cannot
assure that we will ever be able to  establish  trading of our common stock on a
public market or exchange.

As of September 1, 2003,  there were  approximately  532  registered  holders of
record of our  common  stock.  We  estimate  that  there are  approximately  378
beneficial holders of our common stock.

We have not paid any cash  dividends on our common stock 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.  In
addition,  we may not declare or pay any dividend without the consent of lenders
and our preferred stockholders.

On August 6, 2002, the Company created a new series of preferred stock, Series G
Convertible Redeemable Preferred Stock, no par value (the "Series G Stock"), and
the  Company  issued and sold  70,452  shares of Series G Stock on that date for
proceeds of $1,866,037, net of costs of $388,429. The Series G Stock has 230,000
authorized  shares.  In connection with the issuance of the Series G Stock,  the
Company issued  warrants to purchase an aggregate of 3,300,000  shares of common
stock at $.01 per share.  These warrants became exercisable on December 31, 2002
and expire on August 6, 2012. In addition,  on September 15, 2002,  November 15,
2002,  January  15,  2003 and June 30,  2003,  the  Company  issued  and sold an
additional  aggregate  50,485.5  shares  of  Series  G  Stock  for  proceeds  of
$1,497,994,  net of  costs  of  $117,542.  Each  share  of  Series  G  Stock  is
convertible  into 100  shares of common  stock,  subject to  adjustment,  at the
option of the  holder.  Each share of Series G Stock has one vote for each share
of common into which it would be convertible.  In addition, Series G Stock ranks
senior to all other  outstanding  stock of the Company.  Series G Stock  accrues
dividends  at the rate of 8% per year of the original  issuance  price of $32.00
per share and has a  liquidation  preference  equal to $64.00  per share plus an
amount  equal to all  accrued  but  unpaid  dividends.  The Series G Stock has a
mandatory  redemption  date of June 3, 2005,  and is  redeemable at the original
issue price of $32.00 per share plus accrued but unpaid dividends.  The Series G
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.  As noted above, in connection with the
Series G Stock issuance, the Company issued warrants to purchase an aggregate of
3,300,000  shares of common stock with an exercise price of $.01 per share and a
10-year life. The value of these warrants was calculated using the Black-Scholes
method,  an expected life of 7 years,  volatility of 50% and a zero-coupon  bond
rate of 4.09%.  The  resulting  value of  $1,031,000  was recorded as additional

                                       17
<PAGE>
paid-in  capital on August 6, 2002 in  connection  with the sale of the Series G
Stock. The resultant  beneficial  conversion  feature of $1,031,000 was recorded
directly to additional  paid-in capital in December 2002 when the Series G Stock
became convertible.

On August 6, 2002 and prior to the issuance and sale of the Series G Stock,  the
Company  recapitalized its equity structure.  Each outstanding share of Series C
Convertible  Preferred  Stock, par value $1.00 per share (the "Series C Stock"),
was converted into 27.5871 shares of the Company's  common stock.  In connection
with the conversion of the Series C Stock, the Company issued the former holders
of the Series C Stock  warrants to purchase an aggregate of 7,390,613  shares of
our common  stock with an exercise  price of $.01 per share and a 10-year  life.
These warrants  became  exercisable on December 31, 2002 and expire on August 6,
2012.  Additionally,  exercise  prices on warrants to purchase an  aggregate  of
140,330 shares of our common stock  previously  issued to certain former holders
of the Series C Stock were repriced from $1.68 per share to $.01 per share.  The
value of the warrants  issued and the warrants  which were repriced was recorded
as additional  paid-in capital.  The value of these warrants totaled  $2,359,000
and was calculated using the Black-Scholes  method, an expected life of 7 years,
volatility of 50% and a zero coupon rate of 4.09%.

Simultaneously with the conversion of the Series C Stock, each outstanding share
of Series F Convertible  Redeemable Preferred Stock, no par value (the "Series F
Stock"),  was converted into one share of common stock.  In connection  with the
conversion of the Series F Stock,  the Company  issued the former holders of the
Series F Stock warrants to purchase an aggregate of 1,614,560  shares of Company
common stock with an exercise  price of $.01 per share and a 10-year  life.  The
warrants  became  exercisable on December 31, 2002 and expire on August 6, 2012.
Additionally,  the exercise price on previously  issued  warrants to purchase an
aggregate of 1,751,130  shares of common stock was adjusted from $1.00 per share
to $.01 per share.  The value of the warrants issued and the warrants which were
repriced was recorded as additional paid-in capital. The value of these warrants
totaled  $1,052,000  and was  calculated  using  the  Black-Scholes  method,  an
expected life of 7 years, volatility of 50% and a zero coupon rate of 4.09%.

On August 6, 2002 and  subsequent  to the  conversion  of the Series C Stock and
Series F Stock, each outstanding share of Series E Convertible  Preferred Stock,
no par value (the "Series E Stock"),  was exchanged for .3125 shares of Series G
Stock. In connection with the exchange of the Series E Stock, the Company issued
the former  holders of the Series E Stock  warrants to purchase an  aggregate of
817,000 shares of Company common stock with an exercise price of $.01 per share.
These warrants  became  exercisable on December 31, 2002 and expire on August 6,
2012. Additionally, in accordance with their terms, exercise prices on 1,625,000
warrants  to  purchase  common  stock  previously  issued  to  certain  Series E
Stockholders  were repriced from $1.00 per share to $.01 per share. The value of
the  warrants  issued and the  warrants  which were  repriced  were  recorded as
additional paid-in capital. The value of these warrants totaled $763,000 and was
calculated  using  the  Black-Scholes  method,  expected  life of  seven  years,
volatility of 50% and a zero coupon rate of 4.09%.

Under the  restructuring,  former holders of Series C Stock,  Series F Stock and
Series  E  Stock  received  consideration  totaling  approximately  $10,183,000,
including  common  stock,  Series G Stock,  new  warrants  and the  repricing of
certain  existing  warrants,  in exchange for the  retirement of Series C Stock,
Series  F Stock  and  Series E Stock  with a  carrying  value  of  approximately
$21,993,000.  The  difference  of  $11,809,741  has been  credited  to  retained
earnings.

                                       18
<PAGE>
<TABLE>
<CAPTION>
                                                        EQUITY COMPENSATION PLAN INFORMATION
                                                        ------------------------------------

                                                                   JUNE 30, 2003
                                                                                           NUMBER OF SECURITIES
                               NUMBER OF SECURITIES                                      REMAINING AVAILABLE FOR
                                   TO BE ISSUED             WEIGHTED-AVERAGE              FUTURE ISSUANCE UNDER
                                 UPON EXERCISE OF          EXERCISE PRICE OF            EQUITY COMPENSATION PLANS
                               OUTSTANDING OPTIONS,       OUTSTANDING OPTIONS,            (EXCLUDING SECURITIES
                               WARRANTS AND RIGHTS        WARRANTS AND RIGHTS            REFLECTED IN COLUMN (a))
PLAN CATEGORY                          (a)                        (b)                              (c)

<S>                                 <C>                         <C>                             <C>
Equity compensation
     plans approved by
     security holders......         25,440,818                  $0.1965                         2,097,736

Equity compensation
     plans not approved
     by security holders (1)             7,500                   $16.00                                 0
                                    ----------                  -------                         ---------

               Total.......         25,448,318                  $0.2012                         2,097,736
                                    ==========                  =======                         =========
</TABLE>
(1) On August 6, 2002, we granted Bradford C. Walker an option to purchase 7,500
shares of our Series G  Convertible  Redeemable  Preferred  Stock at an exercise
price of $16.00 per share.  This option became fully vested and  exercisable  on
the  first  anniversary  of the grant  date and  expires  upon the tenth  (10th)
anniversary of the grant date. The stock option  agreement  provides that if Mr.
Walker is terminated for any reason other than  misconduct,  the option,  to the
extent vested on the termination date, becomes  exercisable at any time prior to
the  earlier of (i) five (5) years  following  the date he ceases to provide any
service to PrimeSource or (ii) one (1) year  following the  registration  of the
option shares under the Securities Act of 1933.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The selected  consolidated  financial data presented below has been derived from
our historical audited consolidated financial statements of PrimeSource for each
of the five years in the period ended June 30, 2003.  The following  data should
be read in conjunction with  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated  financial  statements
and the notes thereto. Data is in thousands except per share data.
<TABLE>
<CAPTION>
                                                                   FISCAL YEAR
OPERATING DATA:                                                   ENDED JUNE 30
                                          ---------------------------------------------------------------------------
                                          2003(1)(2)     2002(3)(4)            2001(5)    2000(6)(7)         1999(8)
                                          ----------     ----------          ----------   ----------       ----------
<S>                                       <C>            <C>            <C>              <C>          <C>
NET SALES......................            $ 46,360       $ 53,696            $ 48,402     $ 54,411        $ 15,114

NET LOSS.......................            $(3,629)       $(6,191)            $ (4,382)    $ (1,384)       $   (744)

NET INCOME (LOSS) PER                         $0.33       $ (1.11)            $  (1.37)    $  (0.69)       $  (0.17)
SHARE - BASIC..................

BALANCE SHEET DATA:

TOTAL ASSETS...................            $ 31,665       $ 37,587            $ 45,450     $ 31,297        $ 30,380

LONG-TERM OBLIGATIONS..........            $  5,826       $ 23,285            $ 20,335     $ 15,968        $  1,516

STOCKHOLDERS' EQUITY (CAPITAL
DEFICIENCY)....................            $ 10,686       $(5,349)            $   (562)    $   (567)       $  2,622
</TABLE>
                                       19
<PAGE>
(1) In  accordance  with  the  Financial  Accounting  Standards  Board  ("FASB")
Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 142,  the Company
completed the transitional  test for impairment in March 2003 and concluded that
consolidated  goodwill  was  impaired in the amount of  $4,454,656.  The Company
recorded a non-cash  charge of  $4,454,656  to reduce the carrying  value of its
goodwill.  This  charge is  non-operational  in  nature  and is  reflected  as a
cumulative effect of a change in accounting  principle,  effective July 1, 2002,
in the accompanying Consolidated Statements of Operations.

(2) On June 30, 2003, PrimeSource sold all of the issued and outstanding capital
stock of Ruby to NMSI. The Company recognized a loss on the transaction totaling
$73,830  in the  fiscal  year  ending  June  30,  2003,  which  is  included  in
discontinued operations.

(3) In the fiscal  year  ended June 30,  2002,  PrimeSource  approved  plans for
restructuring  of operations  involving  narrowing the focus of its  operations,
consolidation of certain under performing sales regions,  reduction of corporate
overhead  through  workforce  reductions,  restructuring  of its  balance  sheet
through the refinancing of PrimeSource  Healthcare's and PrimeSource  Surgical's
senior bank debt and the reduction of debt levels  through cost  reductions  and
improved  efficiency  of  operations.  The related  costs of the  restructuring,
excluding the $1,038,823 discussed below, included charges of $2,915,675.

(4) On September 20, 2002, in connection with the  restructuring,  Ruby sold all
of the  assets  of  its  former  PEC  line  of  business  in  exchange  for  the
cancellation of stock previously issued to the founder of PEC and the assumption
of certain  liabilities  with respect to the PEC line of  business.  The Company
recognized  a loss on the  transaction  totaling  $1,038,823  in the fiscal year
ending June 30,  2002,  as the assets were held for sale and deemed  impaired at
that date.

(5) Effective March 2, 2001, PrimeSource Surgical completed a merger with Luxtec
Corporation with aggregate consideration exchanged 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,  PEC and NEM,
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 through date of sale, as discussed above.

(6) 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 consolidated  financial statements
from the date of acquisition.

                                       20
<PAGE>
(7) In the fiscal year ended June 30, 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.

(8) In June 1999,  PrimeSource  Surgical acquired four entities for $17,000,000.
In March  1999,  PrimeSource  Surgical  acquired  an  entity  for  approximately
$196,000.  Each of 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 dates of acquisition.




                                       21
<PAGE>
OPERATING 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 our consolidated
financial  statements  and the notes thereto.  Data is in thousands,  except per
share data.
<TABLE>
<CAPTION>

                                      Sep-30,     Dec-31,      Mar-31,      Jun-30,     Sep-30,     Dec-31,     Mar-31,    Jun-30,
                                       2001      2001(1)(2)    2002(2)     2002(1)(2)   2002(3)      2002        2003     2003(4)(5)
                                     ---------  ----------   ---------   ----------   ---------  ---------   ---------    ---------
<S>                                  <C>         <C>         <C>         <C>          <C>        <C>         <C>          <C>
Net sales                            $14,732.1  $ 13,672.3   $13,314.7   $ 11,976.6  $ 11,789.8  $11,587.6   $11,127.0    $11,855.6
Cost of sales                          9,205.8     9,853.0     8,707.9      7,562.4     7,498.9    7,307.1     6,885.2      7,606.4
                                     ---------  ----------   ---------   ----------  ----------  ---------   ---------    ---------
         Gross profit                $ 5,526.3  $  3,819.3   $ 4,606.8   $  4,414.2  $  4,290.9  $ 4,280.5   $ 4,241.8    $ 4,249.2
                                     =========  ==========   =========   ==========  ==========  =========   =========    =========


Net income (loss)                    $ (257.0)  $(5,039.9)   $ (540.2)   $  (353.5)  $(3,970.5)  $   416.1   $   (3.0)    $  (71.4)
                                     =========  ==========   =========   ==========  ==========  =========   =========    =========
Net income (loss) per share-basic    $   (.13)  $    (.73)   $   (.12)   $    (.13)  $      .45  $     .01   $   (.02)    $   (.02)
                                     =========  ==========   =========   ==========  ==========  =========   =========    =========
</TABLE>
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) PrimeSource  Healthcare,  in connection with restructuring,  discontinued an
operational division of the Critical Care segment,  which resulted in a recorded
loss of  approximately  $658,000 in quarter ended December 31, 2001 and $381,000
in quarter ended June 30, 2002.
(2)  PrimeSource  Healthcare  approved  plans for a major  restructuring  of its
operations  resulting in total  charges of  approximately  $2,463,000 in quarter
ended  December 31, 2001,  $341,000 in quarter ended March 31, 2002 and $112,000
in quarter ended June 30, 2002.
(3) In accordance  with SFAS No. 142, the Company  recorded a non-cash charge of
$4,454,656  to  reduce  the  carrying  value of its  goodwill.  This  charge  is
non-operational in nature and is reflected as a cumulative effect of a change in
accounting principle, effective July 1, 2002.
(4) On June 30, 2003, PrimeSource sold all of the issued and outstanding capital
stock of Ruby to NMSI. The Company recognized a loss on the transaction totaling
$73,830 in the fiscal year ended June 30, 2003.
(5) On June 30, 2003, PrimeSource recorded a reserve for severance of the former
President of $195,507 and other restructuring expenses of $150,000.

                                       22

<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 the notes thereto.

                   APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. During
preparation of these financial statements, we are required to make estimates and
judgments that affect the reported amounts of assets,  liabilities,  revenue and
expenses,  and related  disclosure of contingent  assets and liabilities.  On an
on-going basis, we evaluate our estimates, including those related to bad debts,
inventories,  goodwill and other intangible assets and income taxes. We base our
estimates on historical experience and various other assumptions that we believe
are reasonable  under the  circumstances.  The results form the basis for making
judgments  about the  carrying  values of assets  and  liabilities  that are not
readily  apparent  from other  sources.  Actual  results  may differ  from these
estimates under different assumptions or conditions.

The  following  critical  accounting  policies  require  us to make  significant
judgments and estimates used in the preparation of our financial statements.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful  accounts for estimated  losses  resulting
from the inability of our customers to make required payments.  We determine the
adequacy  of  this  allowance  by  regularly   evaluating   individual  customer
receivables and considering a customer's  financial  condition,  credit history,
and current  economic  conditions.  If the financial  condition of our customers
were  to  deteriorate,  additional  allowances  may be  required.  Our  accounts
receivable  are  written  off once an  account  is  deemed  uncollectible.  This
typically  occurs once we have  exhausted  all  efforts to collect the  account,
which includes  collection  attempts by company employees and outside collection
agencies.

INVENTORY RESERVES FOR OBSOLESCENCE

We write down our inventory for estimated obsolescence or unmarketable inventory
in an amount  equal to the  difference  between  the cost of  inventory  and the
estimated  market value based upon  assumptions  about future  demand and market
conditions.  If actual market  conditions  prove to be less favorable than those
projected by management, additional inventory write-downs may be required.

GOODWILL AND OTHER INTANGIBLE ASSETS

We  evaluate  goodwill  and other  intangible  assets  for  impairment  at least
annually, in accordance with SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
For  goodwill,  we first  compare  the fair value of a  reporting  unit with its
carrying amount,  including goodwill. If the carrying amount of a reporting unit
exceeds the fair value of a reporting  unit,  additional  tests would be used to

                                       23
<PAGE>
measure the amount of impairment  loss, if any. We use a present value technique
to  measure  reporting  unit fair  value.  If the  carrying  amount of any other
intangible  asset exceeds its fair value,  we would recognize an impairment loss
for the  difference  between fair value and the carrying  amount.  We recognized
impairment  losses in the year ended June 30, 2002 upon the  disposition  of PEC
and an impairment  loss effective  July 1, 2002 upon  completion of SFAS No. 142
implementation. If other events occur and circumstances change, causing the fair
value of a reporting unit to fall below its carrying amount,  impairment  losses
may be recognized in the future.

DEFERRED TAX ASSETS

We  estimate  our actual  current tax  exposure  obligations  together  with the
temporary  differences that have resulted from the differing  treatment of items
dictated by generally accepted accounting principles versus U.S. tax laws. These
temporary  differences  result in  deferred  tax assets and  liabilities.  On an
on-going  basis, we then assess the likelihood that our deferred tax assets will
be recovered from future taxable  income.  If we believe the recovery to be less
than likely,  we establish a valuation  allowance against the deferred tax asset
and charge  the  amount as an income  tax  expense in the period in which such a
determination is made.

STOCK-BASED COMPENSATION

The  Company   accounts  for   stock-based   awards  to   employees   using  the
intrinsic-value  method in accordance with Accounting  Principles  Board Opinion
No.  25,   ACCOUNTING   FOR  STOCK   ISSUED  TO   EMPLOYEES,   and  elected  the
disclosure-only  alternative  under SFAS No.  123,  ACCOUNTING  FOR  STOCK-BASED
COMPENSATION.  Common stock of the Company has been delisted  since November 17,
2000 and does  not  trade on any  exchange and is not  quoted  on any  quotation
system.  Fair value of the Company's common stock is determined by the Company's
Board of  Directors  based  upon  the  most  recent  significant  capital  stock
transaction  adjusted by current major events affecting the Company's  financial
condition.  Certain  equity-based  compensation  cost is  included in net income
(loss),  as certain  options  granted during  periods  presented had an exercise
price below the market  value of the stock on the date of grant.  In  accordance
with SFAS No. 148,  ACCOUNTING  FOR STOCK BASED  COMPENSATION  - TRANSITION  AND
DISCLOSURE,  the  Company  will  continue  to disclose  the  required  pro-forma
information  in the  notes to the  consolidated  financial  statements  and will
disclose the required information in quarterly unaudited  consolidated financial
statements.

SALES RECOGNITION POLICY

Sales are recorded upon shipment of products to customers.

                              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, 2003,  2002 and
2001.
<TABLE>
<CAPTION>
                                                               2003              2002               2001
                                                         ----------------- ------------------ ------------------
<S>                                                           <C>               <C>                <C>
NET SALES                                                     100.0%            100.0%             100.0%
COST OF SALES                                                 63.2%              65.8%              69.2%
GROSS PROFIT                                                  36.8%              34.2%              30.8%
SELLING EXPENSES                                              16.1%              16.6%              16.9%
GENERAL AND ADMINISTRATIVE EXPENSES                           15.1%              16.1%              17.2%
DEPRECIATION AND AMORTIZATION EXPENSES                         1.8%              4.6%               3.4%
RESTRUCTURING EXPENSES                                         0.7%              7.4%
INTEREST EXPENSE                                               1.8%              1.3%               1.9%
NET LOSS                                                      (7.8%)            (11.5%)            (9.1%)
</TABLE>
                                       24
<PAGE>
FISCAL YEAR ENDED JUNE 30, 2003 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2002

NET SALES:  Net sales of  $46,360,019  for fiscal 2003 were  $7,335,698 or 13.7%
lower than the  $53,695,717  reported for fiscal 2002. The decrease in net sales
in fiscal year 2003 was primarily  due to the closure of the  Company's  western
sales  territory as a result of the Company's  restructuring  plan  initiated in
November 2001 and the divesture of PEC in June 2002. Remaining decreases are due
to a shift in the company's distribution sales mix from stocking to agency-based
sales, lost lines and other effects of the 2002 restructuring. The western sales
territory  closure resulted in approximately  $2,542,000 of the decrease and the
divesture of PEC resulted in approximately $1,327,000 of the decrease.

COST OF SALES:  Cost of sales  decreased  to  $29,297,572  for fiscal  2003 from
$35,329,128  for fiscal 2002. The cost of sales for fiscal 2003 was 63.2% of net
sales  compared to 65.8% of net sales for fiscal  2002.  The decrease in cost of
sales of $6,031,556, or 17.1% was primarily due to lower sales levels related to
the  closure of the  western  sales  territory  and the  divesture  of PEC.  The
remaining  decreases are due to a shift in the Company's  distribution sales mix
from stocking to  agency-based  sales,  lost lines and other effects of the 2002
restructuring.  The western sales territory  closure  resulted in  approximately
$1,810,000  of the decrease and the  divesture of PEC resulted in  approximately
$683,000 of the  decrease.  The decrease in cost of sales as a percentage of net
sales in 2003 compared to 2002 is due to the  difference in the product mix sold
and the non-recurring prior year inventory reserve adjustments.

GROSS PROFIT:  Gross profit decreased to $17,062,447,  or 36.8% of net sales for
fiscal 2003,  from  $18,366,589,  or 34.2% of net sales,  for fiscal  2002.  The
$1,304,142  decrease in gross  profit was  primarily  due to lower sales  levels
related to the closure of the western sales  territory and the divesture of PEC.
The western sales territory  closure resulted in  approximately  $732,000 of the
decrease  and the  divesture of PEC  resulted in  approximately  $644,000 of the
decrease.  The increase in gross profit margins is due to a favorable in product
mix and the  non-recurring  prior year inventory  reserve  adjustment  from 2002
which caused a higher cost of goods sold.

SELLING EXPENSES: Selling expenses decreased to $7,450,394 for fiscal 2003, from
$8,890,380 for fiscal 2002, a decrease of $1,439,986,  or 16.2%. The decrease in
selling  expense in fiscal 2003 is  primarily  due to the closure of the western
sales  territory as a result of the Company's  restructuring  plan  initiated in
November  2001  and the  divesture  of PEC in  June  2002.  Decreased  salaries,
commissions, benefits and travel expenses related to the western sales territory
account  for  approximately  $502,000  of the  decrease  and the  PEC  divesture
resulted in approximately $500,000 of the decrease.

                                       25
<PAGE>
GENERAL  AND  ADMINISTRATIVE  EXPENSES:   General  and  administrative  expenses
decreased to  $7,015,217  for fiscal 2003,  from  $8,625,555  for fiscal 2002, a
decrease of  $1,610,338,  or 18.7%.  The  decrease is  primarily a result of the
Company's restructuring plan initiated in November 2001 and the divesture of PEC
in June 2002.  The  restructuring  plan  decreased  general  and  administrative
expenses  by  narrowing  the  focus of the  Company's  operations  and  reducing
corporate   overhead  through  workforce   reductions.   Non-recurring   reserve
adjustments for inventory and accounts  receivable  recorded in December 2001 of
approximately  $474,000  also  contributed  to the  decrease.  The PEC divesture
resulted in approximately $268,000 of the decrease.

DEPRECIATION AND AMORTIZATION  EXPENSES:  Depreciation and amortization expenses
decreased  to $843,500  for fiscal  2003,  from  $2,455,081  for fiscal  2002, a
decrease of $1,611,581,  or 65.6%. The decrease in depreciation and amortization
expense in fiscal 2003 is primarily  due to the  implementation  of SFAS No. 142
GOODWILL AND OTHER  INTANGIBLE  ASSETS  effective July 2002. As a result of this
adoption goodwill was no longer amortized in fiscal 2003.

RESTRUCTURING  EXPENSES:  Restructuring expense decreased to $345,507 for fiscal
2003,  from  $3,954,498  for fiscal  2002.  Fiscal 2003  restructuring  expenses
include a reserve recorded for the former  President's  severance  agreement for
$195,507 and other restructuring expenses of $150,000. Fiscal 2002 restructuring
expenses  relate to the  restructuring  plan which began in early November 2001,
involving  narrowing the focus of our operations,  the  consolidation of certain
under  performing  sales regions,  the reduction of corporate  overhead  through
workforce  reductions,   the  restructuring  of  our  balance  sheet  through  a
recapitalization   and  refinancing  of  the  PrimeSource   Healthcare  and  the
PrimeSource  Surgical  senior bank debt and a reduction  of debt levels  through
projected  improved  earnings and  potential  asset sales.  From  November  2001
through August 2002 significant  aspects of our new business model,  including a
reduction in workforce  and executive  staff,  exit of the western sales region,
recapitalization  of  equity  and  a  refinancing  of  our  existing  debt  were
completed. As a result of this, restructuring expense of $2,915,675 was recorded
for fiscal 2002. In addition, during 2002, a decision was made to dispose of the
PEC  division,  and the  write-off  of PEC goodwill  and other  impaired  assets
totaled $1,038,823.

INTEREST  EXPENSE:  Interest  expense  increased to $839,243 during fiscal 2003,
compared to $679,244 during fiscal 2002, an increase of $159,999,  or 23.6%. Our
interest  cost  increased  as a result  of  increased  interest  rates  and fees
incurred  related  to  the  restructuring  of  the  PrimeSource  Healthcare  and
PrimeSource Surgical debt.

INCOME TAX BENEFIT:  Income tax benefit decreased to $19,700 during fiscal 2003,
compared to $61,700  during fiscal 2002. The decrease is the result of decreased
taxable net income (loss) at state levels.

NET LOSS: Our net loss decreased to $3,628,799  during fiscal 2003,  compared to
$6,190,563 during fiscal 2002, a decrease of $2,561,764,  or 41.4%. The decrease
in net loss resulted  primarily  from expense  reductions  related to our fiscal
2002 restructuring and decreased  amortization expense.  These expense decreases
were  offset by goodwill  impairment  expense of  $4,454,656  recorded in fiscal
2003, resulting from the Company's implementation of SFAS No. 142 in July 2002.

                                       26
<PAGE>
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2001

NET SALES:  Net sales of  $53,695,717  for fiscal 2002 were  $5,293,248 or 10.9%
higher than the $48,402,469  reported for fiscal 2001. The increase in net sales
in fiscal year 2002 was  primarily a result of  recognizing a full year of sales
contribution  from the merger with Luxtec in March 2001 and the  acquisition  of
NEMS and PEC in December 2000. In addition, we shifted our focus to implementing
key measures to grow and strengthen the existing core business which contributed
to our increase in net sales in fiscal 2002.

COST OF SALES:  Cost of sales  increased  to  $35,329,128  for fiscal  2002 from
$35,475,261  for fiscal 2001. The cost of sales for fiscal 2002 was 65.8% of net
sales  compared to 69.2% of net sales for fiscal  2001.  The increase in cost of
sales is  primarily  due to higher  sales  levels with the addition of full year
Luxtec,  NEMS and PEC results.  The decrease in cost of sales as a percentage of
net sales is primarily due to the full year  addition of Luxtec's  higher margin
sales in our  consolidated  financial  results  in 2002  compared  to only three
months in 2001.

GROSS PROFIT:  Gross profit increased to $18,366,589,  or 34.2% of net sales for
fiscal 2002,  from  $14,927,208,  or 30.8% of net sales,  for fiscal  2001.  The
increase in gross profit is primarily due to higher, full year sales levels with
the addition of the Luxtec,  NEMS and PEC. The increase in gross profit  margins
is primarily due to the addition of a full year of Luxtec's  financials  results
in our consolidated  financial  results in 2002 compared to only three months in
2001.

SELLING EXPENSES: Selling expenses increased to $8,890,380 for fiscal 2002, from
$8,188,831  for fiscal 2001, an increase of $701,549,  or 8.6%.  The increase in
expenses  in fiscal  2002 is  primarily  due to  increased  sales as a result of
recognizing  a full year of sales  contribution  from the merger  with Luxtec in
March 2001 and the acquisition of NEMS and PEC in December 2000.

GENERAL  AND  ADMINISTRATIVE  EXPENSES:   General  and  administrative  expenses
increased to $8,625,555  for fiscal 2002,  from  $8,341,048  for fiscal 2001, an
increase  of  $284,507,  or 3.4%.  The  increase  in  expenses in fiscal 2002 is
primarily due to increases in the allowance for doubtful  accounts and inclusion
of partial year results in 2001 due to the  acquisition  of Luxtec in March 2001
and the  acquisition of NEMS and PEC in December 2000. The results of operations
for  Luxtec,  NEMS and PEC were not  included  in our  consolidated  general and
administrative expense for the entire fiscal year ended June 30, 2001.

DEPRECIATION AND AMORTIZATION  EXPENSES:  Depreciation and amortization expenses
increased to $2,455,081  for fiscal 2002,  from  $1,637,648  for fiscal 2001, an
increase of $817,433,  or 49.9%.  The increase in depreciation  and amortization
expenses in fiscal 2002 is primarily due to a full year of  amortizing  Luxtec's
goodwill in fiscal 2002 compared to three months in fiscal 2001.

RESTRUCTURING  EXPENSE:   Fiscal  2002  restructuring  expenses  relate  to  the
restructuring plan which began in early November 2001,  involving  narrowing the
focus of our operations,  the  consolidation  of certain under  performing sales

                                       27
<PAGE>
regions, the reduction of corporate overhead through workforce  reductions,  the
restructuring of our balance sheet through a recapitalization and refinancing of
the PrimeSource Healthcare and the PrimeSource Surgical senior bank debt and the
reduction of debt levels through projected improved earnings and potential asset
sales.  From November 2001 through  August 2002  significant  aspects of our new
business model,  including a reduction in workforce and executive staff, exit of
the western sales region,  recapitalization  of equity and a refinancing  of our
existing  debt were  completed.  As a result of this,  restructuring  expense of
$2,915,675  was recorded for fiscal 2002.  In addition,  during 2002, a decision
was made to dispose of the PEC  division,  and the write-off of PEC goodwill and
other impaired assets totaled $1,038,823.

INTEREST  EXPENSE:  Interest  expense  decreased to $679,244 during fiscal 2002,
compared to $917,785 during fiscal 2001, a decrease of $238,541,  or 26.0%.  Our
interest cost decreased primarily as the result of a reduction in interest rates
during fiscal 2002.

NET LOSS: Our net loss increased to $6,190,563  during fiscal 2002,  compared to
$4,382,164 during fiscal 2001, an increase of $1,808,399, or 41.3%. Our net loss
increased in fiscal 2002 primarily as a result of the costs incurred  related to
our restructuring process.

                         LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2003,  we had a working  capital  deficit of $793,154  compared to a
deficit of  $5,202,638  at June 30, 2002.  The  decrease in our working  capital
deficit is  primarily  the result of  decreased  accounts  receivable  balances,
offset by decreased total current liabilities.

On March 2, 2001,  we entered  into an Amended and  Restated  Security  and Loan
Agreement (the "Luxtec Credit  Agreement")  for a $2,500,000 line of credit (the
"Luxtec Line of Credit") with ARK CLO 2000-1 LIMITED ("ARK"). On August 6, 2002,
we amended the Luxtec Credit Agreement.  Pursuant to the amendment to the Luxtec
Credit  Agreement,  ARK waived and amended certain  provisions  under the Luxtec
Credit Agreement.  Under the amendment,  as of June 30, 2003, the maximum amount
available to borrow under the Luxtec Line of Credit was limited to the lesser of
$1,275,000 or a certain  percentage of accounts  receivable  and  inventory,  as
defined  ($1,271,585  at June 30, 2003).  As of June 30, 2003,  borrowings  bore
interest at ARK's prime rate plus 3.0% (7.00% at June 30, 2003). 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 PrimeSource  Healthcare's assets,  excluding
the capital  stock of, and assets  held by,  PrimeSource  Surgical.  At June 30,
2003, there was no availability for additional  borrowings under the Luxtec Line
of Credit.  Borrowings under the Luxtec Line of Credit are payable upon maturity
on December 31, 2003.

On March 2, 2001, as part of the Luxtec Credit Agreement, we executed an Amended
and Restated  Term Note (the "Luxtec Term Note") in the amount of $300,000  with
ARK.  The Luxtec  Term Note bore  interest at prime plus 0.5% and was secured by
substantially  all of  PrimeSource  Healthcare's  assets,  excluding the capital
stock of,  and  assets  held by,  PrimeSource  Surgical.  The  Luxtec  Term Note
required monthly principal payments of $10,000 commencing on March 31, 2001. The
Luxtec  Term Note was  scheduled  to  mature  on March  31,  2002 with a balloon

                                       28
<PAGE>
payment of $150,000 on that date.  ARK granted us an extension on the payment of
the Luxtec  Term Note  until May 31,  2002.  On August 6, 2002,  we paid off the
entire outstanding balance of the Luxtec Term Note in connection with the Luxtec
Credit Agreement amendment.

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 as of June 30, 2003.

On June 14, 1999, the Company's wholly owned subsidiary,  PrimeSource  Surgical,
entered into an Amended and Restated Credit Agreement (the "PrimeSource Surgical
Credit Agreement") with Citizens for a line of credit (the "PrimeSource Surgical
Line  of  Credit").  On  August  6,  2002,   PrimeSource  Surgical  amended  the
PrimeSource  Surgical Credit  Agreement,  pursuant to which the maturity date of
the revolving line of credit under the PrimeSource Surgical Credit Agreement was
extended to March 31, 2004,  the maturity  date of the term loan was extended to
December 31, 2003, and certain other changes were made  including  modifications
to interest rates and covenant requirements. Under the amendment, as of June 30,
2003 the maximum amount available to borrow under the PrimeSource  Surgical Line
of Credit is limited  to the lesser of  $8,000,000  or a certain  percentage  of
accounts receivable and inventory, as defined by the PrimeSource Surgical Credit
Agreement  ($5,281,805 at June 30, 2003). As of June 30, 2003, borrowings bore a
variable step  interest  rate at Citizens'  prime rate plus 4.50% (8.50% at June
30, 2003).  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 of
the assets directly held by PrimeSource  Surgical.  At June 30, 2003,  there was
$627,369  of  availability  under  the  PrimeSource  Surgical  Line  of  Credit.
Borrowings  under the  PrimeSource  Surgical  Line of Credit  are  payable  upon
maturity in March 31, 2004.

On June  14,  1999,  as  part  of the  PrimeSource  Surgical  Credit  Agreement,
PrimeSource   Surgical   executed  an  Amended  and  Restated   Term  Note  (the
"PrimeSource  Surgical  Term Loan") in the original  amount of  $5,000,000  with
Citizens.  On June 30, 2003, we paid off the entire  outstanding  balance of the
PrimeSource  Surgical  Term  Loan in  connection  with  the sale of Ruby and the
funding of the last Preferred Series G round. The PrimeSource Surgical Term Loan
was  collateralized by substantially all the assets directly held by PrimeSource
Surgical.  In connection  with the August 6, 2002  amendment to the  PrimeSource
Surgical Credit Agreement,  previously  deferred payments of $675,000 were paid,
the interest rate was modified to a variable step interest rate and the required
PrimeSource  Surgical  Term Loan  monthly  principal  payments  were  changed to
$50,000 between August 2002 and January 2003,  $75,000 between February 2003 and
July 2003.

The PrimeSource Surgical Term Loan was also subject to a term loan facility fee.
PrimeSource Surgical accrued a $75,000 fee on August 6, 2002, in connection with
the amendment to the PrimeSource Surgical Credit Agreement. PrimeSource Surgical
was obligated to pay additional $75,000 fees under the PrimeSource Surgical Term
Loan on the last day of each calendar  quarter,  beginning on September 30, 2002
and for every  quarter  thereafter  until the  earlier of payment in full of the
PrimeSource  Surgical  Term Loan or December  31,  2003.  The accrued  term loan
facility  fees were  reduced by 40%  because on June 30,  2003,  we paid off the
entire outstanding  balance of the PrimeSource  Surgical Term Loan in connection

                                       29
<PAGE>
with the sale of Ruby and the  funding  of the most  recent  Preferred  Series G
round. In connection with the PrimeSource  Surgical Term Loan payoff on June 30,
2003,  the amount  outstanding  under this term loan  facility  fee is $180,000,
which is included in accrued expense and is due on or before December 31, 2003.

The PrimeSource  Surgical Term Loan was also subject to an additional  repayment
obligation. Commencing with the three-month period ending December 31, 2002, and
for each three-month period thereafter,  fifty percent (50%) of excess cash flow
(as  defined  in  the  PrimeSource   Credit  Agreement)   generated  during  the
three-month  period  was  applied  to the  principal  amount of the  PrimeSource
Surgical Term Loan. At December 31, 2002,  the additional  repayment  obligation
totaled $10,451,  which was  subsequently  paid. At March 31, 2003, there was no
additional repayment obligation.

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. PrimeSource Surgical was in compliance with
these covenants as of June 30, 2003.

Other notes payable  include a $100,000 note payable for tenant  improvements to
Luxtec's leased premises in West Boylston,  Massachusetts,  which bears interest
at 9.5% and is due September 19, 2005.  Payments are interest only for the first
12 months,  with remaining  payments  calculated on a 7-year  amortization table
with a balloon  payment on  September  19,  2005.  At June 30, 2003 and June 30,
2002,  Luxtec had  outstanding  borrowing of $77,650 and $91,481,  respectively,
under the tenant  note  payable.  In  addition,  other notes  payable  include a
PrimeSource  Surgical  non-interest bearing demand note payable with an original
amount of $559,977 (net of  unamortized  discount of $40,023 based on an imputed
interest  rate of 8%) to its  special  legal  counsel  in  payment  of  existing
outstanding  accounts  payable,  which matures May 30, 2004.  Monthly  principal
payments are $30,000  commencing  on October 20, 2002. At June 30, 2003 and June
30, 2002,  PrimeSource  Surgical had  outstanding  borrowing of $357,173 (net of
unamortized  discount  of  $12,827)  and  $559,977,  respectively,  on this note
payable to legal  counsel.  Finally,  other notes payable  include a PrimeSource
Surgical  $250,000  note payable to Citizens in payment of the bank  refinancing
amendment fee. Equal principal  payments on the note of $62,500 each were or are
due March 31, 2003, June 30, 2003,  September 30, 2003 and December 31, 2003. At
June 30, 2003 and June 30, 2002, PrimeSource Surgical had outstanding borrowings
of $187,500 and $250,000,  respectively,  on this note payable to Citizens. This
note has been recorded as deferred  financing  costs and is being amortized over
the life of the PrimeSource Surgical Credit Agreement.

On August 6, 2002, we raised  $2,254,466,  before costs,  in additional  capital
through the issuance and sale of the Series G Stock and the warrants to purchase
common stock. In addition, on September 15, 2002, November 15, 2002, January 15,
2003 and June 30, 2003, we raised an additional $1,615,536,  before costs and in
aggregate,  in capital  through the  issuance and sale of  additional  shares of
Series G Stock.  The proceeds from the offerings  were used to pay certain trade
payables and to reduce outstanding borrowings under our credit facilities.

As of June 30, 2003, we had $489,911 of cash and cash equivalents.  In addition,
the principal  source of our short-term  borrowing is the  PrimeSource  Surgical

                                       30
<PAGE>
Line of Credit.  As of June 30, 2003, we had  approximately  $627,000  available
under the PrimeSource  Surgical Line of Credit.  In addition,  we may attempt to
raise additional equity or debt capital in the future.

                        RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL  ACTIVITIES.  SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred.  The Standard is effective for disposal  activities that are initiated
after  December  31, 2002.  The Company does not expect this  Standard to have a
material effect on its financial position or results of operations.

In December  2002,  the FASB issued SFAS No.  148,  ACCOUNTING  FOR  STOCK-BASED
COMPENSATION  -- TRANSITION AND DISCLOSURE -- AN AMENDMENT OF FASB STATEMENT NO.
123. SFAS No. 148 amends SFAS No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION to
provide  alternative  methods of transition  for a voluntary  change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition,  SFAS No. 148 amends the  disclosure  requirements  of SFAS No. 123 to
require prominent  disclosures in both annual and interim  financial  statements
about the method of accounting for  stock-based  employee  compensation  and the
effect on the method used on reported results. The disclosure requirements apply
to all companies for fiscal quarters beginning after December 15, 2002.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),  GUARANTOR'S
ACCOUNTING  AND  DISCLOSURE  REQUIREMENTS  FOR  GUARANTEES,  INCLUDING  INDIRECT
GUARANTEES  OF  INDEBTEDNESS   OF  OTHERS.   FIN  45  addresses  the  disclosure
requirements of a guarantor in its interim and annual financial statements about
its  obligations  under  certain  guarantees  that  it has  issued.  FIN 45 also
requires a guarantor to recognize,  at the inception of a guarantee, a liability
for the fair value of the obligation  undertaken in issuing the  guarantee.  The
disclosure  requirements  of FIN 45 are effective for the Company in its quarter
ended  December  31,  2002.  The  liability  recognition  requirements  will  be
applicable prospectively to all guarantees issued or modified after December 31,
2002. The Company had no guarantees requiring disclosure.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), CONSOLIDATION
OF VARIABLE INTEREST ENTITIES which will be effective for the Company as of June
30, 2004. The Company has no variable interest entities. Under FIN 46, companies
are required to consolidate variable interest entities for which they are deemed
to be the primary  beneficiary,  and disclose  information  about those in which
they have a significant variable interest.

In May 2003,  the FASB  issued SFAS No. 150,  ACCOUNTING  FOR CERTAIN  FINANCIAL
INSTRUMENTS WITH  CHARACTERISTICS  OF BOTH LIABILITIES AND EQUITY.  SFAS No. 150
changes the  classification  in the  statement of financial  position of certain
common  financial  instruments  from either equity or mezzanine  presentation to
liabilities  and requires an issuer of those  financial  statements to recognize
changes in the fair value or the redemption amount, as applicable,  in earnings.
SFAS No. 150 is effective  immediately  for  financial  instruments  (except for
mandatorily  redeemable  financial  instruments  issued by nonpublic  companies)

                                       31
<PAGE>
entered into or modified  after May 31,  2003.  It is  effective  for  financial
instruments (except for mandatorily  redeemable financial  instruments issued by
nonpublic  companies)  issued on or before May 31, 2003 at the  beginning of the
first interim period beginning after June 15, 2003. Finally, it is effective for
mandatorily  redeemable financial  instruments issued by nonpublic companies for
fiscal years  beginning after December 15, 2003. The effect of adopting SFAS No.
150 will be recognized as a cumulative  effect of an accounting change as of the
beginning of the period of adoption. The company anticipates adoption to have an
effect on the  classification  of its  liabilities,  and does not  anticipate  a
material effect on its results of operations.

                                  RISK FACTORS

IF WE ARE  UNABLE  TO  ACHIEVE  OUR  BUSINESS  OBJECTIVES  AND  COMPLY  WITH THE
COVENANTS IN OUR CREDIT  FACILITIES WE MAY HAVE TO SUSPEND OR CEASE  OPERATIONS.
We had income from  continuing  operations of $777,990 for our fiscal year ended
June 30, 2003. If we are unable to generate sufficient positive cash flow and/or
raise  additional  equity or debt  capital,  we may have  insufficient  funds to
continue  our  operations.  In  addition,  if we are  unable to comply  with the
covenants of our credit  facilities,  our creditors may accelerate  repayment of
the borrowings under our facilities.

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.

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 ORGANIZATION  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

                                       32
<PAGE>

voting.  Further,  the majority of the members of our Board of Directors serve a
staggered  three-year  term,  which  may  also  make  it  more  difficult  for a
third-party to gain control of our Board of Directors.

PRIMESOURCE  SURGICAL HAS A LIMITED OPERATING HISTORY,  WHICH MAKES IT DIFFICULT
TO PREDICT ITS FUTURE PERFORMANCE.  PrimeSource Surgical,  which is our material
subsidiary,   commenced  operations  in  1996,  and  grew  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  may be an
important  element  of  a  future  business  strategy.  As  we  sell  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:

     o    potential customers' internal approval processes;

     o    customers' concerns about implementing a new method of doing business;
          and
     o    seasonal and other timing effects.

                                       33
<PAGE>
Increased  sales to larger accounts may result in lower 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 G  Preferred  Stock and
common  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.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our  market  risk  exposure  relates to  outstanding  debt.  The  balance of our
outstanding  bank debt at June 30, 2003 was $6,113,521,  all of which is subject

                                       34
<PAGE>
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>
<TABLE>
<CAPTION>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  PRIMESOURCE HEALTHCARE, INC. and Subsidiaries


                        Consolidated Financial Statements
                          as of June 30, 2003 and 2002,
                             and for the Years Ended
                        June 30, 2003, 2002 and 2001 and
                          Independent Auditors' Report


                                                                                                                   Page
<S>                                                                                                        <C>
Independent Auditors' Report                                                                                        F-1

Consolidated Balance Sheets as of June 30, 2003 and 2002                                                      F-2 - F-3

Consolidated Statements of Operations for the Years Ended
June 30, 2003, 2002 and 2001                                                                                  F-4 - F-5

Consolidated Statements of Stockholders' Equity (Capital
Deficiency) for the Years Ended June 30, 2003, 2002 and 2001                                                        F-6

Consolidated Statements of Cash Flows for the Years Ended
June 30, 2003, 2002 and 2001                                                                                  F-7 - F-8

Notes to Consolidated Financial Statements                                                                   F-9 - F-34

</TABLE>
                                    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, 2003 and 2002,
and the related  consolidated  statements of  operations,  stockholders'  equity
(capital  deficiency),  and cash flows for each of the three years in the period
ended June 30, 2003. 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, 2003 and 2002, and the results of their  operations
and their  cash flows for each of the three  years in the period  ended June 30,
2003 in conformity with accounting  principles  generally accepted in the United
States of America.

As discussed in Note 6 to the  consolidated  financial  statements,  the Company
changed its method of accounting for goodwill and other  intangible  assets with
indefinite lives as required by Statement of Financial  Accounting Standards No.
142, Goodwill and Other Intangible Assets, which was effective July 1, 2002.


Deloitte & Touche LLP
Phoenix, Arizona

October 14, 2003
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002
-------------------------------------------------------------------------------------------------------------------

ASSETS                                                                                  2003                2002

CURRENT ASSETS:
<S>                                                                                <C>                 <C>
  Cash and cash equivalents                                                        $    489,911        $   285,735
  Accounts receivable - net of allowance for doubtful accounts
    of approximately $214,000 (2003) and $400,000 (2002)                              6,111,062          6,348,534
  Inventories - net                                                                   7,517,965          7,496,108
  Income taxes receivable                                                                67,800            110,000
  Prepaid expenses and other current assets                                             172,397            207,765
                                                                                   ------------        -----------

           Total current assets                                                      14,359,135         14,448,142

PROPERTY AND EQUIPMENT - Net                                                            996,358          1,139,935

INTANGIBLE ASSETS - Net of accumulated amortization
  of approximately $236,000 (2003) and $267,000 (2002)                                  118,290            143,272

GOODWILL - Net
                                                                                     15,956,883         21,499,956

OTHER ASSETS - Net of accumulated amortization of
  approximately $782,000 (2003) and $345,000 (2002)                                     233,874            355,463
                                                                                   ------------        -----------

TOTAL                                                                              $ 31,664,540        $37,586,768
                                                                                   ============        ===========

                                                                                                     (Continued)
</TABLE>
                                       F-2
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002
-------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)                              2003          2002

CURRENT LIABILITIES:
<S>                                                                               <C>           <C>
  Accounts payable                                                                $  5,636,333  $  5,587,886
  Accrued expenses                                                                   2,240,770     3,307,581
  Accrued restructuring costs                                                          690,968     1,111,133
  Customer deposits                                                                     72,895       220,901
  Lines of credit                                                                    5,926,021     7,530,875
  Current portion of long-term debt                                                    559,877     1,855,481
  Current portion of capital lease obligations                                          25,425        36,923
                                                                                  ------------  ------------
           Total current liabilities                                                15,152,289    19,650,780
                                                                                  ------------  ------------

CAPITAL LEASE OBLIGATIONS - Net of current portion                                      21,433        47,789
                                                                                  ------------  ------------

LONG-TERM DEBT - Net of current portion                                                105,696     1,244,307
                                                                                  ------------  ------------

COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 9, 10 and 12)

SERIES C REDEEMABLE, CONVERTIBLE PREFERRED STOCK
  $1.00 par value - authorized, 344,864 shares; issued and outstanding,
  344,864 shares; aggregate liquidation preference of $18,983,193                                 16,313,946
                                                                                                ------------

SERIES E REDEEMABLE, CONVERTIBLE PREFERRED STOCK
  no par value - authorized, 1,000,000 shares; issued and outstanding,
  325,000 shares; aggregate liquidation preference of $10,009,288                                  2,029,864
                                                                                                ------------

SERIES F REDEEMABLE, CONVERTIBLE PREFERRED STOCK
  no par value - authorized, 5,221,248 shares; issued and outstanding,
  5,221,248 shares; aggregate liquidation preference of $5,402,061                                 3,649,145
                                                                                                ------------

SERIES G REDEEMABLE, CONVERTIBLE PREFERRED STOCK no par value - authorized,
  230,000 shares; issued and outstanding,
  222,500 shares; aggregate liquidation preference of $14,687,737                    5,699,121
                                                                                  ------------

STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY):
  Common stock, $0.01 par value - authorized, 75,000,000 shares;
     issued and outstanding, 22,375,094 (2003) and 7,978,309 (2002) shares             223,750        79,783
  Additional paid-in capital                                                        21,347,451    12,490,202
  Accumulated deficit                                                             (10,885,200)  (17,919,048)
                                                                                  ------------  ------------

           Total stockholders' equity (capital deficiency)                          10,686,001   (5,349,063)
                                                                                  ------------  ------------

TOTAL                                                                             $ 31,664,540  $ 37,586,768
                                                                                  ============  ============

See notes to consolidated financial statements.                                                  (Concluded)
</TABLE>
                                       F-3
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
-------------------------------------------------------------------------------------------------------------------


                                                                             2003         2002           2001

<S>                                                                     <C>           <C>             <C>
NET SALES                                                               $ 46,360,019  $ 53,695,717    $ 48,402,469

COST OF SALES                                                             29,297,572    35,329,128      33,475,261
                                                                        ------------  ------------    ------------

GROSS PROFIT                                                              17,062,447    18,366,589      14,927,208
                                                                        ------------  ------------    ------------

OPERATING EXPENSES:
  Selling expenses                                                         7,450,394     8,890,380       8,188,831
  General and administrative expenses                                      7,015,217     8,625,555       8,341,048
  Depreciation and amortization expenses                                     843,500     2,455,081       1,637,648
  Restructuring expenses                                                     345,507     3,954,498
                                                                        ------------  ------------    ------------

           Total operating expenses                                       15,654,618    23,925,514      18,167,527
                                                                        ------------  ------------    ------------

OPERATING INCOME (LOSS)                                                    1,407,829   (5,558,925)     (3,240,319)

INTEREST EXPENSE                                                           (839,243)     (679,244)       (917,785)

OTHER INCOME (EXPENSE)                                                       189,704     (115,357)        (16,306)
                                                                        ------------  ------------    ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                                     758,290   (6,353,526)
  BEFORE INCOME TAX BENEFIT (PROVISION)                                                                (4,174,410)

INCOME TAX BENEFIT (PROVISION)                                                19,700        61,700       (207,200)
                                                                        ------------  ------------    ------------

INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS AND
  BEFORE CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE                                                       777,990   (6,291,826)     (4,381,610)
                                                                        ------------  ------------    ------------
DISCONTINUED OPERATIONS:
  INCOME (LOSS) FROM DISCONTINUED OPERATION - NET OF INCOME TAX              121,697       101,263           (554)

  LOSS ON DISPOSAL OF DISCONTINUED OPERATION - NET OF INCOME TAX             (73,830)
                                                                        ------------  ------------    ------------
  TOTAL                                                                       47,867       101,263           (554)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -
  GOODWILL IMPAIRMENT                                                    (4,454,656)
                                                                        ------------  ------------    ------------

NET LOSS                                                                 (3,628,799)   (6,190,563)     (4,382,164)

DIVIDENDS AND ACCRETION ON PREFERRED STOCK                               (1,147,094)   (2,652,571)     (1,419,114)

EFFECT OF EQUITY RECAPITALIZATION                                         11,809,741
                                                                        ------------  ------------    ------------

NET INCOME (LOSS) AVAILABLE FOR COMMON
  STOCKHOLDERS                                                          $  7,033,848  $(8,843,134)    $(5,801,278)
                                                                        ============  ============    ============

</TABLE>
                                       F-4

<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
-------------------------------------------------------------------------------------------------------------------


                                                                                     2003        2002         2001

INCOME (LOSS) PER SHARE BEFORE DISCONTINUED
 OPERATIONS AND CUMULATIVE EFFECT
 OF CHANGE IN ACCOUNTING PRINCIPLE - GOODWILL
  IMPAIRMENT:
<S>                                                                                 <C>         <C>             <C>
    Basic                                                                         $  0.54       $(1.13)         $(1.37)
                                                                                  =======       =======         =======
    Diluted                                                                       $  0.24       $(1.13)         $(1.37)
                                                                                  =======       =======         =======

LOSS PER SHARE FROM DISCONTINUED OPERATIONS - NET OF INCOME TAX
  DISPOSAL OF OPERATION:
    Basic                                                                                         $0.02
                                                                                                =======
    Diluted                                                                                       $0.02
                                                                                                =======

LOSS PER SHARE FROM CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -
 GOODWILL IMPAIRMENT:
    Basic                                                                         $(0.21)
                                                                                  =======
    Diluted                                                                       $(0.09)
                                                                                  =======

INCOME (LOSS) PER SHARE:
    Basic                                                                         $ 0.33       $(1.11)         $(1.37)
                                                                                  =======       =======         =======
    Diluted                                                                       $ 0.15       $(1.11)         $(1.37)
                                                                                  =======       =======         =======

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
------------------------------------------------------------------------------------------------------------------------------------

                                              Series B Convertible                 Additional                          Total
                                     Preferred Stock         Common Stock           Paid-in       Accumulated       Stockholders'
                                  ------------------------------------------
                                   Shares   Amount         Shares    Amount          Capital      Deficit       Equity (Deficiency)
<S>                                <C>     <C>            <C>        <C>           <C>           <C>             <C>
BALANCE, JULY 1, 2000              46,889  $1,195,543     2,874,166  $28,742       $1,523,186    $(3,274,636)    $    (527,165)
 Issuance of common stock
   in and effect of reverse merger                        3,335,000   33,350        4,649,905                        4,683,255
 Issuance of common stock                                   578,324    5,783        1,077,785                        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 and
   accretion                                                                                        (1,419,114)     (1,419,114)
 Net loss                               -          -              -       -                 -       (4,382,164)     (4,382,164)
                                 --------- ------------  ---------- ---------     -----------     -------------     -----------
BALANCE, JUNE 30, 2001                  -          -      7,959,704   79,597        8,434,697       (9,075,914)       (561,620)
 Issuance of common stock                                    18,605      186           24,814                           25,000
 Warrants and beneficial conversion
    features of preferred stock                                                     3,912,000                        3,912,000
 Preferred stock dividends and accretion                                                            (2,652,571)     (2,652,571)
 Restricted common stock vesting                                                      118,709                          118,709
 Refund fractional shares                                                                 (18)                             (18)
 Net loss                               -          -             -        -                -        (6,190,563)     (6,190,563)
                                 --------- ------------  ---------- ---------     -----------     -------------     -----------
BALANCE, JUNE 30, 2002                  -          -      7,978,309   79,783       12,490,202      (17,919,048)     (5,349,063)
 Equity recapitalization                                 14,735,066  147,351        6,785,864       11,809,741      18,742,956
 Warrants issued with issuance of Series G
    preferred stock                                                                 2,062,000                        2,062,000
 Preferred stock dividends and accretion                                                            (1,147,094)     (1,147,094)
 Cancellation of shares in legal settlement                (132,963)  (1,330)         (41,218)                         (42,548)
 Cancellation of shares in sale of PEC assets              (201,067)  (2,011)         (62,330)                         (64,341)
 Cancellation of shares in sale of Ruby Merger               (4,251)     (43)          (1,317)                          (1,360)
 Issuance of compensatory stock options                                               110,000                          110,000
 Restricted common stock vesting                                                        4,250                            4,250
 Net loss                               -          -             -        -                -        (3,628,799)     (3,628,799)
                                 --------- ------------  ---------- ---------     -----------     -------------     -----------
BALANCE, JUNE 30, 2003                  -  $       -     22,375,094 $223,750      $21,347,451     $(10,885,200)     $10,686,001
                                 ========= ============  ========== =========     ===========     =============     ===========

See notes to consolidated financial statements.
</TABLE>
                                       F-6
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
-----------------------------------------------------------------------------------------------------------

                                                                       2003          2002           2001
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                              <C>            <C>           <C>
  Net loss                                                       $(3,628,799)   $(6,190,563)  $(4,382,164)
  Adjustments to reconcile net loss to net cash provided by
    (used in ) operating activities:
    Depreciation and amortization expenses                            849,657      2,462,411     1,659,771
    Amortization of debt discount                                                     28,600        67,311
    Loss on sale of division                                           73,830      1,038,823
    Change in fair value of warrant put obligation                                  (95,000)     (172,000)
    Loss on disposal of property and equipment                         22,147        124,132         8,179
    Goodwill impairment                                             4,454,656
    Write-off of intangible assets                                                    12,406        25,132
    Issuance of common stock for services                               4,250         25,000       100,000
    Gain on legal settlement                                         (42,548)
    Stock compensation expense                                        110,000        118,709
    Changes in operating assets and liabilities - net of
      effect of business acquisitions and dispositions:
      Accounts receivable                                           (313,913)      2,208,904       873,575
      Inventories                                                   (397,713)      1,978,659     (822,554)
      Income taxes receivable and payable                              42,200      (119,500)       859,666
      Prepaid expenses and other current assets                      (31,021)          4,644       131,166
      Other assets                                                   (80,723)      (181,504)     (381,710)
      Accounts payable                                                578,565    (5,235,025)       779,767
      Accrued expenses                                              (604,266)        568,636       316,944
      Accrued restructuring costs                                   (420,165)      1,111,133
      Customer deposits                                             (148,006)      (347,215)       379,456
                                                                    ---------    -----------   -----------

           Net cash provided by (used in) operating activities        468,151    (2,486,750)     (557,461)
                                                                    ---------    -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                (255,320)       (86,828)     (475,280)
  Purchase of intangible assets                                                     (64,166)
  Acquisition of other assets                                                       (31,904)
  Proceeds from sale of property and equipment                            157          6,462         7,200
  Cash paid for business
    acquisitions - net                                                                           (391,000)
  Payment of business acquisition costs                                                          (785,159)
  Proceeds from business disposition                                1,000,000
                                                                    ---------    -----------   -----------
           Net cash provided by (used in) investing activities        744,837      (176,436)   (1,644,239)
                                                                    ---------    -----------   -----------

                                                                                               (Continued)
</TABLE>
                                       F-7
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
-------------------------------------------------------------------------------------------------------------------

                                                                           2003          2002            2001
CASH FLOWS FROM FINANCING ACTIVITIES:
<S>                                                                     <C>            <C>              <C>
  Borrowings under lines of credit                                      16,785,191     19,506,353       28,043,512
  Repayments under lines of credit                                    (18,390,045)   (20,027,304)     (28,674,599)
  Borrowings under long-term debt                                                         600,000           11,854
  Repayment of long-term debt                                          (2,731,323)      (872,711)      (2,361,116)
  Repayment on capital leases                                             (36,666)       (47,192)         (31,340)
  Proceeds from issuance of common stock                                                                     3,261
  Proceeds from issuance of preferred stock - net of costs               3,364,031      3,167,170        5,706,061
  Stock repurchases                                                                          (18)
                                                                      ------------   ------------     ------------
           Net cash (used in) provided by financing activities         (1,008,812)      2,326,298        2,697,633
                                                                      ------------   ------------     ------------
NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                     204,176      (336,888)          495,933
CASH AND CASH EQUIVALENTS, BEGINNING
  OF YEAR                                                                  285,735        622,623          126,690
                                                                      ------------   ------------     ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                 $   489,911    $   285,735      $   622,623
                                                                      ============   ============     ============


SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION - Cash paid during
    the year for:
    Interest                                                           $   698,685    $   741,905      $   945,393
                                                                      ============   ============     ============

    Income taxes                                                       $    30,000       $256,100      $   109,638
                                                                      ============   ============     ============

SUPPLEMENTAL DISCLOSURES OF NONCASH
  TRANSACTIONS -

  Issuance of note payable for debt refinancing cost                   $   250,000
                                                                      ============

  Discount on issuance of note payable for legal services              $  (12,827)
                                                                      ============

  Fair value of common stock cancelled in sale of asset                $    64,341
                                                                      ============

  Fair value of common stock cancelled in legal settlement             $    42,548
                                                                      ============

  Equipment acquired under capital lease                                              $    54,745      $    39,906
                                                                                     ============     ============

  Common stock issued for services                                     $     4,250    $    25,000      $   100,000
                                                                      ============   ============     ============

During the year ended June 30, 2001, the Company acquired entities in
transactions summarized as follows:
    Fair value of assets acquired, including transaction costs                                         $17,076,173
    Issuance of common stock                                                                           (4,254,000)
    Issuance of series D preferred stock                                                               (1,456,180)
    Cash paid in business acquisition - net of refund                                                    (391,000)
                                                                                                      ------------

           Liabilities assumed                                                                         $10,974,993
                                                                                                      ============

See notes to consolidated financial statements.                                                        (Concluded)
</TABLE>
                                       F-8
<PAGE>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
--------------------------------------------------------------------------------

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  Surgical 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 Luxtec
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 PrimeSource Surgical options to purchase 2,519,542
shares of common stock and  PrimeSource  Surgical  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 previously  outstanding 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  Ruby  Merger  Sub  ("Ruby"),   which  included  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  method  of  accounting.

                                      F-9
<PAGE>
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 year ended June 30, 2001 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, along with adjustments that give effect to events
that  are  directly  attributable  to the  transaction  and  expected  to have a
continuing impact.

     Net sales                                                $58,991,021
                                                             ============

     Net loss                                                $(7,834,540)
                                                             ============

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

Effective June 30, 2002, Ruby, the Company's indirect  wholly-owned  subsidiary,
sold all of the assets of the former PEC line of business  in  exchange  for the
cancellation of previously issued stock to the founder of PEC and the assumption
of certain  liabilities  with respect to the PEC line of business.  Goodwill and
other  impaired  assets  were  written  off in  2002,  resulting  in a  loss  of
$1,038,823,  which is  recorded in  restructuring  expense in the  statement  of
operations.

On June 30, 2003, PrimeSource Surgical,  Inc., a subsidiary of the Company, sold
all of the issued and  outstanding  capital  stock of Ruby for cash  proceeds of
$1,000,000  to New England  Medical  Specialties,  Inc., a newly  formed  entity
("NMSI").  The  Company  recognized  a loss of  $73,830  on the  sale.  The cash
proceeds  were used to payoff the  PrimeSource  Term Note with  Citizens Bank of
Massachusetts ("Citizens").

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - The accompanying  consolidated financial statements have
been prepared on the accrual basis of  accounting.  The Company has incurred net
losses of $3,628,799 in 2003,  $6,190,563 in 2002,  and  $4,382,164 in 2001. The
Company's  business  plan  continues  to focus on improving  operations  through
internal growth of its specialty  medical products lines and through  additional
manufacturing  acquisitions of strategic businesses. 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's  primary debt financing is provided under loans from two different
banks. As of June 30, 2003, the Company had $4,654,436 of outstanding borrowings
under the  PrimeSource  Surgical  credit  agreement (the  "PrimeSource  Surgical
Credit Agreement"), and $1,271,585 outstanding under the Luxtec credit agreement

                                      F-10
<PAGE>
(the "Luxtec Credit Agreement"),  as further discussed in Note 7. The two credit
agreements discussed above include certain financial  covenants,  with which the
Company was in  compliance at June 30, 2003.  The  PrimeSource  Surgical  Credit
Agreement  matures on March 31, 2004 and the Luxtec Credit Agreement  matures on
December 31, 2003. The Company is evaluating  refinancing its credit  agreements
or raising  additional  funding  through equity  placements to  consolidate  its
credit  agreements  into a single  agreement.  Based upon  discussions  to date,
Company management  believes it will obtain adequate bank facilities and funding
to continue to fund operations.

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

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid  investments
purchased  with  an  original  maturity  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, 2003, the Company had uninsured cash balances totaling $269,979.

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 for Luxtec and average costing for the remaining companies.

PROPERTY AND  EQUIPMENT  are recorded at cost.  Depreciation  has 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. 144,  Accounting  for the  Impairment  or  Disposal of  Long-Lived
Assets. In accordance with SFAS No. 144, long-lived assets should be measured at
the lower of carrying amount or fair value less cost to sell,  whether  reported
in continuing operations or in discontinued operations. The Company periodically
reviews the carrying value of long-lived assets to determine whether  impairment
to such value has occurred.

GOODWILL AND OTHER INTANGIBLE ASSETS - Effective January 1, 2002, goodwill is no
longer  amortized  but  instead  is subject to  periodic  impairment  testing in
accordance with SFAS No. 142, Goodwill and Other Intangible  Assets. See Note 6.
Intangible  assets  with  finite  lives are stated at cost,  net of  accumulated
amortization  and are tested for  impairment  in  accordance  with SFAS No. 144.
These assets are amortized on the straight-line method over the estimated useful
lives or periods of expected benefit, but not in excess of 20 years.  Intangible
assets with indefinite  lives are no longer amortized but instead are subject to
periodic impairment testing in accordance with SFAS No. 142.

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.

                                      F-11
<PAGE>
REVENUE RECOGNITION - The Company recognizes revenue at the time of shipment and
passage of title.  The Company  also  receives  revenues  under  certain  agency
arrangements  and recognizes  revenue,  on a net basis,  when the agency sale is
complete.   Provision  is  made  currently  for  estimated   sales  returns  and
allowances,  which have  historically been  insignificant.  The Company expenses
warranty costs as incurred as amounts have historically  been  insignificant and
Luxtec offers minimal warranty of products. There were no warranty costs for the
years ended June 30, 2003 and 2002 and for the year ended June 30,  2001,  total
costs were  approximately  $11,000 and are included in cost of goods sold in the
accompanying consolidated statements of operations.

SHIPPING AND HANDLING COSTS are included in costs of sales.

RESEARCH AND DEVELOPMENT COSTS are incurred by the Company's Luxtec division and
are charged to operations as incurred.  Total research and development costs for
the years ended June 30, 2003 and 2002 were  approximately  $253,000 and $87,000
respectively.

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. Common stock of the Company has been delisted since November 17, 2000
and does not trade on any  exchange and is not quoted on any  quotation  system.
Fair value of the Company's common stock is determined by the Company's Board of
Directors  based upon the most  recent  significant  capital  stock  transaction
adjusted by current major events affecting the Company's financial condition.

Had compensation  expense for these employee stock option grants been determined
based on the fair value at the grant dates,  `consistent  with SFAS No. 123, the
Company's net income (loss) for fiscal year 2003,  2002 and 2001 would have been
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                               2003                2002                2001

<S>                                         <C>               <C>                 <C>
Net income (loss) available to common       $7,033,848        $(8,843,134)        $(5,801,278)
stockholders, as reported

Stock-based employee compensation            (521,258)           (401,185)           (611,336)
expense determined under fair-value         ----------        ------------        ------------
method

Pro forma net income (loss)                 $6,512,590        $(9,244,319)        $(6,412,614)
                                            ==========        ============        ============

Earnings Per Share:
  Basic- as reported                        $     0.33        $     (1.11)        $     (1.37)
  Basic- pro forma                          $     0.31        $     (1.16)        $     (1.51)

  Diluted- as reported                      $     0.15        $     (1.11)        $     (1.37)
  Diluted- pro forma                        $     0.14        $     (1.16)        $     (1.51)

Black-Scholes Assumptions
  Risk-free interest rate                        3.10%               5.21%               5.28%
  Expected volatility                              50%                 50%                 50%
  Expected lives- in years                          6                   7                   7
  Expected dividend yield                           0%                  0%                  0%
</TABLE>
                                      F-12
<PAGE>
FINANCIAL  INSTRUMENTS - Pursuant to SFAS No. 107,  DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS,  the Company is required to disclose the fair value of
all  financial  instruments  at June 30, 2003 and 2002.  The  Company  generally
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.  At June 30,  2003 and  2002,  the
estimated fair value of the company's long-term debt was approximately  $666,000
and  $3,100,000,  respectively.  The  Company  estimates  the fair  value of its
long-term debt generally  using  discounted  cash flow analysis based on current
interest rates for instruments with similar maturities.

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.

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.  The following represents a reconciliation from basic earnings per
share to diluted  earnings per share.  Options and  warrants to purchase  common
stock totaling  1,640,185,  5,713,342 and 4,409,289 were outstanding at June 30,
2003, 2002 and 2001,  respectively,  but were not included in the computation of
diluted  earnings  per share  because  the  effect  would be  antidilutive.  Put
warrants  totaling  282,022  for the years ended June 30, 2002 and 2001 were not
included in the  computation  of diluted  earnings per share  because the effect
would also be antidilutive.

<TABLE>
<CAPTION>
<S>                                                          <C>            <C>           <C>
                                                             2003            2002          2001

Weighted-average shares outstanding - basic                21,059,853     7,975,208     4,249,494

Incremental shares due to assumed exercise of              14,479,944
  outstanding options and warrants

Incremental shares due to assumed conversion of            17,484,715
   Series G preferred stock                                ----------     ----------    ----------

Weighted average shares outstanding - diluted              53,024,512     7,975,208     4,249,494
                                                           ==========     ==========    ==========
</TABLE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In accordance with SFAS No. 142, the
Company completed the test for impairment as of July 1, 2002, and concluded that
consolidated  goodwill was impaired.  The Company  recorded a non-cash charge of
$4,454,656  to  reduce  the  carrying  value of its  goodwill.  This  charge  is
non-operational in nature and is reflected as a cumulative effect of a change in
accounting principle,  effective July 1, 2002, in the accompanying  Consolidated
Statements of Operations.  No income tax effect was recognized as the Company is
in a loss  position and any expense  recorded  would be offset by a reduction in
the corresponding valuation allowance.

The total  impairment  amount of  $4,454,656  is  attributable  to the Company's
manufacturing  reporting  segment  and  represents  a portion of the  previously
unamortized   goodwill   resulting  from  the  Company's   reverse  merger  with
PrimeSource Surgical on March 2, 2001. In calculating the impairment charge, the

                                      F-13
<PAGE>
consolidated  goodwill was  allocated to each  reporting  segment based upon the
estimated  fair  value  of each  reporting  unit.  The  fair  value  of the each
reporting unit was estimated using a weighted average of the income  methodology
approach, the market methodology approach and the asset based approach.

In October 2001, the FASB issued SFAS No. 144,  ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED  ASSETS.  SFAS No. 144 requires that long-lived assets be
measured  at the  lower of  carrying  amount  or fair  value  less cost to sell,
whether  reported in continuing  operations or in discontinued  operations.  The
standard was effective for the Company's fiscal year beginning July 1, 2002. The
Company reported discontinued  operations relating to the sale of Ruby stock and
related disposal of NEMS in the year ended June 30, 2003.

In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL  ACTIVITIES.  SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred.  The standard is effective for disposal  activities that are initiated
after  December  31, 2002.  The Company does not expect this  standard to have a
material effect on its financial position or results of operations.

In December  2002,  the FASB issued SFAS No.  148,  ACCOUNTING  FOR  STOCK-BASED
COMPENSATION  -- TRANSITION AND DISCLOSURE -- AN AMENDMENT OF FASB STATEMENT NO.
123. SFAS No. 148 amends SFAS No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION to
provide  alternative  methods of transition  for a voluntary  change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition,  SFAS No. 148 amends the  disclosure  requirements  of SFAS No. 123 to
require prominent  disclosures in both annual and interim  financial  statements
about the method of accounting for  stock-based  employee  compensation  and the
effect on the method used on reported results. The disclosure requirements apply
to all companies for fiscal  quarters  beginning  after  December 15, 2002.  The
Company has elected not to voluntarily  change to the fair value based method of
accounting for  stock-based  compensation at this time. The Company has included
the additional disclosure requirements in Notes 2 and 9.

In  November  2002,  the FASB  issued  FASB  Interpretation  No. 45 ("FIN  45"),
GUARANTOR'S  ACCOUNTING AND DISCLOSURE  REQUIREMENTS  FOR GUARANTEES,  INCLUDING
INDIRECT  GUARANTEES  OF  INDEBTEDNESS  OF  OTHERS.  FIN No.  45  addresses  the
disclosure  requirements  of a guarantor  in its  interim  and annual  financial
statements  about its obligations  under certain  guarantees that it has issued.
FIN No. 45 also  requires  a  guarantor  to  recognize,  at the  inception  of a
guarantee,  a  liability  for the fair  value of the  obligation  undertaken  in
issuing the guarantee.  The disclosure requirements of FIN No. 45 were effective
for  the  Company  in  its  quarter  ended  December  31,  2002.  The  liability
recognition  requirements  will be applicable  prospectively  to all  guarantees
issued or modified  after  December  31,  2002.  The  Company had no  guarantees
requiring disclosure.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), CONSOLIDATION
OF VARIABLE INTEREST ENTITIES which will be effective for the Company as of June
30, 2004. Under FIN 46, companies are required to consolidate  variable interest
entities for which they are deemed to be the primary  beneficiary,  and disclose
information about those in which they have a significant variable interest.  The
Company has no variable interest entities.

In May 2003,  the FASB issued  Statement 150,  ACCOUNTING FOR CERTAIN  FINANCIAL
INSTRUMENTS WITH  CHARACTERISTICS  OF BOTH LIABILITIES AND EQUITY.  SFAS No. 150
changes the  classification  in the  statement of financial  position of certain
common  financial  instruments  from either equity or mezzanine  presentation to
liabilities  and requires an issuer of those  financial  statements to recognize
changes in the fair value or the redemption amount, as applicable,  in earnings.
SFAS No. 150 is effective  immediately  for  financial  instruments  (except for
mandatorily  redeemable  financial  instruments  issued by nonpublic  companies)

                                      F-14
<PAGE>
entered into or modified  after May 31,  2003.  It is  effective  for  financial
instruments (except for mandatorily  redeemable financial  instruments issued by
nonpublic  companies)  issued on or before May 31, 2003 at the  beginning of the
first interim period beginning after June 15, 2003. Finally, it is effective for
mandatorily  redeemable financial  instruments issued by nonpublic companies for
fiscal years beginning after December 15, 2003. The effect of adopting Statement
150 will be recognized as a cumulative  effect of an accounting change as of the
beginning of the period of adoption. The Company anticipates adoption to have an
effect on the  classification  of its  liabilities,  and does not  anticipate  a
material effect on its results of operations.

RECLASSIFICATIONS  -  Certain  reclassifications  have been made to the 2001 and
2002 consolidated financial statements to conform to the 2003 presentation. As a
result of PrimeSource  Surgical  Inc.'s  disposal of Ruby in 2003, the Company's
previously  reported  consolidated  financial  statements for 2002 and 2001 have
been  restated  to  present  the  discontinued  Ruby  operations  separate  from
continuing operations.

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 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 was originally being amortized over
10 years prior to adoption of SFAS 142. 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 0.744183 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 0.02976732 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  0.02976732  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
0.02976732 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

                                      F-15
<PAGE>
common stock with an estimated fair value of $919,000.  Total  goodwill  arising
from this  transaction was  $1,384,792.  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.

PEC DISPOSAL - As discussed in Note 1, effective  September 20, 2002,  Ruby, the
Company's indirect wholly owned subsidiary, sold all of the assets of the former
PEC line of business in exchange for the cancellation of previously issued stock
to the founder of PEC and the assumption of certain  liabilities with respect to
the PEC line of business. Goodwill and other impaired assets were written off in
June 2002, resulting in a loss of $1,038,823, which is recorded in restructuring
expense in the statement of operations.

DISCONTINUED  OPERATION  - On June  30,  2003,  PrimeSource  Surgical,  Inc.,  a
subsidiary of the Company,  sold all of the issued and outstanding capital stock
of Ruby for cash proceeds of $1,000,000 to NMSI.  The Company  recognized a loss
on disposal of $73,830. Ruby was reported in the critical care business segment.

Revenues and income (loss) from the  discontinued  operation,  net of income tax
effect were as follows:

<TABLE>
<CAPTION>
                                                          2003               2002             2001

<S>                                                      <C>              <C>              <C>
     Revenues                                         $ 5,740,135       $ 5,249,566       $ 2,629,141
                                                        =========         =========         =========

     Income (loss) from discontinued operation        $   121,697       $   101,263       $      (554)
     net of income tax effect                           =========         =========         =========
</TABLE>
Assets  and  liabilities  of  the   discontinued   operation   included  in  our
consolidated financial statements as of June 30 were as follows:

                                                                 2002


     Assets                                                 $  1,689,073

     Liabilities                                                 722,736
                                                            ------------

     Net assets (liabilities) of discontinued operation     $    966,344
                                                            ============

4.    INVENTORIES

Inventories consist of the following at June 30:

                                                2003               2002

     Raw materials                          $   775,583         $ 1,162,080
     Work-in-process                                885              29,168
     Finished goods                           7,847,729           7,903,032
     Reserve for obsolescence               (1,106,232)         (1,598,172)
                                            -----------         -----------

     Inventories - net                      $ 7,517,965         $ 7,496,108
                                            ===========         ===========


                                      F-16
<PAGE>
5.    PROPERTY AND EQUIPMENT

Property and equipment consist of the following at June 30:

<TABLE>
<CAPTION>
                                                                   2003             2002

<S>                                                             <C>              <C>
     Office equipment                                        $   466,598       $  708,211
     Furniture and fixtures                                      346,031          305,627
     Machinery and equipment                                     731,916          568,061
     Leasehold improvements                                      477,809          395,604
                                                             -----------        ---------

     Total                                                     2,022,354        1,977,503
     Less accumulated depreciation and amortization           (1,025,996)        (837,568)
                                                             -----------        ---------

     Property and equipment - net                            $   996,358       $1,139,935
                                                             ===========       ==========
</TABLE>
Depreciation  expense  totaled  $381,145,  $536,707  and $355,313 in fiscal year
2003,  2002 and 2001,  respectively.  Property and equipment  held under capital
leases amounted to $46,291 and $81,194, less accumulated amortization of $30,456
and $26,705, at June 30, 2003 and 2002, respectively.

6.  GOODWILL AND OTHER INTANGIBLE ASSETS

In 2001, the FASB issued SFAS No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and
SFAS No.  142,  GOODWILL  AND OTHER  INTANGIBLE  ASSETS.  SFAS No. 142  modified
accounting  for  business  combinations  after June 30,  2001 and  affected  the
Company's  treatment of goodwill  and other  intangible  assets with  indefinite
lives effective July 1, 2002. SFAS No. 142 requires that goodwill and intangible
assets with  indefinite  lives  existing at the date of adoption be reviewed for
possible  impairment and that  impairment  tests be performed at least annually.
Additionally,   intangible  assets  with  finite  lives  must  be  assessed  and
classified  consistent with the  statement's  criteria.  Intangible  assets with
finite lives will continue to be amortized over those periods.  Amortization  of
goodwill and intangible assets with indefinite lives will cease.

The following table sets forth, for all periods  presented,  a reconciliation of
net income to conform to the requirements of SFAS No. 142.


                                       F-17
<PAGE>

<TABLE>
<CAPTION>
                                                             2003                 2002                 2001

<S>                                                 <C>                  <C>                  <C>
     Reported net loss                                   $(3,628,799)         $(6,190,563)         $(4,382,164)
     Add back -
       Goodwill amortization                                                     1,722,256            1,137,000
                                                         ------------         ------------         ------------

     Adjusted net loss                                   $(3,628,799)         $(4,468,307)         $(3,245,164)
                                                         ============         ============         ============

     Basic earnings per share:
       Reported net income (loss)                        $       0.33         $     (1.11)         $     (1.37)
       Goodwill adjustments                                                           0.21                 0.27
                                                         ------------         ------------         ------------

     Adjusted net income (loss)                          $       0.33         $     (0.90)         $     (1.10)
                                                         ============         ============         ============

     Diluted earnings per share:
       Reported net income (loss)                        $       0.15         $     (1.11)         $     (1.37)
       Goodwill adjustments                                                           0.21                 0.27
                                                         ------------         ------------         ------------

     Adjusted net income (loss)                          $       0.15         $     (0.90)         $     (1.10)
                                                         ============         ============         ============
</TABLE>
The changes in the carrying amount of goodwill for the year ended June 30, 2003,
are as follows:

<TABLE>
<CAPTION>
                                         DISTRIBUTION      SURGICAL       MANUFACTURING      TOTAL
                                                         CRITCAL CARE        LUXTEC
<S>                                       <C>              <C>             <C>             <C>
Balance at July 1, 2002                  $12,660,950      $1,279,512     $ 7,559,494      $21,499,956
Less:
  Disposal of NEMS                                          (671,531)                        (671,531)
  Goodwill adjustment from reversal of                                      (416,886)        (416,886)
     purchase accounting reserve
  Transitional impairment charge                                          (4,454,656)      (4,454,656)
                                          -----------      ----------     -----------      -----------

Balance at June 30, 2003                  $12,660,950      $  607,981     $ 2,687,952      $15,956,883
                                          ===========      ==========     ===========      ===========
</TABLE>
7.    LINES OF CREDIT AND LONG-TERM DEBT

Long-term debt consisted of the following as of June 30:

<TABLE>
<CAPTION>
                                                                            2003             2002
<S>                                                                       <C>               <C>
     Term loan payable to bank--PrimeSource Surgical                                     $2,258,307
     Term note payable to bank--Luxtec                                                      150,000
     Other notes payable                                                  $665,573          691,481
                                                                         ----------      ----------

     Total debt                                                            665,573        3,099,788
     Less current portion                                                (559,877)      (1,855,481)
                                                                         ----------      ----------

     Total long-term debt                                                 $105,696       $1,244,307
                                                                         ==========      ==========
</TABLE>
                                      F-18
<PAGE>
Lines of credit consisted of the following as of June 30:
<TABLE>
<CAPTION>
                                                            2003              2002

<S>                                                     <C>                <C>
     Lines of credit - PrimeSource Surgical             $4,654,436         $6,255,573
     Line of credit - Luxtec                             1,271,585          1,275,302
                                                         ---------          ---------

     Total long-term debt                               $5,926,021         $7,530,875
                                                        ==========         ==========
</TABLE>
On March 2, 2001, the Company entered into an Amended and Restated  Security and
Loan Agreement (the "Luxtec Credit  Agreement")  for a $2,500,000 line of credit
(the "Luxtec Line of Credit") with ARK CLO 2000-1 LIMITED ("ARK").  On August 6,
2002, the Company amended the Luxtec Credit Agreement. Pursuant to the amendment
to the Luxtec Credit Agreement,  ARK waived and amended certain provisions under
the Luxtec  Credit  Agreement.  Under the  amendment,  as of June 30, 2003,  the
maximum  amount  available to borrow under the Luxtec Line of Credit was limited
to the lesser of $1,275,000 or a certain  percentage of accounts  receivable and
inventory,  as  defined  ($1,271,585  at June 30,  2003).  As of June 30,  2003,
borrowings bore interest at ARK's prime rate plus 3.0% (7.00% at June 30, 2003).
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 PrimeSource  Healthcare's
assets,  excluding  the  capital  stock  of,  and  assets  held by,  PrimeSource
Surgical.  At June 30, 2003, there was no availability for additional borrowings
under the Luxtec Line of Credit.  Borrowings under the Luxtec Line of Credit are
payable upon maturity on December 31, 2003.

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 ARK. The Luxtec Term Note bore interest at prime plus 0.5% and was
secured by substantially all of PrimeSource  Healthcare's assets,  excluding the
capital stock of, and assets held by, PrimeSource Surgical. The Luxtec Term Note
required monthly principal payments of $10,000 commencing on March 31, 2001. The
Luxtec  Term Note was  scheduled  to  mature  on March  31,  2002 with a balloon
payment of $150,000 on that date. ARK granted an extension on the payment of the
Luxtec Term Note until May 31, 2002. On August 6, 2002,  the Company  repaid the
entire outstanding balance of the Luxtec Term Note in connection with the Luxtec
Credit Agreement amendment.

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 as of June 30, 2003.

On June 14, 1999, the Company's wholly owned subsidiary,  PrimeSource  Surgical,
entered into an Amended and Restated Credit Agreement (the "PrimeSource Surgical
Credit Agreement") with Citizens for a line of credit (the "PrimeSource Surgical
Line  of  Credit").  On  August  6,  2002,   PrimeSource  Surgical  amended  the
PrimeSource  Surgical Credit  Agreement,  pursuant to which the maturity date of
the revolving line of credit under the PrimeSource Surgical Credit Agreement was
extended to March 31, 2004,  the maturity  date of the term loan was extended to
December 31, 2003, and certain other changes were made  including  modifications
to interest rates and covenant requirements. Under the amendment, as of June 30,
2003, the maximum amount available to borrow under the PrimeSource Surgical Line
of Credit is limited  to the lesser of  $8,000,000  or a certain  percentage  of
accounts receivable and inventory, as defined by the PrimeSource Surgical Credit
Agreement  ($4,654,436 at June 30, 2003). As of June 30, 2003, borrowings bore a
variable step  interest  rate at Citizens'  prime rate plus 4.50% (8.50% at June

                                      F-19
<PAGE>
30, 2003).  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 of
the assets directly held by PrimeSource  Surgical.  At June 30, 2003,  there was
$627,369  of  availability  under  the  PrimeSource  Surgical  Line  of  Credit.
Borrowings  under the  PrimeSource  Surgical  Line of Credit  are  payable  upon
maturity in March 31, 2004.

On June  14,  1999,  as  part  of the  PrimeSource  Surgical  Credit  Agreement,
PrimeSource   Surgical   executed  an  Amended  and  Restated   Term  Note  (the
"PrimeSource  Surgical  Term Loan") in the original  amount of  $5,000,000  with
Citizens.  On June 30, 2003, we paid off the entire  outstanding  balance of the
PrimeSource  Surgical  Term  Loan in  connection  with  the sale of Ruby and the
funding of the most recent Preferred  Series G round.  The PrimeSource  Surgical
Term Loan was  collateralized  by substantially  all the assets directly held by
PrimeSource  Surgical.  In connection  with the August 6, 2002  amendment to the
PrimeSource Surgical Credit Agreement,  previously deferred payments of $675,000
were paid,  the interest  rate was modified to a variable step interest rate and
the required  PrimeSource  Surgical  Term Loan monthly  principal  payments were
changed to  $50,000  between  August  2002 and  January  2003,  $75,000  between
February 2003 and July 2003 and $100,000  between August 2003 and November 2003,
with the remainder  ($316,658) due on December 31, 2003.  Prior to its repayment
in full,  and as of June 30,  2003,  the  PrimeSource  Surgical  Term  Loan bore
interest at Citizens' prime rate plus 4.50% (8.50% at June 30, 2003).

The  PrimeSource  Surgical  Term Loan was subject to a term loan  facility  fee.
PrimeSource Surgical accrued a $75,000 fee on August 6, 2002, in connection with
the amendment to the PrimeSource Surgical Credit Agreement. PrimeSource Surgical
was obligated to pay an additional  $75,000 fee under the  PrimeSource  Surgical
Term Loan on the last day of each calendar  quarter,  beginning on September 30,
2002 and for every  quarter  thereafter  until the earlier of payment in full of
the  PrimeSource  Surgical Term Loan or December 31, 2003. The accrued term loan
facility  fees were  reduced by 40%  because on June 30,  2003,  we paid off the
entire outstanding  balance of the PrimeSource  Surgical Term Loan in connection
with the sale of Ruby and the  funding  of the most  recent  Preferred  Series G
round. In connection with the PrimeSource  Surgical Term Loan payoff on June 30,
2003,  the amount  outstanding  under this term loan  facility  fee is $180,000,
which is included in accrued expenses and is due on or before December 31, 2003.

The PrimeSource  Surgical Term Loan was also subject to an additional  repayment
obligation.  Commencing with the three-month period ended December 31, 2002, and
for each three-month period thereafter,  fifty percent (50%) of excess cash flow
(as  defined  in  the  PrimeSource   Credit  Agreement)   generated  during  the
three-month  period  was  applied  to the  principal  amount of the  PrimeSource
Surgical  Term  Loan.  At June  30,  2003,  there  was no  additional  repayment
obligation.

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. PrimeSource Surgical was in compliance with
these covenants as of June 30, 2003.

Other notes payable  include a $100,000 note payable for tenant  improvements to
Luxtec's leased premises in West Boylston,  Massachusetts,  which bears interest
at 9.5% and is due September 19, 2005.  Payments are interest only for the first
12 months,  with remaining  payments  calculated on a 7-year  amortization table
with a balloon payment on September 19, 2005. At June 30, 2003 and 2002,  Luxtec
had  outstanding  borrowings  of $77,650 and  $91,481,  respectively,  under the
tenant note  payable.  In addition,  other notes  payable  include a PrimeSource
Surgical  non-interest  bearing demand note payable with an original  balance of
$559,977 (net of  unamortized  discount of $40,023 based on an imputed  interest
rate of 8%) to its  special  legal  counsel in payment of  existing  outstanding
accounts payable,  which matures May 30, 2004.  Monthly  principal  payments are
$30,000  commencing on October 20, 2002. At June 30, 2003 and 2002,  PrimeSource

                                      F-20
<PAGE>
Surgical had outstanding  borrowings of $357,173 (net of unamortized discount of
$12,827) and  $559,977,  respectively,  on this note  payable to legal  counsel.
Finally,  other notes  payable  include a  PrimeSource  Surgical  $250,000  note
payable to  Citizens in payment of the bank  refinancing  amendment  fee.  Equal
principal  payments on the note of $62,500 were or are due March 31, 2003,  June
30, 2003,  September  30, 2003 and December 31, 2003.  At June 30, 2003 and June
30,  2002,  PrimeSource  Surgical  had  outstanding  borrowings  of $187,500 and
$250,000,  respectively,  on this note payable to  Citizens.  This note has been
recorded as deferred financing costs and is being amortized over the life of the
PrimeSource Surgical Credit Agreement.

8.    PREFERRED 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.  In June 2001, the Company's  stockholders  approved the
amendment to increase the Company's  authorized  number of common  shares.  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  was  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,
2002,  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
ranked  senior to Series B Stock and common stock and ranks junior to the Series
D Stock,  Series E Stock and Series F Stock. Series C Stock accrued dividends at
8 percent per annum of the  original  issue price of $42.76 per share.  Series C
Stock had 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  had a  mandatory  redemption  date of  June  3,  2005,  and was
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 had been
excluded from stockholders'  equity. The Series C Stock also had 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.  Cumulative  accrued  dividends  as of June 30,  2002 and 2001  totaled
$1,567,561 and $387,850, respectively.

On August 6, 2002 and prior to the issuance and sale of the Series G Stock,  the
Company  recapitalized its equity structure.  Each outstanding share of Series C
Convertible  Preferred  Stock, par value $1.00 per share (the "Series C Stock"),
was converted into 27.5871 shares of the Company's  common stock.  In connection
with the conversion of the Series C Stock, the Company issued the former holders
of the Series C Stock  warrants to purchase an aggregate of 7,390,613  shares of
our common stock with an exercise  price of $0.01 per share and a 10-year  life.
These warrants  became  exercisable on December 31, 2002 and expire on August 6,
2012.  Additionally,  exercise  prices on warrants to purchase an  aggregate  of
140,330 shares of the Company's common stock previously issued to certain former
holders of the Series C Stock  were  repriced  from $1.68 per share to $0.01 per

                                      F-21
<PAGE>
share. The value of the warrants issued and the warrants which were repriced was
recorded as additional  paid-in  capital.  The value of these  warrants  totaled
$2,359,000 and was calculated using the Black-Scholes  method with the following
assumptions:  an expected  life of 7 years,  volatility of 50% and a zero coupon
rate of 4.09%.

SERIES D  EXCHANGEABLE,  CONVERTIBLE  PREFERRED STOCK - Series D Stock issued in
the Merger was exchangeable for equity securities of the Company to be issued in
the future and was convertible  into 200 shares of common stock at the option of
the  holder.  Each share of Series D Stock had one vote for each share of common
stock into which it would be  convertible.  In  addition,  Series D Stock ranked
senior to Series C Stock and  common  stock and junior to the Series E Stock and
Series F Stock.  Series D Stock accrued  dividends at the rate of 10 percent per
year of the stated  liquidation value of $342.08 per share and had a liquidation
preference  equal to  $342.08  per share  plus an  amount  in cash  equal to all
accrued but unpaid  dividends.  Accrued  dividends  as of June 30, 2001  totaled
$157,540.  On  January  23,  2002,  all  the  outstanding  shares  of  Series  D
Exchangeable,  Convertible  Preferred  Stock were  automatically  exchanged  for
shares of Series F Redeemable  Convertible  Preferred  Stock,  no par value (the
"Series F Preferred Stock"). The Company issued an aggregate of 5,221,248 shares
of Series F Preferred  Stock upon exchange of the Series D Preferred  Stock.  No
cash  proceeds  were  received in  connection  with the issuance of the Series F
Preferred  Stock.  Pursuant  to  the  provisions  of  the  Certificate  of  Vote
establishing  the Series D Preferred Stock, as of January 23, 2002, the Series D
Preferred  Stock  is  no  longer  outstanding.   The  holders  of  the  formerly
outstanding Series D Stock held warrants to purchase common stock and the number
of shares and price under such  warrants  were  determined  based on the Company
consummating a qualified equity financing,  as defined. On January 23, 2002, the
exercise price per share was set at $1.00 and the aggregate  number of shares of
the Company's common stock subject to purchase pursuant to such warrants was set
at  1,751,130.  See  further  discussion  of the  accounting  treatment  for the
warrants at the Series F Stock below.

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 no par value 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 was  convertible  into 10  shares  of common  stock at the
option of the holder at any time.  Each share of Series E Stock had one vote for
each share of common into which it would be convertible.  In addition,  Series E
Stock ranked senior to common stock, Series C stock and Series D stock. Series E
Stock  accrued  dividends  at the rate of 8  percent  per  year of the  original
issuance  price of $10.00 per share and had a  liquidation  preference  equal to
$30.00 per share plus an amount equal to all accrued but unpaid  dividends.  The
Series  E Stock  had a  mandatory  redemption  date of  June  3,  2005,  and was
redeemable  at the  original  issue  price of $10.00 per share plus  accrued but
unpaid dividends.  The Series E Stock also had 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.  As
noted  above,  in  connection  with the  Series E Stock  issuance,  warrants  to
purchase an aggregate  of  1,625,000  shares of common stock were issued with an
exercise  price of $1.00 per share.  The value of these  warrants was calculated
using the Black-Scholes method with the following assumptions:  an expected life
of 7 years, volatility of 50% and a zero-coupon bond rate of 5.1%. The resulting
value of $950,000  was  recorded  directly to  additional  paid in capital.  The
resultant  beneficial  conversion feature of $950,000 was also recorded directly
to additional paid in capital.

                                      F-22
<PAGE>
On August 6, 2002 and  subsequent  to the  conversion  of the Series C Stock and
Series F Stock, each outstanding share of Series E Convertible  Preferred Stock,
no par value (the "Series E Stock"), was exchanged for 0.3125 shares of Series G
Stock. In connection with the exchange of the Series E Stock, the Company issued
the former  holders of the Series E Stock  warrants to purchase an  aggregate of
817,000 shares of Company common stock with an exercise price of $.01 per share.
These warrants  became  exercisable on December 31, 2002 and expire on August 6,
2012. Additionally, in accordance with their terms, exercise prices on 1,625,000
warrants  to  purchase  common  stock  previously  issued  to  certain  Series E
Stockholders  were repriced from $1.00 per share to $.01 per share. The value of
the  warrants  issued and the  warrants  which were  repriced  were  recorded as
additional paid-in capital. The value of these warrants totaled $763,000 and was
calculated  using  the  Black-Scholes  method  with the  following  assumptions:
expected life of seven years, volatility of 50% and a zero coupon rate of 4.09%.

SERIES F  REDEEMABLE,  CONVERTIBLE  PREFERRED  STOCK - On January 23, 2002,  the
Company  created a new stock  class,  Series F  preferred  stock (the  "Series F
Stock"),  with 5,221,248  authorized shares and no par value per share. Series F
Stock was convertible into 5,221,248 shares of common stock at the option of the
holder at any time.  Each share of Series F Stock had one vote for each share of
common into which it would be  convertible.  In addition,  Series F Stock ranked
senior to all other stock of the Company  outstanding at June 30, 2002. Series F
Stock  accrued  dividends  at the rate of 8  percent  per  year of the  original
issuance price and has a liquidation preference equal to $1.00 per share plus an
amount  equal to all  accrued  but  unpaid  dividends.  The Series F Stock has a
mandatory  redemption  date of June 3, 2005,  and was redeemable at the original
issue  price  plus  accrued  but unpaid  dividends.  The Series F Stock also had
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.  In connection  with the Series F Stock issuance,
the terms of certain  warrants were determined at a price per share at $1.00 for
an  aggregate  of  1,751,130  shares  of our  common  stock.  The value of these
warrants  was  calculated  using the  Black-Scholes  method  with the  following
assumptions:  an expected  life of 7 years,  volatility of 50% and a zero-coupon
bond rate of 4.790%.  The resulting value of $1,006,000 was recorded directly to
additional  paid in capital.  The  resultant  beneficial  conversion  feature of
$1,006,000 was also recorded directly to additional paid in capital.

On August 6, 2002,  simultaneously  with the  conversion  of the Series C Stock,
each outstanding  share of Series F Convertible  Redeemable  Preferred Stock, no
par value (the "Series F Stock"),  was converted into one share of common stock.
In connection with the conversion of the Series F Stock,  the Company issued the
former  holders of the Series F Stock  warrants  to  purchase  an  aggregate  of
1,614,560  shares of Company  common  stock with an  exercise  price of $.01 per
share and a 10-year life. The warrants  became  exercisable on December 31, 2002
and expire on August 6, 2012.  Additionally,  the exercise  price on  previously
issued warrants to purchase an aggregate of 1,751,130 shares of common stock was
adjusted  from  $1.00 per  share to $.01 per  share.  The value of the  warrants
issued and the warrants  which were repriced was recorded as additional  paid-in
capital. The value of these warrants totaled $1,052,000 and was calculated using
the Black-Scholes method with the following  assumptions:  an expected life of 7
years, volatility of 50% and a zero coupon rate of 4.09%.

SERIES G  REDEEMABLE,  CONVERTIBLE  PREFERRED  STOCK - On  August 6,  2002,  the
Company created a new series of preferred stock, Series G Convertible Redeemable
Preferred Stock, no par value (the "Series G Stock"), and the Company issued and


                                      F-23
<PAGE>
sold 70,452  shares of Series G Stock on that date for  proceeds of  $1,866,037,
net of costs of $388,429.  The Series G Stock has 230,000  authorized shares. In
connection with the issuance of the Series G Stock,  the Company issued warrants
to purchase an aggregate of 3,300,000  shares of common stock at $.01 per share.
These warrants  became  exercisable on December 31, 2002 and expire on August 6,
2012. In addition,  on September 15, 2002,  November 15, 2002,  January 15, 2003
and June 30, 2003, the Company issued and sold an additional  aggregate 50,485.5
shares of Series G Stock for proceeds of  $1,497,994,  net of costs of $117,542.
Each share of Series G Stock is  convertible  into 100  shares of common  stock,
subject to adjustment, at the option of the holder. Each share of Series G Stock
has one vote for each  share of common  into which it would be  convertible.  In
addition,  Series G Stock  ranks  senior to all other  outstanding  stock of the
Company.  Series  G Stock  accrues  dividends  at the rate of 8% per year of the
original  issuance  price of $32.00 per share and has a  liquidation  preference
equal to  $64.00  per share  plus an  amount  equal to all  accrued  but  unpaid
dividends. Accrued dividends as of June 30, 2003, totaled $447,736. The Series G
Stock has a mandatory  redemption date of June 3, 2005, and is redeemable at the
original issue price of $32.00 per share plus accrued but unpaid dividends.  The
Series G 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.  As noted  above,  in
connection  with the Series G Stock  issuance,  the Company  issued  warrants to
purchase an aggregate of 3,300,000 shares of common stock with an exercise price
of $.01 per share and a 10-year life. The value of these warrants was calculated
using the Black-Scholes method with the following assumptions:  an expected life
of 7  years,  volatility  of 50%  and a  zero-coupon  bond  rate of  4.09%.  The
resulting  value of  $1,031,000  was recorded as additional  paid-in  capital on
August 6, 2002 in connection with the sale of the Series G Stock.  The resultant
beneficial  conversion feature of $1,031,000 was recorded directly to additional
paid-in capital in December 2002 when the Series G Stock became convertible.  As
of June  30,  2003,  the  aggregate  redemption  amount  of the  Series G Stock,
including accrued dividends, totaled $7,567,736. The difference between carrying
amount of $5,699,121 and the aggregate redemption amount relates to the value of
the  warrants  issued in  connection  with the  issuance of Series G Stock,  the
resultant beneficial conversion feature, and stock issuance costs. These amounts
are being  accreted  into the  Series G Stock  amount out of  retained  earnings
through June 3, 2005, the date of redemption.

In  connection  with the  equity  recapitalization,  former  holders of Series C
Stock,  Series  F Stock  and  Series  E Stock  received  consideration  totaling
approximately $10,183,000,  including common stock, Series G Stock, new warrants
and the repricing of certain existing  warrants,  in exchange for the retirement
of Series C Stock,  Series F Stock and Series E Stock  with a carrying  value of
approximately  $21,993,000.  The difference of $11,809,741  has been credited to
retained earnings.

REVERSE  STOCK SPLIT - In  connection  with the Merger  described in Note 1, the
Company had a reverse  stock  split,  resulting in the exchange of 0.744183 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  10,000,000.  The 1997  Plan  also  provides  for  various  vesting

                                      F-24
<PAGE>
schedules,  as  determined  by  the  compensation  committee  of  the  Board  of
Directors,  and have  terms not to exceed 10 years.  The vested  options  may be
exercised at any time and generally expire 10 years from the date of grant.

The Company issued equity-based  options to certain employees during fiscal year
2003. The exercise price was at the deemed fair market value of the stock at the
date of grant.

During  fiscal year 2003,  the Company  also  issued  equity-based  options to a
certain  employee as required under the executed  employment  agreement with the
Company.  The exercise price was below the deemed fair market value of the stock
at the date of grant. In accordance with the requirements of APB Opinion No. 25,
the Company has recorded deferred  equity-based  compensation for the difference
between the exercise  price of the stock and the deemed fair market value of the
Company's stock at the date of grant. The deferred equity-based  compensation is
amortized to expense on a straight-line  basis,  over the one-year period during
which the options become  vested.  As of June 30, 2003, the Company had recorded
cumulative deferred  equity-based  compensation  related to these options in the
amount of $110,000.

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  sales 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  for
various vesting  schedules,  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 1992 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
or issued  under the 1992 Plan in the period from March 2, 2001 through June 30,
2003.

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 of the Board of  Directors,  and that they have terms not to exceed 10
years. At June 30, 2003 and June 30, 2002, there were 64,000, and 68,000 shares,
respectively, available for future grants under the 1995 Director Plan.

WARRANTS - In  connection  with the  issuance  of a new series of its  preferred
stock,  Series G Stock in August 2002, the Company granted  warrants to purchase
3,300,000  shares  of  common  stock  at $.01 per  share.  The  warrants  became
exercisable on December 31, 2002 and expire in August 2012.

Prior to the  issuance  and sale of Series G Stock in August  2002,  the Company
converted  outstanding  shares of Series C Stock into  shares of Company  common
stock.  In connection  with the  conversion  of the Series C Stock,  the Company
granted former holders of Series C Stock warrants to purchase  7,390,613  shares

                                      F-25
<PAGE>
of common stock with an exercise  price of $.01 per share.  The warrants  became
exercisable  on  December  31,  2002 and  expire in August  2012.  Additionally,
exercise  prices  on  warrants  to  purchase  140,330  shares  of  common  stock
previously issued to certain preferred stockholders were repriced from $1.68 per
share to $.01 per share.

Simultaneously  with the  conversion  of  Series C Stock in  August  2002,  each
outstanding  share of Series F Stock was converted  into shares of common stock.
In connection  with the  conversion,  the Company  granted the former holders of
Series F Stock  warrants to purchase  1,614,560  shares of common  stock with an
exercise price of $.01 per share.  The warrants  became  exercisable on December
31,  2002 and  expire  in  August  2012.  Additionally,  the  exercise  price on
previously  issued  warrants to purchase  1,751,130  shares of common  stock was
adjusted form $1.00 per share to $.01 per share. The warrants vested immediately
and expire in December 2010.

Subsequent  to the  conversion  of the Series C Stock and  Series F Stock,  each
outstanding  share of the  Company's  Series E Stock was exchanged for shares of
Series G Stock.  In  connection  with the  exchange  of the Series E Stock,  the
Company  granted former  holders of Series E Stock warrants to purchase  817,000
shares of the Company's  common stock with an exercise  price of $.01 per share.
The warrants became  exercisable on December 31, 2002 and expire in August 2012.
Additionally,  the exercise price on 1,625,000 warrants to purchase common stock
previously issued to certain Series E Stock stockholders was repriced from $1.00
per share to $.01 per share. The warrants vested  immediately and expire in July
2011.

An additional 118,605 warrants were issued to certain other stockholders related
to prior year grants with expiration  dates of June 2011, and exercise prices of
$1.00 and $2.35.

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  expired December 31,
2001.

Related to a private  placement of its preferred  stock in September  2000,  the
Company  granted  warrants to purchase  157,860  shares of the Company's  common
stock at $1.68 per  share.  These  warrants  vested  immediately  and  expire in
September 2011.

                                      F-26
<PAGE>

Changes in shares under options and warrants,  in common stock equivalents,  for
the years ended June 30, 2001, 2002 and 2003 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, 2000                                1,531,322        $1.63         420,227        $1.03

  Grants                                             1,903,210         1.58         157,861         1.68
  Outstanding Luxtec options at acquisition            454,500         3.03         438,171         5.70
  Canceled                                           (496,002)         1.48
                                                   -----------                  -----------

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

  Grants                                               112,000         1.00       3,494,780         1.01
  Canceled                                         (1,864,554)         1.72       (438,173)         5.70
                                                   -----------                  -----------

Balance, June 30, 2002                               1,640,476         1.85       4,072,866         1.04

   Grants                                            7,487,000         0.32      13,122,173         0.01
   Canceled                                          (525,212)         1.42       (356,485)         1.01
                                                   -----------                  -----------

Balance, June 30, 2003                               8,602,264         0.53      16,838,554         0.02
                                                   ===========                  ===========

Vested and exercisable, June 30, 2003                1,474,960                   16,838,554
                                                   ===========                  ===========

Vested and exercisable, June 30, 2002                  996,076                    4,072,866
                                                   ===========                  ===========

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

</TABLE>
The  weighted-average  fair value of option grants in fiscal 2003, 2002 and 2001
was approximately $0.1602, $0.5803 and $0.8021, respectively.



                                      F-27
<PAGE>
Outstanding  stock  options  and  warrants  at  June  30,  2003  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

<C>                     <C>                 <C>         <C>         <C>                   <C>        <C>
$0.00 - $0.60           7,162,000           8.2         $0.32       16,638,633            8.8        $0.01
$0.61 - $1.20             662,268           5.6         $1.03          163,786            4.9        $1.07
$1.21 - $1.80             418,999           3.7         $1.68           17,530            7.2        $1.68
$1.81 - $2.40             235,497           6.6         $2.34           18,605            7.6        $2.35
$2.41 - $3.00             106,500           3.8         $2.65
$3.01 - $3.60               1,000           2.5         $3.56
$3.61 - $4.80              16,000           1.4         $4.63
                           ------

                        8,602,264           7.7         $0.53       16,838,554            8.8        $0.02
                        =========                                   ==========
</TABLE>
Compensation  expense  in the  amount  of  $110,000  for  fiscal  2003  has been
recognized  for certain  employee stock options  granted below market value.  No
compensation expense has been recognized for the remaining employee stock option
grants.  Had  compensation  expense for these  employee stock option grants been
determined based on the fair value at the grant dates,  consistent with SFAS No.
123, the Company's net income (loss) for fiscal years 2003,  2002 and 2001 would
have been the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                   2003               2002               2001

<S>                                             <C>              <C>                <C>
Net income (loss) available to common
stockholders, as reported                       $7,033,848       $(8,843,134)       $(5,801,278)

Stock-based employee compensation
expense determined under fair-value
method                                           (521,258)          (401,185)          (611,336)
                                                ----------       ------------       ------------

Pro forma net income (loss)                     $6,512,590       $(9,244,319)       $(6,412,614)
                                                ==========       ============       ============

Earnings Per Share:
  Basic- as reported                            $     0.33       $     (1.11)       $     (1.37)
  Basic- pro forma                              $     0.31       $     (1.16)       $     (1.51)

  Diluted- as reported                          $     0.15       $     (1.11)       $     (1.37)
  Diluted- pro forma                            $     0.14       $     (1.16)       $     (1.51)

Black-Scholes Assumptions:
  Risk-free interest rate                            3.10%              5.21%              5.28%
  Expected volatility                                  50%                50%                50%
  Expected lives- in years                              6                  7                  7
  Expected dividend yield                               0%                 0%                 0%
</TABLE>

                                      F-28
<PAGE>
10.   401(k) RETIREMENT PLAN

The  Company 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  Company  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  $110,706,  $169,347,  and $148,949,  for the years ended June 30,
2003, 2002 and 2001, respectively.

11.   INCOME TAXES

The benefit (provision) for income taxes for the years ended June 30 is based on
the following components:

<TABLE>
<CAPTION>
                                                           2003                 2002                 2001
Current income taxes
<S>                                                       <C>              <C>                 <C>
  Federal                                              $   1,600
  State                                                   18,100           $   61,700           $(207,200)
                                                       ---------          -----------          -----------

Total current                                             19,700               61,700            (207,200)
                                                       ---------          -----------          -----------
Deferred income taxes:
  Federal                                               (172,700)           1,458,900            1,269,400
  State                                                  (18,800)             209,200              217,900
                                                       ---------          -----------          -----------

Total deferred                                          (191,500)           1,668,100            1,487,300
                                                       ---------          -----------          -----------

Change in valuation allowance                            191,500          (1,668,100)          (1,487,300)
                                                       ---------          -----------          -----------

Total                                                  $  19,700          $   61,700            $(207,200)
                                                       =========          ===========           ==========

</TABLE>
A  reconciliation  of the provision for income taxes to the amount of income tax
(benefit)  expense that would result from  applying the federal  statutory  rate
(35%) to loss before income tax benefit (provision) is as follows:

<TABLE>
<CAPTION>
                                                                   2003                 2002                2001

<S>                                                              <C>                  <C>               <C>
Income tax benefit at statutory rate                             $1,270,080          $ 2,223,700       $ 1,461,400
Nondeductible warrant put expense (income)                           66,500             (33,250)            60,200
State tax (expense) benefit, net of federal benefit                 112,700              202,350             3,100
Meals and entertainment                                            (20,100)             (14,300)          (22,800)
Nondeductible goodwill                                          (1,448,700)            (613,100)         (225,500)
Change in valuation allowance                                       191,500          (1,668,100)       (1,487,300)
General business credit                                            (13,200)             (45,000)
Loss on sale of subsidiary                                         (18,100)
Expiring net operating losses                                     (118,000)
Other                                                               (2,980)               9,400             3,700
                                                                 ----------          -----------       -----------

Total                                                            $   19,700          $    61,700       $ (207,200)
                                                                 ==========          ===========       ===========
</TABLE>
                                      F-29
<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:

<TABLE>
<CAPTION>
                                                                                    2003                2002
Current:
<S>                                                                            <C>                <C>
  Restructuring reserve                                                        $   229,400        $   387,400
  Accrued vacation                                                                  62,400             57,500
  Inventory valuation adjustment                                                   453,600            805,000
  Bad debt reserve                                                                  87,700            152,200
  Accrued distributor costs                                                        205,000            394,400
  Other                                                                             46,400            120,600
                                                                               -----------        -----------

  Total current                                                                  1,084,500          1,917,100
                                                                               -----------        -----------

Long-term:
  Depreciation and amortization                                                    114,600            155,700
  Credit carryforwards                                                             243,600            256,900
  Capital loss carryforwards                                                       300,100            300,100
  Charitable loss carryforwards                                                      6,800
  Net operating loss carryforwards                                               6,763,700          6,075,000
                                                                               -----------        -----------

  Total long-term                                                                7,428,800          6,787,700
                                                                               -----------        -----------

Total                                                                            8,513,300          8,704,800
Valuation allowance                                                            (8,513,300)        (8,704,800)
                                                                               -----------        -----------

Total                                                                          $        -         $        -
                                                                               ===========        ===========
</TABLE>
At June 30, 2003,  the Company had federal net operating loss  carryforwards  of
approximately  $16,930,300  and state  net  operating  loss  carry  forwards  of
approxiamately $13,967,700. The Company's federal and state net operating losses
expire in the tax years ending June 30, 2003 through 2022. At June 30, 2003, the
Company had federal and State credit carry  forwards of  approximately  $131,500
and  $112,100,  respectively.  The  Company's  federal  and state  credits  will
generally  expire in the tax years ended June 30, 2003 through 2023. 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.  Certain  changes  in stock  ownership  may  result in a
limitation  on the  amount  of net  operating  loss  carryforwards  that  can be
utilized each year.

A full valuation  allowance has been provided against the Company's deferred tax
assets  as of June  30,  2003  and  2002,  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.

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

                                      F-30
<PAGE>
years ended June 30, 2003,  2002, and 2001 was $654,116,  $726,455 and $584,944,
respectively.  Minimum  annual lease  payments  under capital and  noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
                                                                                  CAPITAL          OPERATING
                                                                                   LEASES           LEASES

<C>                                                                                <C>               <C>
2004                                                                               $29,061           $775,640
2005                                                                                13,967            615,300
2006                                                                                 9,066            204,318
2007                                                                                                    4,266
2008                                                                                                    1,645
                                                                                 ---------         ----------

Total minimum lease payments                                                        52,094         $1,601,169
                                                                                                   ==========
Amount representing interest                                                       (5,236)
                                                                                 ---------

Present value of future minimum lease payments                                      46,858
Less current portion of capital lease obligations                                 (25,425)
                                                                                 ---------

Capital lease obligations - net of current portion                                 $21,433
                                                                                 =========
</TABLE>
EXECUTIVE  COMPENSATION  - In May 2001,  the Company  entered into an employment
agreement with its former President and Chief Executive Officer.  The employment
agreement committed the Company to minimum compensation,  severance amounts, and
future  equity-based  incentives.  Two other  executive  officers had employment
agreements that provide for  compensation and severance  amounts.  In connection
with the restructuring  discussed in Note 14, all three agreements were severed.
At June 30, 2003,  the  President/Chief  Executive  Officer and other  executive
officers of the Company's  subsidiaries  had employment  agreements that provide
for compensation and certain severance benefits.  As a result of an agreement of
understanding  prior to June 30,  2003,  the Company  President/Chief  Executive
Officer  resigned,  and certain  benefits  were  accrued at June 30, 2003 in the
amount of $195,507.

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.

On September 5, 2002, two former executive officers and directors of the Company
filed a complaint against the Company in Arizona Superior Court, County of Pima.
The complaint  alleges a breach by the Company of the severance  agreements with
each of them and seeks an  aggregate  of at least $1.2  million in  compensatory
damages. The Company believes that it has meritorious defenses and it intends to
defend its position with respect to this complaint.

During the quarter ended September 30, 2002, the Company resolved an outstanding
matter  relating  to  alleged  non-compete  violations  with a former  employee.
Pursuant to the terms of the settlement,  the former employee paid the Company a
cash settlement in the amount of $168,099, net of costs of $71,901, and returned
for cancellation 132,963 shares of Company common stock valued at $42,548.

                                      F-31
<PAGE>
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.

         SPECIALTY  MEDICAL  DISTRIBUTION - PrimeSource  Surgical - The surgical
         segment is a regional sales and marketing organization that markets and
         sells surgical products primarily to hospitals and surgery centers. 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.

         SPECIALTY  MEDICAL  DISTRIBUTION  -  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.
         The results of the PEC  operation is only included in fiscal years 2002
         and 2001.

         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
         $3,527,516,  $4,194,680  and  $2,655,817  for  2003,  2002,  and  2001,
         respectively.

         Operating  income for each  segment  consists of net sales less cost of
         sales, selling expenses,  depreciation and amortization  expenses,  and
         the segment's general and  administrative  expenses.  The sales between
         segments are made at market prices and are eliminated in consolidation.
         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 and
         equipment,  inventories, accounts receivable, and other assets directly
         associated with the segment's operations.  Included in the total assets
         of the corporate staff  operations are property and equipment and other
         assets.

         Following  the  Merger,  certain  products  of  the  Specialty  Medical
         Products  Manufacturing  segment  were  sold to the  Specialty  Medical
         Distribution - PrimeSource Surgical segment.  Total sales between these
         segments totaled  approximately  $5,055,400,  $5,178,351 and $1,480,000
         for the years ended June 30, 2003, 2002 and 2001.

                                      F--32
<PAGE>
         In June 2003,  the  Company  sold the  capital  stock of Ruby which was
         included in the Critical Care segment. The segment information has been
         restated to reflect historical segment  information as adjusted for the
         reclassification   of  the  NEMS  portion  of  Ruby's   operations   as
         discontinued operations

         Disclosures  regarding the Company's  reportable  segments  including a
         corporate management fee allocation with reconciliation to consolidated
         totals are presented below.

<TABLE>
<CAPTION>
                                DISTRIBUTION -   DISTRIBUTION -
                                PRIMESOURCE      PRIMESOURCE                      CORPORATE/
                                  SURGICAL       CRITICAL CARE   MANUFACTURING      OTHER           TOTAL

Net sales
<S>                              <C>               <C>          <C>             <C>             <C>
     2003                        $26,181,812       $11,939,529  $  8,238,678                    $ 46,360,019
     2002                         29,412,136        16,743,545     7,540,036                      53,695,717
     2001                         33,698,000        11,824,793     2,879,676                      48,402,469

Net income (loss)
     2003                        $   137,765       $   260,978  $(3,090,253)    $  (937,289)    $(3,628,799)
     2002                            448,525         (242,670)       913,610     (7,310,028)     (6,190,563)
     2001                        (2,703,417)         (386,039)     1,363,109     (2,655,817)     (4,382,164)

Total assets
     2003                        $25,041,081       $ 3,361,430  $  2,935,095    $    326,934    $ 31,664,540
     2002                         14,827,268         6,895,708    15,406,712         457,080      37,586,768
     2001                         32,846,222         8,017,389     4,113,415         472,928      45,449,954

Restructuring expenses
     2003                                                                       $    345,507    $    345,507
     2002                                          $ 1,038,823                     2,915,675       3,954,498

Depreciation and amortization
     2003                        $   195,959       $    24,048  $    155,984    $    467,509    $    843,500
     2002                            243,350           170,495     1,344,814         696,422       2,455,081
     2001                            910,002            57,838       324,743         345,065       1,637,648

Interest expense
     2003                        $   282,899       $   129,604  $    111,959    $    314,781    $    839,243
     2002                            273,612           207,856       159,218          38,558         679,244
     2001                            527,003           322,348        68,434                         917,785

</TABLE>
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
years ended June 30, 2003, 2002 and 2001, totaled  $44,015,000,  $51,688,000 and
$47,771,000  respectively  for  sales  in  the  United  States  and  $2,345,000,
$2,008,000 and $631,000 for sales to foreign companies.

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
restructuring was substantially completed in the first quarter of fiscal 2001.

In fiscal year 2002,  the Company  approved plans for further  restructuring  of
operations  involving  narrowing  the  focus of the  Company's  operations,  the
consolidation  of certain  under  performing  sales  regions,  the  reduction of
corporate  overhead  through  workforce  reductions,  the  restructuring  of the
Company's balance sheet through the refinancing of the Company's and PrimeSource

                                      F-33
<PAGE>
Surgical's  senior bank debt and the reduction of debt levels  through  improved
earnings.  During  the year  ended  June  30,  2002,  approximately  twenty-nine
administrative  employees were released along with several former members of the
Company's senior management team, including the Company's former Chief Executive
Officer,  its  former  Chief  Financial  Officer  and its  former  chairman  and
Executive Vice President.

In fiscal year 2003, the Company recorded  additional  severance amounts for the
resignation of its 2003 President and Chief Executive Officer, costs of probable
legal settlement for two former executive  officers and directors of the Company
and the sale of NEMS. Activity consists of the following:

<TABLE>
<CAPTION>
                                                            LOSS ON
                                              EMPLOYEE    DISPOSAL OF      OTHER
                                              RELATED       DIVISION     CONTRACTS        TOTAL

<S>                                           <C>          <C>            <C>           <C>
Estimated costs for 2000 restructuring        $ 258,000    $  732,000     $  41,000     $ 1,031,000
Cash payments                                 (217,000)                    (17,000)       (234,000)
Other adjustments                                     -     (732,000)             -       (732,000)
                                              ---------    ----------     ---------     -----------

Balance, June 30, 2000                           41,000             -        24,000          65,000

Other adjustments                              (41,000)             -      (24,000)        (65,000)
                                              ---------    ----------     ---------     -----------

Balance 30, 2001                                      -             -             -               -

Estimated costs for 2002 restructuring        1,379,000     1,038,823     1,536,675       3,954,498
Cash payments                                 (585,000)             -     (901,000)     (1,486,000)
Other adjustments                             (141,000)   (1,038,823)     (177,542)     (1,357,365)
                                              ---------    ----------     ---------     -----------

Balance, June 30, 2002                          653,000             -       458,133       1,111,133

Estimated costs for 2003 restructuring          195,507                     150,000         345,507
Cash payments                                 (584,739)                   (166,320)       (751,059)
Other adjustments                                     -             -      (14,613)        (14,613)
                                              ---------    ----------     ---------     -----------

Balance, June 30, 2003                        $ 263,768    $        -     $ 427,200     $   690,968
                                              =========    ==========     =========     ===========
</TABLE>

                                     ******

                                      F-34
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE

None.

ITEM 9A.  CONTROLS AND PROCEDURES.

     (a) Disclosure Controls and Procedures. The Company's management,  with the
participation  of the  Company's  Chief  Executive  Officer and Chief  Financial
Officer,  has evaluated the effectiveness of the Company's  disclosure  controls
and procedures (as such term is defined in Rules  13a-15(e) and 15d-15(e)  under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of June
30, 2003.  Based on such evaluation,  the Company's Chief Executive  Officer and
Chief Financial  Officer have concluded that, as of June 30, 2003, the Company's
disclosure controls and procedures are effective.

     (b) Internal  Control  Over  Financial  Reporting.  There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules  13a-15(f) and 15d-15(f)  under the Exchange Act) during the
fiscal  quarter to which this report  relates (the  registrant's  fourth  fiscal
quarter in the case of our annual report) that have materially affected,  or are
reasonably  likely to materially  affect,  the Company's  internal  control over
financial reporting.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a) The following individuals were directors of PrimeSource as of September
1, 2003.
<TABLE>
<CAPTION>
                               BOARD OF DIRECTORS

      Name               Age      Director Since           Position                                   Term Ends
      ----               ---      --------------           --------                                   ---------

<S>                      <C>      <C>               <C>                                                <C>
William H. Lomicka       64       2001              Director and Chairman of the Board                    2004
Larry H. Coleman, Ph.D   58       2001              Director                                              2004
Shaun D. McMeans         41       2003              Director, Chief Operating Officer  & Chief            2003
                                                    Financial Officer
Joseph H. Potenza        56       2003              Director, President                                   2005
</TABLE>

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

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>
                        CLASS II DIRECTORS SERVING A TERM
                       EXPIRING AT THE 2005 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.

JOSEPH H.  POTENZA,  DIRECTOR AND  PRESIDENT - Mr.  Potenza was appointed to our
Board of  Directors  on September  1, 2003.  Prior to joining  PrimeSource,  Mr.
Potenza held senior management positions with McKesson HBOC as Vice President of
the Corporate Program and with Medibuy where he was responsible for the National
Accounts and Corporate  Program.  From 1977 to 1997, Mr.  Potenza  developed his
career with American Hospital Supply Corporation/Baxter  Healthcare Corporation,
culminating as Eastern  Region  President,  running a $750 million  distribution
business  with 650 employees and seven  distribution  facilities.  He received a
Bachelor of Arts degree in English from Norwich  University and a Master of Arts
degree in Management from Central Michigan University.

                       CLASS III DIRECTORS SERVING A TERM
                       EXPIRING AT THE 2003 ANNUAL MEETING

SHAUN D. MCMEANS, DIRECTOR AND CHIEF OPERATING OFFICER & CHIEF FINANCIAL OFFICER
- Mr.  McMeans was appointed to our Board of Directors on September 1, 2003. Mr.
McMeans has 20 years of experience in manufacturing and distribution businesses,
specializing  in  operations,  accounting  and  financial  management.  Prior to
becoming the Company's Chief Financial  Officer,  he served as Vice President of
Operations and Corporate  Controller.  Prior to joining the Company, Mr. McMeans
held operational and financial management positions with Burnham Corporation,  a
leading  domestic  manufacturer  and  distributor of residential  and commercial
boilers.  Mr. McMeans earned a Bachelor of Science degree in accounting from The
Pennsylvania State University and is a certified public accountant. He began his
career in public accounting with the former Peat, Marwick, Mitchell and Company.

     (b) Executive Officers of the Company

          Reference is made to "Executive Officers and Key Management  Personnel
     in Part I.

                                       65
<PAGE>
             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, 2003.

ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth the compensation of our Chief Executive  Officer,
and the two highest-compensated executive officers of the Company as of June 30,
2003, or, collectively, the "Named Executive Officers":

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                               LONG TERM
                                                                                             COMPENSATION
                                                                  ANNUAL COMPENSATION           AWARDS
                                                                  -------------------        ------------
                                                  FISCAL                                        SECURITIES
                                                   YEAR                                         UNDERLYING
          NAME AND PRINCIPAL POSITION             ENDED          SALARY($)      BONUS($)         OPTIONS (#)
          ---------------------------             -----          ---------      --------         -----------

<S>                                         <C>                  <C>                  <C>       <C>
          Bradford C. Walker                 June 30, 2003        229,198(2)           0         1,957,500
          Current President, Chief           June 30, 2002              0(2)           0                 0
          Executive Officer and              June 30, 2001              0              0                 0
          Director (1)

          Shaun D. McMeans                   June 30, 2003        145,000          7,500           975,000
          Chief Operating and Chief          June 30, 2002        138,591          9,990                 0
          Financial Officer                  June 30, 2001        115,267              0            50,000

          Joseph H. Potenza                  June 30, 2003        178,333         12,500         1,300,000
          Senior Vice President, Sales &     June 30, 2002        166,637              0                 0
          Marketing                          June 30, 2001         55,267              0           148,837
</TABLE>
---------
(1)  We appointed  Mr. Walker as President  and Chief  Restructuring  Officer in
     October  2001.  In August 2002,  we appointed  Mr.  Walker as President and
     Chief Executive Officer.  Effective  September 1, 2003, Mr. Walker resigned
     from his position as our  President  and Chief  Executive  Officer and as a
     member of our Board of Directors.
(2)  For our fiscal year ended June 30, 2002,  Mr. Walker was not an employee of
     PrimeSource. Beginning in October 2001 and through June 30, 2002, Corporate
     Revitalization  Partners  provided  consulting  services to  PrimeSource in
     connection with PrimeSource's restructuring. During that period, Mr. Walker
     was a Managing Director of Corporate Revitalization Partners. In the fiscal
     years ended June 30, 2002 and June 30,  2003,  PrimeSource  paid  Corporate
     Revitalization Partners $430,500 and $62,838,  respectively, for consulting
     fees.




                                       66
<PAGE>
The following table sets forth  information  with respect to stock option grants
to our Named Executive Officers during the fiscal year ended June 30, 2003:
<TABLE>
<CAPTION>
                        OPTION GRANTS IN LAST FISCAL YEAR

         (a)                (b)           (c)           (d)                (e)                  (f)              (g)
                         NUMBER OF     % OF TOTAL
                        SECURITIES      OPTIONS      EXERCISE          EXPIRATION             REALIZED VALUE AT ASSUMED
         NAME           UNDERLYING     GRANTED TO      PRICE              DATE               ANNUAL RATES OF STOCK PRICE
                          OPTIONS     EMPLOYEES IN                                          APPRECIATION FOR OPTION TERM
                        GRANTED(1)    FISCAL YEAR
--------------------------------------------------------------------------------------------------------------------------
                                                                                              0%         5%         10%
                                                                                              --         --         ---
<S>                       <C>            <C>          <C>          <C>                     <C>        <C>        <c>
Bradford C. Walker (2)    1,950,000      26.02%       $ 0.32         August 6, 2012                   $392,430   $994,495
Bradford C. Walker (3)        7,500      0.10%        $16.00         August 6, 2012        $120,000   $ 75,467   $191,249
Shaun D. McMeans            975,000      13.01%       $ 0.32          March 1, 2013                   $196,215   $497,248
Joseph H. Potenza         1,300,000      17.35%       $ 0.32          March 1, 2013                   $261,620   $662,997

</TABLE>
---------
(1)  Except with respect to Mr. Walker's option grant described in note (3), the
     option  exercise  price  is the  fair  value  of our  common  stock  on the
     respective  grant dates as determined  by the Board of  Directors.  325,000
     options issued to Mr. Potenza and Mr. McMeans vest over a three-year  term,
     one third are scheduled to vest on March 1, 2004, and the balance will vest
     in twenty-four  equal monthly  installments  on the first day of each month
     thereafter.  975,000  options  issued to Mr.  Potenza and  650,000  options
     issued to Mr. McMeans vest over a four year term,  twenty-five percent vest
     on the anniversary of the grant date each year.
(2)  This  option  vested on the first  anniversary  of the grant  date and will
     remain  exercisable  through  the date that is the  earlier of (a) one year
     from  the  effective  date  of  the  filing  of a  qualifying  registration
     statement or (b) five years following the date Mr. Walker ceases to provide
     any services to PrimeSource.
(3)  This is an option to purchase  Series G  Convertible  Redeemable  Preferred
     Stock.  This option vested on the first  anniversary  of the grant date and
     will  remain  exercisable  through  the date that is the earlier of (a) one
     year from the  effective  date of the filing of a  qualifying  registration
     statement or (b) five years following the date Mr. Walker ceases to provide
     any services to PrimeSource.  Each share of Series G Convertible Redeemable
     Preferred Stock is convertible into 100 shares of common stock.

The following table sets forth  information  with respect to options to purchase
our stock  granted to the Named  Executive  Officers as of our fiscal year ended
June 30, 2003:
<TABLE>
<CAPTION>

                          AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

                                                                  NUMBER OF SECURITIES
                                                                 UNDERLYING UNEXERCISED       VALUE OF UNEXERCISED
                                SHARES                              OPTIONS AT FISCAL         IN-THE-MONEY OPTIONS
                              ACQUIRED ON                              YEAR-END(#)          AT FISCAL YEAR-END($)(1)
              NAME           EXERCISE(#)    VALUE REALIZED($)   EXERCISABLE/UNEXERCISABLE  EXERCISABLE/UNEXERCISABLE
----------------------------------------------------------------------------------------------------------------------

<S>                              <C>              <C>                <C>                            <C>
     Bradford C. Walker (1)        0                0                  0/1,950,000                    0/0
     Bradford C. Walker (2)        0                0                    0/7,500                   0/$120,000
     Shaun D. McMeans              0                0               55,498/1,006,711                  0/0
     Joseph H. Potenza             0                0               86,821/1,362,016                  0/0
</TABLE>
---------
(1)  With respect to options to purchase our common stock,  value is based on an
     estimated fair market value of $ 0.32 per share on June 30, 2003, minus the
     exercise  price  of  such  options,  multiplied  by the  number  of  shares

                                       67
<PAGE>
     underlying  such options.  With respect to options to purchase our Series G
     Convertible Redeemable Preferred Stock, value is based on an estimated fair
     market value on June 30, 2003 of $32.00 per share, minus the exercise price
     of such  options,  multiplied  by the  number  of  shares  underlying  such
     options.
(2)  This is an option to purchase  Series G  Convertible  Redeemable  Preferred
     Stock.  Each share of Series G Convertible  Redeemable  Preferred  Stock is
     convertible into 100 shares of common stock.

                     COMPENSATION OF NON-EMPLOYEE DIRECTORS

As of June 30, 2003, we do not pay our non-employee  directors for attendance at
meetings of the Board of  Directors or meetings of a committee  thereof.  We do,
however,  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 the fair
market  value per  share of our  common  stock,  as  determined  by the board of
directors on the date the option is granted.

                                       68
<PAGE>
         EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-
                              CONTROL ARRANGEMENTS

WALKER EMPLOYMENT AGREEMENT

On  August 6,  2002,  we  entered  into an  employment  agreement  (the  "Walker
Agreement")  with Bradford C. Walker to become our President and Chief Executive
Officer  and a member of our Board of  Directors.  The Walker  Agreement  was to
expire on August 6, 2004 and offered no renewal option.

Mr. Walker was entitled to a base salary of $250,000 per year for the first year
of his employment  after which year, said salary was to be reviewed by the Board
of Directors. Upon review and at the Board of Directors' discretion,  the salary
may have been  increased  but not  decreased.  Mr.  Walker was also  entitled to
receive an annual bonus of not less than $50,000  based upon an incentive  bonus
program  established by the Chairman of the Compensation  Committee and approved
by the Board of Directors.

In connection with the execution of the Walker Agreement,  we granted Mr. Walker
an incentive stock option to purchase 1,950,000 shares of our common stock at an
exercise price per share equal to the fair market value of a share of our common
stock  on  the  date  of  grant,  as  determined  by  the  Board  of  Directors.
Additionally,  we granted Mr.  Walker an option to purchase  7,500 shares of our
Series G Convertible  Redeemable Preferred Stock at an exercise price of $16 per
share.  Additionally,  on  August  6,  2003,  Mr.  Walker  would be  granted  an
additional  incentive  stock option to purchase  1,300,000  shares of our common
stock at an exercise  price per share equal to the fair market  value of a share
of common stock on the date of grant,  as  determined by the Board of Directors.
The  described  stock  options will become fully vested and  exercisable  on the
first  anniversary  of  the  date  of  grant  of  each  such  option.  Following
termination of  employment,  these options may be exercised by Mr. Walker during
the period that is the lesser of one (1) year  following the effective date of a
registration statement covering the option shares or five (5) years.

If we were to terminate Mr. Walker other than for death, disability or cause, or
should he be deemed to be  terminated  by us, all  unvested  stock  options will
immediately become vested. Additionally, upon a change in control, as defined in
the Walker Agreement, all unvested stock options will become vested.

If we were to terminate  Mr.  Walker other than for death,  disability or cause,
upon  execution by Mr.  Walker of a waiver and release of claims  against us, we
will be obligated to pay Mr. Walker a lump sum amount equal to the lesser of six
(6) months base salary or the base salary from the effective date of termination
through the expiration date of the Walker Agreement. If we were to terminate Mr.
Walker  without Cause at any time within twelve (12) months after a of change in
control,  we will be obligated to pay Mr.  Walker a lump sum amount equal to his
base salary from the effective date of such  termination  through the expiration
date of the Walker Agreement.

If Mr. Walker's employment with us terminates for any reason, he may not compete
with us or  solicit  our  employees  for a period  of one year  from his date of
termination.

                                       69
<PAGE>
WALKER SEVERANCE AGREEMENT

On September  5, 2003,  we entered into a severance  agreement  with Mr.  Walker
pursuant to which Mr. Walker resigned as our President,  Chief Executive Officer
and a member of our Board of Directors effective September 1, 2003.

Mr.  Walker is  entitled  to  receive  severance  payments  equal to  $20,833.33
monthly,  for six (6)  consecutive  months from and after September 1, 2003 (the
"Severance  Period").  Mr.  Walker is entitled to receive  additional  severance
payments of $25,000  payable on  September  5, 2003,  and $25,000  payable on or
within five (5) business days after the last day of the Severance Period.

During the  Severance  Period,  Mr.  Walker and his  dependents  are entitled to
continued  coverage under our standard  insurance  plans,  policies or programs,
providing health, dental, vision, accidental death and dismemberment,  long-term
disability and life insurance coverage.

The severance  agreement provides that Mr. Walker's option to purchase 1,300,000
shares of our common  stock,  granted on or about August 6, 2003,  his option to
purchase  1,950,000  shares of our common stock,  granted on August 6, 2002, and
his  option to  purchase  7,500  shares of our Series G  Convertible  Redeemable
Preferred  Stock,  granted  on  August  6,  2002,  each  are  fully  vested  and
exercisable  at any time  prior to the  earlier  of (i) the date that is one (1)
year following the  registration of the applicable  option's  underlying  shares
under the Securities Act of 1933, as amended or (ii) March 1, 2009.

In consideration  for the severance  benefits,  Mr. Walker agreed to release any
claims he may have  against  us and our  affiliates.  We agreed to  release  Mr.
Walker from any claims we may have against him.

Furthermore,  Mr. Walker agreed to cooperate  with our  reasonable  requests for
consultation and services during the Severance Period.

Finally,  Mr.  Walker  agreed that,  during the  Severance  Period,  he will not
compete with us. The Company's obligation to pay severance benefits and payments
under the severance  agreement will cease if Mr. Walker  competes with us during
the Severance Period.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS

                   BENEFICIAL OWNERSHIP OF COMPANY SECURITIES

The following tables furnish certain information as of September 1, 2003 (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.

                                       70
<PAGE>
<TABLE>
<CAPTION>
--------------------------- -----------------------   ----------------------- -------------------------- --------------------
 NAME OF BENEFICIAL OWNER    NUMBER OF SHARES OF      NUMBER OF SHARES OF       AGGREGATE NUMBER OF      PERCENT OF CLASS
                                 COMMON STOCK         SERIES G CONVERTIBLE    SHARES OF COMMON STOCK       VOTING POWER
                              BENEFICIALLY OWNED      REDEEMABLE PREFERRED     BENEFICIALLY OWNED OR      PRESENTLY HELD(3)
                                                       STOCK BENEFICIALLY      UNDERLYING PREFERRED
                                                             OWNED(1)          STOCK BENEFICIALLY OWNED(2)
--------------------------- ------------------------- ------------------------ -------------------------- --------------------
<S>                                  <C>                         <C>                     <C>                      <C>
GE Capital Equity
Investments, Inc.(4)                   17,369,734(5)               125,000                 29,869,734               44.58%

--------------------------- ------------------------- ------------------------ -------------------------- --------------------
Coleman Swenson Hoffman
Booth IV L.P.(6)                        7,968,545(7)              77,187.5                 15,687,295               23.41%
--------------------------- ------------------------- ------------------------ -------------------------- --------------------

Webbmont Holdings L.P.(8)               3,428,271(9)             14,843.75                  4,912,645                7.33%
--------------------------- ------------------------- ------------------------ -------------------------- --------------------

Larry H. Coleman, Ph.D.(10)             7,968,545(7)              77,187.5                 15,687,295               23.41%
--------------------------- ------------------------- ------------------------ -------------------------- --------------------

William H. Lomicka                        838,006(11)             5,468.75                  1,384,881                2.07%
--------------------------- ------------------------- ------------------------ -------------------------- --------------------

Shaun D. McMeans                           63,807(12)                    0                     63,807                    *
--------------------------- ------------------------- ------------------------ -------------------------- --------------------

Joseph H. Potenza                          99,224(13)                    0                     99,224                    *
--------------------------- ------------------------- ------------------------ -------------------------- --------------------

Bradford Walker                         3,250,000(14)                7,500(15)              4,000,000                5.97%
--------------------------- ------------------------- ------------------------ -------------------------- --------------------
All directors and
executive officers as a                 8,969,582                82,656.25                 17,235,207               25.72%
group (4 persons)
--------------------------- ------------------------- ------------------------ -------------------------- --------------------
</TABLE>
-----------------------------------------------
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
September  1,  2003,  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 G Convertible  Redeemable Preferred Stock entitles its
     holder to one  hundred  votes,  subject to  adjustment,  in any vote of the
     holders of our  common  stock and may be  converted  into 100 shares of our
     common stock, subject to adjustment.

2    Includes  common  stock  and the  common  stock  underlying  the  Series  G
     Convertible  Redeemable  Preferred  Stock owned as of September 1, 2003 and
     common stock  underlying  options and warrants that are exercisable  within
     sixty days of September 1, 2003.

3    Based upon the aggregate  number of shares of our common stock  outstanding
     and underlying  outstanding  shares of the Series G Convertible  Redeemable
     Preferred  Stock owned as of  September  1, 2003 and  options and  warrants
     exercisable  within  sixty days of  September 1, 2003 to acquire our common
     stock.

4    The  address  of GE Capital  Equity  Investments  is 120 Long  Ridge  Road,
     Stamford, Connecticut 06927.
                                       71
<PAGE>
5    Includes  3,721  shares of our common  stock  underlying  options  that are
     exercisable within sixty days of September 1, 2003. Also includes 9,398,639
     shares of our common stock  subject to purchase  pursuant to warrants  that
     are exercisable within sixty days of September 1, 2003.

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

7    Includes  15,100  shares of our common  stock  underlying  options that are
     exercisable within sixty days of September 1, 2003. Also includes 4,380,356
     shares of our common stock  subject to purchase  pursuant to warrants  that
     are exercisable within sixty days of September 1, 2003.

8    The address of Webbmont Holdings L.P. is 1680  Hiram-Douglasville  Highway,
     Suite 108, Hiram, Georgia 30141.

9    Includes  1,456,876 shares of our common stock subject to purchase pursuant
     to warrants  that are  exercisable  within sixty days of September 1, 2003.
     Includes  15,930  shares of our common stock held of record by Robert Neale
     Fisher,  8,434  shares of our common  stock held of record by  Virginia  A.
     Fisher,  353,057  shares of our common  stock  held of record by  Investors
     Equity,  Inc.  and  1,586,531  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 7,442
     shares of our common stock  underlying  options held by Mr. Fisher that are
     exercisable within sixty days of September 1, 2003.

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

11   Includes  29,984  shares of our common  stock  underlying  options that are
     exercisable  within sixty days of September 1, 2003. Also includes  186,694
     shares of our common stock  subject to purchase  pursuant to warrants  that
     are exercisable within sixty days of September 1, 2003.

12   Includes  63,807  shares of our common  stock  underlying  options that are
     exercisable within sixty days of September 1, 2003.

13   Includes  99,224  shares of our common  stock  underlying  options that are
     exercisable within sixty days of September 1, 2003.

14   Includes  3,250,000 shares of our common stock underlying  options that are
     exercisable within sixty days of September 1, 2003.

15   Includes  7,500  shares of the Series G  Convertible  Redeemable  Preferred
     Stock subject to purchase pursuant to warrants that are exercisable  within
     sixty days of September 1, 2003.


                                       72
<PAGE>
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Beginning  in October  2000 and  through  August 6, 2002,  we engaged  Corporate
Revitalization   Partners,   or  CRP,  as   consultants  to  assist  us  in  our
restructuring.  Bradford C. Walker, who was appointed as our President and Chief
Restructuring Officer in October 2002, a member of our Board of Directors in May
2002 and our  President  and Chief  Executive  Officer on August 6, 2002,  was a
Managing Director of CRP throughout the period of October 2000 through August 6,
2002.  We  expensed  aggregate  consulting  fees and  expenses  in the amount of
$430,500  and  $62,838,  respectively,  to CRP for Mr.  Walker's  services  from
October  2001  through  June 30,  2002.  On August 6, 2002,  we entered  into an
employment  agreement with Mr. Walker in connection  with his appointment as our
President  and  Chief  Executive  Officer.  See  "Employment  Agreements--Walker
Employment Agreement."

On August 6,  2002,  we  entered  into a  Purchase  Agreement,  or the  Purchase
Agreement,  with GE Capital  Equity  Investments,  Inc., or GE Capital,  Coleman
Swenson Hoffman Booth IV L.P., or Coleman Swenson,  Webbmont Holdings,  L.P., or
Webbmont,  Investors Equity,  Inc., or Investors Equity, and William H. Lomicka.
Pursuant to the  Purchase  Agreement,  we have issued and sold an  aggregate  of
81,343  shares  of Series G Stock and  warrants  to  purchase  an  aggregate  of
3,300,000  shares  of  our  common  stock  for  an  aggregate  consideration  of
$2,602,976.  In addition,  subject to the terms and  conditions  of the Purchase
Agreement,  we may sell up to an  additional  21,782 shares of Series G Stock to
these purchasers for an additional aggregate consideration of up to $697,024. GE
Capital  is known to us to be a record  holder of more than  five  percent  of a
class of our voting securities.  Larry H. Coleman,  who is a member of our Board
of Directors,  is the Managing  General  Partner of CSHB  Ventures IV L.P.,  the
General Partners of Coleman Swenson,  and Coleman Swenson is known to us to be a
record  holder of more than five  percent of a class of our  voting  securities.
Webbmont and Investors are considered  affiliated parties and are known to us to
collectively  be a record  holder of more than  five  percent  of a class of our
voting  securities.  Finally,  Mr. Lomicka is a member of our Board of Directors
and is known to us to be a record holder of more than five percent of a class of
our voting securities.

Also on August 6, 2002, we entered into a Conversion and Exchange Agreement with
GE  Capital,  Coleman  Swenson,  Webbmont,  Investors  Equity  and Mr.  Lomicka.
Pursuant to the Conversion and Exchange  Agreement,  the holders of the Series C
Stock  converted all  outstanding  shares of Series C Stock into an aggregate of
9,513,797 shares of common stock and received  warrants to purchase an aggregate
of  7,390,614  shares  of our  common  stock at a price of $.01 per  share,  the
holders of the Series F Stock converted all outstanding shares of Series F Stock
into an aggregate of 5,221,248  shares of common stock and received  warrants to
purchase an aggregate of 1,614,560 shares of our common stock at a price of $.01
per  share,  and  the  holders  of  the  Series  E  Stock  exchanged  all of the
outstanding  shares of Series E Stock for an aggregate  of  101,562.5  shares of
Series G Stock and received  warrants to purchase an aggregate of 817,000 shares
of our common stock at a price of $.01 per share.


                                       73
<PAGE>
                                     PART IV

 ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

(i)    Consolidated Financial Statements
       ---------------------------------

       Independent Auditors' Report

       Consolidated Balance Sheets as of June 30, 2003 and June 30, 2002.

       Consolidated Statements of Operations
       for the years ended June 30, 2003, June 30, 2002 and June 30, 2001.

       Consolidated Statements of Stockholders'
       Equity (Capital Deficiency) for the years ended June 30, 2003, June 30,
       2002 and June 30, 2001.

       Consolidated Statements of Cash Flows for the years ended June 30, 2003,
       June 30, 2002 and June 30, 2001

       Notes to Consolidated Financial Statements

(ii)   Independent Auditors' Report on Schedules

(iii)  Financial Statement Schedules - Schedule II

                                       74
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES

To the Board of Directors and Stockholders of
PrimeSource Healthcare, Inc.
Tucson, Arizona

We have audited the consolidated financial statements of PrimeSource Healthcare,
Inc. and  subsidiaries  (the "Company") as of June 30, 2003 and 2002 for each of
the three years in the period  ended June 30,  2003,  and have issued our report
thereon  dated  October  14,  2003;  such  financial  statements  and report are
included elsewhere in this annual report on Form 10-K of PrimeSource Healthcare,
Inc.  and  subsidiaries.  Our audits also  included the  consolidated  financial
statement  schedules  of the Company for 2003 and 2002,  Schedule II - Valuation
and   Qualifying   Accounts.   The   financial   statement   schedules  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion  based on our audits.  In our opinion,  such 2003 and 2002  consolidated
financial statement schedules, when considered in relation to the basic 2003 and
2002 consolidated  financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 14, 2003

                                       75
<PAGE>

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

                                                                              Additions
                                            Balance at the       Charged to costs   Charged to other                 Balance at the
                                          beginning of year        and expenses         amounts         Deductions    end the year

FOR THE YEAR ENDED JUNE 30, 2002:
<S>                                   <C>               <C>               <C>            <C>               <C>
Accounts receivable allowances
   for doubtful accounts                       $   622,387          $  539,207        $ (33,697)        $  (727,524)    $   400,373

Inventory reserves - for obsolescence            1,659,410             705,693          (76,977)           (689,954)      1,598,172
Deferred income tax valuation  allowance         7,042,400                            1,662,400                           8,704,800
                                               -----------          ----------       ----------         ------------     -----------


Total allowances deducted from assets          $ 9,324,197          $1,244,900       $1,551,726         $(1,417,478)    $10,703,345
                                               ===========          ==========       ==========         ============     ===========


FOR THE YEAR ENDED JUNE 30, 2003:
Accounts receivable allowances
   for doubtful accounts                       $   400,373          $  173,345        $ (92,964)        $  (266,859)    $   213,895

Inventory reserves - for obsolescence            1,598,172             416,716          (80,869)           (827,787)      1,106,232
Deferred income tax valuation allowance          8,704,800                                                 (191,500)      8,513,300
                                               -----------          ----------       ----------         ------------     -----------


Total allowances deducted from assets          $10,703,345          $  590,061        $(173,833)        $(1,286,146)    $ 9,833,427
                                               ===========          ==========        ==========        ============     ===========

</TABLE>
                                       76
<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).

     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).


                                       77
<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.  (Incorporated  by
             reference to Form 10-K, File No. 0-14961, filed October 15, 2001).

     3.19    Certificate  of Vote of Directors  Establishing a Series or a Class
             of Stock,  dated January 23, 2002 (Series F Convertible  Redeemable
             Preferred Stock). (Incorporated by reference to Form 10-Q, File No.
             0-14961, filed on February 14, 2002).

     3.20    Certificate  of Vote of Directors  Establishing a Series or a Class
             of Stock,  dated  August 6, 2002 (Series G  Convertible  Redeemable
             Preferred Stock).  (Incorporated by reference to Form 8-K, File No.
             0-14961, filed on August 8, 2002).

     3.21    Articles of  Amendment  to Articles  of  Organization,  dated as of
             December 17, 2002.  (Incorporated  by reference to Form 10-Q,  File
             No. 0-14961, filed February 14, 2003).

     3.22    Amended and  Restated  By-Laws  (Incorporated  by reference to Form
             8-K, File No. 0 -14961, filed August 8, 2002).

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


                                       78
<PAGE>
     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     Second Amended and Restated Registration Rights, dated as of August
             6, 2002, by and among PrimeSource Healthcare,  Inc. and the persons
             listed as Stockholders therein.  (Incorporated by reference to Form
             8-K, File No. 0-14961, filed August 8, 2002).

     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. (Incorporated by reference to Form 10-K, File
             No. 0-14961, filed October 15, 2001).

     4.5     Co-Sale  Agreement,  dated  as of  August  6,  2002,  by and  among
             PrimeSource Healthcare, Inc. and the persons listed as Stockholders
             on the signature pages thereto.  (Incorporated by reference to Form
             8-K, File No. 0-14961, filed August 8, 2002).

     10.1    Employment Agreement,  entered into between PrimeSource Healthcare,
             Inc. and Bradford C. Walker, effective upon the Initial Closing (as
             defined  in the  Purchase  Agreement  dated as of August 6,  2002).
             (Incorporated  by reference to Form 10-K, File No.  0-14961,  filed
             September 30, 2002).

     10.2    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).

     10.3    Amended and Restated Credit  Agreement,  dated as of June 14, 1999,
             by and among  PrimeSource  Surgical,  Inc, a Delaware  corporation,
             Bimeco, Inc., a Florida corporation  ("Bimeco"),  Medical Companies
             Alliance,  Inc.,  a Utah  corporation,  Douglas  Medical,  Inc.,  a
             Florida   corporation   and   Citizens   Bank   of   Massachusetts.
             (Incorporated by reference to Form == 10-K, File No. 0-14961, filed
             September 30, 2002).

     10.4    First Amendment to Amended and Restated Credit Agreement,  dated as
             of August  22,  2000,  by and among  PrimeSource  Surgical,  Inc, a
             Delaware  corporation,  Bimeco,  Inc., a Florida  corporation,  and
             Citizens Bank of Massachusetts.  (Incorporated by reference to Form
             10-K, File No. 0-14961, filed September 30, 2002).

     10.5    Second Amendment to Amended and Restated Credit Agreement, dated as
             of December  15, 2000,  by and among  PrimeSource  Surgical,  Inc.,
             Bimeco,   Inc.   Ruby  Merger  Sub,   Inc.  and  Citizens  Bank  of
             Massachusetts.  (Incorporated  by reference to Form 10-K,  File No.
             0-14961, filed September 30, 2002).

     10.6    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).

                                       79
<PAGE>
     10.7    Fourth Amendment to Amended and Restated Credit Agreement, dated as
             of August 6, 2002, among PrimeSource Surgical,  Inc., Bimeco, Inc.,
             Ruby Merger Sub, Inc.,  PrimeSource  Healthcare,  Inc. and Citizens
             Bank of Massachusetts. (Incorporated by reference to Form 8-K, File
             No 0-14961, filed August 8, 2002).

     10.8    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).

     10.9    First   Amendment  to  Amended  and  Restated   Loan  and  Security
             Agreement,  dated as of August 31, 2001,  by and among  PrimeSource
             Healthcare,   Inc.  (f/k/a  Luxtec   Corporation),   Fiber  Imaging
             Technologies, Inc., Cathtec Incorporated, and Cardiodyne, Inc., and
             Ark CLO 2000-1,  Limited.  (Incorporated by reference to Form 10-K,
             File No. 0-14961, filed September 30, 2002).

     10.10   Second  Amendment  and Waiver to the Amended and Restated  Loan and
             Security  Agreement,  dated as of  August  6,  2002,  by and  among
             PrimeSource  Healthcare,  Inc.  (f/k/a Luxtec  Corporation),  Fiber
             Imaging Technologies,  Inc., Cathtec Incorporated,  and Cardiodyne,
             Inc., and Ark CLO 2000-1,  Limited.  (Incorporated  by reference to
             Form 8-K, File No 0-14961, filed August 8, 2002).

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

     10.12   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).

     10.13   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).

     10.14   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).

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

     10.16   Conversion and Exchange  Agreement,  dated as of August 6, 2002, by
             and among  PrimeSource  Healthcare,  Inc. and the persons listed in
             the signature  pages  thereto.  (Incorporated  by reference to Form
             8-K, File No 0-14961, filed August 8, 2002).

     10.17   Purchase  Agreement,  dated as of August 6, 2002, among PrimeSource
             Healthcare,  Inc.  and the Initial  Purchasers  named in Schedule I
             thereto.  (Incorporated  by reference to Form 8-K, File No 0-14961,
             filed August 8, 2002).


                                       80
<PAGE>
     10.18   Lease Agreement, dated as of March 1, 2000, by and between Holualoa
             Butterfield  Industrial,  L.L.C.  and  PrimeSource  Surgical,  Inc.
             (Incorporated by reference to Form 10-K, File No. 0-14961, filed on
             October 15, 2001).

     10.19   Stock  Purchase  Agreement,  dated  June  30,  2003,  by and  among
             PrimeSource  Surgical,  Inc.,  Peter  Miller,  Peter  Eule  and New
             England Medical  Specialties,  Inc.  (Incorporated  by reference to
             Form 8-K, File No. 0-14961, filed July 2, 2003).

     10.20   Waiver  Agreement,  dated June 30, 2003,  by and among  PrimeSource
             Healthcare, Inc. and the Purchasers named therein. (Incorporated by
             reference to Form 8-K, File No. 0-14961, filed July 2, 2003).

     10.21   Severance  Agreement,  dated  September  5,  2003,  by and  between
             PrimeSource Healthcare, Inc. and Bradford C. Walker.  (Incorporated
             by  reference to Form 8-K,  File No.  0-14961,  filed  September 8,
             2003).

     21.1    Subsidiaries of the Registrant.

     31.1    Certification  of the  President  Pursuant  to  Section  302 of the
             Sarbanes-Oxley Act of 2002.

     31.2    Certification of CFO Pursuant to Section 302 of the  Sarbanes-Oxley
             Act of 2002.

     32.1    Certification  of the  President and CFO Pursuant to Section 906 of
             the Sarbanes-Oxley Act of 2002.

    (b) Reports on Form 8-K:

        None.



                                       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/Joseph H. Potenza
                                               ---------------------------------
                                                    Joseph H. Potenza, President


October 14, 2003


                                       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
---------                       -----                                ----


/s/ William H. Lomicka          Director                        October 14, 2003
----------------------
    William H. Lomicka


/s/ Larry H. Coleman            Director                        October 14, 2003
----------------------
    Larry H. Coleman


/s/ Joseph H. Potenza           President and Director          October 14, 2003
----------------------
    Joseph H. Potenza


/s/ Shaun D. McMeans            Chief Operating Officer,        October 14, 2003
----------------------          Chief Financial Officer
    Shaun D. McMeans            and Treasurer, Director


                                       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).


                                       88
<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.  (Incorporated  by
             reference to Form 10-K, File No. 0-14961, filed October 15, 2001).

     3.19    Certificate  of Vote of Directors  Establishing a Series or a Class
             of Stock,  dated January 23, 2002 (Series F Convertible  Redeemable
             Preferred Stock). (Incorporated by reference to Form 10-Q, File No.
             0-14961, filed on February 14, 2002).

     3.20    Certificate  of Vote of Directors  Establishing a Series or a Class
             of Stock,  dated  August 6, 2002 (Series G  Convertible  Redeemable
             Preferred Stock).  (Incorporated by reference to Form 8-K, File No.
             0-14961, filed on August 8, 2002).

     3.21    Articles of  Amendment  to Articles  of  Organization,  dated as of
             December 17, 2002.  (Incorporated  by reference to Form 10-Q,  File
             No. 0-14961, filed February 14, 2003).

     3.22    Amended and Restated  By-Laws  (Incorporated by reference to Form 8
             K, File No. 0 -14961, filed August 8, 2002).

     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).
                                       89
<PAGE>
     4.3     Second Amended and Restated Registration Rights, dated as of August
             6, 2002, by and among PrimeSource Healthcare,  Inc. and the persons
             listed as Stockholders therein.  (Incorporated by reference to Form
             8-K, File No. 0-14961, filed August 8, 2002).

     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. (Incorporated by reference to Form 10-K, File
             No. 0-14961, filed October 15, 2001).

     4.5     Co-Sale  Agreement,  dated  as of  August  6,  2002,  by and  among
             PrimeSource Healthcare, Inc. and the persons listed as Stockholders
             on the signature pages thereto.  (Incorporated by reference to Form
             8-K, File No. 0-14961, filed August 8, 2002).

     10.1    Employment Agreement,  entered into between PrimeSource Healthcare,
             Inc. and Bradford C. Walker,  effective upon the Initial Closing as
             defined  in the  Purchase  Agreement  dated as of August 6,  2002).
             (Incorporated  by reference to Form 10-K, File No.  0-14961,  filed
             September 30, 2002).

     10.2    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).

     10.3    Amended and Restated Credit  Agreement,  dated as of June 14, 1999,
             by and among  PrimeSource  Surgical,  Inc, a Delaware  corporation,
             Bimeco, Inc., a Florida corporation  ("Bimeco"),  Medical Companies
             Alliance,  Inc.,  a Utah  corporation,  Douglas  Medical,  Inc.,  a
             Florida   corporation   and   Citizens   Bank   of   Massachusetts.
             (Incorporated by reference to Form == 10-K, File No. 0-14961, filed
             September 30, 2002).

     10.4    First Amendment to Amended and Restated Credit Agreement,  dated as
             of August  22,  2000,  by and among  PrimeSource  Surgical,  Inc, a
             Delaware  corporation,  Bimeco,  Inc., a Florida  corporation,  and
             Citizens Bank of Massachusetts.  (Incorporated by reference to Form
             10-K, File No. 0-14961, filed September 30, 2002).

     10.5    Second Amendment to Amended and Restated Credit Agreement, dated as
             of December  15, 2000,  by and among  PrimeSource  Surgical,  Inc.,
             Bimeco,   Inc.   Ruby  Merger  Sub,   Inc.  and  Citizens  Bank  of
             Massachusetts.  (Incorporated  by reference to Form 10-K,  File No.
             0-14961, filed September 30, 2002).

     10.6    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).

     10.7    Fourth Amendment to Amended and Restated Credit Agreement, dated as
             of August 6, 2002, among PrimeSource Surgical,  Inc., Bimeco, Inc.,
             Ruby Merger Sub, Inc.,  PrimeSource  Healthcare,  Inc. and Citizens

                                       90
<PAGE>
             Bank of Massachusetts. (Incorporated by reference to Form 8-K, File
             No 0-14961, filed August 8, 2002).

     10.8    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).

     10.9    First   Amendment  to  Amended  and  Restated   Loan  and  Security
             Agreement,  dated as of August 31, 2001,  by and among  PrimeSource
             Healthcare,   Inc.  (f/k/a  Luxtec   Corporation),   Fiber  Imaging
             Technologies, Inc., Cathtec Incorporated, and Cardiodyne, Inc., and
             Ark CLO 2000-1,  Limited.  (Incorporated by reference to Form 10-K,
             File No. 0-14961, filed September 30, 2002).

     10.10   Second  Amendment  and Waiver to the Amended and Restated  Loan and
             Security  Agreement,  dated as of  August  6,  2002,  by and  among
             PrimeSource  Healthcare,  Inc.  (f/k/a Luxtec  Corporation),  Fiber
             Imaging Technologies,  Inc., Cathtec Incorporated,  and Cardiodyne,
             Inc., and Ark CLO 2000-1,  Limited.  (Incorporated  by reference to
             Form 8-K, File No 0-14961, filed August 8, 2002).

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

     10.12   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).

     10.13   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).

     10.14   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).

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

     10.16   Conversion and Exchange  Agreement,  dated as of August 6, 2002, by
             and among  PrimeSource  Healthcare,  Inc. and the persons listed in
             the signature  pages  thereto.  (Incorporated  by reference to Form
             8-K, File No 0-14961, filed August 8, 2002).

     10.17   Purchase  Agreement,  dated as of August 6, 2002, among PrimeSource
             Healthcare,  Inc.  and the Initial  Purchasers  named in Schedule I
             thereto.  (Incorporated  by reference to Form 8-K, File No 0-14961,
             filed August 8, 2002).

     10.18   Lease Agreement, dated as of March 1, 2000, by and between Holualoa
             Butterfield  Industrial,  L.L.C.  and  PrimeSource  Surgical,  Inc.
             (Incorporated by reference to Form 10-K, File No. 0-14961, filed on
             October 15, 2001).

                                       91
<PAGE>
     10.19   Stock  Purchase  Agreement,  dated  June  30,  2003,  by and  among
             PrimeSource  Surgical,  Inc.,  Peter  Miller,  Peter  Eule  and New
             England Medical  Specialties,  Inc.  (Incorporated  by reference to
             Form 8-K, File No. 0-14961, filed July 2, 2003).

     10.20   Waiver  Agreement,  dated June 30, 2003,  by and among  PrimeSource
             Healthcare, Inc. and the Purchasers named therein. (Incorporated by
             reference to Form 8-K, File No. 0-14961, filed July 2, 2003).

     10.21   Severance  Agreement,  dated  September  5,  2003,  by and  between
             PrimeSource Healthcare, Inc. and Bradford C. Walker.  (Incorporated
             by  reference to Form 8-K,  File No.  0-14961,  filed  September 8,
             2003).

     21.1    Subsidiaries of the Registrant.

     31.1    Certification  of the  President  Pursuant  to  Section  302 of the
             Sarbanes-Oxley Act of 2002.

     31.2    Certification of CFO Pursuant to Section 302 of the  Sarbanes-Oxley
             Act of 2002.

     32.1    Certification  of the  President and CFO Pursuant to Section 906 of
             the Sarbanes-Oxley Act of 2002.

     (b) Reports on Form 8-K:

         None.

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