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, 2005

[ ] 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

                              LXU 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.)

               3708 EAST COLUMBIA STREET - TUCSON, ARIZONA - 85714
               (Address of principal executive offices) (Zip code)

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

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

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

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

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

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
<PAGE>
Indicate by check mark whether the  registrant is a shell Company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [ X ]

The  estimated  aggregate  market  value  of the  voting  common  stock  held by
non-affiliates  based on the last business day of the registrant's most recently
completed second fiscal quarter  (December 31, 2004) was $61,841.  Because LXU's
common stock is not listed or quoted on an exchange,  this  computation is based
on an  estimated  market  value of $.01 per share of common stock as of December
31, 2004.

As of September 15, 2005,  29,104,085  shares of common  stock,  $.01 par value,
were issued and outstanding. As of September 15, 2005 the estimated market value
of common stock is $.19 per share.



                       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: N/A






                                       2
<PAGE>
<TABLE>
<CAPTION>
                                TABLE OF CONTENTS

<S>                   <C>                                                                           <C>
Part I
                 Item 1.    Business .............................................................. 4
                 Item 2.    Properties ............................................................17
                 Item 3.    Legal Proceedings .....................................................18
                 Item 4.    Submission of Matters to a Vote Security Holders ......................18

Part II
                 Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters..19
                 Item 6.    Selected Financial Data................................................20
                 Item 7.    Management's Discussion and Analysis of Financial Condition and
                             Results of Operations.................................................24
                 Item 7A.   Quantitative and Qualitative Disclosure about Market Risk..............34
                 Item 8.    Financial Statements and Supplementary Data ...........................35
                 Item 9A    Controls and Procedures................................................64

Part III
                 Item 10.   Directors and Executive Officers of the Registrant.....................64
                 Item 11.   Executive Compensation ................................................66
                 Item 12.   Security Ownership of Certain Beneficial Owners and Management ........71
                 Item 14.   Principal Accountant Fees and Services.................................73

Part IV          Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......75

Signatures       ..................................................................................77

Index to
Exhibits         ..................................................................................79

</TABLE>


                                       3

<PAGE>
                                     PART I

When we refer to "we," "us",  "our," or "LXU," we mean LXU  Healthcare,  Inc., a
Massachusetts corporation,  formerly known as PrimeSource Healthcare,  Inc., and
its consolidated  subsidiaries ("LXU" or the "Company").  This document includes
various  "forward-looking  statements"  within the meaning of Section 27A of the
Securities Act of 1933, as amended,  and Section 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" which might be used in our press releases and periodic
reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission
are  intended  to  identify  forward-looking   statements.  All  forward-looking
statements involve risks and uncertainties. Although we believe our expectations
are based upon  reasonable  assumptions  within the bounds of our  knowledge and
operations,  there can be no assurances  that actual results will not materially
differ from  expected  results.  We caution  that these and  similar  statements
included in this report and in  previously  filed  periodic  reports,  including
reports filed on Forms 10-K and 10-Q are further  qualified by important factors
that  could  cause  actual  results  to  differ  materially  from  those  in the
forward-looking  statements.  Such factors include,  without  limitation,  those
listed  under  Item  7.  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations," under the subheading "Risk Factors."

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


ITEM 1.  BUSINESS
                                     GENERAL


We are a specialty medical products sales,  marketing and manufacturing company.
We sell a broad  portfolio of high  quality,  differentiated  specialty  medical
products,  some of  which we  manufacture,  to  hospitals  and  surgery  centers
nationwide   through  a   dedicated   organization   of  sales   and   marketing
professionals.  We believe  that we are  continuing  to build a  valuable  niche
franchise in the estimated $5 billion  specialty  medical  marketplace,  selling
technologically innovative products that command premium pricing.

Today,  we  have  three  primary  businesses: Specialty  Medical  Distribution -
Surgical; Specialty  Medical  Distribution -  Critical  Care;  and  Manufactured
Products  Division  ("Manufactured  Products").   Information  on  our  business
segments  can be found  in Note 13 to the  accompanying  consolidated  financial
statements.  The Company was  incorporated  on November 11, 1981 in the state of
Massachusetts.  As of June 30, 2005,  we had 146  employees  and  generated  net
revenues of $53.7 million for the fiscal year ended June 30, 2005.

During the year ended June 30,  2002,  we commenced a  restructuring  plan which
involved   narrowing  the  focus  of  our  operations,   consolidating   certain
under-performing  sales regions,  reducing  corporate overhead through workforce
reductions and facility  consolidation,  restructuring our balance sheet through
the  recapitalization  of equity and  refinancing  of our  senior  bank debt and
reducing  debt  levels  through  cost  reductions  and  improved  efficiency  of
operations.

                                       4
<PAGE>
As a result of the  restructuring  plan described  above,  in September 2002, we
sold all of the assets of a  subsidiary  in  exchange  for the  cancellation  of
previously  issued stock and the assumption of certain  liabilities with respect
to the subsidiary's line of business. In addition, in June 2003, we sold another
subsidiary for cash proceeds of $1,000,000.  Cash proceeds from this  subsidiary
sale were partly used to pay off and reduce  portions of our long-term debt. The
loss on the  disposal  of the  operation  of  $73,830,  net of income  tax,  was
included  as  discontinued  operations  in the fourth  quarter of 2003,  and the
related   results  of  operations  for  the  operation  were   reclassified   as
discontinued operations.

In December 2003, we consolidated  our senior debt  facilities.  Our senior debt
financing is now provided  under a revolving  $7,500,000  demand note from Wells
Fargo Business Credit, Inc. ("Wells Fargo"). See further discussion in Note 7 to
the accompanying consolidated financial statement.

On October 20,  2004,  the Board of  Directors  recommended  that the  Company's
Articles  of  Organization  be  amended  and  restated  to change  our name from
PrimeSource Healthcare,  Inc. to LXU Healthcare,  Inc. The Board recommended the
adoption of the Amendment of the Articles after a claim was asserted against the
Company by PrimeSource  Healthcare Systems, Inc., an Illinois corporation,  for,
among other things,  trademark infringement and unfair competition.  The Company
was not served with the complaint  and, as a result of  settlement  discussions,
the parties  agreed that the dispute could be resolved by changing the Company's
name. The stockholders approved the proposed name change to LXU Healthcare, Inc.
at the December 10, 2004 annual stockholders meeting.

On August 22, 2005, the Board of Directors of the Company  proposed to amend the
Articles of  Organization  of the Company to effect a 1-for-1,000  reverse stock
split,  followed  immediately  by a  1,000-for-1  forward  stock  split  of  the
Company's common stock (collectively,  the "Stock Splits").  If the Stock Splits
are approved by shareholders and completed:

     *    Each  shareholder  owning  fewer  than  1,000  shares of common  stock
          immediately  before  the  Stock  Splits  will  receive  $0.19 in cash,
          without interest,  in exchange for each share of common stock owned by
          such  shareholder  immediately  prior to the Stock  Splits and will no
          longer be a shareholder of the Company; and

     *    Each  shareholder   owning  1,000  or  more  shares  of  common  stock
          immediately before the Stock Splits will own the same number of shares
          of common stock after the Stock Splits.

The Company  cannot  complete  the Stock  Splits  unless the  amendments  to the
Articles of  Organization  are  approved by holders  of: (i)  two-thirds  of the
shares of common  stock and Series G  preferred  stock,  voting  together;  (ii)
two-thirds of the shares of common stock,  voting  separately;  and (iii) 60% of
the shares of Series G preferred stock, voting separately.

The Stock Splits are  intended to reduce the number of record  holders of shares
of  common  stock of the  Company  below 300 in order to allow  the  Company  to
terminate the  registration  of its shares of common stock under the  Securities
Exchange Act of 1934, as amended.  The Company  estimates  that the Stock Splits
will  reduce  the  number  of  the  Company's   shareholders  of  record,   from
approximately  609 to  approximately  151.  Deregistration  would  eliminate the
Company's duty to file periodic reports and proxy statements with the Securities
and Exchange Commission (the "SEC") and as a result, the Company would no longer
be a public reporting  company.  Only LXU shareholders of record as of the close
of business on September  30,  2005,  will be entitled to notice of, and to vote
at, the special meeting of shareholders to be held to consider the  transaction.

                                        5
<PAGE>
The Company  will  disclose  the date of the special  meeting once such date has
been determined.  The description of the proposed  transaction  included in this
Annual  Report  on Form  10-K is not a  solicitation  of a proxy  or an offer to
acquire any common shares of the Company.  Proxy solicitations will be made only
by means of a definitive  proxy  statement to be delivered to all  shareholders.
The Company filed a preliminary  proxy statement and Schedule 13E-3 with the SEC
describing the transaction on August 31, 2005. All  shareholders  are advised to
read the definitive proxy statement and Schedule 13E-3  carefully.  Shareholders
may obtain a free copy of the proxy  statement  and Schedule  13E-3 at the SEC's
website http://www.sec.gov.  The Company will also mail a copy of the definitive
proxy statement prior to the special meeting to shareholders entitled to vote at
the special meeting.

                                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 increase our product
          offerings; and

     *    selectively  acquiring  specialty medical products  manufacturers.  We
          expect to benefit from these types of acquisitions by increasing sales
          of acquired product lines through the use of our direct sales force.

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;

     *    sustaining or increasing our market share;

     *    the acquisition of other specialty medical products manufacturers;

     *    expanding margin opportunities in our manufactured products business;

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

     *    entrance  into new  specialty  domestic  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. Larger medical

                                       6
<PAGE>
and surgical, or med-surg,  distributors,  such as Owens & Minor, Inc., Cardinal
Health,  Inc. and McKesson  Corporation  primarily market commodity products and
supplies to group  purchasing  organizations  ("GPOs") and  integrated  delivery
networks ("IDNs").  LXU competes within this segment of the medical products and
supplies market.

Historically,   the  specialty   medical  products   industry  has  been  highly
fragmented.  During the past decade, healthcare providers have consolidated into
larger  IDNs in an  effort  to  reduce  costs.  In  addition,  in  order to gain
purchasing  power,  buyers of medical  products and supplies  have  consolidated
their  purchases  through large,  national GPOs. In addition to our  traditional
customer  base,  composed  primarily of hospitals and surgery  centers,  we also
market  (on a  limited  basis)  to IDNs  and  GPOs.  IDNs and  GPOs  purchase  a
significant  percentage  of medical  products and supplies  for  hospitals.  GPO
contractors  typically  require  purchasing  volume of at least $10 million when
structuring  purchasing  contracts with distributors.  By aggregating  specialty
products,  we have  created  an  opportunity  for GPOs to reduce  their  overall
purchasing costs. We do this by eliminating  multiple  specialty products vendor
relationships in favor of one relationship - LXU. Our ability to access IDNs and
GPOs has created an  advantage  for smaller  product  manufacturers  (who cannot
easily access the IDN and GPO customer base) with whom we do business over their
competitors who might be unable to satisfy IDN and GPO minimum volume purchasing
requirements.

We believe that we are competitive within our industry because we:

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

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

     *    offer a broader range of products, services, and solutions; and

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

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

                              PRODUCTS AND SERVICES

SPECIALTY MEDICAL DISTRIBUTION

Within the  Specialty  Medical  Distribution  business,  we have the LXU Medical
business,  or Surgical,  and LXU Critical Care  business,  or Critical Care. For
segment financial information please refer to footnote 13, Business Segments, on
page F-23. The Surgical business 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

                                       7
<PAGE>
United  States.  The Critical  Care  business 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 business, the primary specialties are:

     *    Cardio Vascular;

     *    Endoscopy;

     *    General Surgery; and

     *    Gynecology.


Within the Critical Care business, the primary specialties are:

     *    Neonatal Intensive Care; and

     *    Maternal and Child Care.

Our  products  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.  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 accounts for the
majority of our revenues.  Our capital equipment  products are typically complex
and require significant consultative selling to medical staff personnel which is
provided as part of our marketing and customer  service  efforts.  Our specialty
disposable products are often sold to support the capital equipment products and
offer a recurring and stable source of revenue.

MANUFACTURED PRODUCTS DIVISION

We operate  the  Manufactured  Products  business  through  our Luxtec  division
("Luxtec"),  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.

                                       8
<PAGE>
The technology used by Luxtec to provide  illumination  directly to the surgical
site is  facilitated by fiber optic cables  transmitting  light to an adjustable
headlight  composed  of a series of lenses and  mirrors  mounted on a  headband.
These lenses then focus the light directly on the surgical site when worn by the
surgeon.  This provides a lightweight,  low temperature  illumination  source to
enhance visualization for microsurgical and deep cavity illumination.  A summary
of the Luxtec division's specific product offerings is as follows:

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

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 consists of 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  hospitals,  IDNs,  surgery  centers and
physician offices.  In our fiscal year ended June 30, 2005, within the Specialty
Medical Distribution  business, we sold specialty medical products to over 3,000
customers,  primarily in the United  States.  We are not dependent on any single
customer or geographic group of customers.  Our largest  customer  accounted for
4.1% of our gross profit during our fiscal year ended June 30, 2005.

We maintain an  extensive  sales  organization  that is highly  experienced  and
skilled   in   representing   clinical   products   and   services.   Our  sales
representatives serve as an educational resource to the marketplace. They assist
clinicians in selecting and purchasing products and help customers better manage

                                       9
<PAGE>
inventories  of specialty  medical  products.  Each sales  representative  works
within an assigned sales territory under the supervision of a dedicated regional
sales  manager.  Our  sales  representatives  are  primarily  compensated  on  a
commission basis.

Within the surgical illumination industry,  Luxtec is the domestic market leader
in surgical  headlight systems with over 50,000 surgeons using these products on
a  worldwide  basis.  Within  the United  States,  the  Luxtec  fiber  optic and
illumination  products are primarily  distributed through our Surgical segment's
sales force,  supported by Luxtec field  specialists and a customer support team
located at our West Boylston, Massachusetts facility.  Luxtec  also  distributes
products  domestically  through a number  of other  regional  specialty  medical
distributors.  Internationally, Luxtec distributes products through a network of
local distributors.

Our net revenues, based upon the customer's country of origin by geographic area
for  the  year  ended  June  30,  2005,  2004  and  2003,  totaled  $50,180,000,
$46,065,000 and  $44,015,000,  respectively,  for sales in the United States and
$3,512,000,  $2,698,000  and  $2,345,000,  respectively,  for  sales to  foreign
customers.

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

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

                           MANUFACTURING AND SUPPLIERS

Manufacturer relationships are an integral part of our businesses. Our Specialty
Medical Distribution business represents more than 125 manufacturers,  with over
90% of our sales  concentrated among products purchased from approximately 30 of
these  manufacturers,  including Luxtec. A majority of the business is comprised
of stocking  relationships  whereby we stock the  vendor's  products and provide
substantially  all  fulfillment  services  (i.e.,  customer  service,  shipping,
returns,  etc.). The remainder of the business is conducted 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 to facilitate the sale of the vendor's product.  For providing the sales
and  marketing  support,  we are  paid a sales  commission  on each  sale of the
vendor's products.

Within the  Manufactured  Products  business,  Luxtec  purchases  components and
materials from more than 200 vendors and believes it can purchase  substantially
all of its product  requirements  from other  competing  vendors  under  similar
terms.  Luxtec has no long-term  contracts  with any supplier but does  maintain
long-standing relationships with certain vendors.


                                       10
<PAGE>
Our Specialty  Medical  Distribution  business pursues the opportunity to market
and sell medical equipment and supplies on an exclusive basis.  Manufacturers of
specialty medical products and supplies typically offer distribution rights only
to a select group of  distributors  and are  increasingly  seeking to reduce the
number  of  distributors  selling  their  products  to end users in an effort to
reduce the overall costs  associated  with selling and marketing their products.
We have been  successful in assisting  manufacturers  in their  development  and
marketing plans and in obtaining the exclusive rights to sell certain  products.
We believe  that our  ability to capture  and retain  such  distribution  rights
represents a barrier to the entry of competitors.

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

                               INFORMATION SYSTEMS

Our  Specialty  Medical  Distribution  business  employs a single,  centralized,
enterprise management  information system utilized across all business units via
a wide-area data network. This approach yields significant benefits including:

     *    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.

We continue to offer 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.  We  are  able  to  enhance  sales   representative
productivity,  customer service levels and assist our  manufacturer  partners to
more effectively manage their businesses through the Surg-E Track system.

                                   COMPETITION

The factors that we  primarily  compete in are the price and  the quality of our
products. 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  Corporation and Owens & Minor, Inc. A brief overview of
the Company's competition follows:

     *    PRODUCT  MANUFACTURERS'  DIRECT SALES FORCES.  Product  manufacturers'
          direct,  internal  sales forces offer  manufacturers  direct access to
          healthcare providers.  Manufacturers,  however, periodically outsource

                                       11
<PAGE>
          the sales and marketing of some of their  products to specialty  sales
          and marketing organizations such as LXU.

     *    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.

     *    REGIONAL  SPECIALTY  DISTRIBUTORS.   Regional  specialty  distributors
          represent our primary  competition in the specialty  medical  products
          market.

     *    NATIONAL  MED-SURG  DISTRIBUTORS.  In most  respects,  we  complement,
          rather than compete, with national med-surg distributors. These larger
          supply companies,  such as McKesson Corporation,  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 and  Sunoptic  Technologies
(formerly Cuda  FiberOptics) and  Illumination  Industrial  Isolux,  SA. Some of
Luxtec's  competitors have historically relied on metal halide technology rather
than  the   state-of-the-art   xenon  technology  offered  by  Luxtec.   Foreign
competitors  include  Richard  Wolf  GMBH,  Scholly  GMBH  and  those  companies
previously mentioned above.

                             PATENTS AND TRADEMARKS

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

     Patents
     -------
     *    Patent No. 4616257 for Headlight Camera System issued October 7, 1986.
     *    Patent No. D345368 for surgical telescopes issued March 22, 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.  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. 4998713 for needle connector issued March 12, 1991.
     *    Patent  No.  5893635  for  headlamp  with  enhanced  light   gathering
          condenser  issued April 13, 1999.

                                       12
<PAGE>
     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; (ii) Mexico, registration number
          543,498,  registered  February 28, 1997; (iii) UK, registration number
          2,024,429,  registered  June 20,  1995 and (iv)  Brazil,  registration
          number 818,560,894, registered October 14, 1997.
     *    MICROLUX,   U.S.  federal  trademark  registration  number  2,113,874,
          registered November 18, 1997
     *    ULTRALITE,  U.S.  federal  trademark  registration  number  2,115,776,
          registered November 25, 1997
     *    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
     *    LXU Healthcare
     *    LXU
     *    LXU Medical
     *    TMC
     *    Clearfield
     *    ValueFlex

Luxtec relies on its development and manufacturing  efforts,  rather than patent
protection,  to establish  and maintain its industry  position.  In general,  we
treat  our  design,  technical,  customer,  vendor  and  other  Company  data as
confidential  and  rely on  nondisclosure  agreements,  trade  secrets  laws and
non-competition  agreements to protect our  proprietary  position;  however,  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  United  States  Food  and Drug
Administration  ("FDA"), 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  FDA and  comparable  state  and  foreign

                                       13
<PAGE>
regulatory agencies.  Typically, products must meet regulatory standards as safe
and  effective  for  their  intended  use  prior to  being  marketed  for  human
applications.  The  clearance  process is expensive and time  consuming,  and no
assurance can be given that any agency will grant  clearance for the sale of our
products  or that  the  length  of time the  process  will  require  will not be
extensive.  We believe  that we are in  substantial  compliance  with all of the
foregoing  laws and that we possess all licenses  required in the conduct of our
business.

                                    EMPLOYEES

As of September  15, 2005 we had 143  employees,  of which 43 are engaged in the
Surgical  segment,  17 in the  Critical  Care  segment,  64 in the  Manufactured
Products  business and 19 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.


        EXECUTIVE OFFICERS OF THE REGISTRANT AND KEY MANAGEMENT PERSONNEL

Following  are the names and ages,  as of September  15, 2005,  of our executive
officers and key management  personnel,  their  positions and summaries of their
backgrounds and business experience.
<TABLE>
<CAPTION>

           Name                Age                          Position
           ----                ---                          --------
<S>                            <C>    <C>
Joseph H. Potenza              58     President and Chief Executive Officer, Secretary and Treasurer
Samuel M. Stein                65     Vice President & General Manager, Manufacturing Division
Mark A. Jungers                53     Regional Vice President, Distribution Division
Bruce R. Hoadley               46     Regional Vice President, Distribution Division
Scott F. Billman               49     Regional Vice President, Distribution Division
</TABLE>


Subsequent to June 30, 2005, the Company's Chief Operating and Financial Officer
resigned.

JOSEPH  H.  POTENZA,  PRESIDENT  & CHIEF  EXECUTIVE  OFFICER:  Mr.  Potenza  was
appointed  President  on September 1, 2003,  was  subsequently  appointed as the
Company's  Chief  Executive  Officer in May 2004 and was appointed the Company's
Secretary  and  Treasurer on August 17, 2005. He will continue to serve in these
capacities  at the pleasure of the Board of  Directors.  Prior to joining LXU in
February  2001,  Mr.  Potenza held senior  management  positions  with  McKesson
Corporation  as Vice  President  of the  Corporate  Program  and with the former
Medibuy  where  he was  responsible  for the  National  Accounts  and  Corporate
Program.  From 1977 to 1997,  Mr.  Potenza  developed  his career with  American
Hospital  Supply  Corporation/Baxter  Healthcare  Corporation,   culminating  as
Eastern  Region  President,   where  he  was  responsible  for  a  $750  million
distribution business with 650 employees and seven distribution  facilities.  He
received a Bachelor  of Arts degree in English  from  Norwich  University  and a
Master of Arts degree in Management from Central Michigan University.

SAMUEL M. STEIN, VICE PRESIDENT & GENERAL MANAGER,  MANUFACTURING  DIVISION: Mr.
Stein's  career  has  focused  on high  growth  technology  companies.  Prior to
becoming General Manager of the Company's  Luxtec Division,  Mr. Stein served as
Luxtec's  Chief  Financial  Officer.  Prior to joining Luxtec in 1993, Mr. Stein
served as Chief Operating and Chief Financial  Officer of Mitrol,  Inc. of which

                                       14
<PAGE>
he was also co-founder.  He has served as Chief Financial Officer with companies
ranging from start-ups to  subsidiaries of Fortune 500  corporations.  Mr. Stein
earned  a  Bachelor  of  Science  degree  in  Business  Administration  from the
University of Toledo and a Master of Science degree from Rensselaer  Polytechnic
Institute.

MARK A. JUNGERS, REGIONAL VICE PRESIDENT, DISTRIBUTION DIVISION: Mr. Jungers has
an  extensive  background  in  med-surg  and  critical  care  product  sales and
management.  Mr.  Jungers joined LXU through its 1999  acquisition of Bimeco,  a
leading distributor of specialty medical products to the critical care market in
the  southeastern  United States,  where he served as a Sales Manager.  Prior to
joining  Bimeco  in  1979,  he held  sales  and  marketing  positions  with  the
Extracorporeal  Medical  Division  of Johnson & Johnson.  Mr.  Jungers  earned a
Bachelor of Science degree in Business Administration from Marquette University.

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

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

                                  RISK FACTORS

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.


                                       15
<PAGE>
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 or upon a change
in control of LXU.  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.

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.  Many of our competitors are, or are affiliated with, major
companies.  These competitors have substantially greater financial and marketing
resources and greater name recognition and more established relationships with a
large base of current and potential customers than we do. Accordingly, it may be
more difficult to compete against these large competitors.

SALES TO LARGER  CUSTOMERS  MAY  INCREASE  THE  LENGTH  OF OUR  SALES  CYCLE AND
DECREASE  OUR  PROFIT  MARGINS.  Increasing  sales to  larger  buyers  may be an
important  element  of our  future  business  strategy.  As we  sell  to  larger
organizations,  it is  expected  that the time  from  initial  contact  to final
approval of contracts  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 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 reforms intended to reduce healthcare costs,
the growth of total healthcare expenditures and expanded healthcare coverage for
the uninsured have been proposed in the past and may be considered  again in the
near future.  Implementation  of  government  healthcare  reforms 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

                                       16
<PAGE>
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 our business.

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 many  corporate
actions require the approval of such stockholder.

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 and
incur the costs and regulatory burden associated with our reporting obligations,
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.  Our ability to use our stock as  consideration
in potential  acquisition will be hindered by the limited trading market for our
stock.

                             ADDITIONAL INFORMATION

Our website is www.lxuhc.com. We make available, free of charge, at this website
our annual report on Form 10-K,  quarterly reports on Form 10-Q, current reports
on Form 8-K, and  amendments  to those  reports  filed or furnished  pursuant to
Section  13(a) or  15(d)  of the  Securities  Exchange  Act of 1934,  as soon as
reasonably  practicable  after we  electronically  file such  material  with, or
furnish it to, the United States Securities and Exchange Commission ("SEC"). The
information  on the website  listed  above,  is not and should not be considered
part of this annual report on Form 10-K and is not  incorporated by reference in
this document.  In addition,  we will provide,  at no cost,  paper or electronic
copies of our Forms 10-K, 10-Q and 8-K and amendments to those reports made with
the SEC. Requests for such filings should be directed to ir@lxuhc.com.


ITEM 2.  PROPERTIES

LXU's registered  headquarters are located at 99 Hartwell Street, West Boylston,
Massachusetts  and it's corporate  headquarters are located at 3708 E. Columbia,


                                       17
<PAGE>
Tucson,  Arizona.  All of our  facilities  are leased and  located in the United
States of America.  A summary of the  Company's  facilities  and offices,  as of
September 15, 2005, is as follows:

                                                    SQUARE            LEASE
   CITY, STATE                                       FEET        EXPIRATION DATE

   Tucson, Arizona.............................    6,054            7/31/2006
   Birmingham, Alabama.........................   18,356           11/30/2006
   Atlanta, Georgia............................    2,950       Month to month
   West Boylston, Massachusetts................   31,689           10/31/2010
                                                ----------

                                                  59,049
                                                ==========

We believe that 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.


ITEM 3.  LEGAL PROCEEDINGS

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


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

Our  annual  meeting of  stockholders  was held on  December  10,  2004.  At the
meeting, the following items were submitted to a vote of the stockholders:

     (1) the election of a Class I director  for a three-year  term was approved
with the election of William H. Lomicka receiving  15,679,521 votes in favor and
33,001 votes withheld.

     (2) an  amendment  and  restatement  of the  PrimeSource  Healthcare,  Inc.
Articles of Organization to change our name to LXU Healthcare, Inc. was approved
with 15,692,974 votes in favor,  17,380 votes against,  2,168  abstentions and 0
broker non-votes;

     (3) the  appointment  by our Board of Directors of Deloitte & Touche,  LLP,
our independent  registered public accounting firm, was ratified with 15,693,184
votes in favor, 17,150 votes against, 2,188 abstentions and 0 broker non-votes.


                                       18
<PAGE>
                                     PART II

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

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

Our common stock is not currently listed on any public exchange or market. There
is no  established  public  trading market for our common stock and no assurance
can be given  that an  established  trading  market  for our  common  stock will
develop in the future.

As of September 15, 2005,  there were  approximately  504 registered  holders of
record of our  common  stock.  We  estimate  that  there are  approximately  609
beneficial holders of our common stock.

As  discussed  in "Item 1.  Business-General",  the  Board  of  Directors of the
Company has  proposed to amend the  Company's  Articles of  Organization  of the
Company to effect a 1-for-1,000 reverse stock split,  followed  immediately by a
1,000-for-1 forward stock split of the Company's common stock (collectively, the
"Stock  Splits").  The Stock  Splits are intended to reduce the number of common
stockholders  of LXU to below 300,  permitting  the  Company to  deregister  the
common  stock  with  the  Securities  and  Exchange   Commission   (the  "SEC").
Deregistration  would eliminate the Company's duty to file periodic  reports and
proxy statements with the SEC and as a result,  the Company would no longer be a
public reporting company.

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 foreseeable  future.
The Board of Directors  currently  intends to retain any future earnings for use
in expanding  our business.  We may not declare or pay any dividend  without the
consent of lenders and our preferred stockholders.

The  Company  also has  preferred  stock  outstanding,  designated  as  Series G
Convertible  Redeemable Preferred Stock (the "Series G Stock"). The no par value
Series G Stock has 230,000  authorized  shares and,  at June 30,  2004,  222,501
shares were issued and outstanding.  Each share of Series G Stock is convertible
into 100 shares of common  stock,  subject to  adjustment,  at the option of the
holder.  Each share of Series G Stock has one vote for each share of common into
which it would be convertible.  In addition,  Series G Stock ranks senior to all
other outstanding stock of the Company.  Series G Stock accrues dividends at the
rate of 8% per  year  of the  original  issuance  price  of  $32.00  per  share,
compounded annually,  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 is
redeemable at the election of not less than 60% of the Series G Stockholders any
time after June 30, 2005, and is redeemable at $64.00 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.

                                       19
<PAGE>
<TABLE>
<CAPTION>
                                                      EQUITY COMPENSATION PLAN INFORMATION
                                -------------------------------------------------------------------------------------
                                                            JUNE 30, 2005
                                                                                             NUMBER OF SECURITIES
                                  NUMBER OF SECURITIES                                      REMAINING AVAILABLE FOR
                                      TO BE ISSUED               WEIGHTED-AVERAGE            FUTURE ISSUANCE UNDER
                                    UPON EXERCISE OF            EXERCISE PRICE OF          EQUITY COMPENSATION PLANS
                                  OUTSTANDING OPTIONS,         OUTSTANDING OPTIONS,          (EXCLUDING SECURITIES
                                   WARRANTS AND RIGHTS         WARRANTS AND RIGHTS         REFLECTED IN COLUMN (a))
PLAN CATEGORY                              (a)                         (b)                            (c)

<S>                                  <C>                             <C>                             <C>
Equity compensation
     plans approved by               26,185,982                      $ 0.1870                        3,288,786
     security holders
Equity compensation
     plans not approved
     by security holders (1)             7,499                         16.00                                 -
                                    ------------                    ---------                     ------------

               Total                26,193,481                      $ 0.1915                         3,288,786
                                    ============                    =========                     ============
</TABLE>
(1)  On August 6, 2002,  the  Company  granted  Bradford  C. Walker an option to
     purchase 7,500 shares of our Series G Stock at an exercise price of $16 per
     share.  This  option  became  fully  vested  and  exercisable  on the first
     anniversary of the grant date and expires upon the tenth (10th) anniversary
     of the grant date. Mr. Walker subsequently left the Company and the options
     became exercisable at any time prior to the earlier of (i) the date that is
     one  (1)  year  following  the  registration  of  the  applicable  option's
     underlying  shares  under  the  Securities  Act  of  1933  on an  effective
     registration  statement  on Form S-8,  as amended or (ii) March 1, 2009,  5
     years after Mr. Walker's severance date. On October 15, 2003, an option for
     the purchase of one share of Series G Stock was  exercised  for $16 leaving
     7,499 options outstanding.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The selected  consolidated  financial data presented below has been derived from
our LXU historical  audited  consolidated  financial  statements for each of the
five years in the period ended June 30, 2005.  The following data should be read
in conjunction with "Management's Discussion and



                                       20
<PAGE>
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>

OPERATING DATA:                                                         FISCAL YEAR
                                                                       ENDED JUNE 30
                               ----------------------------------------------------------------------------------------
                                        2005(1)      2004(2)(3)     2003(4)(5)      2002(6)(7)      2001(8)
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                  <C>              <C>          <C>            <C>            <C>
NET REVENUES                            $ 53,692      $ 48,763      $  46,360       $ 53,696       $  48,402

INCOME (LOSS) FROM CONTINUING
  OPERATIONS                            $  7,440      $  2,177      $     778       $ (6,292)      $  (4,832)

PER SHARE INCOME (LOSS) FROM
  CONTINUING OPERATIONS                 $   0.18      $  (0.05)     $   (0.10)      $  (1.13)      $   (1.37)

NET INCOME (LOSS)                       $  7,440      $  2,177      $  (3,629)      $ (6,191)      $  (4,382)

PER SHARE INCOME (LOSS)
  - BASIC                               $   0.18      $  (0.05)     $   (0.31)      $  (1.11)      $   (1.37)
  - DILUTED                             $   0.13      $  (0.05)     $   (0.31)      $  (1.11)      $   (1.37)

TOTAL ASSETS                            $ 36,242      $ 29,899      $  31,665       $ 37,587       $  45,450

LONG-TERM OBLIGATIONS AND REDEEMABLE
  PREFERRED STOCK                       $ 16,025      $ 12,646      $   9,294       $ 23,285       $  20,335

STOCKHOLDERS' EQUITY

 (CAPITAL DEFICIENCY)                   $ 10,077      $  6,038      $   7,219       $ (5,349)      $    (562)

</TABLE>

(1) During the year ended June 30,  2005,  the Company  released  $4,274,800  of
valuation  allowance  against its deferred  tax assets,  which  increased  total
assets and net income.

(2) Loss per  share is  negative  even  with  positive  income  from  continuing
operations due to dividends and accretion of the Company's Series G Stock.

(3) In December 2003, the Company  refinanced  its senior debt  facilities.  The
Company  paid  off its  Luxtec  revolving  note  in the  amount  of  $1,271,585.
Simultaneously,  the Company paid off its PrimeSource Surgical revolving line of
credit in the amount of $4,793,944.

(4) In  accordance  with  the  Financial  Accounting  Standards  Board  ("FASB")
Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 142,  the Company
completed the transitional  test for impairment in March 2003 and concluded that
consolidated  goodwill  was  impaired in the amount of  $4,454,656.  The Company
recorded a non-cash  charge of  $4,454,656  to reduce the carrying  value of its
goodwill.  This  charge is  non-operational  in  nature  and is  reflected  as a
cumulative effect of a change in accounting  principle,  effective July 1, 2002,
in the accompanying Consolidated Statements of Operations.



                                       21
<PAGE>
(5) In the  fiscal  year ended  June 30,  2003,  the  Company  restructured  its
outstanding  preferred and common stock. The  recapitalization,  as discussed in
Note 14 to the  accompanying  consolidated  financial  statements,  resulted  in
preferred  stockholders  exchanging  preferred stock with a redemption  value of
approximately  $21,993,000  for  preferred  stock  with a  redemption  value  of
$6,500,000,  common  stock  and  common  stock  warrants.  As a  result  of  the
recapitalization,  loss  attributable  to common  stockholders  was increased by
$270,136.

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

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

(8)  Effective  March 2,  2001,  the  Company  completed  a merger  with  Luxtec
Corporation with aggregate consideration exchanged of approximately  $4,791,000,
where the  Company  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 the Company 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.



                                       22
<PAGE>

OPERATING DATA:

The  following  table  sets forth  unaudited  quarterly  consolidated  operating
results for each of our last eight quarters.  We have prepared this  information
on a basis  consistent with our audited  consolidated  financial  statements and
included all adjustments,  consisting only of normal recurring  adjustments that
we consider  necessary  for a fair  presentation  of the data.  These  quarterly
results are not  necessarily  indicative of future results of  operations.  This
information  should be read in  conjunction  with  "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations" and our consolidated
financial  statements  and the notes thereto.  Data is in thousands,  except per
share data.
<TABLE>
<CAPTION>
                                            SEP-30     DEC-31     MAR-31     JUN-30      SEP-30      DEC-31      MAR-31     JUN-30
                                             2003       2003       2004       2004        2004        2004        2005    2005 (2)

<S>                                         <C>       <C>        <C>        <C>         <C>         <C>         <C>       <C>
Net revenues                                $12,162   $12,541    $12,253    $11,807     $12,569     $13,760     $14,076   $13,287
Cost of products sold                       $ 7,666   $ 7,853    $ 7,956    $ 7,556     $ 8,004     $ 8,772     $ 8,998   $ 8,789
                                            -------   -------    -------    -------     -------     -------     -------   -------

Gross profit                                $ 4,496   $4,688     $4,297     $4,251      $4,565      $4,988      $5,078    $ 4,498
                                            =======   =======    =======    =======     =======     =======     =======   =======

Income from continuing operations           $   345   $  481     $  414     $  937      $  692      $  964      $  893    $ 4,891
                                            =======   =======    =======    =======     =======     =======     =======   =======

Net income                                  $   345   $  481     $  414     $  937      $  692      $  964      $  893    $ 4,891
                                            =======   =======    =======    =======     =======     =======     =======   =======
Income available (loss attributable) to
  common stockholders (Note 1)              $ (500)   $ (416)    $ (437)    $  162      $ (183)     $   89      $   93    $ 4,040
                                            =======   =======    =======    =======     =======     =======     =======   =======
Income (loss) Per share -
  - Basic                                   $(0.02)   $(0.02)    $(0.02)    $  0.01     $(0.01)     $ 0.00      $ 0.00    $  0.18
                                            =======   =======    =======    =======     =======     =======     =======   =======
  - Diluted                                 $(0.02)   $(0.02)    $(0.02)    $  0.01     $(0.01)     $ 0.00      $ 0.00    $  0.09
                                            =======   =======    =======    =======     =======     =======     =======   =======

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

The 2004 and 2005  quarterly  results  for basic and diluted  income  (loss) per
share, when totaled, may not equal the basic and diluted income (loss) per share
for the years ended June 30, 2004 and 2005. These variances are due to rounding,
certain options and warrants being antidilutive for certain quarters.

Note  1-  The  difference   between  net  income  and  income   available  (loss
attributable) to common stockholders results from dividends and accretion of the
Company's Series G Stock.

Note 2- During the fourth quarter the Company decreased it's valuation allowance
on deferred tax assets by $4,274,800


                                       23
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

OVERVIEW

This  Overview is intended to provide a context for the  following  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operation.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation should be read in conjunction with our audited consolidated  financial
statements  for the fiscal year ended June 30, 2005 including the notes thereto.
We have attempted to identify the most important matters on which our management
focuses in evaluating our financial condition and operating  performance and the
short-term and long-term opportunities, challenges and risks (including material
trends and  uncertainties)  which we face.  We also  discuss  the actions we are
taking to address these opportunities, challenges and risks. The Overview is not
intended as a summary,  or a substitute for review,  of either the  Management's
Discussion and Analysis of Financial  Condition and Results of Operation section
nor of this Report as a whole.

                                BUSINESS SEGMENTS

We are a specialty medical products sales,  marketing and manufacturing company.
We sell a broad  portfolio of high  quality,  differentiated  specialty  medical
products,  some of  which we  manufacture,  to  hospitals  and  surgery  centers
nationwide   through  a   dedicated   organization   of  sales   and   marketing
professionals.

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

SPECIALTY  MANUFACTURED  PRODUCTS - This segment consists of the Luxtec division
which we acquired  in March  2001.  Luxtec  designs  and  manufactures  surgical
headlight  systems,  including  light  sources,  fiber  optic  cables  and other
custom-made surgical equipment for the medical industry.

SPECIALTY  MEDICAL  DISTRIBUTION - SURGICAL - The surgical segment is a regional
sales and marketing organization that markets and distributes specialty surgical
products primarily to hospitals and surgery centers. The primary specialty areas
include  gynecology,  cardiovascular,   endoscopy  and  general  surgery.  These
products and services are used  extensively in hospital  operating  rooms and in
outpatient surgery centers. This segment does business as LXU Medical.

SPECIALTY MEDICAL  DISTRIBUTION - CRITICAL CARE - The critical care segment is a
regional sales and marketing  organization that markets and distributes products
primarily to  hospitals in the  southeastern  United  States.  This segment does
business as Bimeco,  Inc. Within this segment,  the primary  specialties include
intensive, neonatal and maternal care.

                                       24
<PAGE>
                                BUSINESS STRATEGY

We  differentiate   our  business  from  commodity   healthcare   product  sales
organizations by offering  "consultative"  marketing.  The Company's sales force
spends substantial time teaching,  training and advising  surgeons,  physicians,
nurses and hospital staff in the proper use of products.

We believe  small to medium sized  manufacturers  of specialty  medical  devices
often  prefer  regional  distributors  to reduce the risk  involved in exclusive
national  distribution  relationships.  We maintain three regional  distribution
groups, two for surgical products (Southeast and  Mid-Atlantic/Central)  and one
for critical care products  (primarily focused on the Southeast).  A majority of
the  Company's  sales  representatives  are our  employees,  averaging  15 years
experience, and are compensated almost entirely on commissions.

Our goal is to be a leading supplier 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 Luxtec division continues to lead the surgical headlamp business and focuses
its research and development efforts on new and innovative products which can be
sold through our distribution segment.

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;

     *    sustaining or increasing our market share;

     *    the acquisition of other specialty medical products manufacturers;

     *    expanding margin opportunities in our manufactured products business;

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

                                       25
<PAGE>
     *    entrance  into  new  specialty  medical  markets  and  expansion  into
          international markets; and

     *    marketing  efforts  which  foster   partnerships  with  other  medical
          products companies to widen the customer base for our products.

                             BUSINESS OPPORTUNITIES

The Company's historically  aggressive distribution growth strategy strained its
financial and managerial  resources,  leading the Board of Directors to initiate
and implement a  restructuring  plan in November  2001. The  restructuring  plan
included replacing senior  management,  refocusing the Company's strategy on its
core business and consolidating under-performing sales regions. In January 2002,
the Company ceased distribution of most products west of the Rocky Mountains.  A
portion of the Company's  critical care segment was divested in late 2002,  with
another portion sold in June 2003.  During the past three years, the Company has
achieved several  significant  milestones;  strengthening its core business with
the  renewal of several key vendor  contracts,  attracting  new  product  lines,
simplifying its capital  structure and consolidating its senior debt facilities.
The Company believes it has validated the restructuring plan it began in 2001 by
improving  its  operating  income  (loss) from a loss of $5.6 million in 2002 to
income of $1.4  million in 2003,  $2.5  million in 2004 and $3.9 million in 2005
and by  reducing  its  senior  secured  debt from $9.9  million  in 2002 to $4.5
million in 2005.

We believe that we are well  positioned  to leverage  our existing  distribution
capabilities  with  additional   proprietary   products.   In  addition  to  the
opportunity  for margin  expansion,  our sales  force has  incentives  to market
proprietary  or  "corporate"  products  since  those  products  become  an owned
component of their portfolio. Our sales force is then able to have a more active
role in product  development,  resulting in product lines that are better suited
for their  customer  base.  We believe  that within the  specialty  surgical and
critical care markets,  there exist numerous quality and high growth acquisition
targets.

                                 BUSINESS RISKS

We believe that the following represent our primary business risks:

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  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.

                                       26
<PAGE>
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 or upon a change
in control of the Company.  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.

OUR MAJOR STOCKHOLDER HAS SUBSTANTIAL CONTROL OF US AND COULD DELAY OR PRESENT 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.

The Company's capital structure at June 30, 2005 is summarized below:
<TABLE>
<CAPTION>
                                      SERIES G STOCK(1)                 COMMON STOCK
                          -------------------------------  ------------------------------------------
 SHAREHOLDER                 SHARES         OPTIONS (2)          SHARES       OPTIONS (3)  WARRANTS     TOTAL CSE      %

<S>                          <C>             <C>              <C>           <C>          <C>          <C>            <C>
 GE Capital Equity           12,500,000                         7,967,374        3,721     9,398,639    29,869,734   41.7 %
 Coleman Swenson Booth        7,718,750                         3,573,089       23,721     4,380,356    15,695,916   21.9 %
 Robert Fisher Entities       1,484,375                         1,963,953        7,442     1,456,876     4,912,646    6.9 %
 William H. Lomicka             546,875                           621,328       30,605       186,694     1,385,502    1.9 %
 Brad Walker                        100        749,900                 50    3,249,950                   4,000,000    5.6 %
 LXU Management                                                              2,511,046                   2,511,046    3.5 %
 Others                                                         8,249,350    3,584,729     1,352,203    13,186,282   18.5 %
                            -----------        --------        -----------   ---------     ---------    -----------

 Total                      22,250,100         749,900         22,375,144    9,411,214    16,774,768    71,561,126
                            ===========        ========        ===========   ==========   ===========   ===========
</TABLE>

Note: All figures shown in common stock equivalents ("CSE").

(1) Series G Stock carries  liquidation and redemption  preferences of two times
original  price  per  share  ($0.64  per  CSE)  plus  accrued   dividends,   and
participates in additional proceeds as common stock.

(2) Series G Stock options have an exercise price of $0.16 per CSE.

(3) Common stock  options and warrants have an average  exercise  price of $0.48
and $0.02 per CSE, respectively.


                                       27
<PAGE>
We are a reporting  company under the  Securities  Exchange Act of 1934, but are
not  currently  traded  on  a  recognized   stock  exchange.   The  Company  had
approximately 1,400 shareholders as of June 30, 2005.

As a result of its  ownership  of Series G Stock and  common  stock,  GE Capital
Equity  Investments,  Inc.  is able to  exercise  substantial  control  over the
election of our directors, and many corporate actions require the prior approval
of such stockholder.

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

                   APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

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

RESERVE FOR UNCOLLECTED ACCOUNTS RECEIVABLE

The Company  periodically and  systematically  evaluates the  collectibility  of
accounts  receivable  and  determines  the  appropriate  allowance  for doubtful
accounts.  In  determining  the amount of the  allowance,  management  considers
historical  credit losses,  the past due status of receivables,  payment history
and other  customer-specific  information,  and any other  relevant  factors  or
considerations.

INVENTORY RESERVES FOR OBSOLESCENCE

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


                                       28
<PAGE>
GOODWILL AND OTHER INTANGIBLE ASSETS

We  evaluate  goodwill  and other  intangible  assets  for  impairment  at least
annually, in accordance with Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible  Assets ("SFAS No. 142").  For goodwill,  we first
compare the fair value of a reporting unit with its carrying  amount,  including
goodwill. If the carrying amount of a reporting unit exceeds the fair value of a
reporting  unit,  additional  tests  would  be used to  measure  the  amount  of
impairment  loss, if any. We use a present value technique to measure  reporting
unit fair value.  If the carrying amount of any other  intangible  asset exceeds
its fair value, we would recognize an impairment loss for the difference between
fair value and the carrying  amount.  If other  events  occur and  circumstances
change,  causing the fair value of a reporting  unit to fall below its  carrying
amount,  impairment  losses may be recognized in the future.  In accordance with
SFAS No. 142, the Company  performed its annual impairment test in July 2004 and
found no further impairment in its existing goodwill balances.

DEFERRED TAX ASSETS

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

SALES RECOGNITION POLICY

The Company's policy is to recognize revenues from product sales when earned, as
defined by  accounting  principles  generally  accepted in the United  States of
America.  Specifically,  product  and  commissions  revenue is  recognized  when
persuasive evidence of an arrangement exists, delivery has occurred (or services
have been rendered),  the price is fixed or determinable,  and collectibility is
reasonably assured.

Product  sales are  recognized  as revenue  when the title  transfers,  which is
generally when product is shipped.

Revenues  earned under agency  agreements are  recognized  when the customer has
received the product. Amounts are recorded as commissions in net revenues at the
net amount retained by the Company.

Provisions for vendor discounts and product returns are provided for at the time
the related  sales are  recorded,  and are  reflected  as a reduction of product
sales. The Company estimates  customer discounts and product returns at the time
of  sale  based  on  historical   experience.   These   estimates  are  reviewed
periodically  and,  if  necessary,   revised,   with  any  revisions  recognized
immediately as adjustments to product sales.


                                       29
<PAGE>
                              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, 2005,  2004 and
2003.
<TABLE>
<CAPTION>
                                              2005         2004          2003

<S>                                          <C>           <C>          <C>
Net revenues                                 100.0 %       100.0 %      100.0 %
Cost of products sold                         64.4 %        63.6 %       63.2 %
Gross profit                                  35.6 %        36.4 %       36.8 %
Selling expenses                              15.2 %        16.7 %       16.1 %
General and administrative expenses           12.6 %        13.4 %       15.1 %
Depreciation and amortization expenses         0.6 %         1.0 %        1.8 %
Restructuring expenses                         0.0 %         0.0 %        0.7 %
Interest expense                               0.9 %         1.5 %        1.8 %
Net income (loss)                             13.9 %         4.5 %       (7.8)%

</TABLE>
Fiscal Year Ended June 30, 2005 Compared with Fiscal Year Ended June 30, 2004

NET REVENUES - Net  revenues  increased  $4,929,213,  or 10.1%,  in fiscal  2005
compared to fiscal 2004  primarily due to higher product sales volume from a new
vendor product line,  which replaced another product line, and the addition of a
new selling territory for our proprietary  products provided by Luxtec division.
Sales for this  replacement  product line were higher than the previous  product
line by  approximately  $1,763,000  for the year ended June 30, 2005 compared to
the same period in 2004.  Sales for the Luxtec product  increased  approximately
$1,986,000 for the year ended June 30, 2005 compared to the same period in 2004.
The increase in revenues was partially  offset by a decrease in commissions from
our agency business of $599,000 in fiscal 2005 compared to fiscal 2004.

COST OF PRODUCTS SOLD - Cost of products sold  increased to 64.4% of net product
sales for fiscal  2005 from 63.6% of net  product  sales for  fiscal  2004.  The
increase of  $3,531,371,  or 11.4%,  in fiscal 2005  relative to fiscal 2004 was
primarily  the result of the  corresponding  increase in net product  sales,  as
discussed  above.  The increase in the  percentage of cost of products sold as a
percentage  of net product  sales in fiscal 2005 relative to fiscal 2004 was due
primarily due to an increase in sales of products with higher cost.

GROSS PROFIT - Gross  profit  decreased to 35.6% of net product  sales in fiscal
2005  compared to 36.4% of net product  sales in fiscal  2004.  The  increase in
gross profit of $1,397,842,  or 7.9%, in fiscal 2005 compared to fiscal 2004 was
primarily  due to  higher  sales  volume  from  the  replacement  product  line,
discussed above and the addition of a new selling  territory for our proprietary
products provided by the Luxtec division.  The decrease in gross profit margins,
as a percentage of net product sales in fiscal 2005 compared to fiscal 2004, was
due  primarily  to an increase in sales of  products  with a lower gross  profit
margin.

                                       30
<PAGE>
SELLING EXPENSES - Selling expenses decreased $15,701 in fiscal 2005 compared to
fiscal 2004.  The decrease was minimal and primarily  due to lower  benefits and
travel and entertainment expenses offset by increasing sale commissions paid due
to  higher  sales  volume.  Selling  commissions  are  paid on  agency  sales at
approximately  the same  percentage as stocking  sales,  and as a result,  sales
commissions  as a percent of net sales revenue do not fluctuate when the product
mix of agency and stocking sales varies.

GENERAL AND ADMINISTRATIVE EXPENSES - General  and administrative  expenses were
12.6% of net sales for  fiscal  2005,  compared  to 13.4% for fiscal  2004.  The
increase  of  $236,205,  or 3.6%,  was  primarily  the  result of  approximately
$150,000 of research  and  development  cost  associated  with the  manufactured
products  division  and  approximately   $100,000  legal  fees  associated  with
obtaining certain environmental permits for the manufactured products division.

DEPRECIATION AND AMORTIZATION EXPENSES - Depreciation  and amortization expenses
decreased to 0.6% for fiscal 2005 compared to 1.0% for fiscal 2004. The decrease
of $170,299,  or 34.5%, in depreciation and amortization  expenses was primarily
the result of certain assets and intangible  assets  becoming fully  depreciated
prior to the year ended June 30, 2005.

INTEREST EXPENSE - The  decrease in interest expense of $254,618,  or 34.6%, was
the result of the decreasing  balance of the Company's  senior debt, as compared
to the prior year, as a result of positive cash flow  management  generated from
operations.

INCOME TAX PROVISION - During 2005 the Company recorded an income tax benefit of
$4,274,800 as the result of the release of a portion of the Company's  valuation
allowance  against  deferred  tax assets.  Based upon  available  evidence,  the
Company  believes it will  realize the benefit of the  Company's  net  operating
losses, which represent the majority of the Company's deferred tax assets. There
was no income tax provision benefit recorded in fiscal 2004.

NET INCOME - Net  income  increased  $5,262,594  in fiscal 2005  compared to the
fiscal 2004 net income.  The  increase  resulted  primarily  from the income tax
benefit recognized of $4,274,800,  and the increase in product sales and reduced
legal fees.

FISCAL YEAR ENDED JUNE 30, 2004 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2003

NET REVENUES - Net  revenues  increased  $2,402,987,  or 5.2%,  in  fiscal  2004
compared  to fiscal  2003  primarily  due to higher  product  sales  volume from
existing  product lines and  additional  selling  territory for our  proprietary
products  provided by the Luxtec  division.  Sales in the new  territory for the
year ended June 30,  2004  totaled  $1,114,401.  In March  2004,  we ended a key
vendor  relationship in our Surgical division,  which contributed  approximately
15% of the Surgical  division's sales for the twelve months ended June 30, 2004.
This  vendor made a decision  to sell its  product  directly  to its  customers,
thereby ending all of their independent distributor contracts.  Although we have

                                       31
<PAGE>
replaced this product line with another in the affected  territories  as of June
2004, our Surgical  division  sales did  underperform  historical  levels in the
fourth  quarter.  The decrease in sales due to the loss of this vendor has had a
corresponding  impact on cost of sales,  gross profit,  selling  expense and net
income  after  the date the  relationship  terminated;  however,  we  expect  to
generate  new  revenue to replace the loss lost  revenue as we progress  through
fiscal  2005.  Gross  profit  from  our  agency  business  for  fiscal  2004 was
approximately $492,000 more than in fiscal 2003.

COST OF PRODUCTS SOLD - Cost of products sold  increased to 68.0% of net product
sales for fiscal  2004 from 67.1% of net  product  sales for  fiscal  2003.  The
increase of  $1,734,128,  or 5.9%,  in fiscal  2004  relative to fiscal 2003 was
primarily  the result of the  corresponding  increase in net product  sales,  as
discussed  above.  The increase in the  percentage of cost of products sold as a
percentage  of net product  sales in fiscal 2004 relative to fiscal 2003 was due
to the  effects  of a  large,  lower  margin,  Critical  Care  division  capital
equipment  sale of  $775,000  to a single  customer  in March  2004  offset by a
difference  in product mix between  Luxtec and  Specialty  Medical  Distribution
products.

GROSS PROFIT - Gross  profit  decreased to 38.8% of net product  sales in fiscal
2004  compared to 39.1% of net product  sales in fiscal  2003.  The  increase in
gross profit of $668,859,  or 3.9%,  in fiscal 2004  compared to fiscal 2003 was
primarily  due to  higher  sales  volume  from  existing  product  lines and the
addition of a new selling territory for our proprietary products provided by the
Luxtec  division.  The decrease in gross profit margins,  as a percentage of net
product sales in fiscal 2004 compared to fiscal 2003,  was due to the effects of
a  large,  lower  margin,  Critical  Care  division  capital  equipment  sale as
discussed  in cost of  sales  offset  by a  difference  in  product  mix sold as
discussed above.

SELLING EXPENSES - Selling expenses  increased  $709,812 in fiscal 2004 compared
to fiscal 2003.  The increase was  primarily  due to higher sales volume and was
also attributable to a sales  representative  commission program to sell through
any  remaining  Surgical  division  inventory  for the  discontinued  key vendor
discussed in net sales above.  As a result of this program,  we  liquidated  the
discontinued  inventory  and  created  an  additional  incentive  for the  sales
representatives most impacted by the loss of the vendor. Selling commissions are
paid on agency sales at approximately the same percentage as stocking sales, and
as a  result,  sales  commissions  as a  percent  of net  sales  revenue  do not
fluctuate when the product mix of agency and stocking sales varies.

GENERAL AND ADMINISTRATIVE EXPENSES - General  and administrative  expenses were
13.4% of net sales for  fiscal  2004,  compared  to 15.1% for fiscal  2003.  The
decrease of $474,192,  or 6.8%, was a result of lower salaries and wages related
to reduced  headcount and obtaining  further  overhead  efficiencies and reduced
legal fees,  primarily related to the settled legal complaint with the Company's
former  officers  as  mentioned  in  Note  12  to  the  consolidated   financial
statements.

DEPRECIATION AND AMORTIZATION EXPENSES - Depreciation  and amortization expenses
decreased  to 1.0% for  fiscal  2004,  compared  to 1.8% for  fiscal  2003.  The
decrease of $349,975,  or 41.5%, in depreciation and  amortization  expenses was
primarily the result of certain  assets and  intangible  assets  becoming  fully
depreciated prior to the year ended June 30, 2004.

RESTRUCTURING EXPENSES:  Restructuring expense decreased $340,690 in fiscal 2004
compared to fiscal 2003.  The decrease was due to the lack of any  restructuring
activities  initiated  in  fiscal  2004 and the  continued  payments  under  the
existing  restructuring  plans. The expenses  recorded in fiscal 2004 related to
the June 30, 2003 final closing fees for the sale of Ruby, Inc.

                                       32
<PAGE>
INTEREST EXPENSE - The  decrease in interest expense of $102,467,  or 12.2%, was
the result of lower  interest  rates and fees on the  Company's  senior debt, as
compared  to the prior year,  as a result of the  refinancing  of the  Company's
senior debt in the quarter ended December 31, 2003.

INCOME TAX PROVISION - We recorded  no income tax  expense in fiscal 2004 and a
$19,700  income tax benefit in fiscal 2003.  Our current year taxable income for
federal and certain  state tax purposes  was offset by the use of net  operating
loss  carryforwards  to offset  federal  and state  income  tax  liabilities  in
addition to certain tax credit carryovers.

NET INCOME  (LOSS) - Net income  increased to $2,177,213 in fiscal 2004 compared
to a net loss of $3,628,799 in fiscal 2003.  The  $5,806,012  increase  resulted
primarily  from the goodwill  impairment  charge of $4,454,656  recorded in July
2002 as a result of SFAS No. 142 implementation.  In addition, we recorded other
income of  approximately  $370,000  resulting  from the  resolution  of  certain
disputed distribution costs which had been previously accrued for. This increase
was offset by the write off of deferred financing fees of approximately $190,000
for  previously  outstanding  debt  related to the  refinancing  of our  banking
facilities during December 2003.

                         LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2005, we had working  capital of $6,621,804,  compared to $1,688,823
at June 30, 2004.  The increase in our working  capital was primarily the result
of  increased  accounts  receivable  resulting  from  increased  product  sales,
increased  inventory,  the  release  of a  portion  of the  Company's  valuation
allowance on current  deferred tax assets and decreased lines of credit,  offset
by increased  accounts payable and accrued  expenses.  The increase in inventory
was funded with the increased cash  generated from  operations and the increased
availability  of the line of  credit,  as  discussed  below.  We expect our cash
position  to  remain  stable as we  continue  to  experience  sales  growth  and
streamline operating expenses.

In December 2003, we  consolidated  our senior debt facilities into a $7,500,000
revolving demand note (the  "PrimeSource  Healthcare Line of Credit") from Wells
Fargo under the PrimeSource  Healthcare Credit and Security Agreement,  dated as
of December 10, 2003, by and among the Company, PrimeSource Surgical, Bimeco and
Wells Fargo (the  "Credit and Security  Agreement").  Pursuant to the Credit and
Security Agreement, the maximum amount available to borrow under the PrimeSource
Healthcare  Line of Credit is limited to the lesser of  $7,500,000  or a certain
percentage of accounts  receivable and  inventory,  as defined by the Credit and
Security  Agreement  ($7,500,000  at  June  30,  2005).  As of  June  30,  2005,
borrowings  bore  interest at Wells  Fargo's prime rate plus 2.5% (8.75% at June
30,  2005).  Borrowings  are  secured by  substantially  all assets  held by LXU
Healthcare  and its  subsidiaries.  At June 30, 2005,  there was  $3,008,684  of
availability under the PrimeSource Healthcare Line of Credit.

The  Credit  and  Security   Agreement   contains  covenants  that  require  the
maintenance of defined income levels and limit capital expenditures. The Company
was in compliance with these financial covenants as of June 30, 2005.


                                       33
<PAGE>
The following  table presents the Company's  contractual  obligations as of June
30, 2005:

<TABLE>
<CAPTION>
CONTRACTUAL OBLIGATIONS                                   PAYMENTS DUE BY PERIOD
                                  ----------------------------------------------------------------------------------
                                         Total      Less than 1 year     1 - 3 years  3-5 years    More than 5 years

<S>                                 <C>               <C>             <C>            <C>
Long-term debt obligations          $     88,983      $  18,371       $  70,612      $      -
Capital lease obligations                 45,914         26,750          19,164             -
Operating lease obligations            1,689,130        473,676         858,560        356,894             -
                                    ------------     ----------      ----------     ----------         ----------

Total                               $  1,824,027      $ 518,797       $ 948,336      $ 356,894
                                    ============     ==========      ==========     ==========         ==========
</TABLE>
Series G Stock with a redemption  value of  $15,935,645  at June 30, 2005 is not
included in the table above.  At any time after June 30, 2005,  no less than 60%
of Series G stockholders may elect to redeem the Series G Stock.

                        RECENT ACCOUNTING PRONOUNCEMENTS

In December  2004,  the  Financial  Accounting  Standards  Board issued SFAS No.
123(R) ("SFAS No. 123(R)"),  SHARE-BASED  PAYMENT.  SFAS No. 123(R)  establishes
standards for the accounting for  transactions in which an entity  exchanges its
equity  instruments for goods or services.  SFAS No. 123(R) focuses primarily on
accounting  for  transactions  in which an entity obtains  employee  services in
share-based payment  transactions.  SFAS No. 123(R) requires that the fair value
of such equity instruments be recognized as expense in the historical  financial
statements as services are performed. Prior to SFAS No. 123(R), only certain pro
forma disclosures of fair value were required.  SFAS No. 123(R) is effective for
the Company as of July 1, 2005.  The adoption of SFAS No. 123(R) is not expected
to have a material effect on the Company's consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, AN AMENDMENT OF
ARB NO. 43, CHAPTER 4. SFAS No. 151 clarifies the accounting for amounts of idle
facility expenses,  freight, handling costs and waste material (spoilage).  This
statement is  effective  for the Company for the fiscal year  beginning  July 1,
2006. The adoption of SFAS No. 151 is not expected to have a material  effect on
the Company's consolidated financial statements.

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, 2005 was $4,491,316,  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 flow


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

<TABLE>
<CAPTION>
                      LXU HEALTHCARE, INC. and Subsidiaries


                        Consolidated Financial Statements
                          as of June 30, 2005 and 2004,
                             and for the Years Ended
                          June 30, 2005, 2004 and 2003

                                                                                            Page

<S>                                                                                 <C>
Report of Independent Registered Public Accounting Firm                                      F-1

Consolidated Balance Sheets as of June 30, 2005 and 2004                               F-2 - F-3

Consolidated Statements of Operations for the Years Ended June 30,
2005, 2004 and 2003                                                                    F-4 - F-5

Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2005, 2004 and 2003                                                                 F-6

Consolidated Statements of Cash Flows for the Years Ended June 30,
2005, 2004 and 2003                                                                    F-7 - F-8

Notes to Consolidated Financial Statements                                            F-9 - F-27


</TABLE>
                                       35
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
LXU Healthcare, Inc.
Tucson, Arizona

We have audited the accompanying  consolidated balance sheets of LXU Healthcare,
Inc. and  subsidiaries  (the  "Company")  as of June 30, 2005 and 2004,  and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the three years in the period ended June 30, 2005.  Our audits
also included the financial  statement  schedule listed in the Index at Item 15.
These   financial   statements   and  financial   statement   schedule  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audits included consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   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  LXU  Healthcare,   Inc.  and
subsidiaries  as of June 30, 2005 and 2004, and the results of their  operations
and their  cash flows for each of the three  years in the period  ended June 30,
2005 in conformity with accounting  principles  generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly in all  material  respects  the  information  set forth
therein.


DELOITTE & TOUCHE LLP

Phoenix, Arizona
September 28, 2005



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

CONSOLIDATED BALANCE SHEETS

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

                                                                                                         June 30,
                                                                                      ----------------------------------------
ASSETS (Note 7)                                                                                   2005                2004

CURRENT ASSETS:
<S>                                                                                        <C>                <C>
  Cash and cash equivalents                                                                $      12,228      $    98,903
  Accounts receivable - net of allowance for doubtful accounts
    of approximately $43,000 and $132,000 at June 30, 2005 and
    2004, respectively                                                                         6,375,290        5,718,346
  Inventories - net (Note 4)                                                                   8,324,448        6,732,542
  Income taxes receivable (Note 11)                                                               75,378          129,913
  Prepaid expenses and other current assets                                                      219,052          224,865
  Deferred tax asset (Note 11)                                                                 1,755,000
                                                                                           --------------    ------------

           Total current assets                                                               16,761,396       12,904,569

PROPERTY AND EQUIPMENT - Net (Note 5)                                                            750,998          887,325

DEFERRED TAX ASSET - Net (Note 11)                                                             2,643,100

GOODWILL - Net (Note 6)                                                                       15,956,883       15,956,883

INTANGIBLE ASSETS - Net of accumulated amortization of approximately $253,000
  and $245,000 at June 30, 2005
  and 2004, respectively (Note 6)                                                                 51,453           60,273

OTHER ASSETS                                                                                      77,713           90,196
                                                                                           --------------    ------------

TOTAL                                                                                      $  36,241,543      $29,899,246
                                                                                           ==============    ============

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

CONSOLIDATED BALANCE SHEETS

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

                                                                                                         June 30,
                                                                                      ----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY                                                              2005                2004

CURRENT LIABILITIES:
<S>                                                                                         <C>                  <C>
  Accounts payable                                                                          $   3,712,720        $  4,253,295
  Accrued expenses                                                                              1,716,970           1,509,432
  Accrued restructuring costs (Note 14)                                                                 -              43,726
  Customer deposits                                                                               173,465             166,873
  Lines of credit (Note 7)                                                                      4,491,316           5,204,139
  Current portion of capital lease obligations (Note 12)                                           26,750              21,568
  Current portion of long-term debt (Note 7)                                                       18,371              16,713
                                                                                            -------------        ------------
           Total current liabilities                                                           10,139,592          11,215,746

CAPITAL LEASE OBLIGATIONS - Net of current portion (Note 12)                                       19,164              22,149

LONG-TERM DEBT - Net of current portion (Note 7)                                                   70,612              88,983
                                                                                            -------------        ------------

TOTAL LIABILITIES                                                                              10,229,368          11,326,878
                                                                                            -------------        ------------

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

SERIES G REDEEMABLE, CONVERTIBLE PREFERRED
  STOCK - No par value - authorized, 230,000 shares; issued and
  outstanding, 222,501 shares at June 30, 2005 and 2004, respectively;
  aggregate liquidation value of $15,935,645 and $15,294,342 at
  June 30, 2005 and 2004, respectively (Note 8)                                                15,935,645          12,534,619

STOCKHOLDERS' EQUITY:
  Common stock, $0.01 par value - authorized, 75,000,000 shares;
     issued and outstanding, 22,375,144 shares at June 30, 2005 and 2004                          223,751             223,751
  Additional paid-in capital                                                                   31,372,665          31,372,665
  Accumulated deficit                                                                         (21,519,886)        (25,558,667)
                                                                                            -------------        ------------

           Total stockholders' equity                                                          10,076,530           6,037,749
                                                                                            -------------        ------------

TOTAL                                                                                       $  36,241,543        $ 29,899,246
                                                                                            =============        ============

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

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
------------------------------------------------------------------------------------------------------------------------

                                                                        2005               2004                2003
REVENUES:
<S>                                                                 <C>                 <C>                <C>
  Net product sales                                                 $ 51,188,791        $ 45,660,102       $ 43,666,410
  Commissions and service revenues                                     2,503,428           3,102,904          2,693,609
                                                                    ------------        -------------      -------------

    Net revenues                                                      53,692,219          48,763,006         46,360,019

COST OF PRODUCTS SOLD                                                 34,563,071          31,031,700         29,297,572
                                                                    ------------        -------------      -------------

GROSS PROFIT                                                          19,129,148          17,731,306         17,062,447
                                                                    ------------        -------------      -------------

OPERATING EXPENSES:
  Selling expenses                                                     8,144,505           8,160,206          7,450,394
  General and administrative expenses                                  6,777,230           6,541,025          7,015,217
  Depreciation and amortization expenses                                 323,226             493,525            843,500
  Restructuring expenses (Note 14)                                                             4,817            345,507
                                                                    ------------        -------------      -------------

           Total operating expenses                                   15,244,961          15,199,573         15,654,618
                                                                    ------------        -------------      -------------

OPERATING INCOME                                                       3,884,187           2,531,733          1,407,829

INTEREST EXPENSE                                                        (482,158)           (736,776)          (839,243)

OTHER INCOME (EXPENSE)                                                  (237,022)            382,256            189,704
                                                                    ------------        -------------      -------------

INCOME  FROM CONTINUING OPERATIONS
  BEFORE INCOME TAX BENEFIT                                            3,165,007           2,177,213            758,290

INCOME TAX BENEFIT (Note 11)                                           4,274,800                   -             19,700
                                                                    ------------        -------------      -------------

INCOME BEFORE DISCONTINUED OPERATIONS
  AND CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE                                                 7,439,807           2,177,213            777,990
                                                                    ------------        -------------      -------------

DISCONTINUED OPERATIONS:
  INCOME FROM DISCONTINUED OPERATIONS -
    Net of income tax                                                                                           121,697

  LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS -
    Net of income tax                                                                                           (73,830)
                                                                    ------------        -------------      -------------

           Total                                                                                                 47,867
                                                                    ------------        -------------      -------------

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
  PRINCIPLE - GOODWILL IMPAIRMENT (Note 6)                                                                   (4,454,656)
                                                                    ------------        -------------      -------------

NET INCOME (LOSS)                                                      7,439,807           2,177,213         (3,628,799)

DIVIDENDS AND ACCRETION ON PREFERRED STOCK                            (3,401,026)         (3,368,216)        (2,549,681)

EFFECT OF EQUITY RECAPITALIZATION                                                                              (270,136)
                                                                    ------------        -------------      -------------

INCOME AVAILABLE TO (LOSS ATTRIBUTABLE TO)
  COMMON STOCKHOLDERS                                               $  4,038,781        $ (1,191,003)      $ (6,448,616)
                                                                    ============        =============      =============

                                                                                                              (Continued)
</TABLE>
                                      F-4
<PAGE>
<TABLE>
<CAPTION>
LXU HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
---------------------------------------------------------------------------------------------------------------------------


                                                                            2005                 2004                2003

INCOME (LOSS) PER SHARE BEFORE DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF
 CHANGE IN ACCOUNTING PRINCIPLE:
<S>                                                                       <C>                  <C>                 <C>
    Basic                                                                 $ 0.18               $ (0.05)            $ (0.10)
                                                                          =======              =========           ========

    Diluted                                                               $ 0.13               $ (0.05)            $ (0.10)
                                                                          =======              =========           ========

INCOME PER SHARE FROM DISCONTINUED
OPERATIONS - NET OF INCOME TAX EFFECT-
  DISPOSAL OF OPERATION:
    Basic                                                                                                          $  0.00
                                                                                                                   ========

    Diluted                                                                                                        $  0.00
                                                                                                                   ========

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

    Diluted                                                                                                        $ (0.21)
                                                                                                                   ========

NET INCOME (LOSS) PER SHARE:
    Basic                                                                 $ 0.18               $ (0.05)            $ (0.31)
                                                                          =======              =========           ========

    Diluted                                                               $ 0.13               $ (0.05)            $ (0.31)
                                                                          =======              =========           ========

WEIGHTED AVERAGE SHARES USED IN
  COMPUTATION OF LOSS PER SHARE:
    Basic                                                              22,375,144           22,375,130          21,059,853
                                                                       ==========           ==========          ===========

    Diluted                                                            57,104,219           22,375,130          21,059,853
                                                                       ==========           ==========          ===========

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        Total
                                                            Common Stock         Additional                         Stockholders'
                                                     --------------------------    Paid-in        Accumulated           Equity
                                                         Shares        Amount      Capital          Deficit          (Deficiency)

<S>                                                     <C>          <C>        <C>              <C>                 <C>
BALANCE, JUNE 30, 2002                                  7,978,309    $ 79,783   $12,490,202      $ (17,919,048)      $ (5,349,063)
  Equity recapitalization                              14,735,066     147,351    18,863,078           (270,136)        18,740,293
  Preferred stock dividends and accretion                                                           (2,549,681)        (2,549,681)
  Cancellation of shares in legal settlement             (132,963)     (1,330)      (41,218)                              (42,548)
  Cancellation of shares in sale of PEC assets           (201,067)     (2,011)      (62,330)                              (64,341)
  Cancellation of shares in sale of Ruby Merger            (4,251)        (43)       (1,317)                               (1,360)
  Issuance of compensatory stock options                                            110,000                               110,000
  Restricted common stock vesting                                                     4,250                                 4,250
  Net loss                                                      -           -             -         (3,628,799)        (3,628,799)
                                                      -----------    --------    -----------      --------------     -------------
BALANCE, JUNE 30, 2003                                 22,375,094     223,750    31,362,665        (24,367,664)         7,218,751
  Issuance of compensatory stock options                                             10,000                                10,000
  Exercise of stock option                                     50           1                                                   1
  Preferred stock dividends and accretion                                                           (3,368,216)        (3,368,216)
  Net income                                                    -           -             -          2,177,213          2,177,213
                                                      -----------    --------    -----------      --------------     -------------
BALANCE, JUNE 30, 2004                                 22,375,144     223,751    31,372,665        (25,558,667)         6,037,749
  Preferred stock dividends and accretion                                                           (3,401,026)        (3,401,026)
  Net income                                                    -           -             -          7,439,807          7,439,807
                                                      -----------    --------    -----------      --------------     -------------
BALANCE, JUNE 30, 2005                                 22,375,144    $223,751   $31,372,665      $ (21,519,886)     $  10,076,530
                                                      ===========   =========   ============     ==============     =============

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
-------------------------------------------------------------------------------------------------------------------

                                                                           2005            2004            2003
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                   <C>               <C>           <C>
  Net income (loss)                                                   $  7,439,807      $2,177,213     $(3,628,799)
  Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
      Depreciation and amortization expenses                               323,226         493,525         849,657
      Loss on disposal of property and equipment                             6,554          46,317          22,147
      Change in deferred tax assets                                     (4,398,100)
      Stock compensation expense                                                            10,000         110,000
      Debt forgiveness                                                                    (150,000)
      Goodwill impairment                                                                                4,454,656
      Loss on sale of division                                                                              73,830
      Issuance of common stock for services                                                                  4,250
      Gain on legal settlement                                                                             (42,548)
      Changes in operating assets and liabilities - net of
      effect of business acquisitions and dispositions:
         Accounts receivable                                              (656,944)        392,716        (313,913)
         Inventories                                                    (1,591,906)        785,423        (397,713)
         Income taxes receivable                                            54,535         (62,113)         42,200
         Prepaid expenses and other current assets                           5,813         (52,468)        (31,021)
         Other assets                                                       12,483          (9,688)        (80,723)
         Accounts payable                                                 (540,575)     (1,383,038)        578,565
         Accrued expenses                                                  207,538        (717,878)       (604,266)
         Accrued restructuring costs                                       (43,726)       (647,242)       (420,165)
         Customer deposits                                                   6,592          93,978        (148,006)
                                                                         ----------      ----------      ---------

           Net cash provided by operating activities                       825,297         976,745         468,151
                                                                         ----------      ----------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                      (157,429)       (199,356)       (255,320)
  Proceeds from sale of property and equipment                                 635           5,233             157
  Proceeds from business disposition                                                                     1,000,000
                                                                         ----------      ----------      ---------
           Net cash (used in) provided by investing activities            (156,794)       (194,123)        744,837
                                                                         ----------      ----------      ---------

                                                                                                       (Continued)

</TABLE>
                                      F-7
<PAGE>
<TABLE>
<CAPTION>
LXU HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
--------------------------------------------------------------------------------------------------------------------------

                                                                                     2005          2004           2003
CASH FLOWS FROM FINANCING ACTIVITIES:
<S>                                                                           <C>            <C>             <C>
  Borrowings under lines of credit                                            $ 51,731,337   $ 38,844,614    $ 16,785,191
  Repayments under lines of credit                                             (52,444,160)   (39,566,496)    (18,390,045)
  Repayment of long-term debt                                                      (16,713)      (422,702)     (2,731,323)
  Repayment on capital leases                                                      (25,642)       (29,076)        (36,666)
  Proceeds from issuance of common stock                                                               32
  Proceeds from issuance of preferred stock - net of costs                                                      3,364,031
                                                                              -------------  -------------   ------------
           Net cash used in financing activities                                  (755,178)    (1,173,628)     (1,008,812)
                                                                              -------------  -------------   ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               (86,675)      (391,008)        204,176

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                        98,903        489,911         285,735
                                                                              -------------  -------------   ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                        $     12,228   $     98,903    $    489,911
                                                                              =============  =============   ============


SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION - Cash paid during
    the year for:
    Interest                                                                  $    443,694   $    728,358    $    698,685
                                                                              =============  =============   ============

    Income taxes                                                              $     29,830   $     60,910    $     30,000
                                                                              =============  =============   ============

SUPPLEMENTAL DISCLOSURES OF NONCASH
  TRANSACTIONS:

  Equipment acquired under capital lease                                      $     27,839   $     25,304
                                                                              =============  =============
  Forgiveness of notes payable                                                               $   (150,000)
                                                                                             =============
  Issuance of note payable for debt refinancing cost                                                         $    250,000
                                                                                                             ============
  Discount on issuance of note payable for legal services                                    $     12,827    $    (12,827)
                                                                                             =============   ============
  Fair value of common stock cancelled in sale of asset                                                      $     64,341
                                                                                                             ============
  Fair value of common stock cancelled in legal settlement                                                   $     42,548
                                                                                                             ============
  Common stock issued for services                                                                           $      4,250
                                                                                                             ============

See notes to consolidated financial statements.                                                               (Concluded)

</TABLE>
                                      F-8

<PAGE>
LXU HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
--------------------------------------------------------------------------------

1.       NATURE OF BUSINESS

         LXU  Healthcare,   Inc.  ("LXU"  or  the  "Company"),  a  Massachusetts
         corporation  formerly  known as  Luxtec  Corporation  ("Luxtec"),  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.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         BASIS  OF  PRESENTATION  -  The  accompanying   consolidated  financial
         statements have been prepared on the accrual basis of accounting.

         PRINCIPLES OF  CONSOLIDATION - The  consolidated  financial  statements
         include the accounts of the Company and its wholly owned  subsidiaries:
         LXU  Medical;  Ruby  (See Note 3) and  Bimeco,  Inc.  All  intercompany
         balances and transactions have been eliminated.

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

         CONCENTRATIONS  OF CREDIT RISK - The  Company's  financial  instruments
         that are exposed to  concentrations of credit risk consist primarily of
         cash and accounts receivable.  The Company primarily sells to hospitals
         and other healthcare providers, and ongoing customer credit evaluations
         are performed  with respect to the Company's  customers.  Collateral is
         generally  not  required.  In addition,  the Company does not routinely
         maintain  cash in excess of $100,000.  However,  at June 30, 2005,  the
         Company had $39,332 of uninsured cash balances.

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

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

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

                                      F-9
<PAGE>
         LONG-LIVED   ASSETS  -  In  accordance  with  Statement  of  Accounting
         Standards  ("SFAS") No. 144,  Accounting for the Impairment or Disposal
         of  Long-Lived  Assets,  the Company  evaluates the  recoverability  of
         property,  plant and equipment with definite lives not held for sale by
         comparing the carrying  amount of the asset or group of assets  against
         the estimated  undiscounted  future cash flows  expected to result from
         the use of the asset or group of assets and their eventual disposition.
         If the undiscounted  cash flows are less than the carrying value of the
         asset  or  group of  assets  being  evaluated,  an  impairment  loss is
         recorded. The loss is measured as the difference between the fair value
         and  carrying  value of the asset or group of assets  being  evaluated.
         Assets to be  disposed  of are  reported  at the lower of the  carrying
         amount or the fair value less cost to sell. The estimated fair value is
         based  on the  best  information  available  under  the  circumstances,
         including  prices  for  similar  assets  or the  results  of  valuation
         techniques,  including the present value of expected  future cash flows
         using a discount rate commensurate with the risks involved.

         GOODWILL AND OTHER INTANGIBLE ASSETS - Effective July 1, 2002, goodwill
         is no longer  amortized  but instead is subject to periodic  impairment
         testing in accordance with SFAS No. 142,  Goodwill and Other Intangible
         Assets  ("SFAS No.  142").  See Note 6.  Intangible  assets with finite
         lives  are  stated at cost,  net of  accumulated  amortization  and are
         tested for impairment in accordance with SFAS No. 144. These assets are
         amortized on the  straight-line  method over the estimated useful lives
         or  periods of  expected  benefit,  but not in excess of 20 years.  The
         Company performs an annual impairment test in July of each year and has
         found no further  impairment in its existing  goodwill  balances.  Upon
         implementation  of SFAS No. 142, the Company  recognized  impairment of
         $4,454,656 on its Luxtec division.

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

         REVENUE  RECOGNITION  - The Company's  policy is to recognize  revenues
         from product  sales when earned,  as defined by  accounting  principles
         generally  accepted  in the  United  States of  America.  Specifically,
         product and commissions  revenue is recognized when persuasive evidence
         of an arrangement exists,  delivery has occurred (or services have been
         rendered),  the price is fixed or determinable,  and  collectibility is
         reasonably assured.

         The  Company  recognizes  revenues  from  product  sales when the title
         transfers, generally when product is shipped.

         Revenues  earned  under  agency  agreements  are  recognized  when  the
         customer  has  received  the  product,  and  amounts  are  recorded  as
         commissions in net revenues, at the net amount retained by the Company.

         Provisions for vendor discounts and product returns are provided for at
         the  time  the  related  sales  are  recorded  and are  reflected  as a
         reduction of product sales. The Company  estimates  customer  discounts
         and product returns at the time of sale based on historical experience.
                                      F-10
<PAGE>
         SHIPPING AND HANDLING COSTS are included in cost of products sold.

         RESEARCH AND  DEVELOPMENT  costs are incurred by the  Company's  Luxtec
         division and are charged to operations as incurred.  Total research and
         development costs for the years ended June 30, 2005, 2004 and 2003 were
         approximately $295,000, $185,000 and $253,000, respectively.

         INCOME TAXES - The Company accounts for income taxes in accordance with
         SFAS No. 109,  Accounting for Income Taxes ("SFAS No. 109"). Under SFAS
         No.  109,  deferred  income  taxes are  recognized  for the  difference
         between the  carrying  value of assets and  liabilities  for  financial
         reporting  purposes  and their  income tax basis at  currently  enacted
         income tax rates.  A valuation  allowance  is provided  when it is more
         likely than not that some portion or all of the deferred tax asset will
         not be realized.

         STOCK-BASED  COMPENSATION - The Company accounts for stock-based awards
         to  employees  using  the  intrinsic-value  method in  accordance  with
         Accounting  Principles  Board ("APB")  Opinion No. 25,  Accounting  for
         Stock  Issued  to  Employees.  Common  stock  of the  Company  has been
         delisted since November 17, 2000 and does not trade on any exchange and
         is not quoted on any  quotation  system.  Fair  value of the  Company's
         common stock is determined by the  Company's  Board of Directors  based
         upon the most recent significant  capital stock  transaction,  periodic
         valuations  of the Company  and  current  major  events  affecting  the
         Company's financial condition.


                                      F-11
<PAGE>
         Had  compensation  expense for these  employee stock option grants been
         determined based on the fair value at the grant dates,  consistent with
         SFAS No. 123, the Company's income available to (loss  attributable to)
         common  stockholders and per share amounts for fiscal years ended 2005,
         2004 and 2003 would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                      2005             2004             2003
<S>                                                             <C>              <C>              <C>
Net income (loss), as reported                                  $  7,439,807     $  2,177,213     $ (3,628,799)

Stock-based employee compensation expense determined
under fair-value method                                              (46,903)        (142,588)        (172,858)
                                                                -------------    -------------    -------------

Proforma net income (loss)                                         7,392,904        2,034,625       (3,801,657)

Dividends and accretion on preferred stock                       (3,401,026)      (3,368,216)       (2,549,681)
Effect of equity recapitalization                                                                     (270,136)
                                                                -------------    -------------    -------------

Pro forma, income available to (loss attributable to)
common stockholders                                             $  3,991,878     $(1,333,591)     $ (6,621,474)
                                                                =============    ============     =============

Income (loss) per share:
  Basic- as reported                                            $       0.18     $     (0.05)     $      (0.31)
  Basic- pro forma                                              $       0.18     $     (0.06)     $      (0.31)

  Diluted- as reported                                          $       0.13     $     (0.05)     $      (0.31)
  Diluted- pro forma                                            $       0.13     $     (0.06)     $      (0.31)

Black-Scholes Assumptions for Option Grants:
  Risk-free interest rate                                                               4.23%             3.10%
  Expected volatility                                                                     50%               50%
  Expected lives - in years                                                                 6                 6
  Expected dividend yield                                                                  0%                0%

</TABLE>
         FINANCIAL  INSTRUMENTS  - Pursuant to SFAS No. 107,  Disclosures  about
         Fair  Value of  Financial  Instruments,  the  Company  is  required  to
         disclose the fair value of all financial  instruments  at June 30, 2005
         and 2004.  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,  2005  and  2004  the
         estimated fair value of the Company's  long-term debt was approximately
         $89,000 and  $106,000,  respectively.  The Company  estimates  the fair
         value of its  long-term  debt  generally  using  discounted  cash  flow
         analysis based on current  interest rates for instruments  with similar
         maturities.

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

                                      F-12
<PAGE>

         LOSS PER SHARE - SFAS No. 128,  Earnings  per Share,  requires the dual
         presentation  of basic and diluted  income (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 income
         (loss) per share  calculations which consisted of the following for the
         fiscal years ended June 30:
<TABLE>
<CAPTION>
                                                               2005            2004             2003
Numerator:
<S>                                                          <C>              <C>              <C>
 Net income (loss)                                           $   7,439,807    $  2,177,213     $ (3,628,799)
                                                             =============    ============     =============

      Weighted average common shares                            22,375,144      22,375,130       21,059,853
      Dilutive warrants                                         12,478,975
      Effect of assumed conversion of Series G Stock            22,250,100
                                                              ------------     -----------     ------------
Weighted average common shares for the purpose of
  calculating diluted income (loss) per share                   57,104,219      22,375,130       21,059,853
                                                              ============     ===========     ============
</TABLE>
         Options and  warrants  to purchase  common  stock  totaling  9,547,349,
         26,562,698 and 25,440,818  were  outstanding at June 30, 2005, 2004 and
         2003, respectively, but were not included in the computation of diluted
         income (loss) per share because the effect would be antidilutive as the
         exercise  price  exceeded  the  estimated  fair value of the  Company's
         common stock. The effect of assumed  conversion of preferred shares was
         excluded at June 30, 2004 and 2003 as the effect would be anitdilutive.

         RECENTLY  ISSUED  ACCOUNTING  PRONOUNCEMENTS  - In December  2004,  the
         Financial  Accounting Standards Board issued SFAS No. 123(R) ("SFAS No.
         123(R)"),  Share-Based Payment.  SFAS No. 123(R) establishes  standards
         for the accounting for  transactions  in which an entity  exchanges its
         equity  instruments  for goods or  services.  SFAS No.  123(R)  focuses
         primarily on accounting  for  transactions  in which an entity  obtains
         employee services in share-based payment transactions.  SFAS No. 123(R)
         requires that the fair value of such equity  instruments  be recognized
         as expense in the  historical  financial  statements  as  services  are
         performed. Prior to SFAS No. 123(R), only certain pro forma disclosures
         of fair value  were  required.  SFAS No.  123(R) is  effective  for the
         Company  as of July 1, 2005.  The  adoption  of SFAS No.  123(R) is not
         expected  to  have a  material  effect  on the  Company's  consolidated
         financial statements.

         In November 2004,  the FASB issued SFAS No. 151,  Inventory  Costs,  an
         Amendment  of ARB No.  43,  Chapter  4.  SFAS  No.  151  clarifies  the
         accounting  for amounts of idle facility  expenses,  freight,  handling
         costs and waste  material  (spoilage).  This statement is effective for
         the Company for the fiscal year beginning July 1, 2006. The adoption of
         SFAS No. 151 is not expected to have a material effect on the Company's
         consolidated financial statements.

3.       ACQUISITIONS AND DISPOSALS

         PROFESSIONAL EQUIPMENT COMPANY, INC. ("PEC") DISPOSAL - As discussed in
         Note 1,  effective  June 30,  2002,  Ruby sold all of the assets of the
         former  PEC  line of  business  in  exchange  for the  cancellation  of
         previously  issued  stock to the founder of PEC and the  assumption  of
         certain liabilities with respect to the PEC line of business.  Goodwill
         and other impaired assets were written off in June 2002, resulting in a
         loss of $1,038,823,  which is recorded in restructuring  expense in the
         statement of operations.

                                      F-13
<PAGE>
         NEW ENGLAND MEDICAL SPECIALTIES DISPOSAL,  DISCONTINUED  OPERATION - On
         June  30,  2003,  PrimeSource  Surgical  sold  all  of the  issued  and
         outstanding  capital  stock of Ruby for cash  proceeds of $1,000,000 to
         NMSI.  The Company  recognized a loss on disposal of $73,830.  Ruby was
         reported in the critical care business segment.

         Revenues and income from the discontinued operation,  net of income tax
         effect were as follows:
                                                            2003

Net revenues                                           $  5,740,135
                                                       =============

Income from discontinued operation - net of
  income tax effect                                    $    121,697
                                                      =============

4.       INVENTORIES

         Inventories consist of the following at June 30:

                                                      2005             2004

Raw materials                                    $  1,257,160       $   708,949
Finished goods                                      7,631,629         6,693,999
Reserve for obsolescence                             (564,341)         (670,406)
                                                 -------------      ------------

Inventories - net                                $  8,324,448       $ 6,732,542
                                                 =============      ============

5.       PROPERTY AND EQUIPMENT

         Property and equipment consist of the following at June 30:

                                                            2005         2004

Office equipment                                    $     776,435   $   656,859
Furniture and fixtures                                    283,201       394,740
Machinery and equipment                                   733,949       665,750
Leasehold improvements                                    556,059       503,540
                                                    -------------  ------------

Total                                                   2,349,644     2,220,889
Less accumulated depreciation and amortization         (1,598,646)   (1,333,564)
                                                    -------------  ------------

Property and equipment - net                        $     750,998  $   887,325
                                                    =============  ============

         Depreciation  expense totaled  $314,406,  $321,596 and $381,145 for the
         years ended June 30, 2005,  2004 and 2003,  respectively.  Property and
         equipment  held under  capital  leases  amounted to $55,304 and $82,178
         less  accumulated  amortization of $16,119 and $33,548 at June 30, 2005
         and 2004, respectively.

                                      F-14
<PAGE>
6.       GOODWILL AND OTHER INTANGIBLE ASSETS

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

         At June 30,  2005 and 2004,  the Company  had  $15,956,883  of recorded
         goodwill. In accordance with FASB Statement No. 142, Goodwill and Other
         Intangible  Assets  ("SFAS No.  142"),  the  Company's  goodwill is not
         subject to amortization.

         In  accordance  with SFAS No.  142,  the Company  performed  its annual
         impairment  tests in July 2005 and 2004 and found no  impairment in its
         existing goodwill balances at those dates.

         At June 30, 2005 and 2004, the Company had intangible assets subject to
         amortization with useful lives of 4 to 20 years,  primarily  consisting
         of trademarks and patents with a total cost of $304,838 and accumulated
         amortization of $253,385 and $244,565, respectively.

         Intangible  and other  asset  amortization  expense for the years ended
         June  30,  2005  and  2004  was  approximately   $9,000  and  $172,000,
         respectively.  Estimated  amortization  expense  remaining for the five
         succeeding fiscal years ending June 30 and thereafter is as follows:

         2006                                          $ 8,800
         2007                                            8,400
         2008                                            8,400
         2009                                            8,400
         2010                                            8,400
         Thereafter                                      9,100
                                                       -------

         Total                                         $51,500
                                                       =======

7.       LINES OF CREDIT AND LONG-TERM DEBT

         In December 2003, the Company  consolidated its previously  outstanding
         senior debt  facilities.  The  Company's  senior debt  financing is now
         provided  under a $7,500,000  revolving  demand note (the  "PrimeSource
         Healthcare  Line of Credit")  from Wells Fargo  Business  Credit,  Inc.
         ("Wells  Fargo") under the PrimeSource  Healthcare  Credit and Security
         Agreement, dated as of December 10, 2003, by and among the Company, LXU
         Healthcare,  Inc.- Medical Specialty  Products,  Bimeco and Wells Fargo
         (the  "Credit  and  Security  Agreement").   The  Credit  and  Security
         Agreement has no stated  maturity date, but remains in effect until the
         borrower  terminates the credit facility or the lender demands payment.

                                      F-15
<PAGE>
         Although there is no stated  maturity,  if the  PrimeSource  Healthcare
         Line of Credit is terminated  before  certain dates,  termination  fees
         will be due Wells Fargo, as follows:  on or before December 10, 2005 2%
         of the maximum line, or $150,000;  on or before December 10, 2006 1% of
         the  maximum  line,  or $75,000.  Pursuant  to the Credit and  Security
         Agreement, the maximum amount available to borrow under the PrimeSource
         Healthcare  Line of Credit is limited to the lesser of  $7,500,000 or a
         certain percentage of accounts receivable and inventory,  as defined by
         the Credit and Security Agreement  ($7,500,000 at June 30, 2005). As of
         June 30, 2005,  borrowings  bore  interest at Wells  Fargo's prime rate
         plus  2.5%  (8.75%  at  June  30,  2005).  Borrowings  are  secured  by
         substantially  all assets held by LXU Healthcare and its  subsidiaries.
         At June 30,  2005,  there  was  $3,008,684  of  availability  under the
         PrimeSource Healthcare Line of Credit.

         The Credit and Security Agreement contains certain covenants, including
         covenants  that require the  maintenance  of defined  income levels and
         maximum capital expenditures.  The Company was in compliance with these
         covenants as of June 30, 2005.

         Notes  payable  include  the  Luxtec  tenant  note  payable  for tenant
         improvements  issued to the lessor of Luxtec's  leased premises in West
         Boylston,  Massachusetts.  The note bears  interest  at 9.5% and is due
         September  19,  2007.  Payments  were  interest  only for the  first 12
         months,  with remaining  payments  calculated on a 7-year  amortization
         table due on September 19, 2007. On June 30, 2005 and 2004,  Luxtec had
         outstanding borrowings of $45,733 and $62,446, respectively,  under the
         tenant note payable.  In addition,  notes payable  includes a long-term
         note with an  outstanding  balance of $43,250 at both June 30, 2005 and
         2004.

8.       PREFERRED STOCK

         SERIES G REDEEMABLE,  CONVERTIBLE  PREFERRED STOCK - On August 6, 2002,
         the  Company  created  a  new  series  of  preferred  stock,  Series  G
         Convertible  Redeemable  Preferred  Stock,  no par value (the "Series G
         Stock").  The Series G Stock has  230,000  authorized  shares.  At both
         March 31, 2005 and June 30, 2004, 222,501 shares of Series G Stock were
         issued and  outstanding.  Each  share of Series G Stock is  convertible
         into 100 shares of common stock,  subject to adjustment,  at the option
         of the holder. Each share of Series G Stock has one vote for each share
         of common stock into which it would be convertible. In addition, Series
         G Stock ranks  senior to all other  outstanding  stock of the  Company.
         Series  G Stock  accrues  dividends  at the  rate of 8% per year of the
         original issuance price of $32.00 per share,  compounded annually,  and
         has a liquidation  value equal to $64.00 per share plus an amount equal
         to all accrued but unpaid  dividends.  The Series G Stock is redeemable
         at the election of not less than 60% of the Series G  stockholders  any
         time after June 30, 2005,  and is  redeemable  at $64.00 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 of June 30, 2005 and 2004,
         cumulative  unpaid  dividends on the Series G Stock totaled  $1,695,581
         and $1,048,500,  respectively, and were included in the carrying amount
         of Series G Stock in the consolidated balance sheets.

         The Company's  Series G Stock was  initially  issued August 6, 2002, in
         connection with a  recapitalization  of the Company's  equity structure
         (the   "Recapitalization").   Certain  other  classes  of   outstanding
         preferred stock,  including Series C Redeemable,  Convertible Preferred
         Stock  and  Series F  Redeemable,  Convertible  Preferred  Stock,  were

                                      F-16
<PAGE>
         converted  to common  stock.  Another  class of  outstanding  preferred
         stock, Series F Redeemable,  Convertible Preferred Stock, was exchanged
         for Series G Stock, and additional shares of Series G Stock were issued
         for cash  consideration.  Warrants to purchase common stock were issued
         to  the  Series  C,  F, E and G  Stockholders,  and  previously  issued
         warrants  to  purchase  common  stock held by these  stockholders  were
         repriced.

         The Series G Stock was originally  recorded at the original issue price
         of $32.00 per share which  approximated  fair value. The Series G Stock
         is being  increased  to its  redemption  value of  $64.00  per share in
         periodic  accretions  from the date of  original  issuance  through the
         first possible  redemption  date of June 30, 2005. At June 30, 2005 and
         2004,  cumulative  accretion  of costs  and  redemption  value  totaled
         $7,623,343 and $4,863,620, respectively.

         At issuance  of the Series G Stock,  the  Company  determined  that the
         conversion  feature  of the  Series  G Stock  represented  an  embedded
         derivative,  which was valued  using the Black  Scholes  model with the
         following assumptions:  weighted average risk-free discount rate 1.68%;
         0% expected dividend; 50% volatility;  and an expected life of 3 years,
         and  determined  it had no value at the date of  issuance,  because the
         fair value of the common  stock was less than $0.01.  At June 30, 2005,
         there  was  no  change  in  the  fair  value  of  the  derivative,  and
         accordingly,  no income or expense was recorded for the year ended June
         30, 2005.  Further  changes in the fair value of the derivative will be
         recorded as income or expense during the period of change.

         During the year ended June 30,  2003,  the Company  granted  options to
         purchase  7,500  shares  of  Series  G Stock  for $16 per  share  to an
         executive of the Company.  Options vested one year from August 6, 2002,
         the date of grant,  and will expire March 1, 2009. In October 15, 2003,
         this  executive  exercised  an option for the  purchase of one share of
         Series G Stock for $16. At June 30, 2005,  the remaining  7,499 options
         were vested and exercisable.

9.       STOCK OPTIONS AND WARRANTS

         COMMON STOCK  OPTIONS - In January  1997,  LXU Medical  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 12,000,000 shares. The 1997 Plan
         also  provides for various  vesting  schedules,  as  determined  by the
         compensation  committee  of the Board of  Directors,  and options  have
         terms not to exceed 10 years.  The vested  options may be  exercised at
         any time and generally expire 10 years from the date of grant.

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

         During fiscal year 2003, the Company also issued  equity-based  options
         to an employee as required under the executed employment agreement with
         the Company.  The exercise price was below the deemed fair market value
         of the stock at the date of grant. In accordance with the  requirements
         of APB  Opinion  No.  25, the  Company  recorded  compensation  for the
         difference  between the exercise price of the stock and the deemed fair
         market value of the Company's stock at the date of grant.  Compensation
         expense was  amortized  on a  straight-line  basis,  over the  one-year
         period during which the options became vested.

                                      F-17
<PAGE>
         On October 15,  2003,  options for the  purchase of 50 shares of common
         stock at $0.01 per share were exercised for total proceeds of $16.

         In addition to the 1997 Plan,  the  Company  has several  stock  option
         plans that were  assumed  from  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 has options terms not to exceed 10 years. Under the 1992
         Plan, 500,000 total shares are authorized for issuance.

         The 1995  directors'  plan (the "1995  Director  Plan") was adopted for
         non-employee  directors and provides that an aggregate of up to 200,000
         nonqualified  options  may be granted  to  non-employee  directors,  as
         determined  by the  compensation  committee of the Board of  Directors.
         Under the terms of the 1995 Director  Plan,  options are granted at not
         less than the fair market  value of the  Company's  common stock on the
         date of grant.  The 1995  Director  Plan also provides that the options
         are  exercisable  at varying dates,  as determined by the  compensation
         committee  of the Board of  Directors,  and that they have terms not to
         exceed 10 years.  At both June 30, 2005 and June 30,  2004,  there were
         64,000 shares available for future grants under the 1995 Director Plan.

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

         Prior to the issuance  and sale of Series G Stock in August  2002,  the
         Company converted all outstanding  shares of Series C Stock into shares
         of Company  common  stock.  In  connection  with the  conversion of the
         Series C Stock,  the Company  granted  former holders of Series C Stock
         warrants to purchase  7,390,613 shares of common stock with an exercise
         price of $.01 per share.  The warrants  became  exercisable on December
         31, 2002 and expire in August 2012.  Additionally,  exercise  prices on
         warrants to purchase 140,330 shares of common stock  previously  issued
         to certain preferred stockholders were repriced from $1.68 per share to
         $.01 per share.

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

         Subsequent to the  conversion of the Series C Stock and Series F Stock,
         each  outstanding  share of the Company's  Series E Stock was exchanged
         for shares of Series G Stock.  In  connection  with the exchange of the
         Series E Stock,  the Company  granted  former holders of Series E Stock
         warrants to purchase  817,000 shares of the Company's common stock with
         an exercise price of $.01 per share. The warrants became exercisable on

                                      F-18
<PAGE>
         December 31, 2002 and expire in August 2012. Additionally, the exercise
         price on 1,625,000  warrants to purchase common stock previously issued
         to certain  Series E Stock  stockholders  was  repriced  from $1.00 per
         share to $.01 per share. The warrants vested  immediately and expire in
         July 2011.

         The warrants issued and repriced in connection with the issuance of the
         Company's Series G Stock were valued using the Black-Sholes model using
         the following  assumptions:  weighted average  risk-free  discount rate
         1.68%; 0% expected dividend; 50% volatility;  and an expected life of 3
         years.  As the exercise  price exceeds the estimated  fair value of the
         Company's common stock, zero value was assigned to the warrants.

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

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

         Changes in shares  under  options and warrants for the years ended June
         30, 2003, 2004 and 2005 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, 2002                               1,640,476        $1.85          4,072,866        $1.04

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

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

   Grants                                            1,300,000         0.32
   Exercised                                              (50)         0.32
   Forfeited                                         (114,284)         1.86           (63,786)         1.18
                                                     ---------                        --------

Balance, June 30, 2004                               9,787,930         0.49         16,774,768         0.02
                                                     ---------                      ----------

  Forfeited                                          (376,716)         0.62                  -
                                                     ---------                               -

Balance, June 30, 2005                               9,411,214         0.48         16,774,768         0.02
                                                     =========                      ==========

Vested and exercisable, June 30, 2005                7,776,563                      16,774,768
                                                     =========                      ==========

Vested and exercisable, June 30, 2004                6,544,957                      16,774,768
                                                     =========                      ==========

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

</TABLE>


                                      F-19
<PAGE>
         The  weighted-average  per share fair value of option  grants in fiscal
         2005,  2004  and  2003  was  approximately   zero,  zero  and  $0.5803,
         respectively.

         Outstanding  stock options and warrants at June 30, 2005 consist of the
         following:
<TABLE>
<CAPTION>
                                          OPTIONS                                       WARRANTS
                          ---------------------------------------------  -----------------------------------------------
                                           WEIGHTED                                       WEIGHTED
                                           AVERAGE       WEIGHTED                         AVERAGE       WEIGHTED
                                          REMAINING      AVERAGE                         REMAINING       AVERAGE
      RANGE OF                           CONTRACTUAL     EXERCISE                       CONTRACTUAL     EXERCISE
   EXERCISE PRICES         SHARES        LIFE (YEARS)     PRICE           SHARES        LIFE (YEARS)      PRICE

<C>                     <C>                  <C>        <C>            <C>                   <C>        <C>
$0.00 - $1.60           8,737,298            6.0        $ 0.37         16,738,633            6.8        $ 0.02
$1.61 - $3.20             672,916            4.4          1.98             36,135            5.5          2.03
$3.21 - $4.80               1,000            0.5          3.56
                       ----------                                     -----------

                        9,411,214            5.9          0.48         16,774,768            6.8          0.02
                       ==========                                     ===========
</TABLE>
         Compensation  expense in the amount of $10,000 for fiscal 2004 has been
         recognized  for certain  employee  stock  options  granted below market
         value.  No  compensation  expense has been recognized for the remaining
         employee stock option grants.

         Subsequent  to June 30, 2005,  6,768,109  warrants  were  exercised for
         6,728,941 shares of common stock.

10.      401(k) RETIREMENT PLAN

         The  Company  and LXU  Medical  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 LXU Medical plans,  respectively.  The 401(k) plans provide
         for a contribution  by the Company each year. The Company match totaled
         $155,136,  $145,426  and  $110,706,  for the years ended June 30, 2005,
         2004 and 2003, respectively.


                                      F-20
<PAGE>
11.      INCOME TAXES

         The benefit (provision) for income taxes for the years ended June 30 is
         based on the following components:
<TABLE>
<CAPTION>
                                           2005                 2004                 2003
Current income taxes
<S>                                    <C>                  <C>                 <C>
  Federal                              $  (59,000)          $         -         $      1,600
  State                                   (64,300)                    -               18,100
                                       -----------           ----------         ------------

Total current                            (123,300)                    -               19,700
                                       -----------           ----------         ------------

Deferred income taxes:
  Federal                              (1,429,100)          (1,904,700)             (172,700)
  State                                  (166,300)            (407,100)              (18,800)
                                       -----------           ----------            ---------

Total deferred                         (1,595,400)          (2,311,800)             (191,500)
                                       -----------           ----------            ---------

Change in valuation allowance           5,993,500            2,311,800               191,500
                                       -----------           ----------            ---------

Total                                  $4,274,800            $        -            $  19,700
                                       ===========           ==========            =========

</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 income (loss) before income tax benefit
         (provision) is as follows:
<TABLE>
<CAPTION>
                                                                   2005          2004         2003

<S>                                                                 <C>           <C>          <C>
Income tax (provision) benefit at statutory rate                    35%           35%          35%
Nondeductible warrant put expense (income)                                                      9%
State tax (expense) benefit, net of federal benefit                  5%           -3%          15%
Meals and entertainment                                              0%           -1%          -3%
Nondeductible goodwill                                                             4%        -191%
Change in valuation allowance                                     -189%           45%         153%
Change in prior years estimates                                                  -76%
Loss on sale of subsidiary                                                                     -2%
Expiration and adjustments of net operating
   losses and income tax credits                                    15%           -4%         -18%
Other                                                               -1%            0%           0%
                                                                    ---            --           --

Total                                                             -135%            0%          -2%
                                                                  =====            ==          ===
</TABLE>
         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


                                      F-21
<PAGE>
         income tax purposes.  Significant  components of the Company's deferred
         tax assets (liabilities) are as follows at June 30:

                                                      2005               2004
Current:
  Inventory valuation adjustment                  $  359,000        $   139,000
  Accrued vacation                                    58,300             59,800
  Bad debt reserves                                   16,400             49,000
  Restructuring reserve                                                  17,000
  Net operating loss carryforwards                 1,336,100
  Other                                               68,400             25,300
                                                  ----------        -----------

  Total current                                    1,838,200            290,100
                                                  ----------        -----------

Long-term:
  Depreciation and amortization                     (227,100)           (39,800)
  Credit carryforwards                               165,700            165,800
  Capital loss carryforwards                         208,500            516,200
  Charitable contribution carryforwards                    -             14,600
  Net operating loss carryforwards                 2,621,300          5,254,600
                                                  ----------        -----------

  Total long-term                                  2,768,400          5,911,400
                                                  ----------        -----------

Total                                              4,606,600          6,201,500
Valuation allowance                                 (208,500)        (6,201,500)
                                                  ----------        -----------

Total                                             $4,398,100        $         -
                                                  ==========        ============

         Certain  of  the  Company's  current  deferred  tax  assets,  including
         inventory valuation adjustment and bad debt reserve, are reduced due to
         limitations  in  deductible  amounts  relating to the  Company's  prior
         acquisition of these assets in stock transactions.

         At  June  30,  2005,   the  Company  had  federal  net  operating  loss
         carryforwards  of  approximately  $9,894,000,  pre-tax,  and  state net
         operating loss carry forwards of approximately $8,242,000, pre-tax. The
         Company's  federal and state net operating  losses expire in future tax
         years ending June 30, 2006 through 2024. At June 30, 2005,  the Company
         had federal and state research and development credit  carryforwards of
         approximately $155,000 and $11,000, respectively. The Company's federal
         and state credits will generally expire in future tax years ending June
         30, 2006  through  2021.  The Company  also has a federal  capital loss
         carryforward of approximately  $596,000,  pre-tax,  that will expire in
         the tax year ending June 30, 2006.  Certain  changes in stock ownership
         may  result  in a  limitation  on  the  amount  of net  operating  loss
         carryforwards that can be utilized each year.

         During the year  ended June 30,  2005,  based on the  Company's  recent
         history of positive taxable income,  the Company evaluated positive and
         negative  evidence relating to the Company's  deferred tax assets,  and
         determined  that it is more  likely  than not that the  majority of its
         deferred tax assets will be realized.  Accordingly, the Company reduced
         its  previously   established   valuation  allowance  by  approximately
         $5,993,500,  which,  when offset by the year's  deferred  provision  of
         $1,595,400 and current year income tax expense in certain state and for
         federal  alternative  minimum taxes of $123,300,  resulted in a benefit
         from income taxes of $4,274,800 in the current year.


                                      F-22
<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, 2005,  2004 and 2003 was $445,352,
         $628,259 and  $654,116,  respectively.  Minimum  annual lease  payments
         under capital and noncancelable operating leases are as follows for the
         years ending June 30:
<TABLE>
<CAPTION>

                                                                  CAPITAL       OPERATING
                                                                   LEASES        LEASES
         <S>                                                    <C>            <C>
         2006                                                    $  30,494      $ 473,676
         2007                                                       15,214        296,059
         2008                                                        5,402        282,074
         2009                                                                     280,428
         2010                                                                     268,278
         Thereafter                                                                88,616
                                                               ------------     ---------

         Total minimum lease payments                               51,110      1,689,131
                                                                                =========
         Amount representing interest                               (5,196)
                                                               ------------

         Present value of future minimum lease payments             45,914
         Less current portion of capital lease obligations         (26,750)
                                                               ------------

         Capital lease obligations - net of current portion     $   19,164
                                                               ------------
</TABLE>
         EXECUTIVE  COMPENSATION - At June 30, 2005,  certain executive officers
         of the Company and its  subsidiaries  had  employment  agreements  that
         provide for compensation and certain severance benefits. As a result of
         an  employment  agreement  with the  Company's  former  President/Chief
         Executive  Officer,  certain  benefits were accrued at June 30, 2003 in
         the amount of  $195,507.  All accrued  amounts were paid as of June 30,
         2004.

         Subsequent  to  June  30,  2005,  the  Company's  Chief  Operating  and
         Financial Officer resigned.  As a result of a severance  agreement with
         the Company,  certain  benefits were accrued in July 2005 in the amount
         of approximately $271,000.

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


13.      BUSINESS SEGMENTS

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

         SPECIALTY  MANUFACTURED  PRODUCTS - This  segment  includes  the Luxtec
         division 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.


                                      F-23
<PAGE>

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

         SPECIALTY  MEDICAL  DISTRIBUTION  - 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.
         operations.  Within  this  segment,  the  primary  specialties  include
         maternal and childcare and neonatal  intensive care. The results of the
         NEMS and PEC  operations  are only  included  in fiscal  years prior to
         their sales in 2003 and 2002, respectively.

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

         Operations that are not included in any of the segments are included in
         the category "Corporate/Other" and consist primarily of corporate staff
         operations,  including selling, general, and administrative expenses of
         $2,697,356,  $2,867,349  and  $3,527,516  for  2005,  2004,  and  2003,
         respectively.  The sales between segments are made at market prices and
         are eliminated in consolidation.

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

         Certain  products  of  the  Specialty  Medical  Products  Manufacturing
         segment  are sold to the  Specialty  Medical  Distribution  -  Surgical
         segment.  Sales between these segments totaled  $6,818,321,  $5,382,852
         and  $5,055,400  for the  years  ended  June 30,  2005,  2004 and 2003,
         respectively.


                                      F-24
<PAGE>
         Disclosures  regarding the Company's  reportable  segments  including a
         corporate management fee allocation with reconciliation to consolidated
         totals are presented below.

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

<S>   <C>               <C>              <C>            <C>              <C>             <C>            <C>
Net revenues
      2005              $ 32,116,510     $ 12,559,532   $ 15,834,498                    $ (6,818,321)   $ 53,692,219
      2004                27,330,958       13,296,821     13,518,079                      (5,382,852)     48,763,006
      2003                26,181,812       11,939,529     13,294,078                      (5,055,400)     46,360,019

Net income (loss)
      2005              $  1,423,935     $    102,343   $  1,656,848    $ 4,256,681                     $  7,439,807
      2004                   774,776          383,550      1,576,755       (557,868)                       2,177,213
      2003                   137,765          260,978     (3,090,253)      (937,289)                      (3,628,799)

Total assets
      2005              $ 24,298,807     $  3,027,083   $  4,510,967    $ 4,404,686                     $ 36,241,543
      2004                23,524,547        3,290,404      2,899,675        184,620                       29,899,246
      2003                25,041,081        3,361,430      2,935,095        326,934                       31,664,540

Restructuring expenses
      2005                                                                                                         -
      2004                                                              $     4,817                     $      4,817
      2003                                                                  345,507                          345,507

Depreciation and amortization
      2005              $    108,740     $      1,611   $    204,055    $     8,820                     $    323,226
      2004                   133,736            1,058        186,802        171,929                          493,525
      2003                   195,959           24,048        155,984        467,509                          843,500

Interest expense
      2005              $    176,535     $    162,479   $    138,606    $     4,538                     $    482,158
      2004                   219,370          152,790        121,078        243,538                          736,776
      2003                   282,899          129,604        111,959        314,781                          839,243

Goodwill
      2005              $ 12,660,950     $    607,981   $  2,687,952                                    $ 15,956,883
      2004                12,660,950          607,981      2,687,952                                      15,956,883
      2003                12,660,950          607,981      2,687,952                                      15,956,883

</TABLE>
         LXU Medical and its subsidiaries  have no significant  sales to foreign
         companies; however, Luxtec has several foreign customers. The Company's
         external  sales,  based  upon  the  customer's  country  of  origin  by
         geographic  area for the  years  ended  June 30,  2005,  2004 and 2003,
         totaled $50,180,000, $46,065,000 and $44,015,000 respectively for sales
         in  the  United  States  and  $3,512,000,  $2,698,000  and  $2,345,000,
         respectively, for sales to foreign companies.

14.      RESTRUCTURING

         In October 2001, the Company engaged a restructuring  agent to evaluate
         operations for possible  reorganization.  In November 2001, the Company
         commenced with a  restructuring  plan involving  narrowing the focus of

                                      F-25
<PAGE>
         the Company's operations,  the consolidation of certain underperforming
         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  senior bank debt and the reduction of
         debt levels through improved earnings.

         As a result of the  restructuring  plan,  during fiscal year 2002,  the
         Company  recorded  restructuring  costs of  approximately  $4.0 million
         consisting of $800,000 in specialized restructuring  consultants' fees,
         $500,000 related to a remaining lease liability for a facility that has
         been closed,  $300,000 in costs for exited product lines related to the
         closure of the western sales region, $1.4 million in employee severance
         and $1.0  million  attributable  to the loss on disposal of a division.
         Approximately 29  administrative  employees were released,  and several
         members of the Company's senior management team resigned, including the
         Company's 2002 Chief Executive  Officer,  Chief  Financial  Officer and
         Chairman and Executive Vice President.

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

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

<S>                                          <C>             <C>           <C>              <C>
Balance, June 30, 2002                       $ 653,000              -      $ 458,133        $ 1,111,133

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

Balance, June 30, 2003                         263,768              -        427,200            690,968

Cash payments                                 (263,768)                     (159,584)          (423,352)
Other adjustments                                   -               -       (223,890)          (223,890)
                                             ---------        --------     ----------       ------------

Balance, June 30, 2004                              -               -         43,726             43,726

Cash payments                                       -               -        (43,726)           (43,726)

                                             ---------        --------     ----------       ------------
Balance, June 30, 2005                       $      -         $     -      $      -         $         -
                                             =========        ========     ==========       ============

</TABLE>

15.      SUBSEQUENT EVENT

On August 22, 2005, the Board of Directors of the Company  proposed to amend the
Articles of  Organization  of the Company to effect a 1-for 1,000  reverse stock
split,  followed  immediately  by a  1,000-for-1  forward  stock  split  of  the
Company's common stock (collectively,  the "Stock Splits").  If the Stock Splits
are approved by shareholders and completed:

     *    Each  shareholder  owning  fewer  than  1,000  shares of common  stock
          immediately  before  the  Stock  Splits  will  receive  $0.19 in cash,
          without interest,  in exchange for each share of common stock owned by
          such  shareholder  immediately  prior to the Stock  Splits and will no
          longer be a shareholder of the Company; and

                                      F-26
<PAGE>
     *    Each  shareholder   owning  1,000  or  more  shares  of  common  stock
          immediately before the Stock Splits will own the same number of shares
          of common stock after the Stock Splits.

The Company  cannot  complete  the Stock  Splits  unless the  amendments  to the
Articles of  Organization  are  approved by holders  of: (i)  two-thirds  of the
shares of common  stock and Series G  preferred  stock,  voting  together;  (ii)
two-thirds of the shares of common stock,  voting  separately;  and (iii) 60% of
the shares of Series G preferred stock, voting separately.

The Stock Splits are  intended to reduce the number of record  holders of shares
of  common  stock of the  Company  below 300 in order to allow  the  Company  to
terminate the  registration  of its shares of common stock under the  Securities
Exchange Act of 1934, as amended.  The Company  estimates  that the Stock Splits
will  reduce  the  number  of  the  Company's   shareholders  of  record,   from
approximately  609 to  approximately  151.  Deregistration  would  eliminate the
Company's duty to file periodic reports and proxy statements with the Securities
and Exchange Commission and as a result, the Company would no longer be a public
reporting company.



                                     ******






                                      F-27
<PAGE>
ITEM 9A. CONTROLS AND PROCEDURES.

     (a) Disclosure Controls and Procedures. The Company's management,  with the
participation  of the  Company's  Chief  Executive  Officer and Chief  Financial
Officer,  have evaluated the effectiveness of the Company's  disclosure controls
and procedures (as such term is defined in Rules  13a-15(e) and 15d-15(e)  under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of June
30, 2005.  Based on such evaluation,  the Company's Chief Executive  Officer and
Chief Financial  Officer have concluded that, as of June 30, 2005, the Company's
disclosure controls and procedures are effective.

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

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a) The  following  individuals  were  directors  of LXU  Healthcare  as of
September 15, 2005.

<TABLE>
<CAPTION>
                                            DIRECTOR
             NAME                  AGE       SINCE                  POSITION WITH LXU              TERM ENDS
-------------------------------- -------- ------------- ------------------------------------------ ----------
<S>                                <C>        <C>       <C>                                          <C>
William H. Lomicka                 68         2001      Director and Chairman                        2007
-------------------------------- -------- ------------- ------------------------------------------ ----------
Larry H. Coleman, Ph.D.            61         2001      Director                                     2005
-------------------------------- -------- ------------- ------------------------------------------ ----------
Joseph H. Potenza                  57         2003      Director, President and Chief Executive      2005
                                                        Officer, Secretary & Treasurer
-------------------------------- -------- ------------- ------------------------------------------ ----------
</TABLE>


                        CLASS II DIRECTORS SERVING A TERM
                       EXPIRING AT THE 2005 ANNUAL MEETING

LARRY H.  COLEMAN,  PH.D.,  DIRECTOR  - Dr.  Coleman  has served on our Board of
Directors since March 2, 2001, pursuant to our merger with PrimeSource Surgical.
Dr.  Coleman is the founder  and  President  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
HCA,  Inc.  Dr.  Coleman  has  served  as a  director  on the  boards of over 25
companies.  Dr. Coleman  graduated from the University of North Carolina with an
A.B. and earned his Ph.D. from the University of South Dakota.

JOSEPH H. POTENZA, DIRECTOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER - Mr. Potenza
has served on our Board of Directors since  September 1, 2003.  Prior to joining
PrimeSource,   Mr.  Potenza  held  senior  management  positions  with  McKesson
Corporation as Vice President of the Corporate Program and with Medibuy where he
was responsible for the National  Accounts and Corporate  Program.  From 1977 to
1997,  Mr.  Potenza   developed  his  career  with  American   Hospital   Supply


                                       64
<PAGE>
Corporation/Baxter   Healthcare  Corporation,   culminating  as  Eastern  Region
President,  running a $750 million distribution  business with 650 employees and
seven distribution facilities.  He received a Bachelor of Arts degree in English
from Norwich  University and a Master of Arts degree in Management  from Central
Michigan University.

                         CLASS I DIRECTOR SERVING A TERM
                       EXPIRING AT THE 2007 ANNUAL MEETING

WILLIAM H. LOMICKA,  DIRECTOR - Mr. Lomicka has served on our Board of Directors
since  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 1999,  Mr.  Lomicka was  President  of Mayfair  Capital,  a private
investment  firm.  Mr.  Lomicka,  formerly the Senior V.P. of Finance of Humana,
Inc., presently serves on the boards of numerous companies, both public (Counsel
Corporation and Pomeroy IT Solutions, Inc.) and private (Medventure Technologies
and Merit Health Systems).  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.

Due to Mr. Lomicka's  extensive  experience as the former Senior V.P. of Finance
of Humana,  Inc. Mr. Lomicka satisfies the financial expert  requirement for our
Board of Directors.


        EXECUTIVE OFFICERS OF THE REGISTRANT AND KEY MANAGEMENT PERSONNEL

The  Company  currently  has a code of ethics.  However,  the  Company is in the
process of  adopting  a code of ethics  that  applies to our senior  management,
including our chief executive officer, controller and persons performing similar
functions to comply with SEC requirements.  A copy of the current code of ethics
will be provided free of charge,  upon request.  Requests  should be directed to
ir@lxuhc.com.

For the business  experience  and  background of our executive  officers and key
management personnel,  see information provided under Part I, Item 1, "Executive
Officers of the Registrant and Key Management Personnel".

             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, and in certain cases upon written representations from the reporting persons
that no Form 5 was required, all Section 16(a) filing requirements applicable to
these  persons  were  complied  with during our fiscal year ended June 30, 2005,
except as indicated below.

Based  on  a  review  of  copies  of  those   reports   furnished   to  us,  the
representations  of each insider and as a result of the  Company's due diligence
process for preparing this year's proxy  statement,  it was discovered  that Mr.
Fisher did not file a Form 3 and Form 4 following  an increase in his  ownership
in the fiscal year ending June 30, 2003,  whereupon  he first became  subject to
Section 16(a)  reporting.  The filing of any  deficient  reports is currently in
process.

                                       65
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation of our Chief Executive  Officer,
and the two highest compensated executive officers of the Company as of June 30,
2005, (the "Named Executive Officers"):
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE


                                                                                                              LONG-TERM
                                                                                                              ---------
                                                                  ANNUAL COMPENSATION                        COMPENSATION
                                                                  -------------------                        ------------

                                          FISCAL                                                              SECURITIES
                                           YEAR                                                               UNDERLYING
        NAME AND PRINCIPAL POSITION        ENDED                  SALARY($)        BONUS($)    OTHER          OPTIONS (#)
        ---------------------------        -----                  ---------        --------    -----          -----------
                                                                                             COMP($)(1)
                                                                                             ----------
<S>                                      <C>                      <C>                <C>      <C>                     <C>
   Joseph H. Potenza                     June 30, 2005             $254,800           $0       $6,702                  $0
   Current President, Chief              June 30, 2004              230,556            0        6,772                   0
   Executive Officer and Director        June 30, 2003              178,333                     5,800           1,300,000
                                                                                  12,500

   Shaun D. McMeans (2)                  June 30, 2005              200,000            0        5,700                   0
   Chief Operating Officer , Chief       June 30, 2004              191,667       20,000        6,350                   0
   Financial Officer and Director        June 30, 2003              145,000        7,500        4,575             975,000

   Bradford C. Walker                    June 30, 2005                    0            0            0                   0
   Former President, Chief               June 30, 2004              136,881(4)    50,000(5)         0           1,300,000
   Executive Officer and                 June 30, 2003              229,198(6)         0        5,063           1,957,500
   Director (3)
</TABLE>
---------

(1)  Represents the Company's standard 401(K) matching contribution.

(2)  Subsequent to June 30, 2005,  the Company's  Chief  Operating and Financial
     Officer resigned.

(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.  Effective  September 1, 2003, Mr. Walker resigned
     from his position as our  President  and Chief  Executive  Officer and as a
     member of our Board of Directors.

(4)  Includes  $84,002  paid  out in  accordance  with  Mr.  Walker's  severance
     agreement.

(5)  Total bonus of $50,000 paid out in accordance with Mr.  Walker's  severance
     agreement.

(6)  For our fiscal year ended June 30, 2002,  Mr. Walker was not an employee of
     LXU.  Beginning  in  October  2001 and  through  June 30,  2002,  Corporate
     Revitalization  Partners provided  consulting services to LXU in connection
     with LXU's  restructuring.  During that period,  Mr.  Walker was a Managing
     Director of Corporate  Revilalization  Partners.  In the fiscal years ended
     June 30, 2002 and June 30, 2003, LXU paid Corporate Revitalization Partners
     $430,500 and $62,838, respectively, for consulting fees.

                                       66

<PAGE>
The following table sets forth  information with respect to exercises of options
to purchase our stock granted to the Named  Executive  Officers as of our fiscal
year ended June 30, 2005. Options are for common stock unless otherwise noted.
<TABLE>
<CAPTION>
           AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
                             YEAR-END OPTION VALUES

                                                               NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                             SHARES                           UNDERLYING UNEXERCISED       IN-THE-MONEY OPTIONS
                           ACQUIRED ON                     OPTIONS AT FISCAL YEAR-END(#)   AT FISCAL YEAR-END($)(1)
           NAME           EXERCISE (#)   VALUE REALIZED($)   EXERCISABLE/UNEXERCISABLE     EXERCISABLE/UNEXERCISABLE
           ----           ------------   -----------------   -------------------------     -------------------------
<S>                             <C>              <C>             <C>                             <C>
  Shaun D. McMeans              0                0               655,959 / 406,250                 0/0
  Joseph H. Potenza             0                0               880,087 / 568,750                 0/0

---------
</TABLE>
(1)  With respect to options to purchase our common stock,  value is based on an
     estimated fair market value of $ 0.04 per share on June 30, 2005, minus the
     exercise  price  of  such  options,  multiplied  by the  number  of  shares
     underlying such options.

(2)  This is an option to purchase  Series G  Convertible  Redeemable  Preferred
     Stock.  Each share of Series G Convertible  Redeemable  Preferred  Stock is
     convertible  into 100 shares of common  stock.  With  respect to options to
     purchase our Series G  Convertible  Redeemable  Preferred  Stock,  value is
     based on an  estimated  fair  market  value on June 30,  2005 of $32.00 per
     share,  minus the exercise price of such options,  multiplied by the number
     of shares underlying such options.

                     COMPENSATION OF NON-EMPLOYEE DIRECTORS

During Fiscal Year 2005,  we did not pay our  directors a fee for  attendance at
meetings of the Board of Directors  or meetings of the  committees  thereof.  We
did,  however,  pay expenses to all directors for  attendance at meetings of the
Board  of  Directors  and  committees  thereof.   In  addition,   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. These options are granted pursuant to the 1995 Director Plan
and have an exercise price equal to one-hundred percent of the fair market value
per share of common stock on the date the option is granted.

           COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During  fiscal  year  2005,  Dr.  Coleman  is the only  director  sitting on the
committee,  however GE Capital has an individual  who  participates  as observer
only. Dr. Coleman is the only voting member. The Board of Directors, as a whole,
made the  compensation  decisions for fiscal year 2005, and not the compensation
committee.  No board member who is also an employee  considered  or voted on his
own compensation.

                                       67
<PAGE>
                            BOARD COMPENSATION REPORT
                            ON EXECUTIVE COMPENSATION

The Company's executive compensation program for the Named Executive Officers is
comprised of base salary,  annual  incentive  compensation,  long term incentive
compensation  in  the  form  of  stock  options,   group  medical  benefits  and
participation  in the 401(k)  plan.  In  determining  the level of base  salary,
annual  incentive  compensation  and stock options for executive  officers,  the
Compensation  Committee,  or the in the absence of such Committee,  the Board of
Directors reviews surveys of compensation data for comparable companies and uses
its discretion to set compensation for individual executive officers,  including
the  Chief  Executive  Officer,  at levels  where,  in its  judgment,  external,
internal or  individual  circumstances  warrant.  During  Fiscal Year 2005,  Dr.
Coleman served on the Compensation Committee.

The policies of the Company's executive compensation program are to:

     *    provide  compensation that will attract and retain superior  executive
          talent through a base salary, annual incentive  compensation and bonus
          plan as more fully described below; and

     *    support the achievement of the goals contained in the Company's annual
          internal business plan by linking a portion of the executive officer's
          compensation to the achievement of such goals; and

BASE SALARY.  Base salary  levels for the Company's  executive  officers are set
competitively   relative  to  companies  in  LXU's  industry  and  companies  of
comparable size in the United States. In determining salaries,  the Compensation
Committee,  or in the absence of such  Committee,  the Board of  Directors  also
takes into  account  individual  experience  and  performance  of the  executive
officers and how it relates to the particular  needs of the Company.  All annual
base salaries for executive officers are reviewed annually or more frequently as
events or circumstances warrant as determined by the Compensation Committee.

Joseph Potenza was appointed President on September 1, 2003 and was subsequently
appointed as the Company's  Chief Executive  Officer in May 2004. Mr.  Potenza's
compensation was determined  based on his past  compensation and his position as
compared to others in the Company and salaries of other comparable  positions in
our industry. Mr. Potenza did not receive a base salary raise during fiscal year
2005.

ANNUAL INCENTIVE  COMPENSATION.  Annual incentive compensation may be awarded to
executive officers,  which are usually in the form of cash bonuses.  The purpose
of  such  cash  bonuses  is to  provide  a  direct  financial  incentive  to the
executives  to  achieve  the  annual  goals of the  Company  as set forth in the
beginning of the year in the annual plan. In fiscal 2005, the following measures
were taken into  consideration by the  Compensation  Committee in evaluating the
payment of bonuses:

     *    performance  of the Company in comparison to the Company's  budget for
          the fiscal year,
     *    individual performance.

For fiscal 2005,  the Board of Directors  determined the Company did achieve its
objectives  and therefore in fiscal 2005,  Mr.  Potenza and Mr. McMeans earned a
cash bonus of $60,000 and $35,000,  respectively,  that was subsequently paid in
September  2005.  The Company's  budget is determined by the various  divisional
executive  directors  and approved by the Board of Directors at the beginning of
the fiscal year.

                                       68
<PAGE>
STOCK OPTIONS. The Compensation  Committee, or in the absence of such Committee,
the Board of Directors uses the 1997 Plan as the Company's  long-term  incentive
plan for executive  officers and key employees.  The objectives of the 1997 Plan
are to align the long-term  interests of executive  officers and stockholders by
creating a direct link between executive compensation and stockholder return and
to enable  executives  to develop and maintain a  significant  long-term  equity
interest in the Company.  In general,  under the 1997 Plan,  options are granted
with an exercise price equal to the fair market value of the Common Stock on the
date of grant.  Awards are made at a level  calculated to be competitive  within
the  Company's  industry.  In fiscal  2005,  no stock  options  were  awarded to
executive officers.


         The Board of Directors:

                  William Lomicka, Chairman
                  Larry Coleman, Ph.D.
                  Joseph Potenza


                                PERFORMANCE GRAPH

Our common stock has not been listed or quoted on an exchange since November 17,
2000. A performance  graph comparing our common stock price 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  exchange,  all prices
subsequent  to November  17, 2000 are  estimates  only.  LXU common stock prices
shown are estimates  only and are not  comparable to LXU's peers that are traded
on an active market.

The following  performance  graph is intended to reflect the estimated  price of
our common  stock for our last five  completed  fiscal year  periods,  which are
October 31, 2000, June 30, 2001, June 30, 2002, June 30, 2003, June 30, 2004 and
June 30, 2005.



                                       69
<PAGE>
         COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG LXU, THE
                STANDARD & POOR'S ("S&P") SMALL CAP 600 INDEX AND
                               PRIMESOURCE'S PEER
                                GROUP INDEX (1)


                             PICTURE GRAPH OMMITTED

<TABLE>
<CAPTION>
  --------------------------------------------------------------------------------------------------------
                               10/31/00     10/31/01  6/30/02 (2)  6/30/03 (3)   6/30/04 (3)   6/30/05(3)

  --------------------------------------------------------------------------------------------------------
<S>                              <C>          <C>           <C>           <C>           <C>          <C>
  LXU                            100.00       100.00        32.00         1.00          1.00         4.00
  --------------------------------------------------------------------------------------------------------
  S&P Smallcap 600               100.00       106.34       105.84       101.10        135.59       152.40
  --------------------------------------------------------------------------------------------------------
  LXU's    Peer Group            100.00        97.98       123.52       117.35        179.77       161.64
  --------------------------------------------------------------------------------------------------------
</TABLE>
----------

     (1) This graphic  presentation  assumes (a) one-time  $100  investments  in
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 LXU's  selected  peer group index,  in each case made as of the
market  close  on  October  31,  1999  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.  The
returns of each component issuer of the LXU's peer group are weighted  according
to the  respective  issuer's stock market  capitalization  based on data derived
from such issuer's  filings with the Securities and Exchange  Commission for the
beginning  of each period for which a return is  indicated.  LXU's peer group is
made up of the following five companies:

     Synovis Life Technologies, Inc.
     Cantel Medical Corp.
     Conmed Corp.
     Fisher Scientific International Inc.
     Patterson Dental Co.

     (2) In the  absence  of actual  market  trades,  the  basis for  the  $0.32
estimated  common  stock  value  was based  upon the price of the most  recently
raised  private equity security (convertible  redeemable preferred  stock) on an
as converted to common stock basis.

                                       70
<PAGE>
     (3) Basis for estimated common stock value  was based  upon an  independant
valuation of the Company's common stock.

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

                   BENEFICIAL OWNERSHIP OF COMPANY SECURITIES

The following tables furnish certain information as of September 1, 2005 (except
as otherwise  noted), as to our common stock  beneficially  owned by each of our
directors,  by each of the Named Executive  Officers and by all of our directors
and executive officers as a group.

------------------------------ ----------------------- -------------------
NAME OF BENEFICIAL OWNER       NUMBER OF SHARES OF     PERCENT OF CLASS
                               COMMON STOCK            VOTING POWER
                               BENEFICIALLY OWNED      PRESENTLY HELD(1)
------------------------------ ----------------------- -------------------

Larry H. Coleman, Ph.D.(2)                 7,977,166(3)             27.4%
------------------------------ ----------------------- -------------------

William H. Lomicka                           838,627(4)              2.9%
------------------------------ ----------------------- -------------------

Joseph H. Potenza                            925,225(5)              3.1%
------------------------------ ----------------------- -------------------
All directors and executive
officers as a group (3 persons)            9,741,018                32.4%
------------------------------ ----------------------- -------------------

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

Unless  otherwise  indicated,  the  address  of  each  person  is  care  of  LXU
Healthcare,  Inc. 3708 E. Columbia  Street,  Tucson,  Arizona  85714.  Shares of
common stock  issuable upon exercise of outstanding  options or warrants  within
sixty  days of  September  1, 2005,  are  deemed  outstanding  for  purposes  of
computing  the  percentage  ownership  of the  person  holding  such  options or
warrants but are not deemed outstanding for purposes of computing the percentage
of any other person.

(1)   Based upon the aggregate number of shares of our common stock  outstanding
      on  September 1, 2005 and options and  warrants  exercisable  within sixty
      days of September 1, 2005 to acquire our common stock.

(2)   Dr. Coleman is the Managing  General Partner of CSHB Ventures IV L.P., the
      General  Partner of Coleman  Swenson  Hoffman  Booth IV, L.P. Dr.  Coleman
      expressly disclaims beneficial ownership of shares held by Coleman Swenson
      Hoffman Booth IV L.P.

(3)   Includes  23,721  shares of our common stock  underlying  options that are
      exercisable within sixty days of September 1, 2005.

(4)   Includes  30,605  shares of our common stock  underlying  options that are
      exercisable within sixty days of September 1, 2005.

(5)   Includes  925,225 shares of our common stock  underlying  options that are
      exercisable within sixty days of September 1, 2005.


                                       71
<PAGE>
The  following  table  set  forth  those  persons  who,  to our  knowledge,  are
beneficial  owners of more  than 5% of any  class or  series of our  outstanding
equity securities who are not directors or executive officers as of September 1,
2005.

     --------------------------- ---------------------- --------------------
     NAME OF BENEFICIAL OWNER    NUMBER OF SHARES OF    PERCENT OF CLASS
                                 COMMON STOCK           VOTING POWER
                                 BENEFICIALLY OWNED     PRESENTLY HELD(1)
     --------------------------- ---------------------- --------------------
     GE Capital Equity
     Investments, Inc.(2)                  17,330,566(3)              45.9%
     --------------------------- ---------------------- --------------------
     Coleman Swenson Hoffman                7,977,166(5)              27.4%
     Booth IV L.P. (4)
     --------------------------- ---------------------- --------------------
     Fisher Entities(6)                     3,428,271(7)              11.8%
     --------------------------- ---------------------- --------------------
     Bradford Walker                        3,250,000(8)              10.0%
     --------------------------- ---------------------- --------------------
     Geneva Middle Market                   3,106,693                 10.3%
     --------------------------- ---------------------- --------------------

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

Unless  otherwise  indicated,  the  address  of  each  person  is  care  of  LXU
Healthcare,  Inc. 3708 E. Columbia  Street,  Tucson,  Arizona  85714.  Shares of
common stock  issuable upon exercise of outstanding  options or warrants  within
sixty  days of  September  1, 2005,  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.

(1)   Based upon the aggregate number of shares of our common stock  outstanding
      as of September 1, 2005 and options and warrants  exercisable within sixty
      days of September 1, 2005 to acquire our common stock.

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

(3)   Includes  3,721  shares of our common  stock  underlying  options that are
      exercisable  within  sixty  days  of  September  1,  2005.  Also  includes
      6,151,687  shares of our common  stock  subject to  purchase  pursuant  to
      warrants that are exercisable within sixty days of September 1, 2005.

(4)   The address of Coleman  Swenson Hoffman Booth IV L.P. is 237 Second Avenue
      South,  Franklin,  Tennessee  37064-2649.  Dr. Coleman expressly disclaims
      beneficial  ownership of shares held by Coleman  Swenson  Hoffman Booth IV
      L.P.

(5)   Includes  23,721  shares of our common stock  underlying  options that are
      exercisable within sixty days of September 1, 2005.

(6)   Webbmont Holdings LP, Woodcrest Associates,  Ltd., Investors Equity, Inc.,
      Robert W. Fisher,  Robert N. Fisher and Virginia  Fisher are  collectively
      referred to as the "Fisher  Entities".  Webbmont  Holdings LP beneficially
      owns 3,293,123 shares of Common Stock. Acting through its general partner,
      Webbmont Holdings LP has the power to dispose or direct the disposition of
      and the power to vote or direct the vote of 3,293,123 shares of the Common
      Stock.  Woodcrest  Associates,  Ltd.,  the  general  partner  of  Webbmont
      Holdings  LP,  may be deemed to share  investment  and  voting  power with
      respect to the 3,293,123 shares of Common Stock held by Webbmont  Holdings
      LP. In addition,  Robert W. Fisher, the President of Woodcrest Associates,
      Ltd.,  may be deemed to share  investment and voting power with respect to
      the  3,293,123  shares of  Common  Stock  held by  Webbmont  Holdings  LP.
      Investors Equity,  Inc.  beneficially owns 115,514 shares of Common Stock.

                                       72
<PAGE>
      Robert W. Fisher,  the President of Investors Equity,  Inc., may be deemed
      to share investment and voting power with respect to the 115,514 shares of
      Common Stock held by Investors Equity,  Inc. Mr. Robert N. Fisher, the son
      of Robert W.  Fisher,  is the  beneficial  owner of 7,769 shares of Common
      Stock.  Ms.  Virginia  Fisher,  the daughter of Robert W.  Fisher,  is the
      beneficial owner of 4,423 shares of Common Stock. Mr. Robert W. Fisher has
      also been granted  options to purchase  7,442 shares of Common  Stock,  of
      which options Webbmont Holdings LP, Woodcrest Associates,  Ltd., Investors
      Equity,  Inc.,  Robert N. Fisher and Virginia  Fisher  expressly  disclaim
      beneficial  ownership.  The address of Webbmont  Holdings L.P.,  Woodcrest
      Associates,  Ltd.,  Investors  Equity,  Inc.,  Robert W. Fisher,  Virginia
      Fisher and Robert N. Fisher is 1680-Hiram-Douglasville Highway, Suite 108,
      Hiram, Georgia 30141.

(7)   Includes 7,442 shares of our common stock  underlying  options held by Mr.
      Fisher that are exercisable within sixty days of September 1, 2005.

(8)   Includes  3,249,950 shares of our common stock underlying options that are
      exercisable within sixty days of September 1, 2005.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

                     PRINCIPAL ACCOUNTANT FEES AND SERVICES

During our fiscal years ended June 30, 2005 and June 30, 2004, Deloitte & Touche
LLP,  our  independent  certified  public  accounting  firm,  billed  us in  the
following categories and amounts:

                                  2005            2004
                             --------------   -------------
     Audit Fees               $   227,300      $  242,100
     Tax Fees                      85,995         103,890
     Other Fees                    78,100
                             --------------   -------------
     Total Fees               $   391,395      $  345,990
                             ==============   =============

Tax fees  included  preparation  of the  Company's  federal and state income tax
returns and periodic  consultation  on tax issues.  $10,245 of the tax fees were
not  directly  approved  by the Audit  Committee  because  they  fell  under the
threshold of the approval policy set forth by the Audit Committee.

The Audit  Committee  of the  Board of  Directors  has  considered  whether  the
provision  of  non-audit  services by Deloitte & Touche LLP is  compatible  with
maintaining auditor independence. Services provided by Deloitte & Touche LLP may
be approved by the CFO for an amount not to exceed  $5,000 a quarter.  All other
services  provided by Deloitte & Touche LLP, both audit and  non-audit,  must be
pre-approved  by the Audit  Committee.  The  pre-approval of audit and non-audit
services may

                                       73
<PAGE>
be given at any time up to a year before  commencement of the specified service.
CFO  approval or Audit  Committee  pre-approval  is required  for the  following
services:

     *    Audits of the Company's financial statements.
     *    Consents,  comfort  letters,  reviews of  registration  statements and
          similar  services that  incorporate  or include the audited  financial
          statements of the Company.
     *    Employee benefits plan audits.
     *    Accounting  consultations  and support  related to generally  accepted
          accounting principles.
     *    Tax  compliance  and related  support for any tax returns filed by the
          Company,  and returns  filed by any  executive or  expatriate  under a
          company-sponsored program.
     *    Tax planning and support.
     *    Merger and acquisition due diligence services.

Deloitte & Touche LLP is prohibited from providing  certain types of services to
the Company as follows:

     *    Bookkeeping  or other  services  related to the  Company's  accounting
          records or financial statements.
     *    Appraisal or Valuation Services or Fairness Opinions.
     *    Actuarial Services.
     *    Management Functions or Human Resource Functions.
     *    Broker-Dealer, Investment Adviser, or Investment Banking Services.
     *    Legal Services and Expert Services Unrelated to the Audit.
     *    Internal Audit Outsourcing.
     *    Financial Information Systems Design and Implementation.

Non-prohibited services are deemed permitted services and may be provided to the
Company with the pre-approval by the full Audit  Committee,  as described above.
At each regularly scheduled Audit Committee meeting, the Audit Committee reviews
the services,  including  fees,  provided by Deloitte & Touche LLP to date and a
list of all services pre-approved since its last regularly scheduled meeting.

                                       74
<PAGE>
                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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

(1)    Consolidated Financial Statements
       ---------------------------------

       Independent Auditors' Report

       Consolidated Balance Sheets as of June 30, 2005 and June 30, 2004.

       Consolidated Statements of Operations
       for the years ended June 30, 2005, June 30, 2004 and June 30, 2003.

       Consolidated Statements of Stockholders'
       Equity (Net Capital Deficiency) for the years ended June 30, 2005, June
       30, 2004 and June 30, 2003.

       Consolidated Statements of Cash Flows for the years ended June 30, 2005,
       June 30, 2004 and June 30, 2003

       Notes to Consolidated Financial Statements

(2)    Financial Statement Schedules - Schedule II

                                       75
<PAGE>
Schedule II
<TABLE>
                                                          VALUATION AND QUALIFYING ACCOUNTS

<CAPTION>

                                                     Additions
                                       ------------------------------------
                                                                Charged to                                    Balance at
                                        Balance at the           costs and                                    the end of
                                        beginning of year         expenses      Utilized      Deductions       the year
FOR THE YEAR ENDED JUNE 30, 2004:
<S>                                         <C>                  <C>           <C>            <C>          <C>
Accounts receivable allowances for
     doubtful accounts                      $  213,895           $  34,415                    $ (115,835)     $  132,475
Inventory reserves for obsolescence          1,106,232             159,406                      (595,232)        670,406
Deferred income tax valuation allowance      8,513,300                          (2,311,800)                    6,201,500
                                            ----------           ----------    ------------   ------------    ------------

Total allowances deducted from assets       $9,833,427           $ 193,821     $(2,311,800)   $ (711,067)     $7,004,381
                                            ==========           ==========    ============   ============    ============

FOR THE YEAR ENDED JUNE 30, 2005:
Accounts receivable allowances for
     doubtful accounts                      $  132,475           $ (71,172)                   $  (17,890)     $   43,413
Inventory reserves for obsolescence            670,406             269,925                      (375,990)        564,341
Deferred income tax valuation allowance      6,201,500                          (5,993,000)                      208,500
                                            ----------           ----------    ------------   ------------    ------------


Total allowances deducted from assets       $7,004,381           $ 198,753     $(5,993,000)   $ (393,880)     $  816,254
                                            ==========           ==========    ============   ============    ============

</TABLE>
                                       76
<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.

                                       LXU HEALTHCARE, INC.


                                       by  /s/Joseph H. Potenza
                                          --------------------------------------
                                             Joseph H. Potenza, President and
                                             Chief Executive Officer


September 28, 2005

                                       77

<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

Signature                    Title                            Date
---------                    -----                            ----


/s/ William H. Lomicka       Director                         September 28, 2005
----------------------
    William H. Lomicka


/s/ Larry H. Coleman         Director                         September 28, 2005
----------------------
    Larry H. Coleman


/s/ Joseph H. Potenza        President, Chief Executive       September 28, 2005
----------------------
    Joseph H. Potenza        Officer, Director, (Principal
                             Executive Officer, Principal
                             Financial Officer and Principal
                             Accounting Officer)


                                       78
<PAGE>


3.    Exhibits
      --------

      See Exhibit Index

                                       79
<PAGE>

                                  Exhibit Index

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.

3.1      Amended  and  Restated   Articles  of  Organization   (Incorporated  by
         reference to Form 10Q, File No. 000-14961, filed on May 16, 2005).

3.2      Amended and Restated  By-Laws  (Incorporated  by reference to Form 10Q,
         File No. 000-14961, filed on May 16, 2005).

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      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).

4.3      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).

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

10.2     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).

10.3     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).

10.4     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).

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

10.6     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).

                                       80
<PAGE>
10.7     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).

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

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

21.1     Subsidiaries of the Registrant.

31.1     Certification  of  the  President,   Principal  Financial  Officer  and
         Principal   Accounting   Officer   Pursuant   to  Section  302  of  the
         Sarbanes-Oxley Act of 2002.

32.1     Certification  of  the  President,   Principal  Financial  Officer  and
         Principal   Accounting   Officer   Pursuant   to  Section  906  of  the
         Sarbanes-Oxley Act of 2002.





                                       81