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, 2002

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

For the transition period from _____________ to _____________

                         Commission File Number: 0-14961

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

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

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

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

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


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

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ X ]

The  estimated  aggregate  market  value  of the  voting  common  stock  held by
non-affiliates  of the  registrant  was  $2,231,125  as of  September  16, 2002.
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 16, 2002.


<PAGE>
As of August 31, 2002,  22,713,356  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.


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<TABLE>
<CAPTION>

                                TABLE OF CONTENTS

Part I
         <S>         <C>                                                                                                      <C>
          Item 1.    Business..................................................................................................    4
          Item 2.    Properties................................................................................................   16
          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 Shares and related Stockholder Matters....................................    17
          Item 6.    Selected Financial Data...................................................................................   20
          Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.....................   23
          Item 7A.   Quantitative and Qualitative Disclosures About Market Risk................................................   31
          Item 8.    Financial Statements and Supplementary Data...............................................................   33
          Item 9.    Changes In and Disagreements with Accountants on  Accounting Disclosure...................................   64

Part III  Item 10.   Directors and Executive Officers of the Registrant........................................................   64
          Item 11.   Executive Compensation....................................................................................   67
          Item 12.   Security Ownership of Certain Beneficial Owners and Management............................................   72
          Item 13.   Certain Relationships and Related Transactions............................................................   75

Part IV   Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................................   76

Signatures .....................................................................................................................  83

Index to
Exhibits  ......................................................................................................................  86

</TABLE>
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                                     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  Discussion  and  Analysis,"
under the subheading "Risk Factors."

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

ITEM 1. BUSINESS
                                     GENERAL

We are a leading specialty medical products sales, marketing,  manufacturing and
service company.  We sell a broad portfolio of specialty medical products,  some
of which we manufacture,  to hospitals and surgery centers  nationwide through a
dedicated  organization of sales and marketing  professionals.  We have expanded
rapidly through the acquisition and integration of a number of leading  regional
specialty  sales  and  marketing  organizations  and  select  specialty  medical
products  manufacturing  companies.  Since January 1998, we have acquired eleven
regional  specialty sales and marketing  organizations and one specialty medical
products  manufacturer.  We have  consolidated and integrated each of the twelve
acquired  businesses  in order to create a uniform  operational  platform and to
help facilitate  further  expansion of our business.  Today, we have two primary
businesses:  Specialty  Distribution  Services  and  the  Manufactured  Products
Division or Manufactured  Products.  As of August 31, 2002, we had 169 employees
and generated total revenue of $58.9 million for the fiscal year ending June 30,
2002.

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

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regions,  reduction of  corporate  overhead  through  workforce  reductions  and
facility  consolidation,  restructuring of our balance sheet through refinancing
of our senior bank debt and reduction of debt levels through cost reductions and
improved efficiency of 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:

     *    hiring experienced territory sales representatives;

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

     *    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 plans to focus 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:

     *    favorable industry demographics;

     *    increases in our market share;

     *    the acquisition of select specialty medical products manufacturers;

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

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

                                    INDUSTRY

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

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

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

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

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

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

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

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

                              PRODUCTS AND SERVICES

SPECIALTY DISTRIBUTION SERVICES

Within the SDS business,  we divide our business into PrimeSource  Surgical,  or
Surgical,  and PrimeSource Critical Care, or Critical Care. The Surgical segment
is a 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:

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<PAGE>

     *    Cardio Vascular;

     *    Endoscopy;

     *    General Surgery; and

     *    Gynecology.

Within the Critical Care segment, the primary specialties are:

     *    Neonatal Intensive Care; and

     *    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
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.

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<PAGE>

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.


                               SALES AND MARKETING

We sell our products and services to acute care  hospitals,  clinics and surgery
centers.  In fiscal year ended June 30, 2002,  within the Surgical  Distribution
Service  business,  we sold specialty  medical products to over 3,000 customers,
primarily in the United  States and Canada.  We are not  dependent on any single
customer or geographic  group of customers,  with no single customer  accounting
for more than 2% of our sales during our fiscal year ended June 30, 2002.

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

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<PAGE>
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.  All of our  sales  representatives  are
primarily compensated on a commission basis.

Within  the  surgical  illumination  business,  Luxtec is the  market  leader in
surgical  headlights with an estimated 60,000 surgeons using their products on a
worldwide  basis.   Within  the  United  States,  the  Luxtec  fiber  optic  and
illumination products are primarily  distributed through 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.

                                  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 the internet.  Our customer service call centers answer approximately 95%
of all calls by the third ring and have a call abandonment rate of less than 2%.
All orders are routed through our centralized  computer  ordering,  shipping and
inventory management system, which is linked to our distribution centers.  Rapid
and accurate  order  fulfillment  is a principal  component  of our  value-added
approach. We estimate that 92% of our disposable,  consumable product orders are
shipped complete within 24 hours.

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
Distribution  Service business  represents more than 100 manufacturers with over
95% of sales  concentrated  among  approximately  25 of these  manufacturers.  A
majority of the business is comprised of stocking relationships whereby we stock
the vendors products and provide  substantially all fulfillment  services (i.e.,
customer  service,  shipping,  returns,  etc.).  The remainder of the revenue is
received on an "agency" basis whereby we do not stock the vendor's  products and
do not  provide  fulfillment  services.  In the  case  of an  agency  sale,  the
manufacturer  provides  substantially all fulfillment services for customers and
we provide sales and  marketing  support in helping  facilitate  the sale of the
vendor's product.  For providing the sales and marketing support,  we are paid a
sales commission on each sale of the vendor's products.

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

Our Specialty Distribution Service 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

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

     *    increased inventory utilization;

     *    greater visibility as to sales performance; and

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

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



                                   COMPETITION

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

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     *    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.

     *    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.  Management believes that we
          are the only national specialty surgical  distributor  focusing on the
          hospital operating room.

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

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

Within the  Manufactured  Products  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.

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                            PATENTS AND TRADEMARKS

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

     Patents
     -------
     *    Patent No. 4516190 for Surgical Headlight issued May 7, 1985.
     *    Patent No. 4534617 for Fiber Optic Cable issued August 13, 1985.
     *    Patent No. 4616257 for Headlight Camera System issued October 7, 1986.
     *    Patent No.  4653848  for 45 degree and 90 degree  Fiber  Optic  Cables
          issued March 31, 1987.
     *    Patent No.  4797736 for  Videolux  Television  Fiber  Optic  Headlight
          Camera System issued January 10, 1989.
     *    Patent No. 5003605 for an  electronically  augmented  stethoscope with
          timing sound issued March 26, 1991.
     *    Patent No. 5220453 for telescopic spectacles with coaxial illumination
          issued June 15, 1993.
     *    Patent No. 5295052 for a light source assembly issued March 15 1994.
     *    Patent No. D345368 for surgical telescopes issued March 22, 1994.
     *    Patent No. 5331357 for an illumination assembly issued July 19, 1994.
     *    Patent No. D349123 for spectacles having integral  illumination issued
          July 26, 1994.
     *    Patent No. D350760 for an eyeglass  frame temple issued  September 20,
          1994.
     *    Patent No. 5392781 for blood pressure monitoring in noisy environments
          issued February 28, 1995.
     *    Patent No.  D415285 for Pinhole  Headlamp Video Camera for Medical and
          Surgical Applications issued October 12, 1999.
     *    Patent No. D398403 for Headband for Surgeons with Removable  Headboard
          Hanger issued September 15, 1998.
     *    Patent No. 6258037 for blood pressure monitoring in noisy environments
          issued July 10, 2001.

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

                                       12
<PAGE>
     *    Clearfield
     *    ValueFlex
     *    PrimeSource Healthcare
     *    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  August  31,  2002,  we  had  approximately   169  employees,   of  which
approximately  45 are engaged in the Surgical  segment,  approximately 43 in the
Critical Care segment,  approximately 54 in the Manufactured  Products  business
and  approximately  27 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 August  31,  2002,  of our  executive
officers and key management  personnel,  their  positions and summaries of their
backgrounds and business experience.

Name                   Age    Position
----                   ---    --------
Bradford C. Walker     44     President, Chief Executive Officer and Director
Joseph H. Potenza      55     Senior Vice President of Sales & Marketing
Shaun D. McMeans       40     Chief Financial Officer and Senior Vice President
                              Corporate Development
Samuel M. Stein        62     General Manager, Luxtec Illumination Division
Bruce R. Hoadley       43     Regional Vice President, Surgical Southeast Region
Scott F. Billman       46     Regional Vice President, Surgical Central Region
Mark A. Jungers        50     Regional Vice President, Critical Care
Peter A. Miller        57     Regional Manager, Critical Care

BRADFORD WALKER,  PRESIDENT,  CHIEF EXECUTIVE  OFFICER AND DIRECTOR - Mr. Walker
has over twenty years of experience managing and advising companies in a variety
of  industries.  Mr. Walker has served as our President and Chief  Restructuring
Officer  since  October  2001,  a  Director  since May 16,  2002,  and our Chief
Executive  Officer since August 6, 2002.  Prior to his work at PrimeSource,  Mr.
Walker was a Managing Director with Corporate  Revitalization Partners, where he
consulted for  companies  undertaking a  restructuring.  From 1988 to 2001,  Mr.
Walker lead or  participated  in over 30 corporate  turnarounds.  In addition to
turnaround   work,  Mr.  Walker  has  a  strong   background  with  mergers  and
acquisitions. From 1983 to1988, Mr. Walker was a partner with Beane, Walker & Co
where he was responsible for its "high-tech" venture capital investments. During
that time,  Mr. Walker also served as president of InCare,  the nations first PC
based  intranet-billing  network for physicians.  Mr. Walker began his career in
1980 at Arthur  Andersen  & Co.  Mr.  Walker  graduated  cum laude  from  Baylor
University with majors in Business Administration and Computer Sciences.

JOSEPH H. POTENZA,  SENIOR VICE PRESIDENT OF SALES & MARKETING - Mr. Potenza has
over twenty-five years of experience in the medical supply industry. Mr. Potenza
has served as our Senior Vice President of Sales & Marketing  since December 21,
2001.  Prior to that,  Mr. Potenza had served as our Vice President of Corporate
Accounts since February 2001. Prior to joining PrimeSource in February 2001, Mr.
Potenza worked for McKessonHBOC as Vice President of their Corporate Program and
Medibuy  where he was  responsible  for their  National  Accounts and  Corporate
Program.  Mr. Potenza spent 20 years with American Hospital Supply Corporation /
Baxter   Healthcare   Corporation  from  1977  to  1997  beginning  as  a  Sales
Representative  and culminating as the Eastern Region President,  running a $750
million  distribution   business  with  650  employees  and  seven  distribution
facilities. He received his bachelor's degree from Norwich University and an MBA
from Central Michigan University.

SHAUN D. MCMEANS,  CHIEF FINANCIAL OFFICER,  CHIEF OPERATING OFFICER AND CLERK -
Mr.  McMeans has over 18 years  experience  in  manufacturing  and  distribution
businesses,  specializing  in financial  management,  accounting  and  corporate
development.  Prior to  being  named  our  Chief  Financial  Officer  and  Chief

                                       14
<PAGE>
Operating  Officer in January  2002,  Mr.  McMeans  had also  served as our Vice
President of Operations and Corporate  Controller.  Prior to joining PrimeSource
in April 2000, Mr. McMeans held a number of financial and operational  positions
with Burnham  Corporation,  a leading  domestic  manufacturer and distributor of
residential  and  commercial  boilers for  residential  heating  and  commercial
process  applications.  He holds a  bachelor's  degree  in  accounting  from 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, GENERAL MANAGER,  LUXTEC ILLUMINATION  DIVISION - Mr. Stein has
an extensive  background in the development of young,  high growth,  technically
oriented companies. Prior to becoming the General Manager of the Luxtec Division
in March 2001, Mr. Stein served as Luxtec's Chief  Financial  Officer.  Prior to
joining Luxtec in 1993, Mr. Stein served as Chief  Operating and Chief Financial
Officer  of  Mitrol,  Inc.  of  which he was  also  co-founder.  He has held the
position of Chief Financial  Officer with companies ranging from young start-ups
to subsidiaries  of Fortune 500  corporations.  He holds a bachelor's  degree in
Business Administration from the University of Toledo.

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

SCOTT F.  BILLMAN,  REGIONAL  VICE  PRESIDENT -  PrimeSource  Surgical,  Central
Region-- Mr. Billman has extensive experience in sales, marketing and operations
management. Prior to joining PrimeSource in March 2002, Mr. Billman held several
management  positions in the  healthcare  industry.  He most recently  served as
Senior Vice President,  Product Marketing for Medi-buy, Inc. Mr. Billman holds a
bachelor's degree and an MBA from Bowling Green State University.

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

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

                                       15
<PAGE>
ITEM 2.  PROPERTIES

PrimeSource's  corporate  headquarters is located at 3700 East Columbia  Street,
Tucson,  Arizona. All of our facilities are leased and all of the facilities and
offices are located in the United States. A summary of the Company's facilities,
as of August 31, 2002, and offices is as follows:

                                                                         Lease
                                                         Square       Expiration
      City, State                                         Feet           Date
      -----------                                         ----           ----
      Tucson, Arizona..............................      25,544        02/28/05
      Birmingham, Alabama..........................      18,356        11/30/06
      Atlanta, Georgia.............................       4,800        07/31/04
      Guilford, Connecticut........................       7,300        07/31/03
      West Boylston, Massachusetts.................      31,689        10/31/05
                                                         ------
                                                         87,689
                                                         ======

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.  Our West Boylston,
Massachusetts  facility will undergo repairs of its air conditioning  systems in
fiscal 2003;  however,  the  estimated  cost of these repairs is planned for and
considered  immaterial  to  the  Company.  The  Company  is in  the  process  of
sub-leasing a portion of its Tucson facility  (approximately  16,500 square feet
of idle warehouse and office space).  This space became vacant subsequent to the
2001 restructuring.

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.  The outcome of this action cannot be determined at the present
time  and no  assurance  can be  give  as to the  occurrence  of any  particular
outcome.

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

None.
                                       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.

The  following  table sets  forth the high and low  closing  sale  prices of our
common stock on the AMEX during the periods indicated below:

                                                Common Stock
                                                ------------
                                                High     Low
                                                ----     ---
     Fiscal Year Ended 10/31/99

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

     Fiscal Year Ended 10/31/00

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

Our common stock is not currently listed on any public exchange or market. 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 August 31,  2002,  there were  approximately  547 holders of record of our
common stock. We estimate that there are approximately  1,400 beneficial holders
of our common stock.

We have not paid any cash  dividends 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  January  23,  2002,  we created a new class of stock,  Series F  Convertible
Redeemable Preferred Stock, no par value (the "Series F Stock"),  with 5,221,248
authorized  shares. The Series F Stock was issued in exchange for our previously
outstanding shares of Series D Exchangeable Preferred Stock, par value $1.00 per

                                       17
<PAGE>
share (the "Series D Stock"). We did not receive any cash proceeds in connection
with the  issuance  of the  Series F Stock in  exchange  for the Series D Stock.
Pursuant to the provisions of the Certificate of Vote  establishing the Series D
Stock, as of January 23, 2002, the Series D Stock ceased to remain  outstanding.
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 was convertible.  In addition, Series F Stock
ranked senior to all other of our outstanding  stock at June 30, 2002.  Series F
Stock  accrued  dividends  at the rate of 8  percent  per  year of the  original
issuance price and had a liquidation preference equal to $1.00 per share plus an
amount  equal to all  accrued  but  unpaid  dividends.  The Series F Stock had 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 our activities,  including, but not limited
to,  amendment  of our  articles  or  bylaws  and  merger  or  consolidation  of
PrimeSource. On August 6, 2002, Series F Stock was converted to common stock, as
discussed further below.

On  August 6,  2002,  we  created a new  series  of  preferred  stock,  Series G
Convertible  Redeemable Preferred Stock, no par value (the "Series G Stock"). On
August 6, 2002,  we issued and sold 70,452 shares of Series G Stock and warrants
to purchase an  aggregate  of  3,300,000  shares of our common stock at $.01 per
share.  These warrants vested immediately and expire August 6, 2012. We received
aggregate cash proceeds of $2,254,464 from the issuance and sale of the Series G
Stock and warrants on August 6, 2002.  In addition,  on September  15, 2002,  we
issued  and sold an  additional  10,891  shares of Series G Stock for  aggregate
consideration of $348,512.  Each share of Series G Stock is convertible into 100
shares of common stock,  subject to  adjustment,  at the option of the holder at
any time after the sooner of December  31, 2002 or the  approval by the Board of
Directors  of an increase in the  authorized  shares of common stock to at least
68,000,000  shares.  Each share of Series G Stock has one vote for each share of
common stock into which it would be convertible. In addition, the Series G Stock
ranks senior to all other outstanding stock of PrimeSource.  Each share Series G
Stock  accrues  dividends  at the rate of 8  percent  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.  Each
share of 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 our activities,  including,  but not limited to, amendment of our articles or
bylaws and the merger or consolidation of PrimeSource.  Our sale of the Series G
Stock and the related warrants was exempt from  registration  with the Securites
Exchange  Commission  pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder because the purchasers acquired the
securities  for  their  own   respective   accounts  and  not  with  a  view  to
distribution.

On August 6, 2002 and prior to the  issuance  and sale of the Series G Stock and
warrants,  we restructured our equity  structure.  Each outstanding share of our
Series C Convertible  Preferred Stock,  $1.00 par value per share (the "Series C
Stock"), was converted into 27.58 shares of our common stock. In connection with
the conversion of the Series C Stock, we issued the former holders of the Series
C Stock  warrants to purchase an  aggregate  of  7,390,614  shares of our common
stock with an exercise price of .01 per share. These warrants vested immediately
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 holders of Series C Stock were repriced from $1.68 per share to $.01 per
share.

                                       18
<PAGE>
Simultaneous  with the conversion of the Series C Stock,  each outstanding share
of our  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,  we issued the former holders of the
Series F Stock  warrants to purchase an  aggregate  of  1,614,560  shares of our
common stock with an exercise  price of $.01 per share.  These  warrants  vested
immediately and expire on August 6, 2012.

On August 6, 2002 and subsequent to the conversion of the Series C Stock and the
Series F Stock (but prior to the issuance and sale of the Series G Stock),  each
outstanding share of our 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, we issued the former holders
of the Series E Stock warrants to purchase an aggregate of 817,000 shares of our
common stock with an exercise price of $.01.  These warrants vested  immediately
and expire on August 6, 2012.
<TABLE>
<CAPTION>
                                                        Equity Compensation Plan Information
                                                        ------------------------------------


                                                                   June 30, 2002
                                                                                           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)
Equity compensation
     plans approved by
<S>                                 <C>                          <C>                            <C>
     security holders......         5,713,342                    $1.27                          2,986,658
Equity compensation
     plans not approved
     by security holders                0                          0                                0
                                    ---------                    -----                          ---------

               Total.......         5,713,342                    $1.27                          2,986,658
                                    =========                    =====                          =========

</TABLE>
                                       19
<PAGE>
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, 2002.  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
                                      ------------ ------------ -------------- ------------ -------------
                                          2002(1)      2001(2)     2000(3)(4)      1999(5)       1998(6)
                                         --------      -------     ----------      -------       -------

<S>                                       <C>          <C>            <C>          <C>            <C>
NET SALES . . . . . . . . . .             $58,945      $51,032        $54,411      $15,114        $6,362

NET LOSS. . . . . . . . . . .            $(6,191)     $(4,382)       $(1,384)       $(744)        $(116)

NET LOSS PER SHARE. . . . . .             $(1.11)      $(1.37)         $(.69)      $(0.17)       $(0.04)

BALANCE SHEET DATA:

TOTAL ASSETS. . . . . . . . . . . .       $37,587      $45,450        $31,297      $30,380        $7,261

LONG-TERM OBLIGATIONS. . .                $23,285      $20,335        $15,968       $1,516          $776

STOCKHOLDERS' EQUITY (CAPITAL
DEFICIENCY). . . . .                     $(5,349)       $(562)         $(567)       $2,622        $3,646
</TABLE>
(1) In the fiscal  year  ended June 30,  2002,  PrimeSource  approved  plans for
further  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 aggregate  cost of the
restructuring included total charges of $2,915,673.

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

(3) In  June  2000,  PrimeSource  Surgical  sold  an  entity  for  approximately
$398,000,  which  resulted  in a recorded  loss of  approximately  $732,000.  In

                                       20
<PAGE>
addition,  in April 2000,  PrimeSource Surgical acquired an entity for $405,000.
The  acquisition  was accounted for using the purchase  method of accounting and
the results of operations are included in the audited financial  statements from
the date of acquisition.

4) 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.

(5) 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 date of acquisition.


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

                                       21
<PAGE>
<TABLE>
<CAPTION>
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.

                             Sep-30,       Dec-31,      Mar-31,         Jun-30,      Sep-30,      Dec-31,      Mar-31,      Jun-30,
                              2000        2000 (1)       2001            2001         2001      2001(2)(3)     2002(3)    2002(2)(3)
                           ---------    ----------     ---------      ---------     ---------   ----------    ---------    ---------
<S>                        <C>           <C>           <C>            <C>           <C>          <C>          <C>          <C>
Net revenues               $12,504.9    $ 11,436.0     $12,691.6      $14,399.1     $16,025.7   $ 15,007.7    $14,585.1    $13,326.8
Cost of sales                8,413.7       8,524.9       8,362.8       10,153.7      10,187.7     10,855.5      9,688.6      8,579.4
                           ---------    ----------     ---------      ---------     ---------   ----------    ---------    ---------
         Gross profit      $ 4,091.2    $  2,911.1     $ 4,328.8      $ 4,254.4     $ 5,838.0   $  4,152.2    $ 4,896.5    $ 4,747.4
                           =========    ==========     =========      =========     =========   ==========    =========    =========


Net loss                   $ (148.7)    $(2,702.3)     $ (639.1)      $ (892.1)     $ (257.0)   $(5,039.9)    $ (540.2)    $ (353.5)
                           =========    ==========     =========      =========     =========   ==========    =========    =========
Net loss per share         $   (.05)    $    (.94)     $   (.14)      $   (.19)     $   (.13)   $    (.73)    $   (.12)    $   (.13)
                           =========    ==========     =========      =========     =========   ==========    =========    =========

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

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

(1) In the quarter ended December 31, 2000,  PrimeSource  Surgical sold an entity for  approximately  $398,000,  which resulted in a
recorded loss of approximately $732,000. In addition, in this quarter, PrimeSource Surgical approved plans for a major restructuring
of its operations resulting in total charges of $1,031,000.

(2) PrimeSource  Healthcare  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 ending June 30, 2002.

(3) PrimeSource  Healthcare approved plans for a major  restructuring of its operations  resulting in total charges of $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.
</TABLE>

                                       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.

                              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, 2002,  2001 and
2000.
<TABLE>
<CAPTION>
                                                                    2002              2001               2000
                                                              ----------------- ------------------ ------------------
       <S>                                                       <C>               <C>                <C>
       Net Sales                                                 100.0%            100.0%             100.0%
       Cost of Sales                                             66.7%              69.5%              67.2%
       Gross Profit                                              33.3%              30.5%              32.8%
       Selling, General and Administrative  Expense              35.8%              36.9%              31.1%
       Restructuring Expense                                      6.7%                                 1.9%
       Interest Expense                                           1.2%              1.8%               2.0%
       Net Loss                                                 (10.5%)            (8.6%)             (2.5%)
</TABLE>
  FISCAL YEAR ENDED JUNE 30, 2002 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2001

NET SALES:  Net sales of  $58,945,273  for fiscal 2002 were  $7,913,663 or 15.5%
higher than the $51,031,610  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
New England Medical  Specialties  ("NEMS") and  Professional  Equipment Co. Inc.
("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  $39,311,222  for fiscal  2002 from
$35,455,087  for fiscal 2001. The cost of sales for fiscal 2002 was 66.7% of net
sales  compared to 69.5% 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 $19,634,051,  or 33.3% of net sales for
fiscal 2002,  from  $15,576,523,  or 30.5% 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.

                                       23
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and administrative
expenses  increased to $21,116,385 for fiscal 2002, from  $18,813,441 for fiscal
2001, an increase of  $2,302,944,  or 12.2%.  The increase in expenses in fiscal
2002 is  primarily  due to  increases in  receivable  reserves 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.

RESTRUCTURING EXPENSE: In early November 2001, we commenced with a restructuring
plan  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 the
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. To date we have completed  certain aspects of our new
business model,  completed a reduction in workforce and executive staff,  exited
the western sales region and have  refinanced  our existing debt. As a result of
this,  restructuring expense were recorded of $ 2,915,673,  or 4.9% of sales for
fiscal 2002.  In addition,  during 2002 we made a decision to dispose of the PEC
division,  and the  write-off of PEC  goodwill and other impaired assets totaled
$1,038,825.

INTEREST  EXPENSE:  Interest  expense  decreased to $681,199 during fiscal 2002,
compared to $920,862  during  fiscal 2001,  a decrease of $239,663,  or 26%. 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 $2,085,699,  or 50%. Our net loss
increased in fiscal 2002  primarily as a result of the costs incurred related to
our restructuring process.

  FISCAL YEAR ENDED JUNE 30, 2001 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2000

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

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

GROSS PROFIT:  Gross profit  decreased to 15,576,523,  or 30.5% of net sales for
fiscal 2001, as compared to $17,848,431, or 32.8% of net sales for fiscal 2000.

                                       24
<PAGE>
The  reduction in gross profit was  primarily  due to lower sales levels and the
loss of several  higher  margin  product  lines during fiscal 2001 as well as an
increase in the amount of lower-margin capital equipment sales.

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

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

NET LOSS: Our net loss increased to $4,382,164  during fiscal 2001,  compared to
$1,383,654 during fiscal 2000, an increase of $2,998,510,  or 217%. Our net loss
increased  in fiscal  2001 as a result of lower net sales and gross  profits and
increased operating expenses.


                         LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2002, we had a working capital deficit of ($5,202,638) compared to a
deficit of  ($6,309,266)  at June 30, 2001. The decrease in our working  capital
deficit was primarily a result of decreased  accounts  receivable  and inventory
balances,  offset by decreased amounts accounts payable and current  obligations
for long-term debt.  Operating losses during the twelve-month  period ended June
30, 2002 were primarily offset by proceeds from the issuance of preferred stock.

The PrimeSource  Surgical Credit Agreement (as defined below) with Citizens Bank
of Massachusetts, or "Citizens," contains covenants that require the maintenance
of defined  financial ratios and income levels and limit  additional  borrowings
and capital expenditures.  PrimeSource Surgical was not in compliance with those
financial  covenants as of June 30, 2002, and  accordingly  was in default under
the  PrimeSource  Surgical  Credit  Agreement as of June 30, 2002.  On August 6,
2002,  PrimeSource  Surgical  amended the PrimeSource  Surgical Credit Agreement
and, as of such date through the date of this Report, is no longer in default of
the PrimeSource Surgical Credit Agreement.

On March 2, 2001,  we entered  into an Amended and  Restated  Security  and Loan
Agreement,  or, the "Luxtec Credit  Agreement," for a $2,500,000 line of credit,
or, the "Luxtec Line of Credit," with ARK CLO 2000-1  LIMITED,  or, "ARK." As of
June 30, 2002, the maximum  amount  available to borrow under the Luxtec Line of
Credit was  limited  to the  lesser of  $2,500,000  or a certain  percentage  of
accounts receivable and inventory,  as defined ($1,275,302 at June 30, 2002). As
of June 30, 2002,  borrowings bore interest at ARK's prime rate plus 2.0% (6.75%
at June 30, 2002).  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, 2002, there was no availability under the

                                       25
<PAGE>
Luxtec Line of Credit. As of June 30, 2002,  borrowings under the Luxtec Line of
Credit  were  payable  upon  maturity  on March 31,  2005.  On August 6, 2002 we
amended the Luxtec Line of Credit, which changed the maximum amount available to
borrow under the Luxtec Line of Credit to the lesser of  $1,250,000 or a certain
percentage of accounts receivable and inventory, as defined.

On March 2, 2001, as part of the Luxtec Credit Agreement, we executed an Amended
and  Restated  Term Note,  or the "Luxtec  Term Note," in the amount of $300,000
with ARK. As of June 30, 2002,  the Luxtec Term Note bore interest at prime plus
0.5%  (5.25%  at  June  30,  2002)  and  was  secured  by  substantially  all of
PrimeSource Healthcare's assets, excluding the capital stock of, and assets held
by,  PrimeSource  Surgical.  As of June 30, 2002,  the Luxtec Term Note required
monthly  principal  payments of $10,000 which  commenced 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 us an extension on the payment of
the Luxtec Term Note until May 31, 2002.  At June 30, 2002,  we had  outstanding
borrowings of $150,000 under the Luxtec Term Note. On August 6, 2002 we paid off
the entire  outstanding  balance of the Luxtec Term Note in connection  with the
Luxtec Credit Agreement amendment.

On March 2, 2001, as part of the Luxtec Credit  Agreement,  the Company executed
an Amended and Restated  Equipment Note, or, the "Luxtec Equipment Note," in the
amount of $131,000 with ARK.  Borrowings  bore interest at the bank's prime rate
plus 1.0% and were  secured by  substantially  all of  PrimeSource  Healthcare's
assets,  excluding  the  capital  stock  of,  and  assets  held by,  PrimeSource
Surgical.  The Luxtec  Equipment  Note required  monthly  principal  payments of
$8,333 which  commenced on March 31, 2001. The Luxtec  Equipment Note matured on
June 30, 2002 and was fully paid at that date. At June 30, 2002, the Company had
no outstanding borrowings under the Luxtec Equipment Note.

The Luxtec Credit Agreement  contains  covenants that require the maintenance of
defined  financial ratios and income levels and limit additional  borrowings and
capital expenditures. We were in compliance with these financial covenants as of
June 30, 2002.  However,  the Luxtec Credit  Agreement  contains a cross-default
provision  to our other  credit  agreements.  As a result of this  cross-default
provision and the default under the PrimeSource  Surgical Credit Agreement as of
June 30, 2002 as described  below,  we were in default  under the Luxtec  Credit
Agreement as of June 30, 2002. On August 6, 2002,  PrimeSource  Surgical amended
the PrimeSource  Surgical Credit Agreement and no longer is in default under the
PrimeSource  Surgical  Credit  Agreement,  and thus, as of such date through the
date of this  Report,  we are no  longer in  default  under  the  Luxtec  Credit
Agreement.

On June 14, 1999, the Company's wholly-owned  subsidiary,  PrimeSource Surgical,
entered  into an Amended and  Restated  Credit  Agreement,  or the  "PrimeSource
Surgical  Credit  Agreement,"  with  Citizens  for a  line  of  credit,  or  the
"PrimeSource  Surgical Line of Credit." As of June 30, 2002,  the maximum amount
available to borrow under the PrimeSource Surgical Line of Credit was limited to
the lesser of  $12,000,000  or a certain  percentage of accounts  receivable and
inventory,  as defined by the PrimeSource Surgical Credit Agreement  ($6,243,016
at June 30, 2002).  As of June 30, 2002,  Borrowings  bore interest at Citizens'
prime  rate  plus  0.75%  (5.50%  at June  30,  2002).  Unused  portions  of the
PrimeSource  Surgical Line of Credit  accrued a fee at an annual rate of 0.375%.

                                       26
<PAGE>
Borrowings are secured by substantially  all assets directly held by PrimeSource
Surgical.  At June 30, 2002,  there was no  availability  under the  PrimeSource
Surgical  Line of Credit.  Borrowings  under the  PrimeSource  Surgical  Line of
Credit were payable upon maturity in June 2003.

On June  14,  1999,  as  part  of the  PrimeSource  Surgical  Credit  Agreement,
PrimeSource  Surgical  executed  an Amended  and  Restated  Term  Note,  or, the
"PrimeSource  Surgical  Term Loan" in the  original  amount of  $5,000,000  with
Citizens.  The PrimeSource Surgical Term Loan is collateralized by substantially
all the assets directly held by PrimeSource  Surgical.  As of June 30, 2002, the
PrimeSource  Surgical Term Loan bore interest at Citizens' prime rate plus 0.75%
(5.50% at June 30, 2002).  As of June 30, 2002,  the  PrimeSource  Surgical Term
Loan requires monthly principal  payments of $133,334 between July 2002 and June
2003. As of June 30, 2002, the  PrimeSource  Surgical Term Loan was scheduled to
mature  on  June  1,  2003.  As of  June  30,  2002,  PrimeSource  Surgical  had
outstanding borrowings of $2,258,307 under the PrimeSource Surgical Term Loan.

On August 6,  2002,  we  amended  the  PrimeSource  Surgical  Credit  Agreement.
Pursuant to the amendment, we made a deferred payment in the amount of $675,000.
The  interest  rate is now a  variable  step  interest  rate  and  the  required
PrimeSource  Surgical Term Loan monthly principal payments are $50,000 per month
between  August 2002 and January 2003,  $75,000 per month between  February 2003
and July 2003,  and $100,000 per month  between  August 2003 and November  2003,
with the remainder due on December 2003. In addition,  pursuant to the amendment
to the PrimeSource Surgical Credit Agreement, the maturity date of the revolving
line of credit under the PrimeSource  Surgical Credit  Agreement was extended to
March 31, 2004 and certain other changes were made. As a result of the amendment
to the PrimeSource  Surgical Credit Agreement,  as of August 6, 2002 and through
the date of this Report,  we are not in default under the  PrimeSource  Surgical
Credit Agreement. Also on August 6, 2002, we amended the Luxtec Credit Agreement
pursuant to which ARK waived and  amended  certain  provisions  under the Luxtec
Credit  Agreement.  As a result of our compliance  with the amended  PrimeSource
Surgical Credit Agreement and the amendment to the Luxtec Credit  Agreement,  as
of August 6, 2002 and  through  the date of this  Report,  we are not in default
under the Luxtec Credit Agreement.  Management  expects that we will continue to
be in compliance with each of the PrimeSource  Surgical Credit Agreement and the
Luxtec Credit Agreement.

The principal source of our short-term  borrowings are the Luxtec Line of Credit
and the PrimeSource  Surgical Line of Credit. As of June 30, 2002, both lines of
credit utilized substantially all of their respective available borrowing bases.
As of June 30, 2002,  the  interest  rates on the lines of credit were 6.75% and
5.50%,  respectively.  As a result of the amendments to each of the  PrimeSource
Surgical Credit  Agreement and the Luxtec Credit Agreement on August 6, 2002, we
expect that the availability  under our credit facilities and any cash flow from
operations will be sufficient to fund our operations for the next twelve months.

On August 6, 2002, we raised $2,254,464 in additional equity capital through the
issuance  and sale of the Series G Stock and the warrants to purchase our common

                                       27
<PAGE>
stock. In addition,  on September 15, 2002, we raised an additional  $348,512 in
equity  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.  If we satisfy
the terms and conditions of the Purchase Agreement,  dated as of August 6, 2002,
we may raise an  additional  aggregate  amount  of  $697,024  in equity  capital
through the  issuance of  additional  shares of Series G Stock  through  January
2003.


                        RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS.  SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations  initiated  after June 30, 2001. The statement was effective for us
on July 1, 2001, and there was no material  impact on our financial  position or
results of operations.

In June 2001,  the FASB also issued SFAS No. 142 GOODWILL  AND OTHER  INTANGIBLE
ASSETS, which was effective for us on July 1, 2002. SFAS No. 142 requires, among
other things,  the  discontinuance of goodwill  amortization.  In addition,  the
standard  includes  provisions  for the  reclassification  of  certain  existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized   intangibles,   reclassification   of  certain  intangibles  out  of
previously  reported  goodwill and the  identification  of  reporting  units for
purposes of assessing  potential  future  impairments of goodwill.  SFAS No. 142
also requires us to complete a transitional  goodwill impairment test six months
from  the date of  adoption.  We have  completed  the  preliminary  phase of our
evaluation of goodwill and intangible  assets and it is likely we will have some
impairment of goodwill upon implementation of SFAS No. 142, however,  the amount
of any impairment is not yet known.

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  is  effective  for  our  fiscal  year  beginning  July  1,  2002.  The
implementation of this standard is not expected to have a material impact on our
financial position or results of operations.

In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of  Financial  Accounting  Standards  ("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  Statement  is  effective  for  disposal
activities  that are  initiated  after  December 31, 2002.  The Company does not
expect this SFAS to have a material effect on its financial  position or 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.

                                       28
<PAGE>
We incurred a net loss of $6,190,563 for our fiscal year ended June 30, 2002. If
we are unable to generate  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  INCORPORATION  AND BY-LAWS  COULD MAKE IT
HARDER  FOR  A  THIRD  PARTY  TO  ACQUIRE  CONTROL  OF US  AND  COULD  DETER  AN
ACQUISITION.  Provisions of our Articles of  Organization,  as amended,  and the
Amended and Restated By-Laws of the Massachusetts Business Corporation Law could
have the effect of making it more difficult for a third party to acquire,  or of
discouraging a third party from attempting to acquire,  control of us. Our Board
of  Directors  has the  authority  to issue  shares  of  preferred  stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting  rights,  of those  shares  without  any  further  vote or  action by our
stockholders,  subject to certain limitations.  The rights of the holders of our
common stock may be subject to, and may be adversely  affected by, the rights of
the holders of any preferred stock that we may issue in the future. The issuance
of  preferred  stock  by us may  have  the  effect  of  delaying,  deferring  or
preventing a change of our control  without  further action by our  stockholders
and may  adversely  affect  the voting  and other  rights of the  holders of our
common stock. In addition, our Articles of Organization do not permit cumulative
voting.  Further,  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 has grown rapidly through
the  acquisition of a number of specialty  medical  products sales and marketing
organizations.  Accordingly,  PrimeSource  Surgical has only a limited operating
history  from  which to  evaluate  and  forecast  its  business.  As a result of
PrimeSource Surgical's limited operating history, we may be unable to accurately
forecast financial results going forward. Moreover, failure to meet our revenue,
targets and financial  projections  may have an immediate and negative impact on
our total results of operations.

                                       29
<PAGE>
      OUR  BUSINESS  WILL  SUFFER IF WE FAIL TO ATTRACT  AND RETAIN  EXPERIENCED
SALES  REPRESENTATIVES.  The success and growth of our  business  depends on our
ability to attract and retain qualified and experienced  sales  representatives.
There is significant  competition for  experienced  specialty  medical  products
sales  representatives.  It is uncertain  whether we can continue to attract and
retain qualified personnel.  If we cannot attract, retain and motivate qualified
sales  personnel,  we will not be able to expand our business and our ability to
perform under our existing  contracts will be impaired,  which would  negatively
affect our results of operations.

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

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

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

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

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

      GOVERNMENTAL OR PRIVATE  INITIATIVES TO REDUCE HEALTHCARE COSTS COULD HAVE
A MATERIAL  ADVERSE  EFFECT ON THE  SPECIALTY  MEDICAL  PRODUCTS  INDUSTRY.  The
primary  trend  in  the  United  States  healthcare   industry  is  toward  cost
containment.  Comprehensive  government  healthcare  reform  intended  to reduce

                                       30
<PAGE>
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,  2002 was approximately  $10,505,685,  all of
which is subject to interest rate  fluctuations.  A  hypothetical  10% change in
interest  rates  applied  to the fair  value of debt  would not have a  material
impact on our earnings or cash flows.


                                       31
<PAGE>
<TABLE>
<CAPTION>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                 PRIMESOURCE HEALTHCARE, INC. and Subsidiaries


                        Consolidated Financial Statements
                          as of June 30, 2002 and 2001,
               and for Each of the Three Years in the Period Ended
                          June 30, 2002, 2001 and 2000
                          Independent Auditors' Report


                                                                                         Page

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

Consolidated Balance Sheets as of June 30, 2002 and 2001                            F-2 - F-4

Consolidated Statements of Operations for the Years Ended June
30, 2002, 2001 and 2000                                                                   F-5

Consolidated Statements of Stockholders' Equity (Capital
Deficiency) for the Years Ended June 30, 2002, 2001 and 2000                              F-6

Consolidated Statements of Cash Flows for the Years Ended June
30, 2002, 2001 and 2000                                                             F-7 - F-8

Notes to Consolidated Financial Statements                                         F-9 - F-31
</TABLE>
                                       32
<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, 2002 and 2001,
and the related  consolidated  statements of operations,  stockholders'  capital
deficiency,  and cash flows for each of the three years in the period ended June
30, 2002.  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, 2002 and 2001, and the results of their  operations
and their  cash flows for each of the three  years in the period  ended June 30,
2002 in conformity with accounting  principles  generally accepted in the United
States of America.



Phoenix, Arizona

September  27, 2002
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
------------------------------------------------------------------------------------------------------------------------

ASSETS                                                                                        2002              2001

CURRENT ASSETS:
<S>                                                                                    <C>                 <C>
  Cash and cash equivalents                                                            $     285,735       $    622,623
  Accounts receivable - net of allowance for doubtful accounts
    of approximately $400,000 (2002) and $622,000 (2001)                                   6,348,534          8,771,207
  Inventories - net                                                                        7,496,108          9,821,232
  Income taxes receivable                                                                    110,000
  Prepaid expenses and other current assets                                                  207,765            152,260
                                                                                       --------------     --------------

           Total current assets                                                           14,448,142         19,367,322

PROPERTY, PLANT, AND EQUIPMENT - Net                                                       1,139,935          1,740,340

INTANGIBLE ASSETS - Net of accumulated amortization
  of approximately $267,000 (2002) and $221,000 (2001)                                       143,272            140,479

GOODWILL - Net of accumulated amortization
  of approximately $3,862,000 (2002) and $2,175,000 (2001)                                21,499,956         23,844,720

OTHER ASSETS - Net of accumulated amortization of
  approximately $345,000 (2002) and $192,000 (2001)                                          355,463            357,093
                                                                                       --------------     --------------

TOTAL                                                                                  $  37,586,768       $ 45,449,954
                                                                                       ==============     ==============


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

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
-------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY                                             2002                2001

CURRENT LIABILITIES:
<S>                                                                                       <C>               <C>
  Accounts payable                                                                        $ 5,021,383       $ 10,994,075
  Accrued expenses                                                                          3,307,581          2,747,957
  Accrued restructuring costs                                                               1,111,133
  Customer deposits                                                                           220,901            568,116
  Income taxes payable                                                                                             9,500
  Lines of credit                                                                           8,097,378          8,051,826
  Current portion of long-term debt                                                         1,855,481          3,259,885
  Current portion of capital lease obligations                                                 36,923             45,229
                                                                                          -----------        -----------
           Total current liabilities                                                       19,650,780         25,676,588
                                                                                          -----------        -----------

CAPITAL LEASE OBLIGATIONS - Net of current portion                                             47,789             72,339
                                                                                          -----------        -----------

LONG-TERM DEBT - Net of current portion                                                     1,244,307             84,015
                                                                                          -----------        -----------

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

COMMITMENTS AND CONTINGENCIES

SERIES C REDEEMABLE, CONVERTIBLE PREFERRED STOCK
  $1.00 par value - authorized, 344,864 shares; issued and outstanding,
  344,864 (2002) and 344,864 (2001) shares; aggregate liquidation
  preference of $18,983,193 (2002) and $17,803,482 (2001)                                  16,313,946         15,134,235
                                                                                          -----------        -----------

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

SERIES E REDEEMABLE, CONVERTIBLE PREFERRED STOCK
  no par value - authorized, 1,000,000 shares; issued and outstanding,
  325,000 (2002) shares; aggregate liquidation preference of $10,009,288 (2002)             2,029,864
                                                                                          -----------

SERIES F REDEEMABLE, CONVERTIBLE PREFERRED STOCK
  no par value - authorized, 5,221,248 shares; issued and outstanding,
  5,221,248 (2002) shares; aggregate liquidation preference of $5,402,061 (2002)           3,649,145
                                                                                          -----------

                                                                                                              (Continued)
</TABLE>
                                      F-3
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
-------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY                                                2002                2001


<S>                                                                                         <C>                <C>
STOCKHOLDERS' CAPITAL DEFICIENCY:
  Common stock, $0.01 par value - authorized, 50,000,000 shares;
  issued and outstanding, 7,978,309 (2002) and 7,959,704 (2001) shares                         79,783             79,597
  Additional paid-in capital                                                               12,490,202          8,434,697
  Accumulated deficit                                                                     (17,919,048)        (9,075,914)
                                                                                         --------------     --------------

           Total stockholders' capital deficiency                                          (5,349,063)          (561,620)
                                                                                         --------------     --------------

TOTAL                                                                                    $ 37,586,768       $ 45,449,954
                                                                                         ==============     ==============

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

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
------------------------------------------------------------------------------------------------------------------------


                                                                         2002                2001               2000

<S>                                                                  <C>               <C>                <C>
NET SALES                                                            $58,945,273       $ 51,031,610       $ 54,411,055

COST OF SALES                                                         39,311,222         35,455,087         36,562,624
                                                                     ------------      -------------      ------------

GROSS PROFIT                                                          19,634,051         15,576,523         17,848,431
                                                                     ------------      -------------      ------------

OPERATING EXPENSES:
  Selling, general, and administrative expenses                       21,116,385         18,813,441         16,940,243
  Restructuring expenses                                               3,954,498                             1,031,011
                                                                     ------------      -------------      ------------

           Total operating expenses                                   25,070,883         18,813,441         17,971,254
                                                                     ------------      -------------      ------------

OPERATING LOSS                                                        (5,436,832)        (3,236,918)          (122,823)

INTEREST EXPENSE                                                        (681,199)          (920,862)        (1,104,115)

OTHER EXPENSE                                                           (136,632)           (11,184)          (115,716)
                                                                     ------------      -------------      ------------

LOSS BEFORE INCOME TAX BENEFIT (PROVISION)                            (6,254,663)        (4,168,964)        (1,342,654)

INCOME TAX BENEFIT (PROVISION)                                            64,100           (213,200)           (41,000)
                                                                     ------------      -------------      ------------

NET LOSS                                                              (6,190,563)        (4,382,164)        (1,383,654)

DIVIDENDS ON PREFERRED STOCK                                          (2,652,571)        (1,419,114)          (955,481)
                                                                     ------------      -------------      ------------

NET LOSS AVAILABLE TO COMMON
  STOCKHOLDERS                                                      $ (8,843,134)      $ (5,801,278)      $ (2,339,135)
                                                                    =============      =============      ============

LOSS PER SHARE:
  Basic                                                             $      (1.11)      $      (1.37)      $      (0.69)
                                                                    =============      =============      ============

  Diluted                                                           $      (1.11)      $      (1.37)      $      (0.69)
                                                                    =============      =============      ============
</TABLE>
See notes to consolidated financial statements.
                                      F-5
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
YEARS ENDED JUNE 30, 2002, 2001, AND 2000

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


<S>                                         <C>      <C>           <C>        <C>        <C>           <C>              <C>
BALANCE, JUNE 30, 1999                      47,243   $ 1,205,960   3,415,802  $ 34,159   $ 2,317,650   $  (935,501)     $ 2,622,268
  Repurchase of preferred stock               (354)      (10,417)                                                           (10,417)
  Issuance of common stock                                           260,227     2,602       434,501                        437,103
  Repurchase of common stock                                      (1,036,398)  (10,364)   (1,268,220)                    (1,278,584)
  Exercise of stock options                                          234,535     2,345        39,255                         41,600
  Preferred stock dividends                                                                                (955,481)       (955,481)
  Net loss                                       -             -           -         -             -     (1,383,654)     (1,383,654)
                                           -------   -----------   ---------  --------   ------------   -------------   ------------
BALANCE, JUNE 30, 2000                      46,889     1,195,543   2,874,166    28,742     1,523,186    (3,274,636)        (527,165)
  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)
                                           =======   ===========   =========  ========   ============  ==============   ============
</TABLE>
                                      F-6
<PAGE>
<TABLE>
<CAPTION>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000

                                                                            2002             2001             2000
                                                                        ------------     ------------      ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                    <C>              <C>               <C>
  Net loss                                                             $ (6,190,563)    $ (4,382,164)     $ (1,383,654)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization                                         2,491,011        1,727,082         1,210,506
    Loss on sale of division                                              1,038,823                            731,947
    Change in fair value of warrant put obligation                          (95,000)        (172,000)          124,000
    Loss on disposal of property, plant, and equipment                      124,132            8,179
    Write off of intangible assets                                           12,405           25,132
    Issuance of common stock for services                                    25,000          100,000
    Compensation expense for vesting of stock                               118,710
    Changes in operating assets and liabilities - net of
      effect of business acquisitions and dispositions:
      Accounts receivable                                                 2,208,904          873,575          (856,749)
      Inventories                                                         1,978,659         (822,554)         (555,764)
      Income taxes receivable and payable                                  (119,500)         859,666          (836,116)
      Prepaid expenses and other current assets                               4,644          131,166          (145,312)
      Other assets                                                         (181,504)        (381,710)
      Accounts payable                                                   (5,801,528)         779,767         2,651,440
      Accrued expenses                                                      568,636          316,944        (1,502,609)
      Accrued restructuring costs                                         1,111,133
      Customer deposits                                                    (347,215)         379,456
                                                                        ------------     ------------      ------------

           Net cash used in operating activities                         (3,053,253)        (557,461)         (562,311)
                                                                        ------------     ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property, plant, and equipment                                (86,828)        (475,280)         (606,385)
  Purchase of intangibles                                                   (64,166)
  Acquisition of other assets                                               (31,904)                          (210,444)
  Proceeds from sale of property, plant, and equipment                        6,462            7,200
  (Cash paid) purchase price refunded for business
    acquisitions - net                                                                      (391,000)          945,000
  Payment of business acquisition costs                                                     (785,159)
  Proceeds from business disposition                                                                           198,130
                                                                        ------------     ------------      ------------
           Net cash (used in) provided by investing activities             (176,436)      (1,644,239)          326,301
                                                                        ------------     ------------      ------------

                                                                                                             (Continued)

</TABLE>
                                      F-7
<PAGE>

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
------------------------------------------------------------------------------------------------------------------------
                                                                              2002             2001             2000
CASH FLOWS FROM FINANCING ACTIVITIES:
<S>                                                                        <C>               <C>              <C>
  Borrowings under lines of credit                                         20,072,856        28,043,512       27,583,557
  Repayments under lines of credit                                        (20,027,304)      (28,674,599)     (26,885,104)
  Borrowings under long-term debt                                             600,000            11,854
  Repayment of long-term debt                                                (872,711)       (2,361,116)        (900,000)
  Repayment on capital leases                                                 (47,192)          (31,340)         (41,716)
  Proceeds from issuance of common stock                                                          3,261          200,000
  Proceeds from issuance of preferred stock - net of costs                  3,167,170         5,706,061          904,360
  Proceeds from the exercise of options                                                                           41,600
  Stock repurchases                                                               (18)                        (1,089,001)
                                                                           ----------- ----------------     ------------
           Net cash provided by (used in) financing activities              2,892,801         2,697,633         (186,304)
                                                                           ----------- ----------------     ------------
NET (DECREASE) INCREASE IN CASH
  AND CASH EQUIVALENTS                                                       (336,888)          495,933         (422,314)
CASH AND CASH EQUIVALENTS, BEGINNING
  OF YEAR                                                                     622,623           126,690          549,004
                                                                           ----------- ----------------     ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                     $  285,735  $        622,623   $   126,690.00
                                                                           =========== ================   ==============


SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION - Cash paid during
    the year for:
    Interest                                                               $  741,905  $     945,393.00   $ 1,023,288.00
                                                                           =========== ================   ==============

    Income taxes                                                           $  256,100  $     109,638.00   $    1,220,582
                                                                           =========== ================   ==============


SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS - During the years ended June
  30, 2001, and 2000, the Company acquired entities in transactions summarized
  as follows:
    Fair value of assets acquired, including
    transaction costs                                                                  $ 17,076,173.00    $  594,089.00
    Issuance of common stock                                                             (4,254,000.00)     (237,104.00)
    Issuance of series D preferred stock                                                 (1,456,180.00)
    Cash paid in business acquisition - net of refund                                      (391,000.00)      945,000.00
                                                                                       ----------------   --------------

           Liabilities assumed                                                         $ 10,974,993.00    $ 1,301,985.00
                                                                                       ================   ==============

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


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

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, 2002, 2001, AND 2000
--------------------------------------------------------------------------------


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 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.  PrimeSource Surgical acquired the companies for aggregate

                                      F-9
<PAGE>
consideration of $1,310,000, of which $391,000 was paid in cash and $919,000 was
paid by issuing 390,804 shares of common stock.  An additional  21,262 shares of
common  stock with a fair value of $50,000  were issued to certain  employees of
the acquired companies.  These shares are restricted, and vest 33 percent on the
first, second, and third anniversaries of the acquisition (Note 3).

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

                                                   2001                  2000

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

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

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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF  PRESENTATION  - The Company has incurred  losses of $6,190,563 in
2002,  $4,382,164 in 2001, and  $1,383,654 in 2000. 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  intends to continue with its
current strategy during fiscal 2003.

     The  Company's  primary  debt  financing  is provided  under loans from two
different  banks. As of June 30, 2002, the Company had $9,080,383 of outstanding
borrowings  under the PrimeSource  Surgical credit  agreement (the  "PrimeSource
Surgical Credit Agreement"),  and $1,425,302 outstanding under the Luxtec credit
agreement (the "Luxtec Credit  Agreement"),  as further discussed in Notes 6 and
7.  The  two  credit  agreements   discussed  above  include  certain  financial
covenants,  with which the Company was out of compliance  at June 30, 2002.  The
Company  has  received  waivers of its  defaults as of June 30, 2002 and for all
prior  periods.  Subsequent  to June 30,  2002,  the  Company  amended  both the
PrimeSource  Surgical Credit Agreement and the Luxtec Credit Agreement to revise
certain financial covenants and principal payment  requirements,  and as of such
date cured its defaults under each of the PrimeSource  Surgical Credit Agreement
and the Luxtec Credit Agreement.  Management expects that we will continue to be
in compliance  with each of the PrimeSource  Surgical  Credit  Agreement and the
Luxtec  Credit  Agreement.  As a  result  of  the  amendments  to  each  of  the
PrimeSource  Surgical Credit Agreement and the Luxtec Credit Agreement on August
6, 2002, we expect that the  availability  under our credit  facilities  and any
cash flow from operations will be sufficient to fund our operations for the next
twelve months.

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

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

                                      F-10
<PAGE>
     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, 2002,  the  Company's  had  uninsured  cash  balances
totaling $345,129.

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

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

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

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

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

     REVENUE  RECOGNITION - The Company recognizes  stocking revenue at the time
of shipment  and passage of title.  The Company  also  receives  revenues  under
certain  agency  arrangements  and  recognizes  revenue  when the agency sale is
complete.   Provision  is  made  currently  for  estimated   sales  returns  and
allowances,  which have  historically  been  insignificant.  Warranty  costs are
provided for the Company's Luxtec's division sales of manufactured  product. 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 year ended June 30, 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.

     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 year ended June 30, 2002 and 2001 were  approximately
$87,000 and $76,000 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

                                      F-11
<PAGE>
consequences  of events that have been  recognized  in the  Company's  financial
statements  or tax returns.  A valuation  allowance is provided  when it is more
likely than not that some  portion or all of the  deferred tax asset will not be
realized.

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

     FINANCIAL  INSTRUMENTS - Pursuant to SFAS No. 107,  DISCLOSURES  ABOUT FAIR
VALUE OF  FINANCIAL  INSTRUMENTS,  the Company is required to estimate  the fair
value of all financial  instruments  included on its balance  sheets at June 30,
2002 and 2001.  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, 2002 and 2001, the estimated  fair value of the Company's  long-term
borrowings   was   approximately   $3,119,200  and   approximately   $3,343,900,
respectively.

     USE  OF  ESTIMATES  IN  THE  PREPARATION  OF  FINANCIAL  STATEMENTS  -  The
preparation of financial  statements in conformity  with  accounting  principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

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

     LOSS PER COMMON SHARE - SFAS No. 128, EARNINGS PER SHARE, requires the dual
presentation  of basic and diluted  earnings (loss) per share on the face of the
statement of operations  and the  disclosure of the  reconciliation  between the
numerators  and  denominators  of basic and  diluted  earnings  (loss) per share
calculations.  Earnings  (loss) per share  amounts  for the years ended June 30,
2002,  2001, and 2000 are  calculated  using only  weighted-average  outstanding
shares  of  7,975,208,  4,249,494,  and  3,383,382,  respectively.  Options  and
warrants to purchase common stock totaling 5,713,342,  4,409,289,  and 1,951,549
shares at June 30, 2002, 2001, and 2000,  respectively,  and shares to be issued
upon conversion of preferred stock were not used for computing  diluted earnings
(loss) per share because the result would be antidilutive. Put warrants totaling
282,022 for each of the years ended June 30, 2002,  2001, and 2000 were not used
for  computing  diluted  earnings  (loss) per share  because the result would be
antidilutive.

     RECENTLY  ISSUED  ACCOUNTING  PRONOUNCEMENTS  - In June 2001, the Financial
Accounting  Standards  Board ("FASB") issued  Statement of Financial  Accounting
Standards  ("SFAS") No. 141, BUSINESS  COMBINATIONS.  SFAS No. 141 requires that
the  purchase  method  of  accounting  be  used  for all  business  combinations
initiated  after June 30, 2001.  The  statement was effective for the Company on
July 1,  2001,  and there was no  material  impact  on the  Company's  financial
position or results of operations.

     In June  2001,  the FASB  also  issued  SFAS No.  142  GOODWILL  AND  OTHER
INTANGIBLE ASSETS, which was effective for the Company on July 1, 2002. SFAS No.
142 requires,  among other things, the discontinuance of goodwill  amortization.
In addition, the standard includes provisions for the reclassification of

                                      F-12
<PAGE>
certain existing recognized intangibles as goodwill,  reassessment of the useful
lives  of  existing   recognized   intangibles,   reclassification   of  certain
intangibles  out of  previously  reported  goodwill  and the  identification  of
reporting  units for  purposes of  assessing  potential  future  impairments  of
goodwill.  SFAS No. 142 also  requires  the Company to  complete a  transitional
goodwill  impairment test six months from the date of adoption.  The Company has
completed the  preliminary  phase of its  evaluation of goodwill and  intangible
assets and it is likely  they will have some  impairment  of its  goodwill  upon
implementation  of SFAS No. 142,  however,  the amount of that impairment is not
yet known.

     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 is effective for the Company's  fiscal year  beginning
July 1, 2002.  The  implementation  of this  standard is not  expected to have a
material impact on the Company's financial position or results of operations.

     In June 2002, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("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  Statement  is  effective  for  disposal
activities  that are  initiated  after  December 31, 2002.  The Company does not
expect this SFAS to have a material effect on its financial  position or results
of operations.

     RECLASSIFICATIONS  - Certain  reclassifications  have been made to the 2001
consolidated financial statements to conform to the 2002 presentation.

3.   ACQUISITIONS AND DISPOSALS

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

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

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

     For each share of  PrimeSource  Surgical  Series B-3 preferred  stock,  par
value $0.001 per share, Series C convertible preferred stock, par value $0.001

                                      F-13
<PAGE>
per share,  Series C-2 convertible  preferred stock, par value $0.001 per share,
the PrimeSource  Surgical  stockholders  received .02976732 of a share of Luxtec
Series C Stock, par value $1.00 per share.

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

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

     OTHER ACQUISITIONS AND DISPOSALS - Effective June 30, 2002, the Company set
forth a plan to  dispose of the  business  of PEC based upon the fact that PEC's
products and services did not fit with the Company's  current business lines and
growth  strategies.  Goodwill and other impaired assets were written off in June
2002,  resulting  in a loss of  $1,038,826  which is recorded  in  restructuring
expense in the statement of operations.  In August 2002, the Company consummated
the disposition of the PEC assets.

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

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

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

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


                                      F-14
<PAGE>
4.   INVENTORIES

     Inventories consist of the following at June 30:
<TABLE>
<CAPTION>
                                                             2002                2001
<S>                                                       <C>              <C>
     Raw materials                                        $ 1,162,080          $ 1,346,752
     Work-in-process                                           29,168               62,884
     Finished goods                                         7,903,032           10,071,006
     Reserve for obsolescence                              (1,598,172)          (1,659,410)
                                                          ------------         -----------

     Inventories - net                                    $ 7,496,108          $ 9,821,232
                                                          ============         ===========
</TABLE>
5.   PROPERTY, PLANT, AND EQUIPMENT

     Property, plant, and equipment consist of the following at June 30:
<TABLE>
<CAPTION>
                                                                2002            2001
<S>                                                       <C>              <C>
     Office equipment                                     $   708,211      $  844,943
     Furniture and fixtures                                   305,627         338,851
     Machinery and equipment                                  568,061         655,735
     Automobiles                                                              151,843
     Leasehold improvements                                   395,604         407,487
                                                          ------------     -----------

     Total                                                  1,977,503       2,398,859
     Less accumulated depreciation and amortization          (837,568)       (658,519)
                                                          ------------     -----------

     Property, plant, and equipment - net                 $ 1,139,935      $1,740,340
                                                          ============     ===========
</TABLE>
     Depreciation expense totaled $536,707, $355,313 and $285,237 in fiscal year
2002,  2001 and 2000,  respectively.  Property and equipment  held under capital
leases  amounted to $81,194  and  $191,107,  less  accumulated  amortization  of
$26,705 and $9,817, at June 30, 2002 and 2001, respectively.

6.   LINES OF CREDIT

Lines of credit at June 30 consist of the following:
<TABLE>
<CAPTION>
                                                                2002            2001
<S>                                                       <C>              <C>
     PrimeSource Surgical Line of Credit                  $ 6,822,076      $ 6,793,639
     Luxtec Line of Credit                                  1,275,302        1,258,187
                                                          ------------     -----------

     Total                                                 $8,097,378      $ 8,051,826
                                                           ==========      ===========
</TABLE>
     The PrimeSource  Surgical Credit Agreement (as defined below) with Citizens
Bank of  Massachusetts,  or  "Citizens,"  contains  covenants  that  require the
maintenance of defined  financial  ratios and income levels and limit additional
borrowings and capital expenditures.  PrimeSource Surgical was not in compliance
with those  financial  covenants as of June 30,  2002,  and  accordingly  was in

                                      F-15
<PAGE>
default under the PrimeSource  Surgical Credit Agreement as of June 30, 2002. On
August 6, 2002,  PrimeSource Surgical refinanced the PrimeSource Surgical Credit
Agreement and, as of such date through the date of this Report,  is no longer in
default of the financial covenants. Accordingly, at June 30, 2002 the borrowings
were classified in accordance with  contractual  maturities as contained  within
the  refinanced  agreements.  At June 30,  2001,  the Company was in default and
accordingly, borrowings were classified as current.

     On March 2, 2001, we entered into an Amended and Restated Security and Loan
Agreement,  or, the "Luxtec Credit  Agreement," for a $2,500,000 line of credit,
or, the "Luxtec Line of Credit," with ARK CLO 2000-1  LIMITED,  or, "ARK". As of
June 30, 2002, the maximum  amount  available to borrow under the Luxtec Line of
Credit was  limited  to the  lesser of  $2,500,000  or a certain  percentage  of
accounts receivable and inventory,  as defined ($1,275,302 at June 30, 2002). As
of June 30, 2002,  borrowings bore interest at ARK's prime rate plus 2.0% (6.75%
at June 30, 2002).  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, 2002, there was no availability under the
Luxtec Line of Credit. As of June 30, 2002,  borrowings under the Luxtec Line of
Credit  were  payable  upon  maturity on March 31,  2005.  On August 6, 2002 the
Company  amended the Luxtec  Line of Credit  which  changed  the maximum  amount
available to borrow under the Luxtec Line of Credit to the lesser of  $1,250,000
or a certain percentage of accounts  receivable and inventory,  as defined.  The
amendment  also  changed the  maturity to December  31, 2003 and  increased  the
interest rate to ARK's prime rate plus 3%.

     On June  14,  1999,  the  Company's  wholly-owned  subsidiary,  PrimeSource
Surgical,  entered  into  an  Amended  and  Restated  Credit  Agreement,  or the
"PrimeSource  Surgical Credit Agreement," with Citizens for a line of credit, or
the  "PrimeSource  Surgical  Line of Credit." As of June 30,  2002,  the maximum
amount  available to borrow under the  PrimeSource  Surgical  Line of Credit was
limited  to the  lesser of  $12,000,000  or a  certain  percentage  of  accounts
receivable  and  inventory,  as  defined  by  the  PrimeSource  Surgical  Credit
Agreement  ($6,243,016 at June 30, 2002).  As of June 30, 2002,  Borrowings bore
interest at  Citizens'  prime rate plus 0.75% (5.50% at June 30,  2002).  Unused
portions of the  PrimeSource  Surgical Line of Credit accrued a fee at an annual
rate of 0.375%. Borrowings are secured by substantially all assets directly held
by PrimeSource  Surgical.  At June 30, 2002, there was no availability under the
PrimeSource  Surgical Line of Credit.  Borrowings under the PrimeSource Surgical
Line of Credit are payable upon  maturity in June 2003.  On August 6, 2002,  the
Company amended the  PrimeSource  Surgical Line of Credit to extend the maturity
date to March 31,  2004 and  amended the  interest  rates under the  PrimeSource
Surgical Term Note is paid.


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

     Long-term debt at June 30 consists of the following:
 <TABLE>
<CAPTION>
                                                               2002             2001

<S>                                                       <C>                <C>
     Term loan payable to bank - PrimeSource Surgical          $ 2,258,307        $ 2,904,709
     Term note payable to bank - Luxtec                            150,000            250,000
     Equipment note - Luxtec                                                           89,191
     Other notes payable                                           691,481            100,000
                                                               ------------       -----------

     Total                                                       3,099,788          3,343,900
     Less current portion                                       (1,855,481)        (3,259,885)
                                                               ------------       -----------

     Total                                                     $ 1,244,307        $    84,015
                                                               ============       ============
</TABLE>
     On March 2,  2001,  as part of the Luxtec  Credit  Agreement,  the  Company
executed an Amended and  Restated  Term Note,  or the "Luxtec Term Note," in the
amount of  $300,000  with ARK.  As of June 30,  2002,  the Luxtec Term Note bore
interest  at prime  plus  0.5%  (5.25%  at June 30,  2002)  and was  secured  by
substantially  all of  PrimeSource  Healthcare's  assets,  excluding the capital
stock of, and assets held by,  PrimeSource  Surgical.  As of June 30, 2002,  the
Luxtec Term Note requires monthly principal  payments of $10,000 which commenced
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  us an
extension on the payment of the Luxtec Term Note until May 31, 2002. At June 30,
2002  and  2001,  we  had  outstanding  borrowings  of  $150,000  and  $250,000,
respectively,  under the  Luxtec  Term  Note.  On August 6, 2002 we paid off the
entire outstanding balance of the Luxtec Term Note in connection with the Luxtec
Line of Credit amendment.

     On March 2,  2001,  as part of the Luxtec  Credit  Agreement,  the  Company
executed an Amended  and  Restated  Equipment  Note,  or, the "Luxtec  Equipment
Note," in the amount of  $131,000  with ARK.  Borrowings  bore  interest  at the
bank's  prime  rate plus 1.0%  (5.75% at March  31,  2002) and were  secured  by
substantially  all of  PrimeSource  Healthcare's  assets,  excluding the capital
stock of, and assets held by,  PrimeSource  Surgical.  The Luxtec Equipment Note
required monthly principal payments of $8,333 which commenced on March 31, 2001.
The Luxtec  Equipment  Note  matured on June 30,  2002.  At June 30,  2002,  the
Company had no outstanding  borrowings  under the Luxtec  Equipment Note, and at
June 30, 2001 the Company had $89,190 outstanding.

     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, 2002.  However,  the Luxtec Credit Agreement contains a
cross-default  provision  to our other  credit  agreements.  As a result of this
cross-default  provision and the default under the  PrimeSource  Surgical Credit
Agreement as described below, the Company was in default under the Luxtec Credit
Agreement  as of  June  30,  2002.  On  August  6,  2002,  PrimeSource  Surgical
successfully  refinanced the PrimeSource Surgical Credit Agreement and no longer
is in default under the PrimeSource Surgical Credit Agreement.

                                      F-17
<PAGE>
     On June 14, 1999, as part of the  PrimeSource  Surgical  Credit  Agreement,
PrimeSource  Surgical  executed  an Amended  and  Restated  Term  Note,  or, the
"PrimeSource  Surgical  Term Loan" in the  original  amount of  $5,000,000  with
Citizens.  The PrimeSource Surgical Term Loan is collateralized by substantially
all the assets directly held by PrimeSource  Surgical.  As of June 30, 2002, the
PrimeSource  Surgical Term Loan bore interest at Citizens' prime rate plus 0.75%
(5.50% at June 30, 2002).  As of June 30, 2002,  the  PrimeSource  Surgical Term
Loan requires monthly principal  payments of $133,334 between July 2002 and June
2003.  The  PrimeSource  Surgical Term Loan matures on June 1, 2003. At June 30,
2002 and 2001, PrimeSource Surgical had outstanding borrowings of $2,258,307 and
$2,904,709, respectively, under the PrimeSource Surgical Term Loan.

     On August 6, 2002, we amended the PrimeSource  Surgical  Credit  Agreement.
Pursuant  to the  August 6, 2002  amendment,  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
are $50,000 between August 2002 and January 2003,  $75,000 between February 2003
and July 2003,  $100,000 between August 2003 and November 2003 and the remainder
due on December 2003.

     Other notes payable include a $100,000 note payable for tenant improvements
to Luxtec's  leased  premises,  which  bears  interest at 9.5 percent and is due
September  19, 2005.  Payments are interest  only for the first 12 months,  with
remaining  payments  calculated  on a 7-year  amortization  table with a balloon
payment in September 19, 2005.  Future minimum  payments  total $23,157  (2003),
$25,456 (2004),  $27,982 (2005),  and $7,420 (2006). In addition,  subsequent to
year-end the Company negotiated a $600,000  non-interest bearing note payable to
its special legal counsel in payment of existing  outstanding  accounts  payable
which is due May 30, 2004.  Future minimum  payments  total $270,000  (2003) and
$330,000 (2004).

8.   COMMON AND 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 to  50,000,000.  In June 2001,  the  Company's
stockholders  approved the amendment to increase the Company's authorized number
of common shares to 50,000,000. As a result, the 46,889 shares of Series B Stock
automatically converted into 1,172,214 shares of common stock.

     SERIES C REDEEMABLE, CONVERTIBLE PREFERRED STOCK - Series C Stock issued in
the Merger 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

                                      F-18
<PAGE>
rights to certain of the Company's  activities,  including,  but not limited to,
amendment of the Company's articles or bylaws and merger or consolidation of the
Company.  Accrued  dividends  for the year ended June 30, 2002 and 2001  totaled
$1,567,561 and $387,850, respectively, see note 15.

     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 for the year ended 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. At January 23, 2002, the
exercise price per share was set at $1.00 and the aggregate  number of shares of
our 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, 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, see note 15.

                                      F-19
<PAGE>
     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.  As noted above,  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,  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, see note 15.

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

9.   STOCK OPTIONS AND WARRANTS

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

     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 1993 Plan in the period from March 2, 2001 through June 30,
2002.

                                      F-20
<PAGE>
     The 1995  directors'  plan (the  "1995  Director  Plan")  was  adopted  for
non-employee  directors  and  provides  that  an  aggregate  of  up  to  200,000
nonqualified options may be granted to non-employee  directors, as determined by
the  compensation  committee of the Board of  Directors.  Under the terms of the
1995 Director  Plan,  options are granted at not less than the fair market value
of the Company's  common stock on the date of grant. The 1995 Director Plan also
provides that the options are exercisable at varying dates, as determined by the
compensation committee, and that they have terms not to exceed 10 years. At June
30, 2002 and 2001, there were 68,000 , and 88,000 shares respectively, available
for future grant under the 1995 Director Plan.

     WARRANTS  - Related  to a private  placement  of its  preferred  stock,  in
January 2001, the Company  granted  warrants to purchase shares of the Company's
common  stock.  The quantity  and price of these  warrants  was  dependent  upon
certain future events which were completed in January 2002.  1,751,130  warrants
with  exercise  prices of $1.00 per share  were  issued  in  January  2002.  The
warrants vested immediately and expire in December 2010, see note 15.

     Related to a private  placement of its preferred  stock,  in July 2001, the
Company granted  warrants to purchase  1,625,000  shares of the Company's common
stock at $1.00 per share.  The warrants  vested  immediately  and expire in July
2011, see note 15.

     An additional  118,650  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 157,861 shares of the Company's common
stock at $1.68  per  share.  The  warrants  vested  immediately  and  expire  in
September 2011, see note 15.

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

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

                                      F-21
<PAGE>
     Changes in shares under options and warrants,  in common stock equivalents,
for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
                                                                 Options                       Warrants
                                                       ----------------------------   ----------------------------
                                                                       Weighted                       Weighted
                                                                       Average                        Average
                                                        Shares         Exercise        Shares         Exercise
                                                      Outstanding       Price        Outstanding       Price
                                                     -------------   -------------   -------------  -------------

<S>                                                  <C>             <C>            <C>             <C>
Balance, June 30, 1999                                    687,573         0.78           420,227         1.03

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


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

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

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

   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
                                                     =============                   =============

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

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

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


</TABLE>
     The  weighted-average  fair  value of option and  warrant  grants in fiscal
2002,  2001 and 2000 was  approximately  $1,559,000,  $972,000,  and $1,020,000,
respectively.

                                      F-22
<PAGE>
     Outstanding  stock  options and  warrants  at June 30, 2002  consist of the
following:
<TABLE>
<CAPTION>
                                               Options                                      Warrants
                         ----------------------------------------------   ----------------------------------------------
                                                Weighted                                      Weighted
                                                Average      Weighted                         Average      Weighted
                                               Remaining     Average                         Remaining      Average
          Range of                            Contractual    Exercise                       Contractual    Exercise
       Exercise Prices           Shares       Life (Years)     Price           Shares       Life (Years)      Price

    <S>      <C>                <C>              <C>        <C>              <C>                <C>         <C>
     $1.00 - $1.35              689,806          6.20       $ 1.04           3,896,356          7.70        $ 1.00
     $1.68 - $2.50              718,019          2.96       $ 1.97             176,510          8.29        $ 1.75
     $2.63 - $6.00              232,651          1.08       $ 3.91
                               ---------                                    ----------

                               1,640,476         3.61       $ 1.85           4,072,866          7.72        $ 1.04
                               ==========                                   ===========
</TABLE>
     SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but does
not require,  companies to record  compensation  cost based on the fair value of
employee stock option and warrant grants.  The Company has chosen to continue to
account for employee  option and warrant grants using  intrinsic value under APB
Opinion No. 25.  Accordingly,  no  compensation  expense has been recognized for
employee  stock  option and warrant  grants.  Had  compensation  expense for the
employee stock option and warrant grants been determined based on the fair value
at the grant dates, consistent with SFAS No. 123, the Company's net loss for the
years ended June 30, 2002,  2001,  and 2000 would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                     2002                2001                  2000

     Net loss:
<S>                                                             <C>                  <C>                   <C>
       As reported                                              $(6,190,563)         $ (4,382,164)         $ (1,383,654)
       Pro forma                                                 (6,591,748)           (4,993,500)           (1,523,459)
       Pro forma loss per share - basic and diluted                   (0.86)                (1.17)                (0.45)
</TABLE>
     The fair value of each option and warrant grant is estimated on the date of
grant  using  the  Black-Scholes   option-pricing   model,  with  the  following
weighted-average assumptions:
<TABLE>
<CAPTION>
                                                                     2002                2001               2000

<S>                                                                  <C>                 <C>                   <C>
     Risk-free interest rate                                         5.21%               5.28%                 6%
     Expected dividend yield                                            0%                  0%                 0%
     Expected lives                                                7 years             7 years           10 years
     Expected volatility                                               50%                 50%                50%

</TABLE>
                                      F-23
<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  $169,347,  $148,959,  and $129,400,  for the years ended June 30,
2002, 2001, and 2000, respectively.

11.  INCOME TAXES

     The  (benefit)  provision  for income  taxes for the years ended June 30 is
based on the following components:
<TABLE>
<CAPTION>
                                                                         2002                2001               2000

     Current income taxes -
<S>                                                               <C>               <C>                 <C>
       State                                                      $    (64,100)     $    213,200        $     41,000
                                                                  ---------------   ---------------     ---------------

     Deferred income taxes:
       Federal                                                      (1,458,900)       (1,269,400)          (248,400)
       State                                                          (209,200)         (217,900)           (49,200)
                                                                  ---------------   ---------------     ---------------

     Total deferred                                                 (1,668,100)       (1,487,300)          (297,600)
                                                                  ---------------   ---------------     ---------------

     Change in valuation allowance                                   1,668,100         1,487,300            297,600
                                                                  ---------------   ---------------     ---------------

     Total                                                        $    (64,100)     $    213,200        $    41,000
                                                                  ===============   ===============     ===============
</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>
                                                                       2002              2001               2000
<S>                                                               <C>               <C>                 <C>
     Income tax benefit at statutory rate                         $ (2,248,400)     $ (1,459,100)       $  (469,900)
     Nondeductible warrant put expense (income)                         33,250           (60,200)            43,400
     State tax (expense) benefit, net of federal benefit              (202,350)           (3,100)            26,600
     Meals and entertainment                                            14,300            22,800             29,600
     Nondeductible goodwill                                            613,100           225,500             79,000
     Change in valuation allowance                                   1,668,100         1,487,300            297,600
     General business credit                                            45,000
     Other                                                              12,900                               34,700
                                                                  ---------------   ---------------     ---------------

     Total                                                        $    (64,100)     $    213,200        $    41,000
                                                                  ===============   ===============     ===============
</TABLE>
                                      F-24
<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>
                                                                                            2002                2001
<S>                                                                                          <C>         <C>
     Current:
       Restructuring reserve                                                          $     387,400
       Accrued vacation                                                                      57,500      $      51,400
       Inventory valuation adjustment                                                        80,500            858,500
       Bad debt reserve                                                                     152,200            256,300
       State taxes                                                                                             (89,600)
       Accrued distributor costs                                                            394,400            410,000
       Other                                                                                120,600            165,600
                                                                                      ---------------    ---------------

       Total current                                                                      1,917,100          1,652,200
                                                                                      ---------------    ---------------

     Long-term:
       Depreciation and amortization                                                        155,700            (24,700)
       State taxes                                                                                            (235,100)
       Credit carryforward                                                                  256,900            301,900
       Capital loss carryforward                                                            300,100            300,100
       Net operating loss carryforward                                                    6,075,000          5,066,000
                                                                                      ---------------    ---------------

       Total long-term                                                                    6,793,400          5,390,200
                                                                                      ---------------    ---------------

     Total                                                                                8,710,500          7,042,400
     Valuation allowance                                                                 (8,710,500)        (7,042,400)
                                                                                      ---------------    ---------------

     Total                                                                            $           -      $           -
                                                                                      ===============    ===============
</TABLE>
     At June 30, 2002 and 2001,  the Company  had  federal  net  operating  loss
carryforwards  of  approximately  $15,274,350  and  $12,843,200  and  state  net
operating loss carry forwards of $12,149,146 and $9,512,800,  respectively.  The
Company's  federal and state net operating losses expire in the tax years ending
June 30, 2003 through 2022. At June 30, 2002,  the Company had federal and State
credit carry forwards of approximately $144,800 and $112,100,  respectively.  At
June 30,  2001,  the  Company  had federal  and state  credit  carryforwards  of
approximately  $189,800 and $112,100,  respectively.  The Company's  federal and
state credits will generally expire in the tax years ended June 30, 2002 through
2022. The Company also has a federal capital loss  carryforward of approximately
$732,000.  The Company's  federal capital loss carryforward will begin to expire
in the tax year ending June 30, 2005.

     A full valuation allowance has been provided against the Company's deferred
tax  assets as of June 30,  2002 and 2001,  as it is more  likely  than not that
sufficient  taxable  income will not be  generated  to realize  these  temporary
differences.  Any future reduction of the valuation allowance established at the
dates of the  acquisitions  (Note 3) will  reduce the  goodwill  related to such
acquisition.

                                      F-25
<PAGE>
12.  COMMITMENTS AND CONTINGENCIES

     LEASES - The Company leases office space and certain computer equipment and
software under capital and noncancelable  operating leases. Rent expense for the
years ended June 30, 2002,  2001, and 2000 was $726,455,  $584,944 and $475,037,
respectively.  Minimum  annual lease  payments  under capital and  noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
                                                                                   CAPITAL          OPERATING
                                                                                   LEASES             LEASES

    <S>                                                                        <C>                <C>
     2003                                                                       $     42,906       $    627,498
     2004                                                                             33,181            572,476
     2005                                                                             13,967            482,291
     2006                                                                              6,800            187,149
     2007                                                                                                41,884
                                                                                --------------     --------------

     Total minimum lease payments                                                     96,854       $  1,911,298
                                                                                                   ==============
     Amount representing interest                                                    (12,142)
                                                                                --------------

     Present value of future minimum lease payments                                   84,712
     Less current portion of capital lease obligations                               (36,923)
                                                                                --------------

     Capital lease obligations - net of current portion                         $     47,789
                                                                                ==============
</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, 2002, executive officers of the Company's subsidiaries
had  employment   agreements  that  provide  for   compensation  and  severance.
Subsequent to June 30, 2002, the Company entered into a new employment agreement
with its President and Chief Executive Officer.

     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.


13.  BUSINESS SEGMENTS

     The Company is organized into three  operating  segments based on operating
criteria. These segments are Specialty Medical Products Manufacturing, Specialty

                                      F-26
<PAGE>
Distribution Services - Surgical, and Specialty Distribution Services - Critical
Care. A description of each segment and principal products and operations are as
follows:

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

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

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

               Operations  that  are not  included  in any of the  segments  are
          included in the  category  "Other" and consist  primarily of corporate
          staff  operations,  including  selling,  general,  and  administrative
          expenses of $4,194,680 and  $2,655,817 and $2,011,185 for 2002,  2001,
          and 2000, respectively.

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

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

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


                                      F-27
<PAGE>
     Disclosures   regarding  the  Company's  reportable  segments  including  a
corporate  management fee allocation with  reconciliation to consolidated totals
are presented below.

<TABLE>
<CAPTION>
                                                                        2002
                               --------------------------------------------------------------------------------
                                  DISTRIBUTION -   DISTRIBUTION -
                                   PRIMESOURCE     PRIMESOURCE                     CORPORATE/
                                    SURGICAL       CRITICAL CARE   MANUFACTURING     OTHER           TOTAL

<S>                               <C>                <C>            <C>              <C>            <C>
Net sales                         $ 29,412,136       $ 21,993,101    $ 7,540,036                    $ 58,945,273
                                  ==============     =============   ===========     =============  =============

Net (loss)
  income                          $ (1,914,899)      $   (961,584)    $ 880,600       $(4,194,680)  $ (6,190,563)
                                  ==============     =============   ===========     =============  =============

Total assets                      $ 24,274,210       $  6,171,408    $ 6,684,070      $   457,080   $ 37,586,768
                                  ==============     =============   ===========     =============  =============

Restructuring expense                                $  1,038,823                     $ 2,915,675   $  3,954,498
                                                     =============                   =============  =============

Depreciation and
  amortization                    $  1,169,527       $   107,746      $ 150,375       $ 1,063,363   $  2,491,011
                                  ==============     =============   ===========     =============  =============

Interest expense                  $    273,612       $   209,811      $ 159,218       $    38,558   $    681,199
                                  ==============     =============   ===========     =============  =============

</TABLE>
<TABLE>
<CAPTION>

                                                                       2001
                               -------------------------------------------------------------------------------
                                  DISTRIBUTION -     DISTRIBUTION -
                                   PRIMESOURCE       PRIMESOURCE                    CORPORATE/
                                     SURGICAL        CRITICAL CARE  MANUFACTURING       OTHER           TOTAL
<S>                               <C>                <C>            <C>              <C>            <C>
Net sales                         $  33,698,000      $ 14,453,934   $ 2,879,676                    $ 51,031,610
                                  ==============     =============   ===========                    =============

Net (loss)
  income                          $  (2,703,417)     $   (386,039)  $ 1,363,109      $ (2,655,817)  $ (4,382,164)
                                  ==============     =============   ===========     =============  =============

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

Depreciation and
  amortization                    $   1,061,475      $     79,961   $   324,743      $    260,903   $  1,727,082
                                  ==============     =============   ===========     =============  =============

Interest expense                  $     527,003      $    325,425   $    68,434                     $    920,862
                                  ==============     =============   ===========                    =============
</TABLE>

<TABLE>
<CAPTION>
                                                                             2000
                                           ------------------------------------------------------------------
                                           DISTRIBUTION -  DISTRIBUTION -
                                             PRIMESOURCE     PRIMESOURCE       CORPORATE/
                                              SURGICAL      CRITICAL CARE         OTHER           TOTAL

<S>                                          <C>             <C>               <C>             <C>
Net sales                                    $ 43,096,162    $ 11,314,893                      $ 54,411,055
                                             =============   =============                     ============

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

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

Restructuring expense                                                          $  1,031,011    $ 1,031,011
                                                                               =============   ============

Depreciation and
  amortization                               $ 959,252       $ 96,254          $    155,000    $ 1,210,506
                                             =============   ============      =============   ============

Interest expense                             $ 901,963       $ 202,152                         $ 1,104,115
                                             =============   ============                      ============
</TABLE>
                                      F-28
<PAGE>
     PrimeSource  Surgical and its  subsidiaries  have no  significant  sales to
foreign companies;  however, Luxtec has several foreign customers. The Company's
external sales,  based upon the customer's  country of origin by geographic area
for the year ended June 30, 2002 and 2001,  totaled  $56,937,000 and $50,401,000
respectively for sale in the United States and $2,008,000 and $631,000 for sales
to other foreign companies. There were no significant sales to foreign companies
in the year ended June 30, 2000.

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
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. Activity consists of the following:
<TABLE>
<CAPTION>
                                                                   LOSS ON DISPOSAL
                                                   EMPLOYEE RELATED OF DIVISION    OTHER 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 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      1,038,825     1,537,133       3,954,958
     Cash payments                                     (585,000)          -         (901,000)     (1,486,000)
     Other adjustments                                 (141,000)    (1,038,825)     (178,000)     (1,357,825)
                                                     -----------   ------------   -----------    ------------

     Balance June 30, 2002                           $  653,000    $      -       $  458,133     $ 1,111,133
                                                     ===========   ============   ===========    ============
</TABLE>
                                      F-29
<PAGE>
15.  SUBSEQUENT EVENTS

     SERIES   G   CONVERTIBLE,    REDEEMABLE,   PREFERRED   STOCK   AND   EQUITY
RECAPITALIZATION  - On August 6, 2002,  the Company  created a new stock  class,
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 for
proceeds of $2,254,460 on such date.  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 vested immediately and expire August 6, 2012. In
addition,  on September  15,  2002,  the Company  issued and sold an  additional
10,891 shares of Series G Stock for proceeds of $348,512. Each share of Series G
Stock is convertible into 100 shares of common stock at the option of the holder
at any time after the sooner of December  31, 2002 or the  approval by the Board
of Directors of an increase in  authorized  common stock to  68,000,000  shares.
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
stock of the Company.  Series G Stock accrues dividends at the rate of 8 percent
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.  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 will be recorded directly to additional
paid in  capital  in the  first  quarter  of fiscal  year  2003.  The  resultant
beneficial  conversion  feature of $1,031,000 will be recorded when the Series G
Stock is  convertible  on the earlier of December 31, 2002 or the approval of an
increase in authorized common stock to 68,000,000 shares.

     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 Stock was converted into 27.58 shares of our common stock.  In connection with
the conversion of the Series G Stock, we issued the former holders of the Series
C Stock  warrants to purchase an  aggregate  of  7,390,614  shares of our common
stock with an exercise price of $.01.  These  warrants  vested  immediately  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
Series C Stockholders  were repriced from $1.68 per share to $.01 per share. The
value of the  warrants  issued  and the  warrants  which were  repriced  will be
recorded to additional  paid-in capital in the first quarter of fiscal 2003. 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 Stock  was  converted  into one  share of  common  stock.  In
connection  with the  conversion  of the  Series F Stock,  we issued  the former
holders of the Series F Stock  warrants to purchase an  aggregate  of  1,614,560
shares of our common stock with an exercise price of $.01. These warrants vested
immediately  and expire on August 6, 2012. In  accordance  with the terms of the
1,751,130  previously issued warrants,  the exercise price of such warrants were
repriced  from $1.00 to .01. The value of the  warrants  issued and the warrants
which were repriced will be recorded to additional  paid-in capital in the first
quarter of fiscal 2003. 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 Stock was exchanged for
..3125 shares of Series G Stock.  In connection with the exchange of the Series E
Stock,  we issued the former  holders of the Series E Stock warrants to purchase

                                      F-30
<PAGE>
an  aggregate of 817,000  shares of our common  stock with an exercise  price of
$.01 and a 10 year life for each share of common stock received upon  conversion
of the Series C Stock.  Additionally,  exercise  prices on 817,000  warrants  to
purchase common stock  previously  issued to certain Series E Stockholders  were
repriced from $1.00 to $.01 per share.  These warrants  vested  immediately  and
expire on August 6, 2012.  The value of the  warrants  issued  and the  warrants
which were repriced were repriced will be recorded to additional paid-in capital
in the  first  quarter  of fiscal  2003.  The  value of these  warrants  totaled
$763,000 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%.

     DEBT  RESTRUCTURING  - On August 6, 2002,  the  Company  also  amended  the
PrimeSource Surgical Credit Agreement and the Luxtec Credit Agreement.  Pursuant
to the amendment to the PrimeSource Surgical Credit Agreement, 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.  Pursuant to the
amendment  to the  Luxtec  Credit  Agreement,  ARK waived  and  amended  certain
provisions under the Luxtec Credit Agreement.  See further discussion at Notes 6
and 7.


                                     ******

                                      F-31
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE


          None.

                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a)   Directors of PrimeSource:
<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
     Nicholas C. Memmo         39         2001       Director                                        2004
     James J. Goodman          42         1996       Director                                        2002
     James Berardo             41         1995       Director                                        2003
     James W. Hobbs            52         1993       Director                                        2003
     Bradford C. Walker        44         2002       Director, Chief Executive Officer and           2002
                                                     President
</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.

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.


NICHOLAS C. MEMMO,  DIRECTOR-- Mr. Memmo was appointed to our Board of Directors
on March 2, 2001, pursuant to our merger with PrimeSource Surgical. Mr. Memmo is

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

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

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

BRADFORD C. WALKER, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR - Mr. Walker
has over twenty years of experience  managing and advising  companies in variety
of  industries.  Mr.  Walker has served as our  President  since October 2001, a
Director since May 16, 2002 and our Chief  Executive  Officer since August 2002.
Prior to his  permanent  position  with us,  Mr.  Walker had served as our Chief
Restructuring Officer since October 2001. Prior to his work at PrimeSource,  Mr.
Walker was a Managing Director with Corporate  Revitalization Partners, where he
consulted companies  undertaking a restructuring.  From 1988 to 2001, Mr. Walker
lead or participated in over 30 corporate turnarounds. In addition to turnaround
work, Mr. Walker has a strong  background  with mergers and  acquisitions.  From
1983-1988,  Mr.  Walker  was a  partner  with  Beane  Walker  & Co  where he was
responsible for its "high tech" venture capital  investments.  During that time,
Mr.  Walker has also served as president of InCare,  the nations  first PC based
intranet-billing network for physicians.  Mr. Walker began his career in 1980 at
Arthur Andersen & Co. Mr. Walker graduated cum laude from Baylor University with
majors in Business Administration and Computer Sciences.


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

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


JAMES W. HOBBS,  DIRECTOR--  Mr. Hobbs has been on our Board of Directors  since
1993. From March,  1993, to March 1, 2001, Mr. Hobbs served as our President and
Chief  Executive  Officer.  Prior to that,  Mr.  Hobbs was the  Chief  Executive
Officer of Graylyn  Associates from 1992 to 1993,  where he currently  serves as

                                       65
<PAGE>
Chairman.  Graylyn is an investment firm founded by Mr. Hobbs to invest in early
stage medical  technology.  Prior to Graylyn,  Mr. Hobbs served as the President
and Chief  Executive  Officer of Genica  Pharmaceutical  Inc. from 1989 to 1992.
Acquired by Elan  Corporation,  Genica  Pharmaceutical  Inc.  was a  corporation
engaged in providing new diagnostic assays and conducting  therapeutic  research
for neurological  disorders.  Mr. Hobbs was with Johnson and Johnson as the Vice
President and General  Manager of Johnson and Johnson  Professional  Diagnostics
from  1985 to  1989.  Mr.  Hobbs  received  his B.S.  degree  from  Wake  Forest
University and earned his M.B.A. from the University of North Carolina.

     (b)   Executive Officers of the Company

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

             SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Under Section 16(a) of the Securities Exchange Act of 1934, as amended, our
directors, some of our officers and persons holding more than ten percent of our
common stock are required to report their  ownership of our common stock and any
changes in such ownership to the  Securities and Exchange  Commission and us. To
our knowledge,  based solely on a review of copies of those reports furnished to
us, all Section  16(a)  filing  requirements  applicable  to these  persons were
complied with during our fiscal year ended June 30, 2002.



                                       66
<PAGE>
ITEM 11.  EXECUTIVE COMPENSATION

     The  following  table sets forth the  compensation  of our Chief  Executive
Officer,  and the other  executive  officers of the Company as of June 30, 2002,
or, collectively, the "Named Executive Officers":
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

                                                                                                 LONG TERM
                                                           ANNUAL COMPENSATION                  COMPENSATION
                                                           --------------------                    AWARDS
                                                                                                ------------
                                                                                                 SECURITIES
                                                                                                 UNDERLYING
                                 FISCAL                           OTHER ANNUAL                 OPTIONS (#) /
                                  YEAR                             COMPENSATION                  RESTRICTED
  NAME AND PRINCIPAL POSITION   ENDED(2)    SALARY($)  BONUS($)       ($)(1)       SEVERANCE   STOCK AWARDS($)
  ----------------------------  --------    ---------  --------   -------------    ---------   ---------------
<S>                           <C>            <C>        <C>          <C>            <C>          <C>
  Bradford C. Walker          June 30, 2002     N/A       N/A           (4)           N/A            0
  Current President, Chief    June 30, 2001     N/A       N/A           N/A           N/a           N/A
  Executive Officer and       Oct. 31, 2000     N/A       N/A           N/A           N/A           N/A
  Director (3)

  James L. Hersma             June 30, 2002   105,941      0          28,253         17,875          0
  Former President, Chief     June 30, 2001   159,359      0           8,868                   1,166,274/59,535
  Executive Officer and       Oct. 31, 2000     N/A       N/A           N/A                         N/A
  Director (5)

  Shaun D. McMeans            June 30, 2002   138,591    9,990           0                           0
  Chief Operating and         June 30, 2001   115,267      0             0                         50,000
  Financial Officer
                              Oct. 31, 2000   65,267      N/A           N/A                         N/A

  Joe Potenza                 June 30, 2002   166,637      0           4,800                         0
  Senior Vice President,      June 30, 2001   55,267       0           3,600                      148,837
  Sales & Marketing
                              Oct. 31, 2000     N/A       N/A           N/A                         N/A

  Bruce Hoadley               June 30, 2002   132,818   47,173         4,800
  Regional Vice President     June 30, 2001   111,888   30,088         4,800
                              Oct. 31, 2000   101,500   16,852         4,800

  Mark Jungers                June 30, 2002   209,254      0             0                           0
  Regional Vice President     June 30, 2001   180,603     N/A           N/A                        37,500
                              Oct. 31, 2000   181,718     N/A           N/A                        7,442
</TABLE>
---------

(1)  Automobile  allowance for Joe Potenza and Bruce Hoadley and monthly  living
     allowance,  auto  allowance  and life  insurance  pursuant to Mr.  Hersma's
     employment agreement.
(2)  Effective  March 2, 2001,  we changed  our fiscal  year end to June 30 from
     October 31. Accordingly, our last three fiscal year ends are June 30, 2002,
     June 30, 2001 and October 31, 2000.  Annual  compensation  disclosed is for
     twelve months ended each of these fiscal years.
(3)  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.
(4)  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 and PrimeSource paid consulting
     fees to Corporate Revitalization Partners. During that period, Mr. Walker
     was a Managing Director of Corporate Revitalization Partners.
(5)  Mr. Hersma resigned as our President,  Chief Executive Officer and Director
     effective December 7, 2001.


                                       67
<PAGE>
     During our fiscal year ended June 30,  2002,  no stock  option  grants were
issued to the Named Executive Officers.

     The  following  table sets  forth  information  with  respect to options to
purchase  our common  stock  granted to the Named  Executive  Officers as of our
fiscal year ended June 30, 2002:

                  FISCAL YEAR ENDED JUNE 30, 2002 OPTION VALUES
<TABLE>
<CAPTION>
                                                                NUMBER OF SECURITIES                VALUE OF UNEXERCISED
                               SHARES                            UNDERLYING UNEXERCISED             IN-THE-MONEY OPTIONS
                              ACQUIRED ON                      OPTIONS AT FISCAL YEAR-END(#)       AT FISCAL YEAR-END($)(1)
                             EXERCISE (#)   VALUE REALIZED($)   EXERCISABLE/UNEXERCISABLE         EXERCISABLE/UNEXERCISABLE
                             ------------   -----------------   -------------------------         -------------------------
     NAME
     ----
<S>                                <C>              <C>                    <C>                        <C>
     Bradford C. Walker            0                0                      0/0                        0/0
     James L. Hersma               0                0                      0/0                        0/0
     Shaun D. McMeans              0                0                 31,104/56,105                   0/ 0
     Joseph Potenza                0                0                37,209/111,628                   0/0
     Bruce Hoadley                 0                0                  19069/37209                    0/0
     Mark Jungers                  0                0                 12,165/34,637                   0/0
</TABLE>
(1)  Value is based on an estimated fair market value of our common stock on
     June 30, 2002 of $0.32, minus the exercise price under such options.

                     COMPENSATION OF NON-EMPLOYEE DIRECTORS

     As of  June  30,  2002,  we do  not  pay  our  non-employee  directors  for
attendance  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  one-hundred  percent of the fair market  value per share of our common
stock on the date the option is granted.

                                       68
<PAGE>
                              EMPLOYMENT CONTRACTS

WALKER EMPLOYMENT AGREEMENT

     On August 6, 2002, we entered into an Employment Agreement with Bradford C.
Walker,  our President,  Chief  Executive  Officer and Director,  or the "Walker
Agreement."  The term of the Walker  Agreement will expire on August 6, 2004 and
offers no renewal option.

     Mr.  Walker is entitled to a base salary of $250,000 per year for the first
year of his  employment  after which  year,  said salary will be reviewed by the
Board of Directors. Upon review and at the Board's of Director's discretion, the
salary may be  increased  but not  decreased.  Mr.  Walker is 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 equal to $16 per share.  Subsequently,  upon the first  anniversary of the
Effective Date, Mr. Walker will 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.

     If we 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 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 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 or during any period he is receiving severance payments from us.

HERSMA EMPLOYMENT AGREEMENT

     On May 4,  2001,  we entered  into an  employment  agreement  with James L.
Hersma,  our former  President,  Chief  Executive  Officer and Director,  or the
"Hersma  Agreement."  On December 7, 2001,  Mr. Hersma  resigned his  employment
relationship  with  the  PrimeSource.  Pursuant  to  the  terms  of  the  Hersma

                                       69
<PAGE>
Agreement,  Mr. Hersma was entitled to  continuation  of base salary and medical
benefits for 18 months  following his resignation and may not compete with us or
solicit our employees for a period of one (1) year from his date of  resignation
or during any period he is receiving severance payments from us.

                          COMPENSATION COMMITTEE REPORT
                            ON EXECUTIVE COMPENSATION

     Our executive  compensation  program is  administered  by the  Compensation
Committee of the Board of Directors.  The Compensation Committee is comprised of
non-employee Directors who approve or recommend to the Board of Directors salary
and  bonus  amounts  and  other  annual  compensation  for the  Named  Executive
Officers.

     During our fiscal year ended June 30, 2002, the annual salary of our former
President and Chief  Executive  Officer,  James L. Hersma,  was set forth in his
employment  agreement.  Mr.  Hersma  resigned  effective  December  7, 2001 and,
pursuant  to the terms of his  employment  agreement,  is  entitled  to  receive
severance payments from PrimeSource.

     In October 2001, the Board of Directors appointed Bradford C. Walker as our
President  and  Chief  Restructuring  Officer.  At  the  time  of  Mr.  Walker's
appointment as our President and Chief Restructuring  Officer,  and until August
6, 2002, he was a Managing  Director  with  Corporate  Revitalization  Partners.
Accordingly,  Mr.  Walker was not an employee of  PrimeSource  during our fiscal
year ended June 30, 2002. The Company,  however,  expensed aggregate  consulting
fees and  expenses  in the amount of  $436,800  and  $56,933,  respectively,  to
Corporate Revitalization Partners during our fiscal year ended June 30, 2002 for
Mr. Walker'  services.  On August 6, 2002, the Board of Directors  appointed Mr.
Walker as our President and Chief Executive Officer and PrimeSource entered into
an employment agreement with Mr. Walker.

     The annual salaries of our other executive  officers during our fiscal year
ended June 30, 2002 were  determined  based on their past  salaries and salaries
paid by comparable  companies.  Shaun McMeans,  our Chief Financial  Officer and
Chief Operating  Officer,  received a cash bonus in the amount of $9,990 for our
fiscal year ended June 30, 2002, as a result of his exemplary  contributions  to
PrimeSource. No other executive officers received bonuses or options to purchase
our common stock in our fiscal year ended June 30, 2002 due to our  performance.
Factors taken into account by the Compensation  Committee in determining bonuses
include return on investment, net sales, and net income compared to the business
plan.

         The Compensation Committee:

               William H. Lomicka, Chair
               Nicholas C. Memmo


     On November 17, 2000, our common stock was delisted from the American Stock
Exchange  because we no longer met the  continued  listing  requirements  of the
American Stock Exchange.  Since November 17, 2000, our common stock has not been
listed or quoted on an exchange.  A performance graph comparing our common stock
performance  with the  performance  of the S&P  Small Cap 600 Index and our peer
group index is provided.  Because our common stock is not listed or quoted on an

                                       70
<PAGE>
exchange,  all values  subsequent to November 17, 2000 are estimates  only.  The
following  performance  graph is  intended  to reflect  the  performance  of our
business for our last five completed fiscal year periods,  which are October 31,
1998, October 31, 1999, October 31, 2000, June 30, 2001 and June 30, 2002.

       COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG PRIMESOURCE,
    THE STANDARD & POOR'S ("S&P") SMALL CAP 600 INDEX AND PRIMESOURCE'S PEER
                                 GROUP INDEX (1)


                                PERFORMANCE GRAPH


                                 GRAPH OMMITTED
                           CHART BELOW REFLECTS GRAPH

<TABLE>
<CAPTION>

                                    10/31/97     10/31/98      10/31/99    10/31/00    6/30/01   6/30/02
  -------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>            <C>         <C>        <C>       <C>
  PrimeSource                        $100.00       105.79         96.71       46.95      47.00     15.04
  -------------------------------------------------------------------------------------------------------
  S&P Smallcap 600                   $100.00        88.25         98.07      121.99     129.27    129.10
  -------------------------------------------------------------------------------------------------------
  PrimeSource's Peer Group           $100.00       166.79        199.13      283.26     142.19    125.92
  -------------------------------------------------------------------------------------------------------
</TABLE>
----------
(1) This graphic presentation assumes (a) one-time $100 investments in our
    common stock and in market capital base-weighted amounts apportioned among
    all the companies whose equity securities constitute the above named broad
    equity market index and PrimeSource's selected peer group index, in each
    case made as of the market close on October 31, 1997 and (b) the automatic
    reinvestment of dividends, if any, in additional shares of the same class of
    equity securities constituting such investments at the frequency with which
    dividends were paid on such securities during the applicable fiscal years.
    We selected our peer group in good faith based on companies in a similar
    industry or line-of-business. PrimeSource's peer group is made up of the
    following six companies:

    Bio Vascular, Inc.                      Cantel Medical Corp.
    Conmed Corp.                            Fisher Scientific International Inc.
    PrimeSource Healthcare, Inc.            Patterson Dental Co.


                                       71
<PAGE>
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                   BENEFICIAL OWNERSHIP OF COMPANY SECURITIES

The  following  tables  furnish  certain  information  as of September  16, 2002
(except as otherwise noted), as to our equity securities  beneficially  owned by
each  of  our  directors,  by  each  of the  individuals  named  in the  Summary
Compensation  Table and by all of our  directors  and  executive  officers  as a
group,  and, to our knowledge,  by any  beneficial  owner of more than 5% of any
class or series of our outstanding equity securities.
<TABLE>
<CAPTION>
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
Name of Beneficial Owner    Number of 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      RedeemablePreferred     Beneficially Owned or      Presently Held3
                                                    Stock Beneficially      Underlying Preferred
                                                    Owned(1)                Stock Beneficially Owned(2)
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
<S>             <C>                     <C>                        <C>                     <C>                      <C>
GE Capital Equity                                (5)
Investments, Inc.(4)                    9,715,278                  106,060                 20,321,278               44.08%
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
Coleman Swenson  Hoffman                        (7)
Booth IV L.P. (6)                       4,455,041                   62,500                 10,705,041               23.22%
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
                                                 (9)
Webbmont Holdings L.P.(8)               2,281,890                   10,606                  3,342,490                7.25%
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
Geneva Middle Market                             (11)
Investors, SBIC, L.P. (10)              2,607,181                        0                  2,607,181                5.66%
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
                                                (12)
James Berardo                            178,520                         0                    178,520                    *
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
                                                (7)
Larry H. Coleman, Ph.D. (13)           4,455,041                    62,500                 10,705,041               23.22%
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
                                                (14)
James J. Goodman                       2,627,181                         0                  2,627,181                5.70%
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
                                                (15)
James W. Hobbs                           117,470                         0                    117,470                    *
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
                                                (16)
William H. Lomicka                       621,326                   3,739.5                  1,066,949                2.31%
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
                                                (17)
Shaun McMeans                             31,104                                               31,104                    *
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
                                                (18)
Nicholas C. Memmo                         29,527                         0                     29,527                    *
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
                                                (19)
Joseph Potenza                            37,209                         0                     37,209                    *
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
Bradford Walker                                0                         0                          0                    *
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
James L. Hersma                           59,535                         0                     59,535                    *
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
Mark Jungers                             100,000                         0                    100,000                    *
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
                                                (20)
Bruce Hoadley                             19,069                         0                     19,069                    *
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
All directors and
executive officers as a
group (12 persons)                    10,602,542                    66,239                 18,287,092               39.63%
--------------------------- ----------------------- ----------------------- -------------------------- --------------------
</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  16,  2002,  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.


                                       72
<PAGE>
2         Includes  common  stock and the common stock  underlying  the Series G
          Convertible  Redeemable Preferred Stock owned as of September 16, 2002
          and common stock underlying  options and warrants that are exercisable
          within sixty days of September 16, 2002.

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 16, 2002
          and options and  warrants  exercisable  within sixty days of September
          16, 2002 to acquire our common stock.

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

5         Includes 3,721 shares of our common stock underlying  options that are
          exercisable  within sixty days of September  16, 2002.  Also  includes
          1,744,183  shares of our common stock subject to purchase  pursuant to
          warrants that are exercisable within sixty days of September 16, 2002.
          Does not include warrants to purchase an aggregate of 7,654,456 shares
          of our common stock,  at $.01 per share,  which may not be exercisable
          within sixty days of September 16, 2002.

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

7         Includes 9,860 shares of our common stock underlying  options that are
          exercisable  within sixty days of September  16, 2002.  Also  includes
          872,092  shares of our common  stock  subject to purchase  pursuant to
          warrants that are exercisable within sixty days of September 16, 2002.
          Does not include warrants to purchase an aggregate of 3,508,264 shares
          of our common stock,  at $.01 per share,  which may not be exercisable
          within sixty days of September 16, 2002.

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

9         Includes  310,496  shares of our  common  stock  subject  to  purchase
          pursuant  to  warrants  that  are  exercisable  within  sixty  days of
          September 16, 2002. 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  16, 2002.  Does not include  warrants held by
          Webbmont  Holdings,  Robert  Neale  Fisher,  Virginia  A.  Fisher  and
          Investors  Equity to purchase an aggregate of 1,146,380  shares of our
          common stock, at $.01 per share,  which may not be exercisable  within
          sixty days of September 16, 2002.

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


                                       73
<PAGE>
11        Includes  541,832  shares of our  common  stock  subject  to  purchase
          pursuant  to  warrants  that  are  exercisable  within  sixty  days of
          September 16, 2002. Does not include warrants to purchase an aggregate
          of 499,512  shares of our common stock,  at $.01 per share,  which may
          not be exercisable within sixty days of September 16, 2002.

12        Includes  154,520 shares of our common stock held by various trusts of
          which Mr.  Berardo  is a trustee  and over  which Mr.  Berardo  shares
          investment  and  voting  control.  Mr.  Berardo  disclaims  beneficial
          ownership of such shares.  Also  includes  24,000 shares of our common
          stock  underlying  options that are  exercisable  within sixty days of
          September 16, 2002.

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

14        Consists  of  450,000  shares of our  common  stock  held of record by
          Geneva Middle Market  Investors  SBIC,  L.P., of which Mr.  Goodman is
          President. Includes 541,832 shares of common stock subject to purchase
          pursuant  to  warrants  that  are  exercisable  within  sixty  days of
          September  16,  2002.  Also  includes  20,000  shares of common  stock
          underlying options that are exercisable within sixty days of September
          16,  2002.  Does not include  warrants to  purchase  an  aggregate  of
          499,512 shares of our common stock,  at $.01 per share,  which may not
          be exercisable within sixty days of September 16, 2002.

15        Includes 70,300 shares of our common stock underlying options that are
          exercisable within sixty days of September 16, 2002.

16        Includes 23,813 shares of our common stock underlying options that are
          exercisable  within sixty days of September  16, 2002.  Also  includes
          47,857  shares of our common  stock  subject to  purchase  pursuant to
          warrants that are exercisable within sixty days of September 16, 2002.
          Does not include  warrants to purchase an aggregate of 138,837  shares
          of our common stock,  at $.01 per share,  which may not be exercisable
          within sixty days of September 16, 2002.

17        Includes 31,104 shares of our common stock underlying options that are
          exercisable within sixty days of September 16, 2002.

18        Includes 21,022 shares of our common stock underlying options that are
          exercisable  within sixty days of September  16, 2002.  Also  includes
          8,505  shares of our common  stock  subject to  purchase  pursuant  to
          warrants that are exercisable within sixty days of September 16, 2002.
          Does not include warrants to purchase an aggregate of 18,227 shares of
          our  common  stock,  at $.01 per share,  which may not be  exercisable
          within sixty days of September 16, 2002.

19        Includes 37,209 shares of our common stock underlying options that are
          exercisable within sixty days of September 16, 2002.

20        Includes 19,069 shares of our common stock underlying options that are
          exercisable within sixty days of September 16, 2002.

                                       74
<PAGE>
ITEM 13.  CERTAIN RELATIONSHIPS AMD 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
$436,800  and  $56,933,  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.



                                       75
<PAGE>
                                    PART IV

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

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

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

       Independent Auditor's Report

       Consolidated Balance Sheets as of June 30, 2002 and June 30, 2001.

       Consolidated Statements of Operations
       for the years ended June 30, 2002, June 30, 2001 and June 30, 2000.

       Consolidated Statements of Stockholders'
       Equity (Capital Deficiency) for the years ended June 30, 2002, June 30,
       2001 and June 30, 2000.

       Consolidated Statements of Cash Flows for the years ended June 30, 2002,
       June 30, 2001 and June 30, 2000

       Notes to Consolidated Financial Statements


                                       76
<PAGE>
2.     Financial Statement Schedules
       -----------------------------
<TABLE>
<CAPTION>
                                                                        Additions
                                     Balance at the beginning  Charged to costs  Charged to other                   Balance at the
                                            of period              and expenses     amounts          Deductions    end of the period
<S>                                           <C>                                  <C>                                    <C>
FOR THE YEAR ENDED JUNE 30, 2001:

Accounts receivable allowances
for doubtful accounts                           521,007             257,865           96,289            (252,774)           622,387

Inventory reserves - primarily for
obsolescence                                  1,428,545             250,850          149,040            (169,025)         1,659,410

Deferred income tax valuation
allowance                                     5,555,100                            1,487,300                              7,042,400
                                             ----------           ----------      ----------            ----------      ------------

Total allowances deducted from assets         7,504,652             508,715        1,732,629            (421,799)         9,324,197

FOR THE YEAR ENDED JUNE 30, 2002:

Accounts receivable allowances for
doubtful accounts                               622,387             539,207        (  33,697)           (727,524)           400,373

Inventory reserves - primarily for
obsolescence                                  1,659,410             705,693        (  76,977)           (689,954)         1,598,172

Deferred income tax valuation
allowance                                     7,042,400                            1,668,100                              8,710,500
                                             ----------           ----------      ----------           -----------      -----------

Total allowances deducted from assets         9,324,197           1,244,900        1,557,426           (1,417,478)       10,709,045
                                             ==========           ==========      ==========           ===========      ===========
</TABLE>
                                       77
<PAGE>
3.    Exhibits
      --------

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

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

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

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

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

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

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

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

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

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

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

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

     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).

                                       78
<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   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).

                                       79
<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).

     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.

     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.

     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.

     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
            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,

                                       80
<PAGE>
            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.

     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).

     21.1   Subsidiaries of the Registrant.

     99.1   Certification of CEO and CFO Pursuant to 18 U.S.C.  Section 1350, as
            Adopted  Pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002
            filed herewith.

     (b)  Reports on Form 8-K:

                                       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/Bradford C. Walker
                                               ------------------------------
                                             Bradford C. Walker, President and
                                             Chief Executive Officer


September 30, 2002
                                       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.
<TABLE>
<CAPTION>
Signature                       Title                                Date
---------                       -----                                ----


<S>                            <C>                                    <C>
s/William H. Lomicka            Director                             September 30, 2002
----------------------
William H. Lomicka


s/James Berardo                 Director                             September 30, 2002
----------------------
James Berardo


s/Larry H. Coleman              Director                             September 30, 2002
----------------------
Larry H. Coleman


s/James J. Goodman              Director                             September 30, 2002
----------------------
James J. Goodman


s/Bradford C. Walker            President, Chief                     September 30, 2002
----------------------          Executive Officer, Director
Bradford C. Walker


s/James W. Hobbs                Director                             September 30, 2002
----------------------
James W. Hobbs


s/Nicholas C. Memmo             Director                             September 30, 2002
-------------------
Nicholas C. Memmo


s/Shaun McMeans                 Chief Financial Officer,             September 30, 2002
----------------------          Chief Operating Officer
Shaun McMeans                   And Treasurer

</TABLE>
                                       83
<PAGE>
I, Bradford C. Walker, certify that:

     1.     I have  reviewed  this  annual  report on Form  10-K of  PrimeSource
Healthcare, Inc.;

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

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


Date: September 30, 2002

                                             /s/  Bradford C. Walker
                                             -----------------------------------
                                             Name:  Bradford C. Walker
                                             Title: President and Chief
                                                    Officer

                                       84
<PAGE>

I, Shaun McMeans, certify that:

     1.     I have  reviewed  this  annual  report on Form  10-K of  PrimeSource
Healthcare, Inc.;

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

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


Date: September 30, 2002

                                             /s/  Shaun McMeans
                                             -----------------------------
                                             Name:  Shaun McMeans
                                             Title: Chief Operating Officer
                                                    and Chief Financial Officer



                                       85
<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).
                                       86
<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   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).

     4.3    Second Amended and Restated  Registration Rights, dated as of August
            6, 2002, by and among PrimeSource  Healthcare,  Inc. and the persons

                                       87
<PAGE>
            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). =

     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.

     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.

     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.

     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
            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).
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<PAGE>
     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.

     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).

     21.1   Subsidiaries of the Registrant.

     99.1   Certification of CEO and CFO Pursuant to 18 U.S.C.  Section 1350, as
            Adopted  Pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002
            filed herewith.

(b)  Reports on Form 8-K:

     None.

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