**SECURITIES AND EXCHANGE**
 **COMMISSION**
 **Washington, D.C. 20549**
 
 **FORM 10-K/A**
 
 **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, 2004
 
 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from _____________ to _____________
 
 Commission File Number: **0-14961**
 
 **PRIMESOURCE HEALTHCARE, INC.**
 (Exact name of registrant as specified in its charter)
 **Massachusetts**     **04-2741310**
 (State or other jurisdiction of   (I.R.S. Employer
 incorporation or organization)     Identification No.)
 
 **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 _
  
 
  The estimated aggregate market value of the voting common stock held by non-affiliates of the registrant was $61,841 as of December 31, 2003. Because PrimeSource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 September 1, 2004.
  As of September 1, 2004, 22,375,144 shares of common stock, $.01 par value, were issued and outstanding.
  **DOCUMENTS INCORPORATED BY REFERENCE**
  List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated:
  
 
 
 
 
  **TABLE OF CONTENTS**
 
 Part IItem 1. Business
4Item 2. Properties
17Item 3. Legal Proceedings
18Item 4. Submission of Matters to a Vote of Security Holders
18Part IIItem 5. Market for Registrants Common Equity and Related Stockholder Matters
18Item 6. Selected Financial Data
20Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
23Item 7A. Quantitative and Qualitative Disclosures About Market Risk
35Item 8. Financial Statements and Supplementary Data
36Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
64Item 9A.Controls and Procedures
64Part III
Item 10. Directors and Executive Officers of the Registrant
64Item 11. Executive Compensation
67Item 12. Security Ownerships of Certain Beneficial Owners and Management
72Item 13. Certain Relationships and Related Transactions
75Item 14. Principal Accountant Fees and Service
75Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
77Signatures

84Index to Exhibits

90
  
 
 
 
 
 
 This Annual Report on Form 10-K/A is being filed to provide information responsive to Items 10-14 of Part III of Form 10K/A that the Registrant originally intended to incorporate by reference from its definitive proxy statement. This amendment does not reflect events occurring after the filing of the original Form 10-K on October 29, 2004, except for the amendment described above.
 
 
 **PART I**
  When we refer to we, us, our, or PrimeSource, we mean PrimeSource Healthcare, Inc., a Massachusetts corporation, formerly known as Luxtec Corporation, and its consolidated subsidiaries.
 This document includes various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and 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 leading specialty medical products sales, marketing, manufacturing and service 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 two primary businesses: Specialty Medical Distribution and the Manufactured Products Division or 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. As of June 30, 2004, we had 132 **** employees and generated total revenue of $48.8 million for the fiscal year ending June 30, 2004.
  
 
 
 
  On March 2, 2001, we completed a merger with PrimeSource Surgical, Inc., or PrimeSource Surgical, resulting in PrimeSource Surgical becoming our wholly owned subsidiary. Subsequent to the merger with PrimeSource Surgical, we changed our name from Luxtec Corporation, to PrimeSource Healthcare, Inc. (PrimeSource or the Company).
  During the year ended June 30, 2002, we commenced a restructuring plan which involved narrowing the focus of our operations, consolidation of certain under-performing sales regions, reduction of corporate overhead through workforce reductions and facility consolidation, restructuring of our balance sheet through the recapitalization of equity and refinancing of our senior bank debt and reduction of debt levels through cost reductions and improved efficiency of operations.
  On September 20, 2002, Ruby Merger Sub, Inc., the Companys indirect wholly owned subsidiary (Ruby), sold all of the assets of the former Professional Equipment Co., Inc. (PEC) line of business in exchange for the cancellation of previously issued stock to the founder of PEC and the assumption of certain liabilities with respect to the PEC line of business.
 
 On June 30, 2003, PrimeSource Surgical sold all of the issued and outstanding capital stock of Ruby for cash proceeds of $1,000,000 to New England Medical Specialties, Inc., a newly formed entity (NMSI). Peter Miller, a stockholder of NMSI, was the Regional Manager of Ruby prior to the disposition of the capital stock of Ruby. In connection with the sale of the capital stock of Ruby, Mr. Miller concluded his employment relationship with PrimeSource. Cash proceeds from the Ruby sale were partly used to pay off the PrimeSource Surgical Amended and Restated Term Note (the PrimeSource Surgical Term Loan) and to reduce the revolving line of credit with Citizens Bank of Massachusetts (Citizens). 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 re-classified 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). As of June 30, 2004, the Company had $5,204,139 of outstanding borrowings under the PrimeSource Healthcare Credit and Security Agreement, dated as of December 10, 2003, by and among the Company, PrimeSource Surgical, Bimeco, Inc. (Bimeco) and Wells Fargo (the Credit and Security Agreement) as further discussed in Note 7 to the accompanying consolidated financial statements.
  **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 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; 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. Healthcare industry analysts estimate that the overall market for medical products and supplies in the United States is in excess of $45 billion. An estimated $15 billion is distributed by the larger medical and surgical, or med-surg, distributors, such as Owens & Minor, Inc., Cardinal Health, Inc. and McKesson Corporation. These distributors primarily market commodity products and supplies to group purchasing organizations (GPOs) and integrated delivery networks (IDNs). It is estimated that an additional $25 billion in medical product sales is sold directly by medical device manufacturers to end customers. Local and regional distributors account for an estimated $5 billion of specialty medical products sold to hospitals, clinics and physicians. PrimeSource competes within this 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 - PrimeSource. 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 well positioned 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 exceeding those of any single specialty medical product manufacturers direct sales force; 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 divide our business into PrimeSource Surgical, or Surgical, and PrimeSource Critical Care, or Critical Care. The Surgical segment is a regional sales and marketing organization that markets and sells a large number of surgical products primarily to hospitals and surgery centers in the midwestern, mid-atlantic and southeastern United States. The Critical Care segment is a regional sales and marketing organization that sells a large number of products primarily to hospitals and surgery centers in the southeastern and northeastern United States.
 
 Within the Surgical segment, the primary specialties are:
 
 ·
Cardio Vascular;
 
 ·
Endoscopy;
 
 ·
General Surgery; and
 
 ·
Gynecology.
 
 Within the Critical Care segment, the primary specialties are:
 
 ·
Neonatal Intensive Care; and
 
 ·
Maternal and Child Care.
 
 
 
 
 
 Our products and services are primarily used in hospital operating rooms and intensive care units, outpatient surgery centers and, to a lesser degree, doctors' offices. Most of our products are technologically innovative medical products, or specialty products, that require hands-on training of clinicians and medical personnel. We continue to expand our product base to include additional instruments and equipment, thereby allowing customers to use us as a source for a greater percentage of their specialty products needs.
 
 The sale of specialty disposable products and capital equipment accounts for the majority of our revenues. Our capital equipment products are typically complex and require significant consultative selling and training of medical staff personnel. Our specialty disposable products are often sold to support the growing base of installed capital equipment products and offer a recurring and stable source of revenue.
 
 *Manufactured Products Division*
 
 We operate the Manufactured Products business through our Luxtec division, which designs, manufactures and markets fiber optic headlight and video camera systems, light sources, cables, retractors and surgical and other custom-made equipment for the medical and dental industries. Luxtec has developed a proprietary, fiber optic drawing system designed to manufacture optical glass to a specified diameter. The fibers are utilized in fiber optic cables, which are incorporated with Luxtec's surgical headlight systems and video camera systems, as well as into an array of fiber optic transilluminators utilized with Luxtecs surgical instruments. Luxtec also markets replacement fiber optic cables, bulbs, and light sources for use with other manufacturers' products, including various endoscopic systems used in minimally invasive surgical procedures.
 
 Fiber optics allow for the transmission of a light or image from one place to another through a flexible conduit of optical glass rods and tubes. The flexible conduit provides for an improved ability to bend and transmit light and images to and from places with limited or difficult access.
 
 The technology used by Luxtec to provide illumination directly to the surgical site is facilitated by fiber optic cables transmitting light to an adjustable headlight composed of a series of lenses and mirrors mounted on a headband. These lenses then focus the light directly on the surgical site when worn by the surgeon. This provides a lightweight, low temperature illumination source to enhance visualization for microsurgical and deep cavity illumination. A summary of the Luxtec divisions specific product offerings is as follows:
 
 ***Headlight Systems:*** Luxtec designs and manufactures a proprietary line of fiber optic headlight systems that assist surgeons by brightly illuminating the surgical site. Designed to provide maximum performance and comfort, Luxtec's patented headlight systems are lightweight and provide the surgeon with a virtually unobstructed view of the surgical area.
 
 ***Light Sources:*** Luxtec manufactures a product line of high quality, solid state xenon and halogen fiber optic light sources. Luxtec's light sources offer a wide range of light intensities in order to serve the varying requirements in illuminating surgical and diagnostic procedures. The lamps illuminate the end surface of the fiber optic cable through which the light is transmitted, without transmitting heat. Luxtec's light sources are designed and manufactured to comply with Underwriters Laboratories 544 medical safety standards and are listed domestically with ETL Laboratories. Internationally, Luxtec strives to achieve compliance with all applicable international standards to compete effectively on a worldwide basis (including the CE mark, which has been attained on the present product line).
 
 
 
 
 
 ***Fiber Optic Cables:*** Luxtec designs and manufactures a complete range of fiber optic cables and holds patents on certain fiber optic cable assemblies. See "Patents and Trademarks." Luxtec offers surgeons a range of fiber bundle diameters in order to optimize the use of surgical instruments. Luxtec employs a proprietary technology that enables the fiber optic interface to withstand significantly higher temperatures and permits the use of higher output light sources. In addition, all of Luxtec's fiber optic cables are adaptable to light sources made by other manufacturers.
 
 ***Fiber Optic Headlight and Video Camera Systems:*** Luxtec manufactures and markets a series of video products that are currently being used in the United States and in over 25 countries around the world. Luxtec's Microlux headlight camera systems are designed to televise surgical procedures. The system is a very small, lightweight, solid state television camera mounted at the front of a headband, manufactured by Luxtec, and integrated with fiber optic illumination.
 
 **Sales and Marketing**
 
 We sell our products and services to hospitals, IDNs, surgery centers and physician offices. In fiscal year ended June 30, 2004, 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 2.3% of our gross profit during our fiscal year ended June 30, 2004.
 
 We maintain an extensive sales organization that is highly experienced and skilled in representing clinical products and services. Our sales representatives serve as a service and educational resource to the marketplace. They assist clinicians in selecting and purchasing products, help customers better manage inventories of specialty medical products and direct the appropriate utilization of our clinically focused products. Each sales representative works within an assigned sales territory under the supervision of a dedicated regional sales manager. Our sales representatives are primarily compensated on a commission basis.
 
 Within the surgical illumination industry, Luxtec is the domestic market leader in surgical headlight systems with over 50,000 surgeons using their products on a worldwide basis. Within the United States, the Luxtec fiber optic and illumination products are primarily distributed through our Surgical segments sales force, supported by Luxtec field specialists and a customer support team now located at our Birmingham, Alabama facility. Luxtec also distributes domestically through a number of other regional specialty medical distributors. Internationally, Luxtec distributes through a network of local distributors.
 
 Our external sales, based upon the customers country of origin by geographic area for the year ended June 30, 2004, 2003 and 2002, totaled $46,065,000, $44,015,000 and $51,688,000, respectively, for sales in the United States and $2,698,000, $2,345,000 and $2,008,000, 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 EDI. All orders are routed through our centralized computer ordering, shipping and inventory management system, which is linked to our distribution centers. Rapid and accurate order fulfillment is a principal component of our value-added approach.
  In order to assure the availability of our broad product lines for prompt delivery to customers, we must maintain sufficient inventories at our distribution centers. Our inventory levels are centralized with and managed by a purchasing department using an integrated inventory control system. Our inventory consists primarily of medical products and supplies.
 
 **Manufacturing and Suppliers**
  Manufacturer relationships are an integral part of our businesses. Our Specialty Medical Distribution business represents more than 125 manufacturers with over 90% of our sales concentrated among products purchased from approximately 30 of these manufacturers. A majority of the business is comprised of stocking relationships whereby we stock the vendors products and provide substantially all fulfillment services (i.e., customer service, shipping, returns, etc.). The remainder of the revenue is received on an "agency" basis whereby we do not stock the vendor's products and do not provide fulfillment services. In the case of an agency sale, the manufacturer provides substantially all fulfillment services for customers and we provide sales and marketing support 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 contract with any supplier but does maintain long-standing relationships with certain vendors.
  Our Specialty Medical Distribution business aggressively pursues the opportunity to market and sell medical equipment and supplies on an exclusive basis. Manufacturers of specialty medical products and supplies typically offer distribution rights only to a 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**
 
 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 the sales and marketing of some of their products to specialty sales and marketing organizations such as PrimeSource.
 
 ·
***National Specialty Distributors****.*Several companies serve the national specialty medical products market. These national specialty distributors tend to focus and specialize within a particular segment of the specialty medical products market.
 
 ·
***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. The xenon technology is more widely accepted and provides a broader color spectrum than metal halide technology. 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. 5295052 for a light source assembly issued March 15 1994.
 ·
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. 6258037 for blood pressure monitoring in noisy environments issued July 10, 2001.
 ·
Patent No. 4998713 for needle connector issued March 12, 1991.
 ·
Patent No. 5893635 for headlamp with enhanced light gathering condenser issued April 13, 1999.
 
 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.
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LUXTEC (stylized), U.S. federal trademark registration number 1,758,176, registered March 16, 1993.
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LUXTEC, U.S. federal trademark registration number 1,956,027, registered February 13, 1996.
 ·
Luxtec is also the owner of the following foreign trademark registrations for its LUXTEC trademark: (i) Chile, registration number 452.314, registered October 31, 1995; and (ii) Peru, registration number 016214, registered June 14, 1995.
  
 
 
 
 ·
BIMECO, U.S. federal trademark registration number 1,190,584, registered February, 23 1981
 ·
MegaTech Medical, U.S. federal trademark registration number 1,930,021, registered October 24, 1995
 ·
TMC
 ·
Clearfield
 ·
ValueFlex
 
 
 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 regulatory agencies. Typically, products must meet regulatory standards as safe and effective for their intended use prior to being marketed for human applications. The clearance process is expensive and time consuming, and no assurance can be given that any agency will grant clearance for the sale of our products or that the length of time the process will require will not be extensive. We believe that we are in substantial compliance with all of the foregoing laws and that we possess all licenses required in the conduct of our business.
 
 **Employees**
 
 As of September 1, 2004, we had 136 employees, of which 41 are engaged in the Surgical segment, 19 in the Critical Care segment, 56 in the Manufactured Products business and 20 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 and Key Management Personnel**
 
 Following are the names and ages, as of September 1, 2004, of our executive officers and key
 management personnel, their positions and summaries of their backgrounds and business experience.
 
 Name
Age
PositionJoseph H. Potenza
57
President and Chief Executive OfficerShaun D. McMeans
42
Chief Operating Officer and Chief Financial OfficerSamuel M. Stein
64
Vice President & General Manager, Manufacturing DivisionMark A. Jungers
52
Regional Vice President, Distribution DivisionBruce R. Hoadley
45
Regional Vice President, Distribution DivisionScott F. Billman
48
Regional Vice President, Distribution Division
 
 ***Joseph H. Potenza, President & Chief Executive Officer:*** Prior to joining PrimeSource 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.
 
 ***Shaun D. McMeans, Chief Operating Officer & Chief Financial Officer:*** Mr. McMeans has over 20 years of experience in manufacturing and distribution businesses, specializing in operations, accounting and financial management. Prior to becoming the Companys Chief Financial Officer, he served as Vice President of Operations and Corporate Controller. Prior to joining the Company in April 2000, Mr. McMeans held operational and financial management positions with Burnham Corporation, a leading domestic manufacturer and distributor of residential and commercial boilers. Mr. McMeans earned a Bachelor of Science degree in Accounting from Pennsylvania State University and is a certified public accountant. He began his career in public accounting with the former Peat, Marwick, Mitchell and Company.
 
 ***Samuel M. Stein, Vice President & General Manager, Manufacturing Division*** **:** Mr. Steins career has focused on high growth technology companies. Prior to becoming General Manager of the Companys Luxtec Division, Mr. Stein served as Luxtec's Chief Financial Officer. Prior to joining Luxtec in 1993, Mr. Stein served as Chief Operating and Chief Financial Officer of Mitrol, Inc. of which he was also co-founder. He has served as Chief Financial Officer with companies ranging from start-ups to subsidiaries of Fortune 500 corporations. Mr. Stein earned a Bachelor of Science degree in Business Administration from the University of Toledo and a Master of Science degree from Rensselaer Polytechnic Institute.
 
 ***Mark A. Jungers, Regional Vice President, Distribution Division:*** Mr. Jungers has an extensive background in med-surg and critical care product sales and management. Mr. Jungers joined PrimeSource through its 1999 acquisition of Bimeco, a leading distributor of specialty medical products to the critical care market in the southeastern United States, where he served as a Sales Manager. 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.
 
 *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 PrimeSource. 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.
 
 *PrimeSource Surgical Has a Limited Operating History, Which Makes it Difficult to Predict its Future Performance* . PrimeSource Surgical, which is our material subsidiary, commenced operations in 1996, and grew rapidly through the acquisition of a number of specialty medical products sales and marketing organizations. Accordingly, PrimeSource Surgical has only a limited operating history from which to evaluate and forecast its business. As a result of PrimeSource Surgical's limited operating history, we may be unable to accurately forecast financial results going forward. Moreover, failure to meet our revenue targets and financial projections may have an immediate and negative impact on our total results of operations.
 
 
 
 
 
 *If We are Unable to Achieve Our Business Objectives and Comply with the Covenants in Our Credit Facilities We May Have to Suspend or Cease Operations.* We had net income of $1,606,049 for our fiscal year ended June 30, 2004. If we are unable to generate sufficient positive cash flow and/or raise additional equity or debt capital, we may have insufficient funds to continue our operations. In addition, if we are unable to comply with the covenants of our credit facilities, our creditors may accelerate repayment of the borrowings under our credit facility.
 
 *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 a future business strategy. As we sell to larger organizations, it is expected that the time from initial contact to final approval will increase. During this sales cycle, we may expend substantial funds and management resources without any corresponding revenue. If approval of contracts is delayed or does not occur, our financial condition and operating results for a particular period may be adversely affected. Approval of contracts may be subject to delays for reasons over which we will have little or no control, including:
    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 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 requiring the approval of such stockholders.
 
 *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.
 
 
 **ITEM 2. PROPERTIES**
 
 PrimeSources corporate headquarters are located at 99 Hartwell Street, West Boylston, Massachusetts. 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 1, 2004, is as follows:
 Square
LeaseCity, State
Feet
Expiration DateTucson, Arizona......
6,054
7/31/2006Birmingham, Alabama.........
18,356
11/30/2006Atlanta, Georgia.....................
1,200
9/30/2004Atlanta, Georgia.....
1,750
9/30/2004West Boylston, Massachusetts............
31,689
10/31/200559,049
  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 12, 2003. At the meeting, the following items were submitted to a vote of the stockholders:
 
 (1) the election of a Class III director for a three-year term was approved with the election of Shaun D. McMeans receiving 7,862,958 votes in favor, 0 votes against, 8,217,358 votes withheld and 0 broker non-votes.
 
 (2) an amendment to our 1997 Stock Option/Stock Issuance Plan, as amended, increasing the number of shares of common stock reserved thereunder from 10,000,000 to 12,000,000 was approved with 14,726,893 votes in favor, 295,691 votes against, 68,005 abstentions and 988,927 broker non-votes;
 
 (3) the appointment by our Board of Directors of Deloitte & Touche LLP, our independent auditors, was ratified with 16,071,771 votes in favor, 5,230 votes against, 2,515 abstentions and 0 broker non-votes.
 
 
 
 **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 1, 2004, there were approximately 534 registered holders of record of our common stock. We estimate that there are approximately 800 beneficial holders of our common stock.
 
 We have not paid any cash dividends on our common stock since our inception and the Board of Directors does not contemplate doing so in the 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.
 
 
 
 
 
 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. In connection with the issuance of the Series G Stock, the Company issued warrants to purchase an aggregate of 3,300,000 shares of common stock at $.01 per share. These warrants became exercisable on December 31, 2002 and expire on August 6, 2012. Each share of Series G Stock is convertible into 100 shares of common stock, subject to adjustment, at the option of the holder. Each share of Series G Stock has one vote for each share of common into which it would be convertible. In addition, Series G Stock ranks senior to all other outstanding stock of the Company. Series G Stock accrues dividends at the rate of 8% per year of the original issuance price of $32.00 per share and has a liquidation preference equal to $64.00 per share plus an amount equal to all accrued but unpaid dividends. The Series G Stock has a mandatory redemption date of June 3, 2005, and is redeemable at the original issue price of $32.00 per share plus accrued but unpaid dividends. The Series G Stock also has special consent rights to certain of the Companys activities, including, but not limited to, amendment of the Companys articles or bylaws and merger or consolidation of the Company.
  **Equity Compensation Plan Information****June 30, 2004****Number of securities****Number of securities**



**remaining available for****to be issued**

**Weighted-average**

**future issuance under****upon exercise of**

**exercise price of**

**equity compensation plans****outstanding options,**

**outstanding options,**

**(excluding securities****warrants and rights**

**warrants and rights**

**reflected in column (a))****Plan category**
**(a)**

**(b)**

**(c)**Equity compensationplans approved by
26,562,698

$ 0.1930

2,912,070security holdersEquity compensationplans not approvedby security holders (1)
7,499

16.0000

0Total
26,570,197

$ 0.1975

2,912,070
 
 (1)  On August 6, 2002, we granted Bradford C. Walker an option to purchase 7,500 shares of our Series G Convertible Redeemable Preferred Stock at an exercise price of $16.00 per share. This option became fully vested and exercisable on the first anniversary of the grant date and expires upon the tenth (10 th ) anniversary of the grant date. The stock option agreement provides that if Mr. Walker is terminated for any reason other than misconduct, the option, to the extent vested on the termination date, becomes exercisable at any time prior to the earlier of (i) five (5) years following the date he ceases to provide any service to PrimeSource or (ii) one (1) year following the registration of the option shares under the Securities Act of 1933. On October 15, 2003, one option for the purchase of Series G Stock was exercised for $16.
  
 
 
 
 **ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA**
  The selected consolidated financial data presented below has been derived from our historical audited consolidated financial statements of PrimeSource for each of the five years in the period ended June 30, 2004. The following data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the notes thereto. Data is in thousands except per share data.
 
  Operating Data:
Fiscal YearEnded June 302004(1)(2)
2003(3)(4)
2002(5)(6)
2001(7)
2000(8)(9)Net sales
$   48,763
$   46,360
$   53,696
$   48,402
$   54,411Net income (loss)
$     1,606
$   (3,629)
$   (6,191)
$   (4,382)
$   (1,384)Net income (loss) pershare - Basic
$       0.07
$       0.33
$     (1.11)
$     (1.37)
$     (0.69)Total assets
$   29,899
$   31,665
$   37,587
$   45,450
$   31,297Long-term obligations
$     8,250
$     5,826
$   23,285
$   20,335
$   15,968Stockholders' equity(Capital deficiency)
$   10,433
$   10,686
$   (5,349)
$      (562)
$      (567)
 
 (1) 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.
 
 (2) Upon adoption of SFAS No. 150 as of July 1, 2003, the Series G Stock was reclassified in the Consolidated Balance Sheets from presentation in the equity section the liability section. Upon original issuance of the Series G Stock, $2,062,000 relating to warrants issued was recorded to additional paid-in capital. These amounts were reversed out of additional paid-in capital and the book value of the Series G Stock was increased to the redemption amount upon adoption of SFAS No. 150.
 
 (3) 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.
 
 (4) In the fiscal year ended June 30, 2003, the Company restructured its outstanding preferred and common stock. The restructuring resulted in preferred stockholders exchanging preferred stock with a redemption value of approximately $21,993,000 for preferred stock with a redemption value of $3,250,000, common stock and common stock warrants. As a result of the restructuring, net income available for common stockholders was increased by $11,809,741 (to $0.33 per share) due to the effect of the equity recapitalization.
 
 
 
 
 
 (5) In the fiscal year ended June 30, 2002, PrimeSource approved plans for restructuring of operations involving narrowing the focus of its operations, consolidation of certain under performing sales regions, reduction of corporate overhead through workforce reductions, restructuring of its balance sheet through the refinancing of PrimeSource Healthcares and PrimeSource Surgical s senior bank debt and the reduction of debt levels through cost reductions and improved efficiency of operations . The related cost s of the restructuring, excluding the $1,038,823 discussed in footnote (6) below, included charges of $ 2,915,675.
  (6) On September 20, 2002, in connection with the restructuring, Ruby sold all of the assets of its former PEC line of business in exchange for the cancellation of stock previously issued to the founder of PEC and the assumption of certain liabilities with respect to the PEC line of business. The Company recognized a loss on the transaction totaling $1,038,823 in the fiscal year ending June 30, 2002, as the assets were held for sale and deemed impaired at that date.
 
 (7) Effective March 2, 2001, PrimeSource Surgical completed a merger with Luxtec Corporation with aggregate consideration exchanged of approximately $4,791,000, where PrimeSource Surgical assumed liabilities, net of assets acquired and costs of approximately $3,931,000. The acquisition was accounted for using the purchase method of accounting and the results of operations of Luxtec have been included in the financial statements of PrimeSource Surgical as of the date of acquisition. In December 2000, the Company acquired two entities, PEC and NEM, for aggregate consideration of $1,310,000. The acquisition was accounted for using the purchase method of accounting and the results of operations of the acquired entities have been included in the consolidated financial statements from the date of acquisition through date of sale, as discussed above.
 
 (8) In June 2000, PrimeSource Surgical sold an entity for approximately $398,000, which resulted in a recorded loss of approximately $732,000. In addition, in April 2000, PrimeSource Surgical acquired an entity for $405,000. The acquisition was accounted for using the purchase method of accounting and the results of operations are included in the consolidated financial statements from the date of acquisition.
 
 (9 ) In the fiscal year  ended June 30, 2000, PrimeSource Surgical approved plans for a major restructuring of its operations with the goal of centralizing distribution facilities, eliminating unprofitable divisions and reducing costs . The aggregate cost s of the restructu ring included total charges of $ 1,031,000.
 
 
  
 
 
 
 **Operating Data:**
  The following table sets forth unaudited quarterly consolidated operating results for each of our last eight quarters. We have prepared this information on a basis consistent with our audited consolidated financial statements and included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the data. These quarterly results are not necessarily indicative of future results of operations. This information should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the notes thereto. Data is in thousands, except per share data.
 
 Sep-30,
Dec-31,
Mar-31,
Jun-30,
Sep-30,
Dec-31,
Mar-31,
Jun-30,2002(1)
2002
2003
2003
2003
2003
2004
2004Net sales
$11,789.8
$11,587.6
$11,127.0
$11,855.6
$12,162.3
$12,540.7
$12,253.4
$11,806.6Cost of sales
7,498.9
7,307.1
6,885.2
7,606.4
7,665.9
7,853.0
7,956.4
7,556.4Gross profit
$  4,290.9
$  4,280.5
$  4,241.8
$  4,249.2
$  4,496.4
$  4,687.7
$  4,297.0
$  4,250.2Net income (loss)
$(3,970.5)
$    416.1
$      (3.0)
$     (71.4)
$    201.8
$    286.0
$    258.8
$    859.4Net income (loss) per share  basic
$      0.45
$      0.01
$    (0.02)
$     (0.02)
$      0.01
$      0.01
$      0.01
$      0.04
 
 *Computed as described in our accompanying consolidated financial statements and related notes.*
 
 Our results of operations historically have fluctuated on a quarterly basis and can be expected to continue to be subject to quarterly fluctuations.
 
 (1) In accordance with SFAS No. 142, the Company recorded a non-cash charge of $4,454,656 to reduce the carrying value of its goodwill. This is a non-cash charge and is reflected as a cumulative effect of a change in accounting principle, effective July 1, 2002.
 
 
 
  
 
 
 
 **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, 2004 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, manufacturing and service 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 includes 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 PrimeSource Surgical, Inc.
  *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.
  
  
 
 
 ****
 **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 their 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). All 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;
  ·
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 the remainder sold in June 2003. During the past two 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 and $2.5 million in 2004 and by reducing its senior secured debt from $9.9 million in 2002 to $5.2 million in 2004.
  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, the sales force has incentives to market proprietary or "corporate" products since those products become an owned component of their portfolio. The 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 exists numerous quality, high growth acquisition targets, including several in its current product portfolio.
 ****
 **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, as well as purchase commitments, could adversely affect our future operating results. We cannot assure that we will be able to maintain our existing supplier relationships or secure additional suppliers as needed.
  
 
 
 
 *If Suppliers Terminate Their Agreements with Us, Our Product Offerings May Suffer.* Following an initial one-year term, many of our standard supplier agreements may be terminated by either party on 90 days' notice 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, 2004 is summarized below:
 
 Series G (1)

Common StockShareholder
Shares

Options (2)

Shares
Options (3)
Warrants
Total CSE
%GE Capital Equity
12,500,000



7,967,374
3,721
9,398,639
29,869,734
41.5%Coleman Swenson Booth
7,718,750



3,573,089
23,721
4,380,356
15,695,916
21.8%Robert Fisher Entities
1,484,375



1,963,953
7,442
1,456,876
4,912,646
6.8%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%PSHC Management





2,511,046

2,511,046
3.5%Others




8,249,350
3,961,445
1,352,203
13,562,998
18.9%Total
22,250,100

749,900

22,375,144
9,787,930
16,774,768
71,937,842
 
 Note: All figures shown in common stock equivalents (CSE).
  (1) Series G Preferred Stock carries a preference of two times original price per share plus accrued dividends ($0.64 per CSE) and participates in additional proceeds as Common Stock.
  (2) Series G Preferred Stock options convert to Series G Preferred Stock at a strike price of $0.32 per CSE.
  (3) Common Stock options and warrants convert at an average strike price of $0.49 and $0.02 per CSE, respectively.
  
 
 
 
 We are a reporting company under the Securities Exchange Act of 1934, but not traded on a recognized stock exchange. The Company had approximately 1,400 shareholders as of June 30, 2004.
  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 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.
  *Inventory Reserves for Obsolescence*
  We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions prove to be less favorable than those projected by management, additional inventory write-downs may be required. ****
  *Goodwill and Other Intangible Assets*
  We evaluate goodwill and other intangible assets with indefinite lives 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. We recognized impairment losses in the year ended June 30, 2002 upon the disposition of a subsidiary and an impairment loss effective July 1, 2002 upon completion of SFAS No. 142 implementation. If other events occur and circumstances change, causing the fair value of a reporting unit to fall below its carrying amount, impairment losses may be recognized in the future. In accordance with SFAS No. 142, the Company has performed its annual impairment test in July 2003 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 and services when earned, as defined by accounting principles generally accepted in the United States of America. Specifically, 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.
  Revenues earned under agency agreements are recognized when the customer has received the product, and amounts are recorded in net sales, at the net amount retained by the Company.
  Provisions for discounts, rebates to customers, and returns are provided for at the time the related sales are recorded, and are reflected as a reduction of sales. These estimates are reviewed periodically and, if necessary, revised, with any revisions recognized immediately as adjustments to sales. The Company periodically and systematically evaluates the collectibility of accounts receivable and determines the appropriate reserve for doubtful accounts. In determining the amount of the reserve, 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.
  
 
 
 ****
 
  The following table sets forth certain consolidated financial data as a percentage of net revenues for the fiscal years ended June 30, 2004, 2003 and 2002.
 
 2004
2003
2002Net sales
100.0%
100.0%
100.0%Cost of sales
63.6 %
63.2 %
65.8 %Gross profit
36.4 %
36.8 %
34.2 %Selling expenses
16.7 %
16.1 %
16.6 %General and administrative expenses
13.4 %
15.1 %
16.1 %Depreciation and amortization expenses
1.0 %
1.8 %
4.6 %Restructuring expenses
0.0 %
0.7 %
7.4 %Interest expense
2.7 %
1.8 %
1.3 %Net income (loss)
3.3 %
(7.8)%
(11.5)%
 ****
 **Fiscal** **Year Ended June 30,** **2004 Compared with Fiscal** **Year Ended June 30,** **2003**
 
 ***Net Sales*** Net sales increased $2,402,987, or 5.2%, in fiscal 2004 compared to fiscal 2003 primarily due to higher 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 Surgical divisions sales for the twelve months ended June 31, 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 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. Any 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 recover lost revenue as we progress through fiscal 2005.
  ***Cost of Sales*** Cost of sales increased to 63.6% of net sales for fiscal 2004 from 63.2% of net 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 sales, as discussed above. The slight increase in the percentage of cost of sales as a percentage of net sales in fiscal 2004 relative to fiscal 2003 is due is 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 stocking sales and agency sales. A majority of our business is comprised of stocking relationships whereby we stock the vendors products and provide substantially all
  
 
 
 
 fulfillment services such as customer service and warehouse logistics. The remainder of our revenue is received on an agency basis where we do not stock the vendors products and do not provide fulfillment services, but instead receive revenue in the form of an agency commission from the vendor in return for arranging the sale of a vendors products. In the past nine months, our product mix between stocking and agency based sales has shifted slightly to a higher agency component. Agency sales are recorded in an amount equal to the commission received, and as a result have no direct cost of sales. As a result, an increase in agency sales will decrease cost of sales as a percentage of net sales as net sales have increased with no associated increase in cost of sales.
  ***Gross Profit*** Gross profit decreased to 36.4% of net sales in fiscal 2004 compared to 36.8% of net 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 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. Gross profit from our agency business for fiscal 2004 was approximately $492,000 more than in fiscal 2003.
  ***Selling Expenses*** **** Selling expenses increased $709,812 in fiscal 2004 compared to fiscal 2003. The increase is primarily due to higher sales volume and is 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%, is a result of lower salaries and wages related to reduced headcount by 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 is 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 is 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 related to the sale of Ruby, Inc.
 
 ***Interest Expense*** The increase in interest expense of $468,697, or 55.8%, is the result of the costs incurred relating to the refinancing of the Companys senior debt in the quarter ended December 31, 2003. Due to the demand provision in the line of credit, all financing costs relating to the refinancing were expensed as incurred. The increase also relates to the implementation of SFAS 150, which requires all dividends accrued on our preferred stock to be recorded as interest expense effective July 1, 2003 because the preferred stock is classified as a liability in accordance with the provisions of SFAS 150. These increases are offset by decreases relating to lower interest rates and fees on the Companys senior debt, as compared to the prior year, as a result of the refinancing. Interest expense on the Companys senior debt, excluding the financing costs, actually decreased by $155,754, or 23%, during fiscal 2004 over fiscal 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 states can 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 $5,234,848 in fiscal 2004 compared to the fiscal 2003 net loss. The 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 is 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.
  **Fiscal** **Year Ended June 30,** **2003 Compared with Fiscal** **Year Ended June 30,** **2002**
 
 ***Net Sales*** ****** Net sales decreased $7,335,698, or 13.7%, in fiscal 2003 compared to fiscal 2002. The decrease in net sales in fiscal year 2003 was primarily due to the closure of our western sales territory as a result of the Companys restructuring plan initiated in November 2001 and the divesture of PEC in June 2002. Remaining decreases were due to a shift in the companys distribution sales mix from stocking to agency-based sales, lost lines and other effects of the 2002 restructuring. The western sales territory closure resulted in approximately $2,542,000 of the decrease and the divesture of PEC resulted in approximately $1,327,000 of the decrease.
 
 ***Cost of Sales*** Cost of sales decreased to 63.2% for fiscal 2003 from 65.8% for fiscal 2002. The decrease in cost of sales of $6,031,556, or 17.1%, was primarily due to lower sales levels related
  
 
 
 
 to the closure of the western sales territory and the divesture of PEC. The remaining decreases are due to a shift in our distribution sales mix from stocking to agency-based sales, lost lines and other effects of the 2002 restructuring. The western sales territory closure resulted in approximately $1,810,000 of the decrease and the divesture of PEC resulted in approximately $683,000 of the decrease. The decrease in cost of sales as a percentage of net sales in 2003 compared to 2002 is due to the difference in the product mix sold and the non-recurring prior year inventory reserve adjustments.
  ***Gross Profit*** Gross profit decreased to 36.8% of net sales for fiscal 2003 from 34.2% of net sales for fiscal 2002. The $1,304,142 decrease in gross profit was primarily due to lower sales levels related to the closure of the western sales territory and the divesture of PEC. The western sales territory closure resulted in approximately $732,000 of the decrease and the divesture of PEC resulted in approximately $644,000 of the decrease. The increase in gross profit margins is due to a favorable change in product mix and the non-recurring prior year inventory reserve adjustment from 2002 which caused a higher cost of goods sold.
  ***Selling Expenses*** Selling expenses decreased $1,439,986 in fiscal 2003 compared to fiscal 2002. The decrease in selling expense is primarily due to the closure of the western sales territory as a result of the Companys restructuring plan initiated in November 2001 and the divesture of PEC in June 2002. Decreased salaries, commissions, benefits and travel expenses related to the western sales territory account for approximately $502,000 of the decrease and the PEC divesture resulted in approximately $500,000 of the decrease.
  ***General and Administrative Expenses*** General and administrative expenses decreased to $7,015,217 for fiscal 2003, from $8,625,555 for fiscal 2002, a decrease of $1,610,338, or 18.7%. The decrease is primarily a result of the Companys restructuring plan initiated in November 2001 and the divesture of PEC in June 2002. The restructuring plan decreased general and administrative expenses by narrowing the focus of the Companys operations and reducing corporate overhead through workforce reductions. Non-recurring reserve adjustments for inventory and accounts receivable recorded in December 2001 of approximately $474,000 also contributed to the decrease. The PEC divesture resulted in approximately $268,000 of the decrease.
  ***Depreciation and Amortization Expenses*** Depreciation and amortization expenses decreased to $843,500 for fiscal 2003, from $2,455,081 for fiscal 2002, a decrease of $1,611,581, or 65.6%. The decrease in depreciation and amortization expense in fiscal 2003 is primarily due to the implementation of SFAS No. 142 *Goodwill and Other Intangible Assets* effective July 2002. As a result of this adoption, goodwill was no longer amortized in fiscal 2003.
  ***Restructuring Expenses*** Restructuring expense decreased to $345,507 for fiscal 2003, from $3,954,498 for fiscal 2002. Fiscal 2003 restructuring expenses include a reserve recorded for the former Presidents severance agreement for $195,507 and other restructuring expenses of
  
 
 
 
 $150,000. Fiscal 2002 restructuring expenses relate to the restructuring plan which began in early November 2001, involving narrowing the focus of our operations, the consolidation of certain under performing sales regions, the reduction of corporate overhead through workforce reductions, the restructuring of our balance sheet through a recapitalization and refinancing of the PrimeSource Healthcare and the PrimeSource Surgical senior bank debt and a reduction of debt levels through projected improved earnings and potential asset sales. From November 2001 through August 2002 significant aspects of our new business model, including a reduction in workforce and executive staff, exit of the western sales region, recapitalization of equity and a refinancing of our existing debt, were completed. As a result of this, restructuring expense of $ 2,915,67 5 was recorded for fiscal 2002. In addition, during 2002, a decision was made to dispose of the PEC division, and the write-off of PEC goodwill and other impaired assets totaled $1,038,823 which was included in restructuring expenses.
  ***Interest Expense*** Interest expense increased $159,999, or 23.6%. Our interest cost increased as a result of increased interest rates and fees incurred related to the restructuring of the PrimeSource Healthcare and PrimeSource Surgical debt.
  ***Income Tax Benefit*** Income tax benefit decreased to $19,700 during fiscal 2003, compared to $61,700 during fiscal 2002. The decrease is the result of decreased taxable net income (loss) at state levels.
  ***Net Loss*** Net loss decreased $ 2,561,764, or 41.4%. The decrease in net loss resulted primarily from expense reductions related to our fiscal 2002 restructuring and decreased amortization expense. These expense decreases were offset by goodwill impairment expense of $4,454,656 recorded in fiscal 2003, resulting from the Companys implementation of SFAS No. 142 in July 2002.
  **Liquidity and Capital Resources**
  At June 30, 2004, we had working capital of $1,688,823 compared to a deficit of $793,154 at June 30, 2003. The increase in our working capital was primarily the result of decreased accounts payable, accrued expenses, lines of credit and current obligations for long-term debt, offset by decreased receivable and inventory balances. Accounts payable, accrued expenses and obligations for long-term debt were paid with the increased cash generated from operations and the increased availability of the line of credit, as discussed below.
  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 ($6,757,524 at June 30, 2004). As of June 30, 2004, borrowings bore interest at Wells Fargos prime rate plus 3.0% (7.25% at June 30, 2004). Borrowings are secured by substantially all assets held by PrimeSource Healthcare and its subsidiaries. At June 30, 2004, there was $1,553,385 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 capital expenditures. The Company was in compliance with these financial covenants as of June 30, 2004.
  
  Contractual Obligations
Payments due by periodTotal
Less than 1 year
1 - 3 years
3-5 years
More than  5yearsLong-term debt obligations
$     62,446
$     16,713
$    45,733Capital lease obligations
-
-
-Operating lease obligations
882,320
606,293
274,382
1,645Series G Preferred Stock
8,138,933
8,138,933
_________
________
________Total
$ 9,083,699
$8,761,939
$   320,115
$     1,645 ****
 **Recent Accounting Pronouncements**
  In May 2003, the Financial Accounting Standards Board (FASB) issued Statement 150, *Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity* (SFAS No. 150). SFAS No. 150 changes the classification in the statement of financial position of certain common financial instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in the fair value or the redemption amount, as applicable, in earnings. SFAS No. 150 was effective for the Company as of July 1, 2003. The Company adopted SFAS No. 150 in the quarter ended September 30, 2003 and, as a result, reclassified its Series G Convertible Redeemable, Preferred Stock (Series G Stock) from equity to a liability. Further effects of this adoption are discussed in Note 8 to the accompanying consolidated financial statements.
  In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which codifies, revises, and rescinds certain sections of SAB No. 101, Revenue Recognition, in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes in SAB No. 104 did not have a material impact on our financial position or results of operations.
  On March 31, 2004, the FASB issued an exposure draft, Share-Based Payment, an Amendment of SFAS No. 123 and 95. The exposure draft proposes to expense the fair value of share-based payments to employees beginning in July 2005. We are currently evaluating the impact of this proposed standard on our 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, 2004 was $5,204,139, all of which is subject to interest rate fluctuations. A hypothetical 10% change in interest rates applied to the fair value of debt would not have a material impact on our earnings or cash flows.
  
   
 
 
 
 **ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
  PRIMESOURCE HEALTHCARE, INC. and Subsidiaries
  
 Consolidated Financial Statements
 as of June 30, 2004 and 2003,
 and for the Years Ended
 June 30, 2004, 2003 and 2002 and
 Independent Auditors Report
 
 
 PageIndependent Auditors
F-1Consolidated Balance Sheets as of June 30, 2004 and 2003
F-2 - F-3Consolidated Statements of Operations for the Years EndedJune 30, 2004, 2003 and 2002
F-4 - F-5Consolidated Statements of StockholdersCapital Deficiency) for the Years Ended June 30, 2004, 2003 and 2002
F-6Consolidated Statements of Cash Flows for the Years EndedJune 30, 2004, 2003 and 2002
F-7 - F-8Notes to Consolidated Financial Statements
F-9 - F-27
 
 
 
 
 
  **INDEPENDENT AUDITORS REPORT**
  Board of Directors
  PrimeSource Healthcare, Inc.
  Tucson, Arizona
   We have audited the accompanying consolidated balance sheets of PrimeSource Healthcare, Inc. and subsidiaries (the Company) as of June 30, 2004, and 2003, and the related consolidated statements of operations, stockholders equity (capital deficiency), and cash flows for each of the three years in the period ended June 30, 2004.  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 Corporations management.  Our responsibility is to express an opinion on the financial statements and 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.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
   In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PrimeSource Healthcare, Inc. and subsidiaries as of June 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004, 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, present fairly in all material respects the information set forth therein.
  As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for its Series G Redeemable, Convertible preferred stock as required by Statement of Financial Accounting Standards No. 150, *Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity* , which was effective for the Company July 1, 2003.
  
  DELOITTE & TOUCHE LLP
  Phoenix, Arizona
 September 28, 2004
  
   
 
 
 
 PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSJUNE 30, 2004AND 2003ASSETS (Note 7)
2004
2003CURRENT ASSETS:Cash and cash equivalents
$          98,903
$        489,911Accounts receivable  net of allowance for doubtful accountsof approximately $132,000 (2004) and $214,000 (2003)
5,718,346
6,111,062Inventories  net (Note 4)
6,732,542
7,517,965Income taxes receivable (Note 11)
129,913
67,800Prepaid expenses and other current assets
224,865
172,397Total current assets
12,904,569
14,359,135PROPERTY AND EQUIPMENT  Net (Note 5)
887,325
996,358GOODWILL  Net (Note 6)
15,956,883
15,956,883INTANGIBLE ASSETS  Net of accumulated amortizationof approximately $245,000 (2004) and $236,000 (2003) (Note 6)
60,273
118,290OTHER ASSETS  Net of accumulated amortization ofapproximately $782,000 (2003)
90,196
233,874TOTAL
$   29,899,246
$      1,664,540(Continued)
 
  
 
 
   PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSJUNE 30, 2004AND 2003LIABILITIES AND STOCKHOLDERS EQUITY
2004
2003CURRENT LIABILITIES:Accounts payable
$  4,253,295
$     5,636,333Accrued expenses
1,509,432
2,240,770Accrued restructuring costs (Note 14)
43,726
690,968Customer deposits
166,873
72,895Lines of credit (Note 7)
5,204,139
5,926,021Current portion of long-term debt (Note 7)
16,713
559,877Current portion of capital lease obligations (Note 12)
21,568
25,425Total current liabilities
11,215,746
15,152,289CAPITAL LEASE OBLIGATIONS  Net of current portion                                                     (Note 12)
22,149
21,433LONG-TERM DEBT  Net of current portion (Note 7)
88,983
105,696SERIES G REDEEMABLE, CONVERTIBLE PREFERREDSTOCK  No par value  authorized, 230,000 shares;issued and outstanding, 222,501 shares; aggregate liquidationpreference of $15,258,964 (Note 8)
8,138,933TOTAL LIABILITIES
19,465,811
15,279,418COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 9, 10 and 12)SERIES G REDEEMABLE, CONVERTIBLE PREFERREDSTOCK  No par value  authorized, 230,000 shares;issued and outstanding, 222,500 shares; aggregate liquidationpreference of $14,687,737

5,699,121STOCKHOLDERS EQUITY:Common stock, $0.01 par value  authorized, 75,000,000 shares;issued and outstanding, 22,375,144 (2004) and 22,375,094
(2003) sharesAdditional paid-in capital
19,295,451
21,347,451Accumulated deficit
(9,085,767)
(10,885,200)Total stockholders equity
10,433,435
10,686,001TOTAL
$ 29,899,246
$   31,664,540See notes to consolidated financial statements.

(Concluded)
 
 
 
   
 
 **PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF OPERATIONS****YEARS ENDED JUNE 30, 2004, 2003 AND 2002**
****
****
******2004**
**2003**
**2002**NET SALES
$   48,763,006
$   46,360,019
$  53,695,717COST OF SALES
31,031,700
29,297,572
35,329,128GROSS PROFIT
17,731,306
17,062,447
18,366,589OPERATING EXPENSES:Selling expenses
8,160,206
7,450,394
8,890,380General and administrative expenses
6,541,025
7,015,217
8,625,555Depreciation and amortization expenses
493,525
843,500
2,455,081Restructuring expenses (Note 14)
4,817
345,507
3,954,498Total operating expenses
15,199,573
15,654,618
23,925,514OPERATING INCOME (LOSS)
2,531,733
1,407,829
(5,558,925)INTEREST EXPENSE
(1,307,940)
(839,243)
(679,244)OTHER INCOME (EXPENSE)
382,256
189,704
(115,357)INCOME (LOSS) FROM CONTINUING OPERATIONSBEFORE INCOME TAX BENEFIT
1,606,049
758,290
(6,353,526)INCOME TAX BENEFIT (Note 11)

19,700
61,700INCOME (LOSS) BEFORE DISCONTINUED OPERATIONSAND CUMULATIVE EFFECT OF CHANGE INACCOUNTING PRINCIPLE
1,606,049
777,990
(6,291,826)DISCONTINUED OPERATIONS:INCOME FROM DISCONTINUED OPERATION -Net of income tax

121,697
101,263LOSS ON DISPOSAL OF DISCONTINUED OPERATION -Net of income tax

(73,830)Total

47,867
101,263CUMULATIVE EFFECT OF CHANGE IN ACCOUNTINGPRINCIPLE - GOODWILL IMPAIRMENT

(4,454,656)NET INCOME (LOSS)
1,606,049
(3,628,799)
(6,190,563)DIVIDENDS AND ACCRETION ON PREFERRED STOCK

(1,147,094)
(2,652,571)EFFECT OF EQUITY RECAPITALIZATION

11,809,741NET INCOME (LOSS) AVAILABLE FOR COMMONSTOCKHOLDERS
$  1,606,049
$   7,033,848
$  (8,843,134)(Continued)
 
  
 
  
 
 **PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF OPERATIONS****YEARS ENDED JUNE 30, 2004, 2003 AND 2002**
****
****
******2004**
**2003**
**2002**INCOME (LOSS) PER SHARE BEFORE DISCONTINUEDOPERATIONS AND CUMULATIVE EFFECTOF CHANGE IN ACCOUNTING PRINCIPLE:Basic
$           0.07
$           0.54
$           (1.13)Diluted
$           0.07
$           0.24
$           (1.13)LOSS PER SHARE FROM DISCONTINUEDOPERATIONS - NET OF INCOME TAX - DISPOSALOF OPERATION:Basic


$           0.02Diluted


$          0.02LOSS PER SHARE FROM CUMULATIVE EFFECT OF CHANGEIN ACCOUNTING PRINCIPLE - GOODWILL IMPAIRMENT:Basic

$           (0.21)Diluted

$          (0.09)INCOME (LOSS) PER SHARE:Basic
$           0.07
$           0.33
$          (1.11)Diluted
$           0.07
$          0.15
$           (1.11)WEIGHTED AVERAGE SHARES USED INCOMPUTATION OF INCOME (LOSS) PER SHARE:Basic
$ 22,375,130
$ 21,059,853
$ 7,975,208Diluted
$ 22,375,130
$ 53,024,512
$ 7,975,208See notes to consolidated financial statements.


(Concluded)
 
  
 
 
 **PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)****YEARS ENDED JUNE 30, 2004, 2003 AND 2002**
****
****
****
****
****
****
******Total****Additional**



**Stockholders****Common Stock**

**Paid-in**

**Accumulated**

**Equity****Shares**
**Amount**

**Capital**

**Deficit**

**(Deficiency)**BALANCE, JULY 1, 2001
7,959,704
$          79,597

$           8,434,697

$           (9,075,914)

$           (561,620)Issuance of common stock
18,605
186

24,814



25,000Warrants and beneficial conversionfeatures of preferred stock



3,912,000



3,912,000Preferred stock dividends and accretion





(2,652,571)

(2,652,571)Restricted common stock vesting



118,709



118,709Refund fractional shares



(18)



(18)Net loss
-
-

-

(6,190,563)

(6,190,563)BALANCE, JUNE 30, 2002
7,978,309
79,783

12,490,202

(17,919,048)

(5,349,063)Equity recapitalization
14,735,066
147,351

6,785,864

11,809,741

18,742,956Warrants issued with issuance of Series Gpreferred stock



2,062,000



2,062,000Preferred stock dividends and accretion





(1,147,094)

(1,147,094)Cancellation of shares in legal settlement
(132,963)
(1,330)

(41,218)



(42,548)Cancellation of shares in sale of PEC assets
(201,067)
(2,011)

(62,330)



(64,341)Cancellation of shares in sale of Ruby Merger
(4,251)
(43)

(1,317)



(1,360)Issuance of compensatory stock options



110,000



110,000Restricted common stock vesting



4,250



4,250Net loss
-
-

-

(3,628,799)

(3,628,799)BALANCE, JUNE 30, 2003
22,375,094
223,750

21,347,451

(10,885,200)

10,686,001Reclassification of Series G preferredstock to liability



(2,062,000)

193,384

(1,868,616)Issuance of compensatory stock options



10,000



10,000Exercise of stock option
50
1





1Net income
-
-

-

1,606,049

1,606,049BALANCE, JUNE 30, 2004
22,375,144
$       223,751

$       19,295,451

$          (9,085,767)

$         10,433,435See notes to consolidated financial statements.
 
 
 
 
 **PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****YEARS ENDED JUNE 30, 2004, 2003 AND 2002**


****
******2004**

**2003**

**2002**CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
$ 1,606,049

$ (3,628,799)

$ (6,190,563)Adjustments to reconcile net income (loss) to net cashprovided by (used in) operating activities:Depreciation and amortization expenses
493,525

849,657

2,462,411Loss on disposal of property and equipment
46,317

22,147

124,132Stock compensation expense
10,000

110,000

118,709Debt forgiveness
(150,000)Goodwill impairment


4,454,656Loss on sale of division


73,830

1,038,823Issuance of common stock for services


4,250

25,000Gain on legal settlement


(42,548)Change in fair value of warrant put obligation




(95,000)Write-off of intangible assets




12,406Amortization of debt discount




28,600Changes in operating assets and liabilities - net ofeffect of business acquisitions and dispositions:Accounts receivable
392,716

(313,913)

2,208,904Inventories
785,423

(397,713)

1,978,659Income taxes receivable
(62,113)

42,200

(119,500)Prepaid expenses and other current assets
(52,468)

(31,021)

4,644Other assets
(9,688)

(80,723)

(181,504)Accounts payable
(1,383,038)

578,565

(5,235,025)Accrued expenses
(717,878)

(604,266)

568,636Accrued restructuring costs
(647,242)

(420,165)

1,111,133Customer deposits
93,978

(148,006)

(347,215)Net cash provided by (used in) operating activities
405,581

468,151

(2,486,750)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
(199,356)

(255,320)

(86,828)Proceeds from sale of property and equipment
5,233

157

6,462Purchase of intangible assets




(64,166)Acquisition of other assets




(31,904)Proceeds from business disposition


1,000,000Net cash (used in) provided by investing activities
(194,123)

744,837

(176,436)
  
 
 
 **PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****YEARS ENDED JUNE 30, 2004, 2003 AND 2002**

****

****
******2004**

**2003**

**2002**CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under lines of credit
38,844,614

16,785,191

19,506,353Repayments under lines of credit
(39,566,496)

(18,390,045)

(20,027,304)Borrowings under long-term debt




600,000Repayment of long-term debt
(422,704)

(2,731,323)

(872,711)Repayment on capital leases
(29,076)

(36,666)

(47,192)Proceeds from issuance of stock
32Proceeds from issuance of preferred stock - net of costs
571,164

3,364,031

3,167,170Stock repurchases




(18)Net cash (used in) provided by financing activities
(602,466)

(1,008,812)

2,326,298NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(391,008)

204,176

(336,888)CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
489,911

285,735

622,623CASH AND CASH EQUIVALENTS, END OF YEAR
$ 98,903

$ 489,911

$ 285,735SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION - Cash paid duringthe year for:Interest
$ 728,358

$ 698,685

$ 741,905Income taxes
$ 60,910

$ 30,000

$ 256,100SUPPLEMENTAL DISCLOSURES OF NONCASHTRANSACTIONS:Forgiveness of notes payable
$ (150,000)Equipment acquired under capital lease
$ 25,304



$ 54,745Issuance of note payable for debt refinancing cost


$ 250,000Discount on issuance of note payable for legal services
$ 12,827

$ (12,827)Fair value of common stock cancelled in sale of asset


$ 64,341Fair value of common stock cancelled in legal settlement


$ 42,548Common stock issued for services


$ 4,250

$ 25,000See notes to consolidated financial statements.




(Concluded)
 
 
 
 
 **PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES**
  **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 **YEARS ENDED JUNE 30, 2004, 2003 AND 2002**
  **1.**
**NATURE OF BUSINESS**
  PrimeSource Healthcare, Inc. (PrimeSource 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.
  On June 30, 2003, PrimeSource Surgical, Inc., a wholly owned subsidiary of the Company (PrimeSource Surgical), sold all of the issued and outstanding capital stock of Ruby Merger Sub, Inc., an indirect wholly owned subsidiary (Ruby) for cash proceeds of $1,000,000 to New England Medical Specialties, Inc., a newly formed entity. The Company recognized a loss of $73,830 on the sale. The cash proceeds were used to payoff a portion of the Companys outstanding long-term debt.
  Prior to the sale of Ruby, effective June 30, 2002 the Company sold all of the assets of Professional Equipment Corporation, a wholly owned subsidiary of Ruby (PEC), line of business in exchange for the cancellation of previously issued stock to the founder of PEC and the assumption of certain liabilities with respect to the PEC line of business. Goodwill and other impaired assets were written off in 2002, resulting in a loss of $1,038,823, which is recorded as restructuring expenses in the consolidated statement of operations.
  **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: PrimeSource Surgical; 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 and, as a result, at June 30, 2004, the Company had no 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 companies.
  ***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. ****
  ***Property and equipment*** are recorded at cost. Depreciation has been provided using the straight-line method over estimated useful lives, generally three to ten years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
  ***Long-Lived*** ***Assets*** - The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets* . In accordance with SFAS No. 144, long-lived assets should be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The Company periodically reviews the carrying value of long-lived assets to determine whether impairment to such value has occurred.
  ***Goodwill and Other Intangible Assets*** - Effective July 1, 2002 for the Company, 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. Intangible assets with indefinite lives are no longer amortized but instead are subject to periodic impairment testing in accordance with SFAS No. 142. In accordance with SFAS No. 142, the Company performed its annual impairment test in July 2003 and found no further impairment in its existing goodwill balances.
  ***Other assets*** consist principally of deposits and deferred financing costs. Deferred financing costs are amortized over the life of the related debt using the effective interest method.
  ***Revenue Recognition*** - The Company recognizes revenue at the time of shipment and passage of title. The Company also receives revenues under certain agency arrangements and recognizes revenue, on a net basis, when the agency sale is complete. Provision is made currently for estimated sales returns and allowances, which have historically been insignificant. The Company expenses warranty costs as incurred as amounts have historically been insignificant, and Luxtec offers minimal warranty of products. There were no warranty costs for the years ended June 30, 2004, 2003 and 2002.
  
 
 
 
 ***Shipping and handling costs*** ** are included in costs of sales *.*
  ***Research and development costs*** are incurred by the Companys Luxtec division and are charged to operations as incurred. Total research and development costs for the years ended June 30, 2004, 2003 and 2002 were approximately $185,000, $253,000 and $87,000 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, income taxes are recognized for: (a) the amount of taxes payable or refundable for the current year, and (b) deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Companys financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
  ***Stock-Based Compensation*** - The Company accounts for stock-based awards to employees using the intrinsic-value method in accordance with Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees* . ** Common stock of the Company has been delisted since November 17, 2000 and does not trade on any exchange and is not quoted on any quotation system. Fair value of the Company's common stock is determined by the Company's Board of Directors based upon the most recent significant capital stock transaction adjusted by current major events affecting the Company's financial condition.
  Had compensation expense for these employee stock option grants been determined based on the fair value at the grant dates, consistent with SFAS No. 123, the Companys net income (loss) for fiscal years ending 2004, 2003 and 2002 would have been the pro forma amounts indicated below:
  **2004**
**2003**
**2002**Net income (loss) available to common stockholders, as reported
$    1,606,049
$    7,033,848
$   (8,843,134)Stock-based employee compensation expense determined under fair-value method
(576,585)
(521,258)
(401,185)Pro forma net income (loss)
$    1,029,464
$    6,512,590
$  (9,244,319)Earnings (Loss) Per Share:Basic- as reported
$             0.07
$             0.33
$           (1.11)Basic- pro forma
$             0.05
$             0.31
$           (1.16)Diluted- as reported
$             0.07
$             0.15
$           (1.11)Diluted- pro forma
$             0.05
$             0.14
$           (1.16)Black-Scholes AssumptionsRisk-free interest rate
4.23%
3.10%
5.21%Expected volatility
50%
50%
50%Expected lives - in years
6
6
7Expected dividend yield
0%
0%
0%
 
 
 
 
 ***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, 2004, 2003 and 2002. The Company generally considers the carrying value of such amounts in the financial statements to approximate their fair value due to the relatively short period of time between origination of the instruments and their expected realization or the variable interest rate nature of such instruments. At June 30, 2004, 2003 and 2002, the estimated fair value of the companys long-term debt was approximately $106,000, $666,000 and $3,100,000, respectively. The Company estimates the fair value of its long-term debt generally using discounted cash flow analysis based on current interest rates for instruments with similar maturities.
  ***Use of Estimates in the Preparation of Financial Statements*** *-* The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
  ***Loss per Common Share*** - SFAS No. 128, *Earnings per Share,* requires the dual presentation of basic and diluted earnings (loss) per share on the face of the statement of operations and the disclosure of the reconciliation between the numerators and denominators of basic and diluted earnings (loss) per share calculations. The following represents a reconciliation from basic earnings per share to diluted earnings per share. Options and warrants to purchase common stock totaling 26,562,698, 1,640,185 and 5,713,342 were outstanding at June 30, 2004, 2003 and 2002, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. Put warrants totaling 282,022 for the year ended June 30, 2002 were not included in the computation of diluted earnings per share because the effect would also be antidilutive.
  
 **2004**
**2003**
**2002**Weighted-average shares outstanding - basic
22,375,130
21,059,853
7,975,208Incremental shares due to assumed exercise of

14,479,944outstanding options and warrantsIncremental shares due to assumed conversion ofSeries G preferred stock

17,484,715Weighted average shares outstanding - diluted
22,375,130
53,024,512
7,975,208
    ***Recently Issued Accounting Pronouncements -*** In May 2003, the Financial Accounting Standards Board (FASB) issued Statement 150, *Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity* (SFAS No. 150). SFAS No. 150 changes the classification in the statement of financial position of certain common financial
  
 
 
 
 instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in the fair value or the redemption amount, as applicable, in earnings. SFAS No. 150 was effective for the Company as of July 1, 2003. The Company adopted SFAS No. 150 in the quarter ended September 30, 2003 and, as a result, reclassified its Series G Convertible Redeemable, Preferred Stock (Series G Stock) from equity to a liability. Further effects of this adoption are discussed in Note 8.
  In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, *Revenue Recognition,* which codifies, revises, and rescinds certain sections of SAB No. 101, *Revenue Recognition* , in order to make this interpretive guidance consistent with current authoritative accounting guidance and SEC rules and regulations. SAB No. 104 did not have a material impact on the Companys financial position or results of operations.
  On March 31, 2004, the FASB issued an exposure draft, *Share-Based Payment, an Amendment of SFAS No. 123 and 95* . The exposure draft proposes to expense the fair value of share-based payments to employees beginning in 2005. We are currently evaluating the impact of this proposed standard on our financial statements.
  ***Reclassifications*** - Certain reclassifications were made to the 2002 consolidated financial statements to conform to the 2003 presentation.
  **3.**
**ACQUISITIONS AND DISPOSALS**
  ***PEC Disposal*** - As discussed in Note 1, effective September 20, 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.
  ***NEMS 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

2002Net Sales
$5,740,135

$        5,249,566Income from discontinued operation - net of
$  121,697

$101,263Income tax effect
  
  
 
 
 **4.**
**INVENTORIES**
  Inventories consist of the following at June 30:
  **2004**
****
**2003**
****Raw Materials
$     708,949
$      776,468Finished Goods
6,693,999
7,847,729Reserve for obsolescence
(670,406)
(1,106,232)Inventories - net
$   6,732,542
$   7,517,965
  **5.**
**PROPERTY AND EQUIPMENT**
  Property and equipment consist of the following at June 30:
 
 **2004**
****
**2003**
****Office equipment
$     656,859
$     466,598Furniture and fixtures
394,740
346,031Machinery and equipment
665,750
731,916Leasehold improvements
503,540
477,809Total
2,220,889
2,022,354Less accumulated depreciation and amortization
(1,333,564)
(1,025,996)Property and equipment - net
$     887,325
$    996,358
  
  Depreciation expense totaled $321,596, $381,145 and $536,707 for the years ended June 30, 2004, 2003 and 2002, respectively. Property and equipment held under capital leases amounted to $82,178, $46,291 and $81,194, less accumulated amortization of $33,548, $30,456 and $26,705, at June 30, 2004, 2003 and 2002, respectively.
  **6.      GOODWILL AND OTHER INTANGIBLE ASSETS**
  In 2001, the FASB issued SFAS No. 141, *Accounting for Business Combinations,* and SFAS No. 142, *Goodwill and Other Intangible Assets.* SFAS No. 142 modified accounting for business combinations after June 30, 2001 and affected the Companys treatment of goodwill and other intangible assets with indefinite lives effective July 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives existing at the date of adoption be reviewed for possible impairment and that impairment tests be performed at least annually. Additionally, intangible assets with finite lives must be assessed and classified consistent with the statements criteria. Intangible assets with finite lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indefinite lives will cease.
  
 
 
 
 The following table sets forth, for the year ended June 30, 2002, a reconciliation of net income to conform to the requirements of SFAS No. 142.
  **2002**Reported net loss
$  (6,190,563)Add back -Goodwill amortization
1,722,256Adjusted net loss
$  (4,468,307)Basic earnings per share:Reported net loss
$          (1.11)Goodwill adjustments
0.21Adjusted net loss
$  (0.90)Diluted earnings per share:Reported net loss
$            (1.11)Goodwill adjustments
0.21Adjusted net loss
$          (0.90)
 
 There were no changes in the carrying amount of goodwill for the year ended June 30, 2004.
  **7.**  **LINES OF CREDIT AND LONG-TERM DEBT**
 
 Lines of credit consisted of the following as of June 30:
 **2004**
**2003**Line of credit - PrimeSource Healthcare
$   5,204,139Line of credit - PrimeSource Surgical

$   4,654,436Line of credit - Luxtec

1,271,585Total line of credit
$   5,204,139
$   5,926,021
 
 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, 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 ($6,757,524 at June 30, 2004). As of June 30, 2004, borrowings bore interest at Wells Fargos prime rate plus 3.0% (7.25% at June 30, 2004). Borrowings are secured by substantially all assets held by PrimeSource Healthcare and its subsidiaries. At June 30, 2004, there was $1,553,385 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, 2004.
  Prior to December 2003, the Companys senior debt financing was provided under separate lines of credit at Luxtec and PrimeSource Surgical.
  The Companys Amended and Restated Security and Loan Agreement (the Luxtec Credit Agreement) provided for a $2,500,000 line of credit (the Luxtec Line of Credit) with ARK CLO 2000-1 LIMITED (ARK). On August 6, 2002, the Company amended the Luxtec Credit Agreement whereby ARK waived and amended certain provisions under the Luxtec Credit Agreement. Under the amendment, as of June 30, 2003, the maximum amount available to borrow under the Luxtec Line of Credit was limited to the lesser of $1,275,000 or a certain percentage of accounts receivable and inventory ($1,271,585 at June 30, 2003). As of June 30, 2003, borrowings bore interest at ARKs prime rate plus 3.0% (7.0% at June 30, 2003). Unused portions of the Luxtec Line of Credit accrued a fee at an annual rate of 1.00%. Borrowings were secured by substantially all of PrimeSource Healthcares assets, excluding the capital stock of, and assets held by, PrimeSource Surgical. Borrowings under the Luxtec Line of Credit were payable upon maturity on December 31, 2003. In December 2003, the Company refinanced its senior debt facilities, and paid off the Luxtec Line of Credit in the amount of $1,271,585.
  The Companys PrimeSource Surgical Amended and Restated Credit Agreement (the PrimeSource Surgical Credit Agreement) with Citizens Bank of Massachusetts (Citizens) provided for a line of credit (the PrimeSource Surgical Line of Credit) with a maturity date of March 31, 2004. Under the PrimeSource Surgical Credit Agreement, as amended, the maximum amount available to borrow under the PrimeSource Surgical Line of Credit was limited to the lesser of $8,000,000 or a certain percentage of accounts receivable and inventory, as defined by the PrimeSource Surgical Credit Agreement ($5,281,805 at June 30, 2003). As of June 30, 2003, borrowings bore a variable step interest rate at Citizens prime rate plus 4.50% (8.50% at June 30, 2003). Unused portions of the PrimeSource Surgical Line of Credit accrued a fee at an annual rate of 0.375%. Borrowings were secured by substantially all of the assets directly held by PrimeSource Surgical. In December 2003, the Company paid off the PrimeSource Surgical Line of Credit in the amount of $4,793,944.
  On June 14, 1999, as part of the PrimeSource Surgical Credit Agreement, PrimeSource Surgical executed an Amended and Restated Term Note (the PrimeSource Surgical Term Loan) in the original amount of $5,000,000 with Citizens. On June 30, 2003, the Company paid off the entire outstanding balance of the PrimeSource Surgical Term Loan in connection with the sale of Ruby and the funding of the last Preferred Series G round. The PrimeSource Surgical Term Loan was collateralized by substantially all the assets directly held by PrimeSource Surgical.
  The PrimeSource Surgical Term Loan was also subject to a term loan facility fee. In December 2003, in connection with the refinancing of its senior debt, the Company used proceeds from the refinancing with Wells Fargo to pay Citizens an $180,000 term loan facility fee.
  
 
 
 
 Long term debt includes notes payable as follows:
  **June 30,**
**June 30,****2004**
**2003**Luxtec tenant note
$ 62,446
$ 77,650PrimeSource legal counsel note, net of unamortizeddiscount of $12,827

357,173PrimeSource Citizens Bank note

187,500Other long-term note
43,250
43,250Total other notes payable
105,696
665,573Less current portion
(16,713)
(559,877)Total long-term debt
$ 88,983
$ 105,696
 The Luxtec tenant note is a note payable for tenant improvements to the lessor of Luxtecs leased premises in West Boylston, Massachusetts, which bears interest at 9.5% and is due September 19, 2005. Payments are interest only for the first 12 months, with remaining payments calculated on a 7-year amortization table with a balloon payment due on September 19, 2005.
  The PrimeSource legal counsel note was a non-interest bearing demand note payable with an original balance of $559,977 (net of original unamortized discount of $40,023 based on an imputed interest rate of 8%) to its special legal counsel for payment of prior accounts payable. This note matured on May 30, 2004. Special legal counsel reduced the balance of this note by $150,000 in November 2003. As of June 30, 2004 the note payable had been paid off.
  The PrimeSource Citizens Bank note was a $250,000 note payable to Citizens for the bank refinancing amendment fee. This note was paid off in December 2003 in connection with the refinancing of the Companys senior debt, as described above.
  **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. 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 and has a liquidation preference equal to $64.00 per share plus an amount equal to all accrued but unpaid dividends. The Series G Stock has a mandatory redemption date of June 3, 2005, and is redeemable at the original issue price of $32.00 per share plus accrued but unpaid dividends. The Series G Stock also has special consent rights to certain of the Companys activities, including, but not limited to, amendment of the Companys articles or bylaws and merger or consolidation of the Company. Accordingly, accrued dividends of $571,167 for the year ended June 30, 2004 are included in interest expense in the consolidated statements of operations. As of June 30, 2004, cumulative unpaid dividends on the Series G Stock totaled $1,018,900, and were included in the Series G Stock in the consolidated balance sheet.
  
 
 
 
 Upon adoption of SFAS No. 150 as of July 1, 2003, the Series G Stock has been reclassified in the consolidated balance sheet from presentation in the equity section to the liability section. Upon original issuance of the Series G Stock, $2,062,000 relating to warrants issued was recorded to additional paid-in capital. These amounts were reversed out of additional paid-in capital and the book value of the Series G Stock was increased to the redemption amount upon adoption of SFAS No. 150.
  During the year ended June 30, 2003, the Company granted 7,500 options to purchase Series G Stock for $16.00 a share to an executive of the Company. Options vested one year from August 6, 2002, the date of grant, and have a 10 year life.
  On October 15, 2003, one option for the purchase of Series G Stock was exercised for $16. At June 30, 2004, the remaining 7,499 options were vested and exercisable.
  **9.**
**STOCK OPTIONS AND WARRANTS**
  ***Common Stock Options*** *-* In January 1997, PrimeSource Surgical adopted a stock option plan (the 1997 Plan) for the grant of stock options and other awards to certain officers, key employees, or other persons affiliated with the Company. The maximum number of shares of common stock that may be issued pursuant to the 1997 Plan is 12,000,000. 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 a certain employee as required under the executed employment agreement with the Company. The exercise price was below the deemed fair market value of the stock at the date of grant. In accordance with the requirements of APB Opinion No. 25, the Company has recorded equity-based compensation for the difference between the exercise price of the stock and the deemed fair market value of the Companys stock at the date of grant. The deferred equity-based compensation is amortized to expense on a straight-line basis, over the one-year period during which the options become vested. As of June 30, 2004 and 2003, the Company had recorded cumulative deferred equity-based compensation related to these options of $10,000 and $110,000, respectively.
  On October 15, 2003, fifty options for the purchase of common stock were exercised for $16.
  In addition to the 1997 Plan, the Company has several stock option plans sponsored by Luxtec. The 1992 stock plan (the 1992 Plan) provides for the grant of incentive stock options, nonqualified stock options, stock awards, and direct sales of stock. Under the 1992 Plan,
  
 
 
 
 incentive stock options may be granted at an exercise price not less than the fair market value of the Companys common stock on the date of grant. The Board of Directors at its discretion may grant nonqualified options. The 1992 Plan also provides for various vesting schedules, as determined by the compensation committee of the Board of Directors, and have 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, 2004 and June 30, 2003, 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 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 December 31, 2002 and expire in August 2012. Additionally, the exercise price on 1,625,000 warrants to purchase common stock previously issued to certain Series E Stock stockholders was repriced from $1.00 per share to $.01 per share. The warrants vested immediately and expire in July 2011.
  An additional 118,605 warrants were issued to certain other stockholders related to prior year grants with expiration dates of June 2011, and exercise prices of $1.00 and $2.35.
  
 
 
 
 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, in common stock equivalents, for the years ended June 30, 2002, 2003 and 2004 are as follows:
  **Options**
**Warrants****Weighted**

**Weighted****Average**

**Average****Shares**
**Exercise**
**Shares**
**Exercise****Outstanding**
**Price**
**Outstanding**
**Price**Balance, July 1, 2001
3,393,030
$ 1.81
1,016,259
$ 3.15Grants
112,000
1.00
3,494,780
1.01Canceled
(1,864,554)
1.72
(438,173)
5.70Balance, June 30, 2002
1,640,476
1.85
4,072,866
1.04Grants
7,487,000
0.32
13,122,173
0.01Canceled
(525,212)
1.42
(356,485)
1.01Balance, June 30, 2003
8,602,264
0.53
16,838,554
0.02Grants
1,300,000
0.32Exercised
(50)
0.32Canceled
(114,284)
1.86
(63,786)
1.18Balance, June 30, 2004
9,787,930
0.49
16,774,768
0.02Vested and exercisable, June 30, 2004
6,544,957

16,774,768Vested and exercisable, June 30, 2003
1,474,960

16,838,554Vested and exercisable, June 30, 2002
996,076

4,072,866
 
 The weighted-average per share fair value of option grants in fiscal 2004, 2003 and 2002 was approximately $0.1147, $0.1602 and $0.5803, respectively.
  
 
 
 
 Outstanding stock options and warrants at June 30, 2004 consist of the following:
  **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**$0.00 - $1.60

9,077,745
6.8

$0.37


16,738,633

7.8

$0.02$1.61 - $3.20

693,185
5.3

1.98


36,135

6.5

2.03$3.21 - $4.80

17,000
0.5

4.579,787,930
6.7

0.49


16,774,768

7.8

0.02
 Compensation expense in the amount of $10,000 and $110,000 for fiscal 2004 and 2003, respectively, 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.
  **10.**
**401(k) RETIREMENT PLAN**
  The Company and PrimeSource Surgical separately maintain qualified 401(k) retirement plans. The plans cover substantially all employees who have over six months of service and have attained ages 18 and 21 for the Company and PrimeSource Surgical plans, respectively. The 401(k) plans provide for a contribution by the Company each year. The Company match totaled $145,426, $110,706 and $169,347, for the years ended June 30, 2004, 2003 and 2002, respectively.
  **11.**
**INCOME TAXES**
  The benefit (provision) for income taxes for the years ended June 30 is based on the following components:
  **2004**

**2003**

**2002**Current income taxesFederal

$

$              1,600State



18,100

$           61,700Total current



19,700

61,700Deferred income taxes:Federal

(1,904,700)

(172,700)

1,458,900State

(407,100)

(18,800)

209,200Total deferred

(2,311,800)

(191,500)

1,668,100Change in valuation allowance

(2,311,800)

191,500

(1,668,100)Total

$               -

$             19,700

$            61,700
 
 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:
  **2004**
**2003**
**2002**Income tax (provision) benefit at statutory rate
$ (562,100)
$ 1,270,080
$ 2,223,700Nondeductible warrant put expense (income)

66,500
(33,250)State tax (expense) benefit, net of federal benefit
(73,500)
112,700
202,350Meals and entertainment
(13,700)
(20,100)
(14,300)Nondeductible goodwill
78,800
(1,448,700)
(613,100)Change in valuation allowance
2,311,800
191,500
(1,668,100)Change in prior years estimates
(1,660,600)General business credit

(13,200)
(45,000)Loss on sale of subsidiary

(18,100)Expiration and adjustments of net operatinglosses and income tax credits
(85,800)
(118,000)Other
5,100
(2,980)
9,400Total
$        -
$     19,700
$      61,700
 
 On an annual basis, the Company reviews its deferred tax assets based on open tax years, available net operating loss carryforwards and other factors. Based on its 2004 review, the Company decreased its deferred tax assets by $1,660,600, and decreased the offsetting valuation allowance by the same amount. In addition, the Company decreased income taxes payable and income tax expense by approximately $113,000, which offset estimated state income taxes due and payable for the year ended June 30, 2004.
  Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities are as follows at June 30:
   
 
 
 
 **2004**
**2003**Current:Restructuring reserve
$       17,000
$   229,400Accrued vacation
59,800
62,400Inventory valuation adjustment
139,000
453,600Bad debt reserve
49,000
87,700Accrued distributor costs

205,000Other
25,300
46,400Total current
290,100
1,084,500Long-term:Depreciation and amortization
(39,800)
114,600Credit carryforwards
165,800
243,600Capital loss carryforwards
516,200
300,100Charitable loss carryforwards
14,600
6,800Net operating loss carryforwards
5,254,600
6,763,700Total long-term
5,911,400
7,428,800Total
6,201,500
8,513,300Valuation allowance
(6,201,500)
(8,513,300)Total
$         -
$         - 
 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, 2004, the Company had federal net operating loss carryforwards of approximately $13,266,700, pre-tax, and state net operating loss carry forwards of approximately $10,191,000, pre-tax. The Companys federal and state net operating losses expire in the tax years ending June 30, 2004 through 2024. At June 30, 2004, the Company had federal and State research and development credit carryforwards of approximately $154,800 and $11,000, respectively. The Companys federal and state credits will generally expire in the tax years ended June 30, 2004 through 2021. The Company also has a federal capital loss carryforward of approximately $1,326,900, pre-tax, that will begin to 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.
  A full valuation allowance has been provided against the Companys deferred tax assets as of June 30, 2004 and 2003, as it is more likely than not that sufficient taxable income will not be generated to realize these temporary differences. Any future reduction of the valuation allowance established at the dates of the acquisitions (see Note 3) will reduce the goodwill related to such acquisition.
  **12.**
**COMMITMENTS AND CONTINGENCIES**
  ***Leases*** - The Company leases office space and certain computer equipment and software under capital and noncancelable operating leases. Rent expense for the years ended June 30, 2004, 2003, and 2002 was $628,259, $654,116 and $726,455, respectively. Minimum annual lease payments under capital and noncancelable operating leases are as follows for the years ending June 30:
 
 
 **Capital**
**Operating****leases**
**leases**2005
$     26,124
$         606,2932006
19,691
266,2502007
4,411
8,1322008

1,645Total minimum lease payments
50,226
$         882,320Amount representing interest
(6,509)Present value of future minimum lease payments
43,717Less current portion of capital lease obligations
(21,568)Capital lease obligations - net of current portion
$     22,149
  ***Executive Compensation*** - At June 30, 2004, 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.
  ***Litigation*** - The Company is involved in litigation incidental to its business. Management does not believe the ultimate disposition of this litigation will have a material adverse effect on the Companys consolidated financial statements. ****
  On September 5, 2002, former executive officers and directors of the Company filed a complaint in Arizona Superior Court, County of Pima. The complaint alleged a breach by the Company of the severance agreements with each of the officers. The complaint was settled in November 2003. The terms of the settlement included cash payments totaling $125,000 to the officers over a period of four months, ended in February 2004.
  During the quarter ended September 30, 2002, the Company resolved an outstanding matter relating to alleged non-compete violations with a former employee. Pursuant to the terms of the settlement, the former employee paid the Company a cash settlement in the amount of $168,099, net of costs of $71,901, and returned for cancellation 132,963 shares of Company common stock valued at $42,548.
  **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.
  *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 PrimeSource Surgical.
  *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 Other and consist primarily of corporate staff operations, including selling, general, and administrative expenses of $2,867,349, $3,527,516 and $4,194,680 for 2004, 2003, and 2002, respectively.
  Operating income for each segment consists of net sales less cost of sales, selling expenses, depreciation and amortization expenses, and the segments general and administrative expenses. The sales between segments are made at market prices and are eliminated in consolidation. Cost of products sold reflects current costs adjusted, where appropriate, for lower of cost or market inventory adjustments.
  The total assets of each segment consist primarily of net property and equipment, inventories, accounts receivable, and other assets directly associated with the segment's operations. Included in the total assets of the corporate staff operations are property and equipment and other assets.
  
 
 
 
 Certain products of the Specialty Medical Products Manufacturing segment are sold to the Specialty Medical Distribution - PrimeSource Surgical segment. Total sales between these segments totaled $5,382,852, $5,055,400 and $5,178,351 for the years ended June 30, 2004, 2003 and 2002.
  Disclosures regarding the Companys reportable segments including a corporate management fee allocation with reconciliation to consolidated totals are presented below.
  **Distribution**

**Distribution****PrimeSource**

**PrimeSource**



**Corporate/****Surgical**

**Critical Care**

**Manufacturing**

**Other**

**Total**Net sales2004

$          27,330,958

$                13,296,821

$              8,135,227



$              48,763,0062003

26,181,812

11,939,529

8,238,678



46,360,0192002

29,412,136

16,743,545

7,540,036



53,695,717Net income (loss)2004

$               774,776

$                     383,550

$              1,576,755

$                (1,129,032)

$                1,606,0492003

137,765

260,978

(3,090,253)

(937,289)

(3,628,799)2002

448,525

(242,670)

913,610

(7,310,028)

(6,190,563)Total assets2004

$          23,524,547

$                  3,290,404

$              2,899,675

$                     184,620

$              29,899,2462003

25,041,081

3,361,430

2,935,095

326,934

31,664,5402002

14,827,268

6,895,708

15,406,712

457,080

37,586,768Restructuring expenses2004







$                         4,817

$                       4,8172003







345,507

345,5072002



$                  1,038,823



2,915,675

3,954,498Depreciation and amortization2004

$               133,736

$                         1,058

$                 186,802

$                     171,929

$                  493,5252003

195,959

24,048

155,984

467,509

843,5002002

243,350

170,495

1,344,814

696,422

2,455,081Interest expense2004

$               219,370

$                     152,790

$                 121,078

$                     814,702

$              1,307,9402003

282,899

129,604

111,959

314,781

839,2432002

273,612

207,856

159,218

38,558

679,244
  PrimeSource Surgical and its subsidiaries have no significant sales to foreign companies; however, Luxtec has several foreign customers. The Companys external sales, based upon the customers country of origin by geographic area for the years ended June 30, 2004, 2003 and 2002, totaled $46,065,000, $44,015,000 and $51,688,000 respectively for sales in the United States and $2,698,000, $2,345,000 and $2,008,000, respectively, for sales to foreign companies.
  
 
 
 
 **14.**  **RESTRUCTURING**
  In October 2001, PrimeSource engaged a restructuring agent to evaluate the Companys operations for possible reorganization. In November 2001, the Company commenced with a restructuring plan involving narrowing the focus of 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 and PrimeSource Surgical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 to be 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:
  
 **Employee related**
**Loss on disposal**
**of   division**
**Other contracts**
**Total**Estimated costs for 2002 restructuring
$ 1,379,000
$ 1,038,823
$ 1,536,675
$ 3,954,498Cash payments
(585,000)
-
(901,000)
(1,486,000)Other adjustments
(141,000)
(1,038,823)
(177,542)
(1,357,365)Balance, June 30, 2002
653,000
-
458,133
1,111,133Estimated costs for 2003 restructuring
195,507

150,000
345,507Cash payments
(584,739)

(166,320)
(751,059)Other adjustments
-
-
(14,613)
(14,613)Balance, June 30, 2003
263,768
-
427,200
690,968Cash payments
(263,768)

(159,584)
(423,352)Other adjustments
-
-
(223,890)
(223,890)Balance, June 30, 2004
$        -
$       -
$ 43,726
$ 43,726
 
  ******
  
   
 
 
 
 
 **ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL** **DISCLOSURE**
  None.
 
 **ITEM 9A. CONTROLS AND PROCEDURES** .
 
 (a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of June 30, 2004. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2004, the Company's disclosure controls and procedures are effective.
  (b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates (the registrants fourth fiscal quarter in the case of our annual report) that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
 ****
 ****
 **PART III**
 
 **Item 10. Directors and Executive Officers of the Registrant**
 
 The following individuals were the directors and/or executive officers of PrimeSource as of September 1, 2004.
 
 **Name**
**Age**
**Director Since**
**Position with PrimeSource**
**Term Ends**William H. Lomicka
67
2001
Director and Chairman
2004Larry H. Coleman, Ph.D.
61
2001
Director
2005Joseph H. Potenza
57
2003
Director, President and Chief Executive Officer
2005Shaun D. McMeans
43
2003
Director, Chief Operating Officer and Chief Financial Officer
2006
 
 CLASS I DIRECTORS SERVING A TERM
 EXPIRING AT THE 2004 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 and private.
  
 
 
 
 Representative companies include: Counsel Corporation, Pomeroy IT Solutions, Inc., Broadband Laboratories, 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.
 
 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 Columbia/HCA Healthcare Corporation. Dr. Coleman has served as a director on the boards of over 20 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 Corporation/Baxter Healthcare Corporation, culminating as Eastern Region President, running a $750 million distribution business with 650 employees and seven distribution facilities. He received a Bachelor of Arts degree in English from Norwich University and a Master of Arts degree in Management from Central Michigan University.
 
 CLASS III DIRECTOR SERVING A TERM
 EXPIRING AT THE 2006 ANNUAL MEETING
 
 **Shaun McMeans, Director, Chief Operating Officer and Chief Financial Officer** - Mr. McMeans has served on our Board of Directors since September 1, 2003. Mr. McMeans has over 20 years of experience in manufacturing and distribution businesses, specializing in operations, accounting and financial management. Prior to becoming the Companys Chief Operating Officer and Financial Officer, he served as Vice President of Operations and Corporate Controller. Prior to joining the Company, Mr. McMeans held senior operational and financial management positions with Burnham Corporation, a leading domestic manufacturer and distributor of residential and commercial heating equipment. Mr. McMeans earned a Bachelor of Science degree in accounting from The Pennsylvania State University and is a certified public accountant. He began his career in public accounting with the former Peat, Marwick, Mitchell and Company.
 
 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.
 
 **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. 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 certain Section 16(a) filing requirements applicable to certain of these persons were not complied with during prior periods.  These persons inadvertently failed to file certain reports when due.
 
 Specifically, the Company discovered that Mr. Potenza and Mr. McMeans did not file a Form 3 following an unexpected change in the Company's officers in the fiscal year ending June 30, 2002, whereupon they first became subject to Section 16(a) reporting.  Mr. Walker did not file a Form 3 in the fiscal year ending June 30, 2003 upon becoming the Company's former President and CEO and whereupon he became subject to to Section 16(a) reporting.  Mr. Potenza, Mr. McMeans and Mr. Walker each did not file a Form 4 to report one transaction relating to the grant of certain incentive options to each of them during the fiscal year ended June30, 2003.  In addition, Mr. Walker exercised certain of his incentive options during the fiscal year ended June 30, 2004, for which he also did not file Form 4 reporting the transactions.  Mr. Lomicka did not file Form 4 for purchases of and changes in the Company's preferred securities in fiscal years ended June 30, 2002, 2003 and 2004.
 
 The filing of any deficient reports is currently in process.
 
 
 **EXECUTIVE OFFICERS AND KEY MANAGEMENT PERSONNEL**
 
 The Company currently has a code of ethics. However, the Company is in the process of revising its code of ethics to comply with SEC requirements.
 
 For the business experience and background of our executive officers, Joseph H. Potenza, President and Chief Executive Officer, and Shaun D. McMeans, Chief Operating Officer and Chief Financial Officer, see information provided under Item 10, Directors and Executive Officers of Registrant. The following persons are considered key management personnel.
 
 **Samuel M. Stein, 64, Vice President & General Manager** , **Manufacturing Division:** Mr. Steins career has focused on high growth technology companies. Prior to becoming General Manager of the Companys Luxtec Division, Mr. Stein served as Luxtec's Chief Financial Officer. Prior to joining Luxtec in 1993, Mr. Stein served as Chief Operating and Chief Financial Officer of Mitrol, Inc. of which he was also co-founder. He has served as Chief Financial Officer with companies ranging from start-ups to subsidiaries of Fortune 500 corporations. Mr. Stein earned a Bachelor of Science degree in Business Administration from the University of Toledo and a Master of Science degree from Rensselaer Polytechnic Institute.
 
 **Mark A. Jungers, 52, Regional Vice President, Distribution Division:** Mr. Jungers has an extensive background in med-surg and critical care product sales and management. Mr. Jungers joined PrimeSource through its 1999 acquisition of Bimeco, a leading distributor of specialty medical products to the critical care market in the southeastern United States, where he served as a Sales Manager. 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, 45, Regional Vice President, Distribution Division:** Mr. Hoadley has worked for over 20 years in 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, 48, 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 Medibuy, Inc. Mr. Billman earned a Bachelor of Science degree in Business Administration and an MBA from Bowling Green State University.
  
 
 
 
 **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, 2004, or, collectively, the "Named Executive Officers":
 **SUMMARY COMPENSATION TABLE**
 
 **Annual Compensation**
****
**Long Term**
**Compensation****Awards******

**Name and Principal Position**
**Fiscal**
**Year**
**Ended**
**Salary($)**
**Bonus($)**
****
**Securities**
**Underlying**
**Options (#)**Joseph H. Potenza
June 30, 2004
230,556
0
0Current President, Chief
June 30, 2003
178,333
12,500
1,300,000Executive Officer and Director
June 30, 2002
166,637
0
0Shaun D. McMeans
June 30, 2004
191,667
20,000
0Chief Operating Officer , Chief
June 30, 2003
145,000
7,500
975,000Financial Officer and Director
June 30, 2002
138,591
9,990
0Bradford C. Walker
June 30, 2004
136,881(3)
50,000(4)
1,300,000Former President, Chief
June 30, 2003
229,198(2)
0
1,957,500Executive Officer and
June 30, 2002
0(2)
0
0Director (1)
 _________
 (1)
We appointed Mr. Walker as President and Chief Restructuring Officer in October 2001. In August 2002, we appointed Mr. Walker as President and Chief Executive Officer. Effective September 1, 2003, Mr. Walker resigned from his position as our President and Chief Executive Officer and as a member of our Board of Directors.
 (2)
For our fiscal year ended June 30, 2002, Mr. Walker was not an employee of PrimeSource. Beginning in October 2001 and through June 30, 2002, Corporate Revitalization Partners provided consulting services to PrimeSource in connection with PrimeSources restructuring. During that period, Mr. Walker was a Managing Director of Corporate Revitalization Partners. In the fiscal years ended June 30, 2002 and June 30, 2003, PrimeSource paid Corporate Revitalization Partners $430,500 and $62,838, respectively, for consulting fees.
 (3)
Includes $84,002 paid out in accordance with Mr. Walkers severance agreement.
 (4)
Total bonus of $50,000 paid out in accordance with Mr. Walkers severance agreement.
  The following table sets forth information with respect to options to purchase common stock granted to the Named Executive Officers as of our fiscal year ended June 30, 2004:
 
 **OPTION GRANTS IN LAST FISCAL YEAR**
 
 **Name**
**Number of Securities Underlying**
**Options****Granted(1)****(#)**
**% of Total Options Granted to Employees in**
**Fiscal Year**
**Exercise****Price****($/sh)**
**Expiration**
**Date**
**Potential Realizable Value**
**at Assumed Annual Rates**
**of Stock Price**
**Appreciation for Option Term****5% ($)**
**10%**Bradford C. Walker (1)
1,300,000
100%
$ 0.32
August 6, 2013

$0
$0
 67



________
 (1) The option exercise price is the fair value of our common stock on the respected grant date as determined by the Board of Directors. The options would have vested 100% after one year from the grant date of August 6, 2003. However, effective September 1, 2003, Mr. Walker resigned from his position as our President and Chief Executive Officer and as our Board of Directors. As a result, these options became immediately exercisable and expire 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.
 
 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, 2004. Options are for common stock unless otherwise noted.
  
 **AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL**
 **YEAR-END OPTION VALUES**
 
 ****
****


**Name**
**Shares Acquired on****Exercise (#)**
**Value Realized($)**
**Number of Securities**
**Underlying Unexercised**
**Options at Fiscal Year-End(#)  Exercisable/Unexercisable**
**Value of Unexercised**
**In-the-Money Options**
**at Fiscal Year-End($)(1)**
**Exercisable/Unexercisable**Bradford C. Walker (1)
50
0
3,249,950/0
0/0Bradford C. Walker-
Series G Stock (2)
1
$16.00
7,499/0
$119,984/0Shaun D. McMeans
0
0
373,666/688,543
0/0Joseph H. Potenza
0
0
503,196/945,641
0/0
 _________
  (1) With respect to options to purchase our common stock, value is based on an estimated fair market value of $ 0.01 per share on June 30, 2004, 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, 2004 of $32.00 per share, minus the exercise price of such options, multiplied by the number of shares underlying such options.
 
 **COMPENSATION OF DIRECTORS**
 
 During Fiscal Year 2004, we did not pay our directors for attendance at meetings of the Board of Directors or meetings of the committees thereof. We do, however, pay expenses for attendance at meetings of the Board of Directors and committees thereof. In addition, non-employee directors are compensated with options to purchase shares of common stock, in accordance with the 1995 Directors plan (the 1995 Director Plan). Under the terms of the 1995 Director Plan, we grant our non-employee directors non-qualified stock options to purchase a total of 12,000 shares of common stock upon their election or appointment to the Board of Directors, with 4,000 options vesting on the date of grant, and 4,000 shares vesting annually thereafter provided the individual continues to serve on the Board of Directors. The options granted pursuant to the 1995 Director Plan have an exercise price equal to one-hundred percent of the fair market value per share of common stock on the date the option is granted.
 
 
 
 
 
 **COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION**
  During Fiscal Year 2004, Mr. Walker served on the Compensation Committee from July 1, 2003 to September 1, 2003. Mr. Walker served as our President and Chief Executive Officer during that period. Other than Mr. Walker's position as an officer, no past or present member of the Compensation Committee has ever been an officer or employee of PrimeSource or any of our subsidiaries, nor has such person ever had any relationship with PrimeSource or our officers requiring disclosure. Currently 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 during Fiscal Year 2004, and not the compensation committee. No board member who is also an employee considered or voted on his own compensation.
 
 **EMPLOYMENT CONTRACTS**
 
 WALKER EMPLOYMENT AND SEVERANCE AGREEMENTS
 
 On August 6, 2002, we entered into an employment agreement with Bradford C. Walker, our former President and Chief Executive Officer and a member of our Board of Directors. On September 5, 2003, we entered into a severance agreement with Mr. Walker pursuant to which subsequently, Mr. Walker resigned as our President, Chief Executive Officer and a member of our Board of Directors effective September 1, 2003.
 
 Mr. Walker was entitled to receive severance payments equal to $20,833.33 monthly, for six (6) consecutive months from and after September 1, 2003 (the Severance Period). Mr. Walker was also entitled to receive additional severance payments of $25,000 payable on September 5, 2003, and $25,000 payable on or within five (5) business days after the last day of the Severance Period, March 5, 2004.
 
 During the Severance Period, Mr. Walker and his dependents are entitled to continued coverage under our standard insurance plans, policies or programs, providing health, dental, vision, accidental death and dismemberment, long-term disability and life insurance coverage.
 
 The severance agreement provided that Mr. Walkers option to purchase 1,300,000 shares of our common stock, granted on or about August 6, 2003, his option to purchase 1,950,000 shares of our common stock, granted on August 6, 2002, and his option to purchase 7,500 shares of our Series G Convertible Redeemable Preferred Stock, granted on August 6, 2002, each were fully vested and exercisable at any time prior to the earlier of (i) the date that is one (1) year following the registration of the applicable option's underlying shares under the Securities Act of 1933 on an effective registration statement on Form S-8, as amended or (ii) March 1, 2009, 5 years after Mr. Walkers severance date.
 
 In consideration for the severance benefits, Mr. Walker agreed to release any claims he may have against us and our affiliates. We agreed to release Mr. Walker from any claims we may have against him. Furthermore, Mr. Walker agreed to cooperate with our reasonable requests for consultation and services during the Severance Period.
 
 
 
 
 
 Finally, Mr. Walker agreed that, during the Severance Period, he would not compete with us. The Companys obligation to pay severance benefits and payments under the severance agreement will cease if Mr. Walker competes with us during the Severance Period.
 
 **BOARD COMPENSATION REPORT**
 **ON EXECUTIVE COMPENSATION**
 
 Our executive compensation policies, which include salary and bonus amounts and other annual compensation for the Named Executive Officers, are determined by the Compensation Committee of the Board of Directors, or in the absence of such Committee, the Board of Directors. During our Fiscal Year 2004, **** Mr. Walker served on the Compensation Committee from July 1, 2003, to September 1, 2003. During Fiscal Year 2004, Dr. Coleman served on the Compensation Committee. However, the duties of this committee were carried out by the entire board of directors. During our Fiscal Year 2005, we may nominate directors to serve on the Compensation Committee.
 
 During our Fiscal Year 2004, the annual salary of our former President and Chief Executive Officer, Bradford C. Walker, was set forth in his employment agreement. Mr. Walker resigned effective September 1, 2003 and, pursuant to the terms of his employment agreement, received severance payments from PrimeSource. 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.
 
 The annual salaries of our other executive officers during our fiscal year ended June 30, 2004 were determined based on their past salaries and salaries paid by comparable companies for comparable positions. Shaun D. McMeans, our Chief Operating Officer and Chief Financial Officer, received a cash bonus in the amount of $20,000 in our fiscal year ended June 30, 2004, as a result of his significant contributions to PrimeSource. Factors taken into account by the Compensation Committee in determining compensation include net sales, gross profit, net income and other specific operating goals as compared to the Companys operating plan.
 
 The Board of Directors:
 
 William Lomicka, Chairman
 Larry Coleman, Ph.D.
 Joseph Potenza
 Shaun McMeans
  
 
 
 
 **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 performance with the performance of the S&P Small Cap 600 Index and our peer group index is provided. Because our common stock is not listed or quoted on an exchange, all values subsequent to November 17, 2000 are estimates only.
 
 The following performance graph is intended to reflect the performance of our business for our last five completed fiscal year periods, which are October 31, 1999, October 31, 2000, June 30, 2001, June 30, 2002, June 30, 2003 and June 30, 2004.
 
 **COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG PRIMESOURCE, THE STANDARD & POORS (S&P) SMALL CAP 600 INDEX AND PRIMESOURCE'S PEER GROUP INDEX (1)**
  10/31/99
10/31/00
6/30/01
6/30/02
6/30/03
6/30/04PrimeSource
100.00
48.48
48.48
15.52
15.52
.48S&P Smallcap 600
100.00
124.41
132.29
131.68
125.79
168.69PrimeSource's Peer Group
100.00
137.85
135.07
173.55
173.52
280.34
 
 __________
 (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 PrimeSource's selected peer group index, in each case made as of the market close on October 31, 1998 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 PrimeSource'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. PrimeSource'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.
 
 
 **Item 12. Security Ownership of Certain Beneficial Owners and Management**
 
 The information required for the Companys Equity Compensation Plan can be found in Part II, Item 5, Market for the Registrants Common Equity and Related Stockholder Matters.
 
 **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND**
 **MANAGEMENT**
  The following tables furnish certain information as of October 29, 2004 (except as otherwise noted), as to our equity securities beneficially owned by each of our directors, by each of the individuals named in the Summary Compensation Table and by all of our directors and executive officers as a group, and, to our knowledge, by any beneficial owner of more than 5% of any class or series of our outstanding equity securities.
 
 Name of Beneficial Owner
Number of Shares of Common Stock Beneficially Owned
Number of Shares of Series G Convertible Redeemable Preferred Stock Beneficially Owned1
Aggregate Number of Shares of Common Stock Beneficially Owned or Underlying Preferred Stock Beneficially Owned2
Percent of Class Voting Power Presently Held3Larry H. Coleman, Ph.D.4
7,973,1665
77,187.5
15,691,916
22.68%William H. Lomicka
838,6276
5,468.5
1,385,502
2.00%Shaun D. McMeans
424,0147
0
424,014
*Joseph H. Potenza
563,8398
0
563,839
*All directors and executive officers as a group (4 persons)
9,799,646
82,656.25
18,065,271
26.11%
 
 Unless otherwise indicated, the address of each person is care of PrimeSource Healthcare, Inc. 3708 E. Columbia Street, Tucson, Arizona 85714. Shares of common stock subject to options or warrants exercisable within sixty days of September 30, 2004, are deemed outstanding for purposes of computing the percentage ownership of the person holding such options or warrants but are not outstanding for purposes of computing the percentage of any other person.
  
 
 
 
 
 *
Less than 1%.
 
 1
Each share of Series G Convertible Redeemable Preferred Stock entitles its holder to one hundred votes, subject to adjustment, in any vote of the holders of our common stock and may be converted into 100 shares of our common stock, subject to adjustment.
 
 2
Includes common stock and the common stock underlying the Series G Convertible Redeemable Preferred Stock owned as ofSeptember 30, 2004 and common stock underlying options and warrants that are exercisable within sixty days of September 30, 2004.
 
 3
Based upon the aggregate number of shares of our common stock outstanding and underlying outstanding shares of the Series G Convertible Redeemable Preferred Stock owned as of September 30, 2004 and options and warrants exercisable within sixty days of September 30, 2004 to acquire our common stock.
 
 4
Dr. Coleman is the Managing General Partner of CSHB Ventures IV L.P., the General Partner of Coleman Swenson Hoffman Booth IV, L.P.
 
 5
Includes 19,721 shares of our common stock underlying options that are exercisable within sixty days of September 30, 2004. Also includes 4,380,356 shares of our common stock subject to purchase pursuant to warrants that are exercisable within sixty days of September 30, 2004.
 
 6
Includes 30,605 shares of our common stock underlying options that are exercisable within sixty days of September 30, 2004. Also includes 186,694 shares of our common stock subject to purchase pursuant to warrants that are exercisable within sixty days of September 30, 2004.
 
 7
Includes 424,014 shares of our common stock underlying options that are exercisable within sixty days of September 30, 2004.
 
 8
Includes 563,839 shares of our common stock underlying options that are exercisable within sixty days of September 30, 2004.
  
 
 
 
 
 The following tables outlines beneficial owners of more than 5% of any class or series of our outstanding equity securities who are not directors or executive officers.
 
 Name of Beneficial Owner
Number of Shares of Common Stock Beneficially Owned
Number of Shares of Series G Convertible Redeemable Preferred Stock Beneficially Owned1
Aggregate Number of Shares of Common Stock Beneficially Owned or Underlying Preferred Stock Beneficially Owned2
Percent of Class Voting Power Presently Held3GE Capital Equity Investments, Inc.4
17,369,7345
125,000
29,869,734
43.17%Coleman Swenson Hoffman Booth IV L.P.6
7,973,1667
77,187.5
15,691,916
22.68%Webbmont Holdings L.P.8
3,428,2719
14,843.75
4,912,646
7.10%Bradford Walker
3,250,00010
7,50011
4,000,000
5.78%Geneva Middle Market12
3,106,693
0
3,106,693
4.49%
 
 **_______________________________________________**
 
 Unless otherwise indicated, the address of each person is care of PrimeSource Healthcare, Inc. 3708 E. Columbia Street, Tucson, Arizona 85714. Shares of common stock subject to options or warrants exercisable within sixty days of September 30, 2004, are deemed outstanding for purposes of computing the percentage ownership of the person holding such options or warrants but are not outstanding for purposes of computing the percentage of any other person.
  
 *
Less than 1%.
 
 1
Each share of Series G Convertible Redeemable Preferred Stock entitles its holder to one hundred votes, subject to adjustment, in any vote of the holders of our common stock and may be converted into 100 shares of our commonstock, subject to adjustment.
 
 2
Includes common stock and the commonstockunderlying the Series G Convertible Redeemable Preferred Stock owned as of September 30, 2004 and commonstockunderlying options and warrants that are exercisable within sixty days of September 30, 2004.
 
 3
Based upon the aggregate number of shares of our common stock outstanding and underlying outstanding shares of the Series G Convertible Redeemable Preferred Stock owned as ofSeptember 30, 2004and options and warrants exercisable within sixty days of September 30, 2004 to acquire ourcommonstock.
 
 4
The address of GE Capital Equity Investments is 120 Long Ridge Road, Stamford, Connecticut 06927.
 
 5
Includes 3,721 shares of our commonstockunderlying options that are exercisable within sixty days of September 30, 2004. Also includes 9,398,639shares of our commonstocksubject to purchase pursuant to warrants that are exercisable within sixty days of September 30, 2004.
 
 
 
 
 
 6
The address of Coleman Swenson Hoffman Booth IV L.P. is 237 Second Avenue South, Franklin, Tennessee 37064-2649.
 
 7
Includes 19,721 shares of our common stock underlying options that are exercisable within sixty days of September 30, 2004. Also includes 4,380,356 shares of our common stock subject to purchase pursuant to warrants that are exercisable within sixty days of September 30, 2004.
 
 8
The address of Webbmont Holdings L.P. is 1680 Hiram-Douglasville Highway, Suite 108, Hiram, Georgia 30141.
 
 9
The Includes 1,456,876 sharesof our commonstocksubject to purchase pursuant to warrants that are exercisable within sixty days of September 30, 2004. Includes15,930 shares of our commonstockheld of record by Robert Neale Fisher, 8,434 shares of our commonstockheld of record by Virginia A. Fisher, 353,057 shares of our commonstockheld of record by Investors Equity, Inc. and 1,586,531 shares of our commonstockheld of record by Webbmont Holdings, L.P., all of which are considered beneficially held by Robert W. Fisher. Mr. Fisher is the President of Woodcrest Associates, Ltd., the general partner of Webbmont Holdings, L.P. Also includes 7,442 shares of our commonstockunderlying options held by Mr. Fisher that are exercisable within sixty days ofSeptember 30, 2004.
 
 10
Includes 3,249,950 shares of our common stock underlying options that are exercisable within sixty days of September 30, 2004.
 
 11
Includes 7,499 shares of the Series G Convertible Redeemable Preferred Stock subject to purchase pursuant to warrants that are exercisable within sixty days of September 30, 2004. Also includes 1 share of Series G Convertible Redeemable Preferred Stock purchased under an exercised stock option.
 
 12
Geneva Middle Market holds 9.2% of the Companys common stock.
 
 
 **Item 13. Certain Relationships and Related Transactions**
 
 None.
 
 **Item 14. Principal Accountant Fees and Services**
 
 **PRINCIPAL ACCOUNTANT FEES AND SERVICES**
  During our fiscal years ended June 30, 2004 and June 30, 2003, Deloitte billed us in the following categories and amounts:
  **2004**
**2003**Audit Fees
$    242,100
$   209,700Tax Fees
103,890
101,200Total Fees
345,990
310,900
  
 
 
 
 Tax fees included preparation of the Companys federal and state income tax returns and periodic consultation on tax issues. $10,390 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 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 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.
  
 
 
 
 **PART IV**
 
 **ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**
  (a) The following documents are filed as part of this report:
 
 (1)  Consolidated Financial Statements
 
 Independent Auditors Report
 
 Consolidated Balance Sheets as of
 June 30, 200 4 and June 30, 2003.
 
 Consolidated Statements of Operations
 for the years ended June 30, 2004, June 30, 200 3 and June 30, 2002.
 
 Consolidated Statements of Stockholders'
 Equity (Net Capital Deficiency) for the years ended June 30, 2004, June 30, 2003 and June 30, 2002.
 
 Consolidated Statements of Cash Flows for the years
 ended June 30, 2004, June 30, 2003 and June 30, 2002
 
 Notes to Consolidated Financial Statements
 
 (2) Financial Statement Schedules - Schedule II
  
 
 
 
 Schedule II
 
 **VALUATION AND QUALIFYING ACCOUNTS**
 
 AdditionsBalance at the
beginning of year
Charged to costs
and   expenses
Charged to other amounts
Deductions
Balance at the end of the year**For the year ended June 30, 2003:**Accounts receivable allowances fordoubtful accounts
$           400,373
$         173,345
$        (92,964)
$      (266,859)
$    213,895Inventory reserves for obsolescence
1,598,172
416,716
80,869
827,787
1,106,232Deferred income tax valuation allowance
8,704,800


191,500
8,513,300Total allowances deducted from assets
$      10,703,345
$         590,061
$      (173,833)
$   (1,286,146)
$ 9,833,427**For the year ended June 30, 2004:**Accounts receivable allowances fordoubtful accounts
$          213,895
$          34,415

$     (115,835)
$    132,475Inventory reserves for obsolescence
1,106,232
159,406

595,232
670,406Deferred income tax valuation allowance
8,513,300

2,311,800

6,201,500Total allowances deducted from assets
$      9,833,427
$        193,821
$  (2,311,800)
$   ( 711,067)
$ 7,004,381
 
 
 
 
 
 
 3. Exhibits

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

3.1
Articles of Organization. (Incorporated by reference to Form S-18, File No. 33-5514B, declared effective on July 7, 1986).
3.2
Amendment, dated March 30, 1982, to Articles of Organization. (Incorporated by reference to Form S-18, File No. 33-5514B, declared effective on July 7, 1986).
3.3
Amendment, dated August 9, 1984, to Articles of Organization. (Incorporated by reference to Form S-18, File No. 33-5514B, declared effective on July 7, 1986).
3.4
Amendment, dated April 10, 1992, to Articles of Organization. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1993).
3.5
Amendment, dated October 20, 1995, to Articles of Organization. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1995).
3.6
Amendment, dated October 20, 1995, to Articles of Organization. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1995).
3.7
Amendment, dated September 16, 1996, to Articles of Organization. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1996).
3.8
Certificate of Vote of Directors Establishing a Series of a Class of Stock dated September 16, 1996. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1996).
3.9
Certificate of Correction dated October 4, 1996. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1996).
3.10
Certificate of Correction dated October 4, 1996. (Incorporated by reference to Form 10-K, File No. 0-14961, filed for the fiscal year ended October 31, 1996).
3.11
Certificate of Vote of Directors Establishing a Series or a Class of Stock, dated February 27, 2001 (Series B Convertible Preferred Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
3.12
Certificate of Vote of Directors Establishing a Series or a Class of Stock, dated February 27, 2001 (Series C Convertible Preferred Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
79



3.13
Certificate of Vote of Directors Establishing a Series or a Class of Stock, dated February 27, 2001 (Series D Exchangeable Preferred Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
3.14
Certificate of Correction dated March 2, 2001 (Series C Convertible Preferred Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
3.15
Certificate of Correction dated March 2, 2001. (Incorporated by reference to Form 8-K, File No. 0-14961, filed on March 16, 2001).
3.16
Articles of Amendment to Articles of Organization, dated as of June 27, 2001. (Incorporated by reference to Form 8-K, File No. 0-14961, filed on July 11, 2001).
3.17
Certificate of Vote of Directors Establishing a Series or a Class of Stock, dated June 28, 2001 (Series E Convertible Preferred Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed on July 11, 2001).
3.18
Certificate of Correction dated July 13, 2001. (Incorporated by reference to Form 10-K, File No. 0-14961, filed October 15, 2001).
3.19
Certificate of Vote of Directors Establishing a Series or a Class of Stock, dated January 23, 2002 (Series F Convertible Redeemable Preferred Stock). (Incorporated by reference to Form 10-Q, File No. 0-14961, filed on February 14, 2002).
3.20
Certificate of Vote of Directors Establishing a Series or a Class of Stock, dated August 6, 2002 (Series G Convertible Redeemable Preferred Stock). (Incorporated by reference to Form 8-K, File No. 0-14961, filed on August 8, 2002).
3.21
Articles of Amendment to Articles of Organization, dated as of December 17, 2002. (Incorporated by reference to Form 10-Q, File No. 0-14961, filed February 14, 2003).
3.22
Amended and Restated By-Laws (Incorporated by reference to Form8-K, File No. 0-14961, filedAugust 8, 2002).
4.1
Specimen of Common Stock Certificate. (Incorporated by reference to Form S-18, File No. 33-5514B, declared effective on July 7, 1986).
4.2
Registration Rights Agreement made as of June 3, 1996, between the Company and the Purchasers identified therein. (Incorporated by reference to Form 10-Q, File No. 0-14961, filed September 13, 1996).
4.3 SecondAmended and Restated Registration Rights, datedas 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).

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4.4Amended and Restated Co-Sale Agreement, dated June 28, 2001, by and among PrimeSource Healthcare, Inc. and the persons listed as
Stockholders therein.(Incorporated by reference to Form 10-K, File No. 0-14961, filed October 15, 2001).

4.5
Co-Sale Agreement, dated as of August 6, 2002, by and among PrimeSource Healthcare, Inc. and the persons listed as Stockholders on the signature pages thereto. (Incorporated by reference to Form 8-K, File No. 0-14961, filed August 8, 2002).
10.1 Employment Agreement, entered intobetweenPrimeSourceHealthcare, Inc.andBradfordC.Walker, effective upon the Initial Closing(as defined in the Purchase Agreement dated as of August 6, 2002).(Incorporated by reference to Form 10-K, File No. 0-14961, filed September 30, 2002).

10.2
Amended and Restated Credit Agreement, dated as of June 14, 1999, by and among PrimeSource Surgical, Inc, a Delaware corporation, Bimeco, Inc., a Florida corporation ("Bimeco"), Medical Companies Alliance, Inc., a Utah corporation, Douglas Medical, Inc., a Florida corporation and Citizens Bank of Massachusetts.(Incorporated by reference to Form 10-K, File No. 0-14961, filed September 30, 2002).
10.3
First Amendment to Amended and Restated Credit Agreement, dated as of August 22, 2000, by and among PrimeSource Surgical, Inc, a Delaware corporation, Bimeco, Inc., a Florida corporation, and Citizens Bank of Massachusetts.****(Incorporated by reference to Form 10-K, File No. 0-14961, filed September 30, 2002).
10.4
Second Amendment to Amended and Restated Credit Agreement, dated as of December 15, 2000, by and among PrimeSource Surgical, Inc., Bimeco, Inc. Ruby Merger Sub, Inc. and Citizens Bank of Massachusetts.****(Incorporated by reference to Form 10-K, File No. 0-14961, filed September 30, 2002).
10.5
Third Amendment to Amended and Restated Credit Agreement, dated as of March 2, 2001, by and among PrimeSource Surgical, Inc, a Delaware corporation, Bimeco, Inc., a Florida corporation, Ruby Merger Sub, Inc., a Delaware corporation, Luxtec Corporation, a Massachusetts corporation and Citizens Bank of Massachusetts. (Incorporated by reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).
10.6
Fourth Amendment to Amended and Restated Credit Agreement, dated as of August 6, 2002, among PrimeSource Surgical, Inc., Bimeco, Inc., Ruby Merger Sub, Inc., PrimeSource Healthcare, Inc. and Citizens Bank of Massachusetts. (Incorporated by reference to Form 8-K, File No 0-14961, filed August 8, 2002).
10.7
Amended and Restated Loan and Security Agreement, dated March 2, 2001, by and among Luxtec Corporation, Fiber Imaging Technologies, Inc., Cathtec Incorporated, CardioDyne, Inc. and ARK CLO 2000-1, Limited. (Incorporated by reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).
10.8
First Amendment to Amended and Restated Loan and Security Agreement, dated as of August 31, 2001, by and among PrimeSource Healthcare, Inc. (f/k/a Luxtec Corporation), Fiber Imaging Technologies, Inc., Cathtec Incorporated, and Cardiodyne, Inc., and Ark CLO 2000-1, Limited.(Incorporated by reference to Form 10-K, File No. 0-14961, filed September 30, 2002).
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10.9
Second Amendment and Waiver to the Amended and Restated Loan and Security Agreement, dated as of August 6, 2002, by and among PrimeSource Healthcare, Inc. (f/k/a Luxtec Corporation), Fiber Imaging Technologies, Inc., Cathtec Incorporated, and Cardiodyne, Inc., and Ark CLO 2000-1, Limited. (Incorporated by reference to Form 8-K, File No 0-14961, filed August 8, 2002).
10.10
Luxtec Corporation 1992 Stock Plan, as amended. (Incorporated by reference to Form 10-K, File No. 0-14961, filed January 28, 1994).
10.11
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).
10.12
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).
10.13
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).
10.14
Form of Warrant. (Incorporated by reference to Form 8-K, File No. 0-14961, filed July 11, 2001).
10.15
Conversion and Exchange Agreement, dated as of August 6, 2002, by and among PrimeSource Healthcare, Inc. and the persons listed in the signature pages thereto. (Incorporated by reference to Form 8-K, File No 0-14961, filed August 8, 2002).
10.16
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).
10.17
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).
10.18
Stock Purchase Agreement, dated June 30, 2003, by and among PrimeSource Surgical, Inc., Peter Miller, Peter Eule and New England Medical Specialties, Inc. (Incorporated by reference to Form 8-K, File No. 0-14961, filed July 2, 2003).
10.19
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).
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10.20
Severance Agreement, dated September 5, 2003, by and between PrimeSource Healthcare, Inc. and Bradford C. Walker. (Incorporated by reference to Form 8-K, File No. 0-14961, filed September 8, 2003).
21.1Subsidiaries of the Registrant.

31.1
Certification of the President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the President and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:

None.
 
 
 
 
 
 
 
 SIGNATURES
 
 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 PRIMESOURCE HEALTHCARE, INC.
 
 by___ /s/Joseph H. Potenza _________
 Joseph H. Potenza, President and
 Chief Executive Officer
 
  
 September 28, 2004
 
 
 
 
 
 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
 William H. Lomicka
 
 
 /s/ Larry H. Coleman    Director      September 28, 2004
 Larry H. Coleman
 
 
 /s/ Joseph H. Potenza   President, Chief Executive   September 28, 2004
 Joseph H. Potenza    Officer, Director, (Principal
 Executive Officer)
 
 
 /s/ Shaun D. McMeans   Chief Operating Officer,   September 28, 2004
 Shaun D. McMeans    Chief Financial Officer
 and Treasurer, Director,
 (Principal Accounting
 Officer)