UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C. 20549              


                                    FORM 10-K

[X] Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
    Act of 1934 for the fiscal year ended October 31, 1998 [Fee Required]
           or
[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 [No Fee Required]

For the transition period from _____________ to _____________

                       Commission File Number: 0-14961

                              LUXTEC CORPORATION
           (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.)

             326 Clark Street, Worcester, Massachusetts   01606
           (Address of principal executive offices)     (Zip code)

            Registrant's telephone number, including area code:
                             (508) 856-9454

  Securities registered pursuant to Section 12(b) of the Act:
                           American Stock Exchange
                    Common Stock, $.01 par value per share
                              (Title of class)

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

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

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

The aggregate market value of the voting Common Stock held by  non-affiliates of
the registrant was  approximately  $2,934,096 based on the closing price of such
stock on January 19, 1999, as reported by the American Stock Exchange ($2.75 per
share).

As of January 19, 1999,  2,872,149 shares of Common stock,  $.01 par value, were
issued and outstanding.


   Documents Incorporated by Reference                    Form 10-K Reference
Proxy Statement for the next Annual Meeting                    Part III


<PAGE>
                                   PART I

     This  report  contains  forward-looking  statements  within the  meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange  Act of  1934.  Actual  results  could  differ  materially  from  those
projected in the forward-looking  statements as a result of the risk factors set
forth below.  The  industry in which the Company  competes is  characterized  by
rapid changes in technology and frequent new product introductions.  The Company
believes that its long-term growth depends largely on its ability to continue to
enhance  existing  products and to introduce new products and features that meet
the continually  changing  requirements of its customers.  While the Company has
invested  heavily in new products and processes,  there can be no assurance that
it can continue to introduce new products and features on a timely basis or that
certain of its products and  processes  will not be rendered  noncompetitive  or
obsolete by its competitors.

 ITEM 1. BUSINESS

     The  Corporation  Luxtec  Corporation,  a  Massachusetts  Corporation  (the
"Corporation"  or "Luxtec"),  was organized in November  1981, and is engaged in
the design, manufacture, marketing and distribution of fiber optic headlight and
video camera systems, light sources, cables, retractors, surgical telescopes and
other  custom made  surgical  equipment  for the medical and dental  industries.
Through its subsidiaries, Fiber Imaging Technologies, Inc. and CardioDyne, Inc.,
the Corporation also manufactures small diameter specialty endoscopes and motion
tolerant blood pressure monitors, respectively, for the medical market.

The Corporation has developed a proprietary,  totally programmable,  fiber optic
drawing system designed to manufacture optical glass to a predetermined diameter
as well as to  control  the  actual  size of the fiber  bundles.  The fibers are
utilized in fiber optic cables  which are  incorporated  with the  Corporation's
Surgical  Headlight  Systems and the Video Camera Systems as well as in an array
of  fiber  optic  transilluminators  utilized  with the  Corporation's  surgical
instruments.  The Corporation  also markets  replacement  fiber optic cables and
light  sources for use with other  manufacturers'  products,  including  various
endoscopic systems used in minimally invasive surgical procedures.

The  Corporation's  CardioDyne,  Inc.  subsidiary  is  engaged in the design and
development of proprietary,  motion tolerant, non-invasive blood pressure ("BP")
monitors for use on moving and  exercising  patients.  The products are designed
for use in the  categories  of exercise  stress  testing,  emergency  transport,
obstetrics, and other applications where frequent,  accurate blood pressure data
is vital,  yet where  existing blood  pressure  monitors  typically fail to work
because of patient motion.  The Corporation's two existing BP products have been
approved for sale in the United States by the Food and Drug  Administration (the
"FDA").

The Corporation  maintains its principal executive offices and facilities at 326
Clark Street, Worcester,  Massachusetts 01606, and its telephone number is (508)
856-9454.



<PAGE>


 Background and Technology
Fiber Optics
Fiber optics allow for the transmission, element by element, of a light or image
from one place to another  through a flexible  conduit.  Fiber optic  technology
permits the drawing of high quality  optical  glass rods and tubes into flexible
fibers,  each  coated  with a  "jacket"  (a film of an  organic  silicon),  that
protects the fibers from abrasion. This provides for an improved ability to bend
and transmit light and images to and from inaccessible places.

The technology used by Luxtec to provide  illumination  directly to the surgical
site is  facilitated  by fiber  optic  cables  piping  light into 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.  State of
the art  microsurgery  often involves working on anatomical  structures  smaller
than 1 millimeter  in diameter.  To work on such small  structures,  the surgeon
often needs high quality,  portable magnification devices. Luxtec telescopes are
designed to offer high quality magnification with coincident illumination.

Blood Pressure Monitoring
An important symptom of patients with life threatening conditions such as shock,
internal  bleeding or heart  failure,  is usually a drop in blood pressure (BP).
Thus, blood pressure is measured often on most patients, and is a key vital sign
in medicine.

The most common  method of  measuring  blood  pressure is by placing an inflated
cuff around the arm in order to occlude  arterial blood flow.  Blood pressure is
determined by slowly  deflating the cuff and  listening  with a stethoscope  for
Korotkoff  sounds (arterial blood flow vibrations) that begin at systolic BP and
cease at diastolic BP. These  measurements  can be taken  manually,  or by using
various automated and semi-automated instruments or systems. Small vibrations in
the cuff pressure,  called oscillometric  pulses, are measured by most automatic
blood  pressure  monitors and are used to derive  systolic and  diastolic  blood
pressure measurements.

For  resting  patients  whose  blood  pressure  must  be  sampled  periodically,
automatic  intermittent  non-invasive  blood pressure  monitors are widely used.
Current  measuring  techniques  are very  sensitive to any motion of the patient
during  the time that the  actual  reading is being  taken.  Most  intermittent,
non-invasive  BP monitors  work poorly or do not work at all on patients who are
moving  or  being  transported  when the  measurement  is  being  taken.  Motion
interferes with the ability to detect critical sounds and, therefore, it is very
difficult  to  measure  the  blood  pressure  of  patients  who  are  shivering,
exercising or being transported.

For patients  whose blood pressure must be known more  frequently,  direct blood
pressure  measurement is routinely used. In direct  measurement,  a fluid filled
catheter is introduced  into an artery and  connected to a pressure  transducer.
This form of direct,  invasive BP  monitoring  is  expensive  and painful to the
patient, requires frequent attention by a nurse or physician, and poses risks of
infection  and blood  clots.  Although  several  continuous  non-invasive  blood
pressure  monitors  have been designed and  introduced  to the market,  none has
received wide  clinical use to date.  The  Corporation  believes this stems from
questions  regarding  the  accuracy,  stability,  and motion  tolerance  of such
monitors.


<PAGE>

 Products
Headlight  Systems The Corporation has designed and manufactures a line of fiber
optic headlight  systems that assist  surgeons by  illuminating  the area of the
surgical  procedure.  Designed to provide maximum  performance and comfort,  the
Corporation's  headlight  systems are lightweight and provide the surgeon with a
near coaxial  view.  The  Corporation's  patented  headlight  systems  provide a
virtually unobstructed view of the area of surgical procedure.

Light  Sources A fiber optic light source with solid state  electronics  permits
the  precise  regulation  of electric  current in order to control  illumination
levels of Xenon and  Halogen  lamps and,  thereby,  eliminates  fluctuations  or
"flickering" in the light provided.  The lamps illuminate the end surface of the
fiber optic cable through which the light is  transmitted in a rigid or flexible
mode without heat. The Corporation  manufactures a product line of high quality,
solid state Xenon and Halogen fiber optic light sources. The Corporation's light
sources  offer a wide range of light  intensities  in order to serve the varying
requirements   in   illuminating   surgical  and  diagnostic   procedures.   The
Corporation's  light sources are designed and  manufactured  to comply with U.L.
544 medical safety standards and are listed  domestically with ETL Laboratories.
Internationally,  the  Corporation  works  to  achieve  compliance  with as many
international standards as necessary to compete effectively on a worldwide basis
(including the CE mark that has been attained on the present product line).

The Corporation's  model numbers 9100, 9175 and 9300 Xenon light sources produce
high  intensity  light that is the  equivalent  of daylight in color.  The white
light  produced by these light  sources is used in instances  where more intense
illumination  is required,  e.g., for endoscopic  television  surgery or for use
with the Corporation's Microlux television camera products.

Fiber Optic Cables The Corporation  designs and manufactures a complete range of
fiber optic cables and holds  patents on certain  fiber optic cable  assemblies.
See "Patents and Proprietary  Information." The Corporation has a range of fiber
bundle  diameters from 1.0 mm to 6.5 mm and also allows a surgeon to choose from
various  angles (180  degree,  90 degree and 45 degree) in order to optimize the
use of surgical  instruments.  The Corporation employs a proprietary  technology
that  enables  the fiber  optic  interface  to  withstand  significantly  higher
temperatures and that permits the use of higher output light sources.

All of the Corporation's  fiber optic cables are adaptable to competitors' light
sources.  The Corporation's  Component Cable System allows the end-user to adapt
the end fitting of each cable to their own needs.  The Component Cable System is
designed to provide the  flexibility  of  universal  cables by  incorporating  a
patented  process to  permanently  attach  select end fittings to the cable and,
thereby,  customize the cable according to the user's needs, either at the point
of  manufacturing  or at the customer's site. This allows the customer to reduce
the inventory of replacement  cables and  facilitates a rapid  turnaround when a
cable needs to be replaced in the operating room, clinic, or surgi - center.

Fiber Optic Headlight and Video Camera Systems The Corporation  manufactures and
markets a series of video  products that are currently  being used in the United
States and  approximately  26  countries  around the  world.  The  Corporation's
Microlux  Headlight  Camera  Systems  are  designed to  televise  most  surgical
procedures.  The system is a very small,  lightweight,  solid  state  television
camera mounted at the front of a headband,  manufactured by the Corporation, and
integrated with fiber optic illumination.
<PAGE>
The  Corporation's  Microlux  System can transmit the  surgeon's eye view of the
procedure live to a television  monitor for teaching  purposes or to be recorded
for later use.

Surgical Telescopes The Corporation  manufactures and markets a proprietary line
of surgical  telescopes.  The custom fit  telescopes  provide  the surgeon  with
increased  magnification ranging from 2.5X to 4.5X. During the fourth quarter of
fiscal  year 1993,  the  Corporation  introduced  illumination  to the  surgical
telescope,  utilizing  fiber optic  delivery of light into the line of sight and
thus providing the first surgical telescope with coaxial illumination.
These products are part of the current product offering of the Corporation.

Blood Pressure  Monitors The Corporation has developed a proprietary  electronic
signal  acquisition  and signal  processing  technology  that separates  "motion
noise" from systolic and diastolic  blood pressure  signals.  In addition to the
Corporation's current product line, the Corporation plans to use this technology
to develop additional  non-invasive blood pressure  monitoring products that are
motion tolerant.

Microlaparascopic   Products  The  Corporation's   Fiber  Imaging   Technologies
subsidiary   manufactures  and  markets  small  diameter  rigid,   flexible  and
semi-flexible  endoscopes  that  provide  fields  of view for  either  very high
magnification  of  objects  or  panoramic  views  of  internal  cavities.  These
instruments  can  offer any  direction  of view that is  required.  The  primary
product  line  consists  of  endoscopes  that are  between  0.5mm  and  2.7mm in
diameter.  Endoscopes  are  produced  that  contain  working  channels  for  the
insertion of tools,  fluid  infusion or  drainage.  Fiber  Imaging  Technologies
specializes in the design, manufacturing and marketing of custom optical systems
that offer outstanding image quality and optimum energy delivery.


<PAGE>


 Patents and Proprietary Information

The medical device industry traditionally has placed considerable  importance on
obtaining and  maintaining  patents and trade secret  protection for significant
new technologies,  products and processes. The Corporation maintains a policy of
seeking patent  protection in connection with certain elements of its technology
when it  believes  that  such  protection  will  benefit  the  Corporation.  The
Corporation  owns  the  following  U.S.  Patents  (date  of  issuance  shown  in
parentheses):

   * Patent No. 4516190 for Surgical Headlight (May 7, 1985)
   * Patent No. 4534617 for Fiber Optic Cable (August 13, 1985)
   * Patent No. 4616257 for Headlight Camera System (October 7, 1986)
   * Patent No. 4653848 for 45 degree and 90 degree Fiber Optic
          Cables (March 31, 1987)
   * Patent No. 4797736 for Videolux Television Fiber Optic Headlight
          Camera System (January 10, 1989)
   * Patent No. 5003605 for an electronically augmented stethoscope
          with timing sound (March 26, 1991)
   * Patent No. 5078469 for Optical System allowing coincident viewing,
          illuminating and photography (January 7, 1992)
   * Patent No. 5220453 for telescopic spectacles with coaxial
          illumination (June 15, 1993)
   * Patent No. 5295052 for a light source assembly (March 15 1994)
   * Patent No. D345368 for surgical telescopes (March 22, 1994)
   * Patent No. 5307432 for crimped light source termination (April 26, 1994)
   * Patent No. 5331357 for an illumination assembly (July 19, 1994)
   * Patent No. D349123 for spectacles having integral
          illumination (July 26, 1994)
   * Patent No. D350760 for an eyeglass frame temple (September 20, 1994)
   * Patent No. 5392781 for blood pressure monitoring in noisy
          environments (February 28, 1995)

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

The Corporation is the owner of four U.S. federal trademark  registrations:  (i)
LUXTEC,  registration number 1,453,098,  registered August 18, 1987; (ii) LUXTEC
(and design), registration number 1,476,726, registered February 16, 1988; (iii)
LUXTEC (stylized), registration number 1,758,176, registered March 16, 1993; and
(iv) LUXTEC,  registration  number 1,956,027,  registered February 13, 1996. The
Corporation 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.

In general, the Corporation relies on its development and manufacturing  efforts
and skills of its  personnel  rather than patent  protection  to  establish  and
maintain its industry position.  The Corporation treats its design and technical
data as confidential and relies on nondisclosure agreements,  trade secrets laws
and non-competition agreements to protect its proprietary position. There can be
no assurance  that these  measures  will  adequately  protect the  Corporation's
proprietary technologies.

<PAGE>

 Marketing and Sales
Fiber Optics
The  Corporation's  customers for its fiber optic and illumination  products are
acute care hospitals,  clinics, surgi centers, and surgeons. An estimated 50,000
surgeons use the Corporation's products, on a worldwide basis. The Corporation's
products  provide  illumination  and  magnification  used  during  the  surgical
procedure.

The Corporation  distributes its fiber optic and  illumination  products through
regional specialty surgical distributors,  supported by Luxtec field specialists
as  well  as  a  customer  support  team  located  in  the  Worcester  facility.
Internationally, Luxtec distributes through a network of local distributors. The
Corporation currently has distributors in 27 countries.

The Corporation competes on the basis of price, product quality and reliability.
The  Corporation  believes that its large base of satisfied  users is also a key
marketing  advantage and that the combination of satisfied customers and quality
products  positions  the  corporation  as  one  of the  premium  vendors  in the
marketplace. The Corporation believes that it provides a higher standard of post
sales  support when  compared to the  competition  and that the  combination  of
service   and  a  three   year   warranty   stands  as  a   significant   market
differentiation.

The Corporation's  marketing strategy is to provide training and support for the
distributor  channel,  to enhance end user awareness and demand by participating
as an exhibitor at major medical  meetings,  and to insure that the  Corporation
provides high quality and performance of its products.

Blood Pressure Monitoring
The  Corporation  believes  that the  initial  target  market  segments  for its
products are for use in exercise stress testing, emergency transport, obstetrics
and for  post-operative  patients.  First shipments of production units occurred
during the fourth quarter of fiscal year 1996.

           Exercise Stress Testing

The exercise  stress test is a common  non-invasive  test for  evaluating  heart
function in known or suspected coronary artery disease. There are an estimated 5
million  exercise  stress tests done annually at  approximately  20,000 exercise
stress test labs in the U.S. Most stress test labs now measure blood pressure on
their patients  manually.  Blood pressure must be measured  accurately and often
(recommended  by many experts to be at least once per minute) during the test. A
decline in systolic  BP during  exercise  may  reflect the  presence of advanced
coronary  artery  disease,  and is a criterion for immediate  termination of the
stress test.  This important  indicator  must be detected  immediately to reduce
patient risk. Yet measuring blood pressure, either manually or automatically, is
difficult  since the  patient is moving and the  treadmill  creates  interfering
background noise.

The CardioDyne NBP 2000 incorporates a sensor and companion  processing software
that  significantly  reduces the interference from motion and noise in the blood
pressure  signal.  The  Corporation  believes  this results in a reliable  blood
pressure measurement during an exercise stress test. The CardioDyne NBP 2000 has
undergone  clinical  trials  at Beth  Israel  Hospital,  and has been  tested by
physicians  and  clinicians  at several  other  hospitals,  including  Deaconess
Hospital, and the University of Massachusetts Medical Center.

<PAGE>



           Emergency Transport

The Corporation  estimates that the emergency  transport  (ambulance) market for
the CardioDyne product line is potentially large. There are approximately 42,000
emergency  transport  vehicles in the U.S., of which the  Corporation  estimates
that  30,000 are  potential  candidates  for  products  based on the  CardioDyne
technology.

The Corporation  estimates that emergency  victims of accidents,  heart attacks,
strokes,  and other medical emergencies account for almost 10 million transports
in the U.S.  The  Corporation  further  estimates  that an  additional 2 million
medical  patients  are  transferred  between  hospitals  annually  in  emergency
transport  vehicles.  These  patients  are often  unstable or at risk of medical
hazard, hence their vital signs (blood pressure,  heart rate,  respiration,  and
oxygen  saturation)  are  measured  frequently.  Currently,  blood  pressure  is
measured manually on most transport patients and the measurement is difficult to
do even by a skilled  EMT  because of the noise and  vibration  in the  vehicle.
Preliminary  tests  indicate that the CardioDyne  NBP 2000  accurately  measures
blood pressure during transports,  even with a shivering patient and even in the
presence of vibration and noise.

           Obstetrics

Blood  pressure is an important  parameter to monitor  during labor and delivery
due to the  possibility  of  dangerously  high blood  pressures,  hemorrhage and
shock,  as well as  other  potential  complications.  Frequent,  accurate  blood
pressure  information is important to manage these patients.  However,  women in
labor frequently shiver,  particularly those receiving epidural anesthesia.  The
Corporation  believes that shivering  causes commonly used  oscillometric  blood
pressure  monitors  to become  inaccurate  or to cease  working.  To  accurately
measure blood  pressure on shivering  patients,  the  alternatives  are invasive
blood pressure  measurement,  which is expensive and risky,  or frequent  manual
monitoring.   The  Corporation   believes  that  the  CardioDyne   product  line
potentially provides a better alternative, as it accurately measures and records
blood pressure on moving or shivering labor patients,  without the cost and risk
of invasive monitoring or the constant attention of manual monitoring.

           Post-Operative

Many recovery room patients experience post anesthesia  tremors.  These patients
are monitored for various vital signs, including blood pressure. The Corporation
believes that current commercial models can become inaccurate or fail to work in
this  application  due to  patient  tremor  and that a motion  tolerant  monitor
therefore may be well received in this market.

 Competition
Fiber Optics
The Corporation  competes with national and  international  companies engaged in
the  manufacture  of headlight  systems,  including  B.F.  Wehmer,  Cogent Light
Technologies,   Inc.  and  Designs  for  Vision,  and  in  fiber  optic  medical
instruments  with Pilling Weck Company,  the Stryker  Company and Richard Wolf &
Company as well as other smaller diversified companies. In the replacement cable
market, the Corporation  competes with both original equipment  manufacturers as
well as others  engaged in activities  similar to that of the  Corporation.  The
Corporation  is not  aware  of any  specific  seasonal  variation  factors  that
directly affect net sales levels.

<PAGE>


The  Corporation's  management  believes  that direct  competition  in the light
source  market  comes from several  established  companies  having  considerably
larger  and  greater  financial  and human  resources,  including  Cogent  Light
Technologies,  Inc.,  Designs  for  Vision,  Olympus,  B.F.  Wehmer,  Karl Storz
Company, and Richard Wolf & Company.

Blood Pressure Monitoring
The Corporation has identified two companies, Suntek and Colin Medical, that are
currently  supplying  exercise blood pressure monitors in the U.S. The companies
sell  directly  under their own name,  and Colin  produces an OEM version of its
monitor that is sold by Quinton.  Critical care blood pressure monitors are sold
by numerous companies,  including Critikon,  Datascope,  Colin, Hewlett Packard,
Spacelabs and others. The Corporation  believes that the CardioDyne product line
performance,  features  and  capabilities  will allow it to compete  effectively
against these products.  Nonetheless,  the Corporation  expects that many of its
current and future competitors will have financial, technical, marketing, sales,
manufacturing, distribution and other resources substantially greater than those
of the Corporation.  There can be no assurance that the Corporation will be able
to compete successfully in its intended markets.


 Government Regulation
The  Corporation's  products are subject to government  regulation in the United
States and other  countries.  In order to test  clinically,  produce  and market
products for human  diagnostic or therapeutic  use, the Corporation  must comply
with mandatory procedures and safety standards  established by the United States
Food and Drug Administration ("FDA") and comparable state and foreign regulatory
agencies.  Typically,  products  must  meet  regulatory  standards  as safe  and
effective for their intended use prior to being marketed for human applications.
The clearance  process is expensive and time consuming,  and no assurance can be
given that any agency  will grant  clearance  for the sale of the  Corporation's
products  or that  the  length  of time the  process  will  require  will not be
extensive.  The Corporation believes that its facility is in compliance with the
Federal  Food  and  Drug  Administration  requirements  for  Good  Manufacturing
Practice.


 Major Customers
For  the  year  ended  October  31,  1998,  one  customer,   Specialty  Surgical
Instruments, accounted for 13% of the Corporation's net revenues.

 Research and Development
The Corporation incurred  approximately $523,000 of product development expenses
in fiscal year 1998,  $495,000 in fiscal 1997,  and $543,000 in fiscal 1996. The
increase in expenses in this category was directly  related to the  introduction
of a major new product (the dual port light source) during fiscal 1998.

 Manufacturing and Suppliers
The Corporation  purchases  components and materials from more than 300 vendors.
The  Corporation  believes  it can  purchase  substantially  all of its  product
requirements  from other competing  vendors under similar terms. The Corporation
has no long-term contract with any supplier.

<PAGE>


 Backlog
At October  31,  1998,  the  Corporation's  backlog  was  $485,000,  compared to
$549,200 at October 31, 1997. The  Corporation  generally  ships products within
three weeks of the receipt of an order from a customer. The Corporation does not
believe that its backlog  accurately  predicts the amount of quarterly or annual
revenues.

 Employees
As of October 31, 1998,  the  Corporation  had 63 full time  employees,  of whom
seven are  executives,  nine are engaged in  supervisory  capacities,  26 are in
manufacturing  and the  remainder  are  involved in  engineering,  research  and
development,  marketing and administration.  None of the Corporation's employees
is covered by a collective  bargaining  agreement.  The Corporation believes its
employee relations are good.
 Executive Officers
For information with respect to the Executive  Officers of the Corporation,  see
the section  entitled  "Election of  Directors"  appearing in the  Corporation's
Proxy  Statement in connection  with its next Annual Meeting of  Shareholders or
special  meeting  in lieu  thereof,  which  section  is  incorporated  herein by
reference.

 ITEM 2.  PROPERTIES

The Corporation  occupies  approximately 30,000 square feet at 326 Clark Street,
Worcester,  Massachusetts  under a lease is currently  being  renegotiated.  The
Corporation   believes   that  this  space  is  adequate  to  meet  its  current
requirements and that alternative  space would be available at comparable prices
should the lease not be extended after its expiration.

 ITEM 3.  LEGAL PROCEEDINGS

None.


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

No  matters  were  submitted  to a vote of  security  holders,  whether  through
solicitation  of  proxies  or  otherwise,  during  the  fourth  quarter  of  the
Corporation's fiscal year ended October 31, 1998.



<PAGE>


                             PART II

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

The  Corporation's  Common Stock is traded on the American Stock Exchange (AMEX)
under the AMEX symbol "LXU.EC." The  Corporation's  Common Stock has been listed
on the American Stock Exchange since April 20, 1994. From September,  1986 until
April,  1994 the Corporation's  Common Stock was traded in the  over-the-counter
market  on the  National  Association  of  Securities  Dealers,  Inc.  Automated
Quotations System (NASDAQ) under the NASDAQ symbol "LUXT."

AMEX has notified the Corporation that the Corporation has fallen below the AMEX
Emerging Company  Marketplace  guidelines for continued  listing on the exchange
and that AMEX is reviewing the Corporation's listing eligibility. As a result of
a meeting  between  representatives  of the Corporation and AMEX held on January
22, 1998, AMEX decided to continue the Corporation's  listing.  A further review
of the  Corporation's  listing status was conducted in June, 1998, at which time
AMEX further continued the Corporation's  listing. The Corporation's fiscal 1998
financial  performance  resulted in a reduction of the  shortfall  from the AMEX
listing guidelines.  The Corporation is reviewing its options concerning actions
it may take to comply with the AMEX guidelines.

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

                                                             Common Stock
                                                       High              Low

 Fiscal Year Ended 10/31/97
First Quarter                                          4.00              2.63
Second Quarter                                         3.88              2.38
Third Quarter                                          3.00              2.38
Fourth Quarter                                         2.75              2.13

 Fiscal Year Ended 10/31/98
First Quarter                                          3.25              2.06
Second Quarter                                         3.88              2.50
Third Quarter                                          6.38              3.13
Fourth Quarter                                         3.63              2.00



On January 19, 1999, the closing sale price of the Corporation's Common Stock on
the American Stock Exchange was $2.75 per share. As of December 31, 1998,  there
were approximately 642 holders of record of the Corporation's  Common Stock. The
Corporation  estimates that there are approximately  1,300 beneficial holders of
the Corporation's Common Stock.

The  Corporation  has not paid any cash  dividends  since its  inception and the
Board of Directors does not contemplate  doing so in the near future.  The Board
of  Directors  currently  intends to retain any future  earnings  for use in the
Corporation's business.



<PAGE>


 ITEM 6.  SELECTED FINANCIAL DATA

The selected consolidated operating data and the consolidated balance sheet data
presented below are derived from and qualified by reference to the Corporation's
consolidated financial statements that have been audited by Arthur Andersen LLP,
the  Corporation's  independent  public  accountants.  The information set forth
below should be read in conjunction with the consolidated  financial  statements
and notes thereto appearing elsewhere herein.
<TABLE>

 Operating Data:                                     (In thousands, except per share data)
                                                             Year Ended October 31,
                                         1994           1995           1996            1997           1998

<S>                                       <C>            <C>            <C>            <C>             <C>
Net Revenues . . . . . . . . . .        $8,139         $7,755         $9,348         $10,977         $12,067

Net Income  (Loss). . . . . .              164         (6,127)          (571)           (472)            185

Net Income (Loss) Per Share . . .
 . . . . . . . . . . . . .                  .11          (4.20)          (.22)          (.17)             .06



                                                                   (In thousands)
Balance Sheet Data:                                            Year Ended October 31,
                                         1994           1995           1996            1997           1998


Working Capital. . . . . . . .          $ 1,410        $ (599)         $ 935      $    1,394         $1,735

Total Assets. . . . . . . . . . .         4,072          4,122         5,295           5,803          5,959
 .

Long-term debt, less current
portions  . . . .                            -              -           119            661             558


Stockholders' equity. . . . .             2,163            198          813            456             666



</TABLE>



<PAGE>


 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS

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

 Results of Operations

The  following  table  sets  forth  certain  consolidated  financial  data  as a
percentage of net revenues for the fiscal years ended October 31, 1996, 1997 and
1998.

                                       1996          1997         1998
Net revenues                           100%          100%         100%
Cost of goods sold                      57            60           58
Selling and marketing                   23            22           18
Research and development                 6             4            4
General and administrative              18            15           15
Other expense                            2             2            3
Net (loss) income                       (6)           (3)           2

 Fiscal 1998 Compared with Fiscal 1997

Net Revenues:  Net revenues of $12,066,787 for fiscal 1998 were 9.9% higher than
the  $10,977,435  reported  for fiscal  1997.  Luxtec  domestic  branded and OEM
products were responsible for virtually all of the Corporation's revenue growth.
International  Luxtec branded revenues were below fiscal 1997 levels,  primarily
in the Pacific Rim area.  Management  believes that the  introduction of new and
improved products over the last two years was chiefly responsible for the fiscal
1998 revenue growth.  The CardioDyne  marketing effort was delayed during fiscal
1998.

Cost of Goods Sold:  Cost of goods sold  increased to $6,959,620 or 57.7% of net
revenues  for fiscal 1998  compared to  $6,544,409  or 59.6% of net revenues for
fiscal 1997. The higher product cost related to the  introduction of a series of
new  products  in  fiscal  1997 did not recur in fiscal  1998,  resulting  in an
improvement in cost of goods sold as a percentage of net revenues.

Gross Profit:  Gross Profit increased to $5,107,167 or 42.3% of net revenues for
fiscal 1998 compared to $4,433,026 or 40.4% of net revenues for fiscal 1997. The
margin  improvement  percentage  reflected an improvement related to
products  introduced  during fiscal 1997. The Corporation  does not expect gross
profit margins to change dramatically from their 1998 relationship to revenues.

Selling and  Marketing  Expenses:  Selling and marketing  expenses  decreased to
$2,205,693 for fiscal 1998 compared to $2,437,746 for fiscal 1997, a decrease of
$232,053 or 9.5%.  During fiscal 1998,  Luxtec  decreased its  investment in the
distribution channel for the CardioDyne product line. Management expects selling
and marketing expenses for fiscal 1999 to remain in approximately the same ratio
to sales as 1998.

Research and  Development:  Research and  development  expenses were $522,593 in
fiscal 1998 compared to $495,373 in fiscal 1997, an increase of $27,220 or 5.5%.
The increase in expenses in this category was directly related to the completion
of a major new product  introduction  (the dual port light source) during fiscal
1998. Management expects that research expenditures will increase as a result of
the Corporation's product development plans.
<PAGE>

General and Administrative:  General and administrative expenses were $1,824,606
in fiscal 1998 compared to $1,627,637 in fiscal 1997, an increase of $196,969 or
12.1%.  The largest  cost  increases  during  fiscal 1998 were the result of new
investment banking and investor relations programs.

Interest:  Interest  expense  increased  to  $269,318  during  fiscal  year 1998
compared with $234,024 during fiscal year 1997, an increase of $35,294 or 15.1%.
The  Corporation's  interest  cost  increase was  primarily the result of higher
average balances for the revolving credit line.

 Fiscal 1997 Compared with Fiscal 1996

Net Revenues: Net revenues of $10,977,435 for fiscal 1997 were 17.4% higher than
the  $9,347,699  reported for fiscal 1996.  The Luxtec branded and OEM products,
both  domestic and  international,  were  responsible  for  virtually all of the
Corporation's  revenue growth.  Management believes that the introduction of new
and improved products during fiscal 1996 and fiscal 1997 was chiefly responsible
for the fiscal 1997 revenue growth.

Cost of Goods Sold:  Cost of goods sold  increased to $6,544,409 or 59.6% of net
revenues for fiscal 1997 compared  with  $5,323,764 or 57.0% of net revenues for
fiscal 1996.  The higher  product cost related to the recent  introduction  of a
series of new products was the main reason for the higher costs in fiscal 1997.

Gross Profit:  Gross Profit increased to $4,433,026 or 40.4% of net revenues for
fiscal 1997  compared to  $4,023,935  or 43.0% of net  revenues for fiscal 1996.
Although the  percentage  decreased  between  years,  the higher  sales  volume,
partially  offset by the higher  costs  related to product  introductions  and a
contractual decrease in royalties received for a CardioDyne product, yielded the
increased gross profit in fiscal 1997.

Selling and  Marketing  Expenses:  Selling and marketing  expenses  increased to
$2,437,746  for fiscal 1997 compared to $2,190,881  for fiscal 1996, an increase
of $246,865 or 11.3%.  During fiscal 1997, Luxtec introduced  marketing programs
and continued to build the distribution  channel for the new CardioDyne  product
line of motion tolerant blood pressure monitors.

Research and  Development:  Research and  development  expenses were $495,373 in
fiscal 1997  compared to $542,691 in fiscal 1996, a decrease of $47,318 or 8.7%.
The decrease in expenses in this category was directly related to the completion
of the introduction of two major product line upgrades during fiscal 1996.

General and Administrative:  General and administrative expenses were $1,627,637
in fiscal 1997 compared to $1,646,081 in fiscal 1996, representing a decrease of
$18,444 or 1.1%. Fiscal year 1997 administrative  activities and staffing levels
remained essentially unchanged from fiscal 1996.

Interest:  Interest  expense  increased  to  $234,024  during  fiscal  year 1997
compared  with  $231,442  in fiscal  1996,  an  increase  of  $2,582 or 1%.  The
Corporation's  cost of debt  remained  at  approximately  the same level  during
fiscal years 1997 and 1996.
<PAGE>

 Liquidity and Capital Resources

At October  31,  1998,  the  Corporation  had working  capital of  approximately
$1,734,700  compared to working  capital of $1,394,500 at October 31, 1997.  The
increase was primarily the result of profitable operations for fiscal year 1998.

On April 3, 1997, the Company  received  $500,000 from a new term loan agreement
with a bank.  Borrowings  bear  interest  at the bank's  prime rate plus  1.00%.
Borrowings  are secured by  substantially  all assets of the Company.  Principal
repayment is to be repaid from "Excess Cash Flow," as defined, but no later than
April 3, 2002. The agreement  contains  covenants,  including the maintenance of
certain  financial  ratios,  as defined.  The Company was in compliance with all
covenants  for the year ended  October 31, 1998.  As an  inducement to grant the
loan under the stated  terms,  the Company  issued a warrant  that  entitles the
holder to purchase  44,000 shares of common stock at an exercise  price of $3.00
per share  (approximate  fair market  value at the date of grant),  adjusted for
certain dilutive events, as defined.

The  principal  source of  short-term  borrowings  during the year was a secured
$2,500,000  revolving  credit  agreement.  At October 31, 1998,  the credit line
borrowings balance was approximately $2,186,100. The interest rate on the credit
line at the end of the fiscal year was 8.5%.

The Corporation anticipates that its current cash requirements will be satisfied
by cash flow from  existing  operations  and the  continuation  of its revolving
credit  arrangement  with a bank,  although the Company is  considering  raising
additional debt or equity in the near future.

The Corporation had no significant capital expenditures during fiscal year 1998.


Year 2000

The Year  2000  problem,  which is  common to most  corporations,  concerns  the
inability of information  systems,  primarily  computer  software  programs,  to
properly  recognize  and process  date  sensitive  information  as the year 2000
approaches.  Many computer  systems and other  equipment  with embedded chips or
microprocessors may not be able to appropriately  interpret dates after December
31, 1999 because such systems use only two digits to indicate a year in the date
field rather than four digits.  If not  corrected,  many  computers and computer
applications could fail or create  miscalculations,  causing  disruptions to the
Company's operations. In addition, the failure of customer and supplier computer
systems could result in  interruption of sales and deliveries of key supplies or
utilities.  Because  of the  complexity  of the issues and the number of parties
involved,  the Company  cannot  reasonably  predict with certainty the nature or
likelihood of such impacts.

Using  internal  staff  [and  outside  consultants],  the  Company  is  actively
addressing this situation and anticipates that it will not experience a material
adverse impact to its operations,  liquidity or financial  condition  related to
systems under its control. The Company is addressing the Year 2000 issue in four
overlapping  phases:  (i) identification and assessment of all critical software
systems and equipment requiring  modification or replacement prior to 2000; (ii)
assessment of critical business  relationships  requiring  modification prior to
2000; (iii) corrective action and testing of critical systems;  (iv) development
of contingency and business continuation plans to mitigate any disruption to the
Company's operations arising from the Year 2000 issue.
<PAGE>

The Company has upgraded its [financial and manufacturing] computer systems with
specific  year 2000  "fixes".  Other  computer  systems  used in the Company are
currently  being  scheduled  for upgrade  during  1999.  These  systems are less
critical  to  the  Company's  operations.  The  Company  is in  the  process  of
implementing a plan to obtain  information from its external service  providers,
significant suppliers and customers, and financial institutions to confirm their
plans and readiness to become Year 2000 compliant, in order to better understand
and evaluate how their Year 2000 issues may affect the Company's operations. The
Company  currently  is not in a position  to assess this aspect of the Year 2000
issue;  however, the Company plans to take the necessary steps to provide itself
with reasonable assurance that its service providers,  suppliers,  customers and
financial institutions are Year 2000 compliant.  This phase is approximately 15%
complete to date.  The Company  currently  believes it will be able to modify or
replace its  affected  systems in time to minimize  any  detrimental  effects on
operations.

The Company is developing  contingency plans to identify and mitigate  potential
problems and disruptions to the Company's  operations arising from the Year 2000
issue.  This phase is expected to be completed by October 31, 1999.  While it is
not possible,  at present,  to give a precise estimate of the cost of this work,
the Company  does not expect  that such costs will be material to the  Company's
results of operations in one or more fiscal quarters or years, and will not have
a material adverse impact on the long-term  results of operations,  liquidity or
consolidated  financial  position  of the  Company.  To date,  the  Company  has
expensed  less than  $25,000  on the  effort to  combat  the year 2000  problems
inherent in its systems.  The total direct costs of the Year 2000 corrections is
expected to be less than $100,000 through the first two quarters of 2000.

While the Company believes that its own internal assessment and planning efforts
with  respect  to its  external  service  providers,  suppliers,  customers  and
financial  institutions  are and will be  adequate  to  address  its  Year  2000
concerns,  there can be no assurance  that these  efforts will be  successful or
will not have a material adverse effect on the Company's operations.

 Risk Factors and Cautionary Statements

When used in this Form 10-K and in future  filings by the  Corporation  with the
Securities and Exchange  Commission,  in the Corporation's press releases and in
oral statements made with the approval of an authorized  executive officer,  the
words or phrases "will likely result",  "are expected to", "will continue",  "is
anticipated",  "estimate",  "project",  or similar  expressions  are intended to
identify  "forward-looking   statements"  within  the  meaning  of  the  Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and  uncertainties,  including  those  discussed  below,  that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Corporation wishes to caution readers not to place
undue reliance on any such  forward-looking  statements,  which speak only as of
the date made. The Corporation  wishes to advise readers that the factors listed
below could cause the Corporation's  actual results for future periods to differ
materially  from any  opinions or  statements  expressed  with respect to future
periods in any current statements.

The Corporation will NOT undertake and  specifically  declines any obligation to
publicly  release  the  result  of  any  revisions  which  may  be  made  to any
forward-looking  statements to reflect events or circumstances after the date of
such  statements or to reflect the occurrence of  anticipated  or  unanticipated
events.

           The Corporation's  revenues and income are derived primarily from the
          sale of  medical  devices.  The  medical  device  industry  is  highly
          competitive.    Such   competition   could   negatively   impact   the
          Corporation's  market  share and  therefore  reduce the  Corporation's
          revenues and income.


<PAGE>

           Another result of competition  could be the reduction of average unit
          prices paid for the Corporation's products. This could have the impact
          of  reducing  the  percentage  of  profit  margin   available  to  the
          Corporation for its product sales.

           The  Corporation's  future  operating  results are  dependent  on its
          ability to develop, produce and market new and innovative products and
          services.  There are numerous risks inherent in this complex  process,
          including  rapid  technological  change and the  requirement  that the
          Corporation  bring to  market in a timely  fashion  new  products  and
          services that meet customers' needs.

           Historically,  the  Corporation's  operating results have varied from
          fiscal  period  to  fiscal  period;  accordingly,   the  Corporation's
          financial  results in any particular fiscal period are not necessarily
          indicative of results for future periods.

           The  Corporation  offers a broad  variety of products and services to
          customers  around  the  world.  Changes  in the  mix of  products  and
          services  comprising  revenues could cause actual operating results to
          vary from those expected.

           The  Corporation's  success  is partly  dependent  on its  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 future operating results.

           The Corporation operates in a highly competitive environment and in a
          highly competitive  industry,  which includes significant  competitive
          pricing pressures and intense competition for skilled employees.

            The  Corporation  offers its  products  and  services  directly  and
           through  indirect  distribution  channels.  Changes in the  financial
           condition of, or the Corporation's  relationship  with,  distributors
           and other indirect  channel  partners,  could cause actual  operating
           results to vary from those expected.

            The Corporation does business worldwide in over 50 countries. Global
           and/or regional  economic  factors and potential  changes in laws and
           regulations affecting the Corporation's  business,  including without
           limitation, currency exchange rate fluctuations,  changes in monetary
           policy  and  tariffs,  and  federal,  state  and  international  laws
           regulating the environment,  could impact the Corporation's financial
           condition or future results of operations.

            The market price of the Corporation's securities could be subject to
           fluctuations  in  response  to  quarter  to  quarter   variations  in
           operating results,  market conditions in the medical device industry,
           as well as general economic  conditions and other factors external to
           the Corporation.



<PAGE>


                           LUXTEC CORPORATION AND SUBSIDIARIES
                            CONSOLIDATED FINANCIAL STATEMENTS

                                         INDEX



                                                                          PAGE

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                   19

CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1997 AND 1998                20

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
OCTOBER 31, 1996, 1997 AND 1998                                            21

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998                        22

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
OCTOBER 31, 1996, 1997 AND 1998                                            23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 24



<PAGE>


                      REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Luxtec Corporation:

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Luxtec
Corporation (a  Massachusetts  corporation)  and  subsidiaries as of October 31,
1997  and  1998,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity and cash  flows for each of the three  years in the period
ended October 31, 1998. These financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position  of  Luxtec  Corporation  and
subsidiaries  as of  October  31,  1997  and  1998,  and the  results  of  their
operations  and their cash flows for each of the three years in the period ended
October 31, 1998, in conformity with generally accepted accounting principles.








Boston, Massachusetts
December 9, 1998


<PAGE>

<TABLE>

                                          LUXTEC CORPORATION AND SUBSIDIARIES

                                              CONSOLIDATED BALANCE SHEETS

                                                        ASSETS
                                                                                                October 31,
                                                                                          1997              1998

CURRENT ASSETS:
<S>                                                                                  <C>              <C>
   Cash                                                                              $        41,712  $        43,698
   Accounts receivable, less reserves of approximately $320,000 and $250,000 in            2,319,945        2,571,230
     1997 and 1998, respectively
   Inventories                                                                             2,527,309        2,549,244
   Prepaid expenses and other current assets                                                  71,191           55,068
                                                                                     ---------------  ---------------

         Total current assets                                                              4,960,157        5,219,240
                                                                                     ---------------  ---------------

PROPERTY AND EQUIPMENT, AT COST                                                            2,476,691        2,570,501

ACCUMULATED DEPRECIATION AND AMORTIZATION                                                 (1,890,093)      (2,075,345)
                                                                                     ---------------  ---------------

         Property and equipment, net                                                         586,598          495,156
                                                                                     ---------------  ---------------

OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION OF APPROXIMATELY $143,000 AND                  255,819          244,754
                                                                                     ---------------  ---------------
$109,000 IN 1997 AND 1998, RESPECTIVELY

         Total assets                                                                $     5,802,574  $     5,959,150
                                                                                     ===============  ===============

                                         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Revolving line of credit                                                          $     2,082,854  $     2,186,052
   Current portion of equipment facility loan                                                 65,186           88,726
   Accounts payable                                                                          938,733          497,980
   Accrued expenses                                                                          478,931          711,745
                                                                                     ---------------  ---------------

         Total current liabilities                                                         3,565,704        3,484,503
                                                                                     ---------------  ---------------

TERM NOTE                                                                                    460,250          469,250
                                                                                     ---------------  ---------------

EQUIPMENT FACILITY LOAN, NET OF CURRENT PORTION                                              200,992           88,726
                                                                                     ---------------  ---------------

Minority Interest
                                                                                                  -           51,386
                                                                                      -------------- ----------------

COMMITMENTS (Note 13)

REDEEMABLE PREFERRED STOCK, $1.00 PAR VALUE:
  Series A Preferred Stock-
  Authorized--500,000 shares
  Issued and outstanding--10,000 shares (at liquidation value)                              1,119,768        1,199,768
                                                                                      ---------------  ---------------

STOCKHOLDERS' EQUITY:
   Common stock, $.01 par value-
     Authorized--10,000,000 shares
     Issued and outstanding--2,853,491 shares in 1997 and 2,867,592 in 1998                   28,535           28,676
   Additional paid-in capital                                                              8,318,685        8,263,018
   Accumulated deficit                                                                    (7,891,360)      (7,626,177)
                                                                                     ---------------- ----------------

         Total stockholders' equity                                                          455,860          665,517
                                                                                     ---------------  ---------------

         Total liabilities, redeemable preferred stock  and stockholders' equity     $     5,802,574  $     5,959,150
                                                                                     ===============  ===============
</TABLE>

                The   accompanying   notes  are  an   integral   part  of  these
consolidated financial statements.


<PAGE>



                                          LUXTEC CORPORATION AND SUBSIDIARIES

                                         CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
                                                                             For the Years Ended October 31,
                                                                         1996             1997              1998

<S>                                                                <C>               <C>              <C>
NET REVENUES                                                       $     9,347,699   $    10,977,435  $    12,066,787

COST OF GOODS SOLD                                                       5,323,764         6,544,409        6,959,620
                                                                   ---------------   ---------------  ---------------

         Gross profit                                                    4,023,935         4,433,026        5,107,167
                                                                   ---------------   ---------------  ---------------

OPERATING EXPENSES:
   Selling and marketing                                                 2,190,881         2,437,746        2,205,693
   Research and development                                                542,691           495,373          522,593
   General and administrative                                            1,646,081         1,627,637        1,824,606
                                                                   ---------------   ---------------  ---------------

         Total operating expenses                                        4,379,653         4,560,756        4,552,892
                                                                   ---------------   ---------------  ---------------

         (Loss)  income from operations                                   (355,718)         (127,730)         554,275
                                                                   ---------------   ---------------  ---------------

OTHER EXPENSE:
   Interest expense                                                       (231,442)         (234,024)        (269,318)
   Other income (expense)                                                   16,484             9,114          (19,774)
                                                                   ---------------   ---------------  ----------------

         Total other expense                                              (214,958)         (224,910)        (289,092)
                                                                   ---------------   ---------------  ---------------

         Net (loss) income                                                (570,676)         (352,640)         265,183

ACCRETION OF PREFERRED STOCK DIVIDENDS                                           -           119,768           80,000
                                                                   ---------------   ---------------  ---------------

         Net (loss) income applicable to common stockholders       $      (570,676)  $      (472,408) $       185,183
                                                                   ===============   ===============  ===============

NET (LOSS) INCOME PER SHARE
    Basic                                                               $(.22)           $(.17)             $.06
                                                                        =====            =====              ====
    Diluted                                                             $(.22)           $(.17)             $.06
                                                                        =====            =====              ====

WEIGHTED AVERAGE SHARES OUTSTANDING
    Basic                                                             2,574,705         2,849,538        2,863,147
                                                                      =========         =========        =========
    Diluted                                                           2,574,705         2,849,538        2,937,026
                                                                      =========         =========        =========

</TABLE>

                The   accompanying   notes  are  an   integral   part  of  these
consolidated financial statements.




<PAGE>


                                    LUXTEC CORPORATION AND SUBSIDIARIES

                            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
                                      Common Stock,          Additional
                                      $.01 Par Value          Paid-in         Accumulated
                                   Shares        Amount       Capital           Deficit        Total





<S>                             <C>          <C>           <C>             <C>             <C>
BALANCE, OCTOBER 31, 1995        2,436,541    $  24,365     $7,141,576      $ (6,968,044)   $  197,897

Net loss                              -            -             -              (570,676)     (570,676)


Issuance of common stock under       9,327           93         26,524              -           26,617
employee stock purchase plan



Issuance of common stock under       1,500           15          2,430              -            2,445
stock option plan

Issuance of common stock in a
private placement, net of
issuance costs of $25,885          394,171        3,942       1,152,686             -        1,156,628
                                  ----------   ----------    -----------      -----------   ----------
BALANCE, OCTOBER 31, 1996        2,841,539       28,415       8,323,216      (7,538,720)       812,911

Net loss                               -            -             -            (352,640)      (352,640)

Issuance of common stock under      11,952          120          27,135            -            27,255
employee stock purchase plan

Dividends on Series A                  -            -           (76,666)           -           (76,666)
Preferred Stock

Issuance of warrants in
connection with term note              -            -            45,000            -            45,000
                                 -------------------------  -------------   -------------   ------------

BALANCE, OCTOBER 31, 1997        2,853,491       28,535       8,318,685      (7,891,360)       455,860

Net income                           -              -           -               265,183        265,183

Issuance of common stock under         9,311         93          12,938              -          13,031
employee stock purchase plan


Issuance of  common stock              4,790         48          11,395              -          11,443
under stock option plan

Dividends on Series A                  -            -           (80,000)             -         (80,000)
Preferred Stock               -------------    -------------- ------------   ------------    ------------

BALANCE, OCTOBER 31, 1998        2,867,592    $  28,676     $ 8,263,018    $ (7,626,177)   $  665,517
                                  =========    =========     ===========    =============   ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financia
statements

<PAGE>


                                       LUXTEC CORPORATION AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>

                                                                             For the Years Ended October 31,
                                                                          1996             1997              1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                  <C>               <C>              <C>
   Net (loss) income                                                 $    (570,676)    $    (352,640)   $     265,183

   Adjustments to reconcile net (loss) income  to net cash (used
   in) provided by operating activities-
     Depreciation and amortization                                         265,258           301,448          215,163
     Amortization of debt discount                                               -             5,250            9,000
     Provision for uncollectible accounts receivable                         3,651           158,748          (70,000)
     Changes in current assets and liabilities-
       Accounts receivable                                                (211,053)         (737,024)        (181,285)
       Inventories                                                        (477,014)         (354,294)         (21,935)
       Prepaid expenses and other current assets                          (127,826)          139,373           16,123
       Accounts payable                                                   (827,668)          212,532         (440,753)
       Accrued expenses                                                   (188,901)           70,965          232,814
                                                                   ---------------   ---------------  ---------------

              Net cash (used in) provided by  operating activities      (2,134,229)         (555,642)          24,310
                                                                    ---------------   ---------------  ---------------


CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                                    (294,116)         (110,951)         (93,810)
   Increase in other assets                                                 (9,645)          (35,660)         (17,485)
                                                                   ----------------  ---------------- ----------------

              Net cash used in investing activities                       (303,761)         (146,611)        (111,295)
                                                                   ---------------   ---------------  ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from (payments on) revolving line of credit                415,915           (63,369)         103,198
   Net proceeds from (payments on) equipment facility loan                  (2,980)          107,723          (88,726)
   Proceeds from note payable to stockholder                             1,000,000                 -                -
   Proceeds from term note                                                       -           500,000                -
   Net proceeds from sale of subsidiary stock                                    -                              50,025
   Net proceeds from issuance of common stock in a private               1,156,628                 -                -
   placement
   Issuance of common stock under stock option plan                          2,445                 -           11,443
   Issuance of common stock under employee stock purchase plan              26,617            27,255           13,031
                                                                   ---------------   ---------------  ---------------

              Net cash provided by financing activities                  2,598,625           571,609           88,971
                                                                   ---------------   ---------------  ---------------

NET INCREASE (DECREASE) IN CASH                                            160,635          (130,644)           1,986

CASH, BEGINNING OF PERIOD                                                   11,721           172,356           41,712
                                                                   ---------------   ---------------  ---------------

CASH, END OF PERIOD                                                  $     172,356     $      41,712    $      43,698
                                                                     =============     =============    =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid for Interest                                        $       157,144     $     239,133    $     257,661
                                                                   ===============     =============    =============

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:

  Purchases of property and equipment under equipment facility       $     161,435     $           -    $           -
                                                                     =============     =============    =============
  loan
  Conversion of note payable to stockholder to Series A              $           -     $   1,043,102    $           -
                                                                     =============     =============    =============
  Preferred Stock
  Accretion of Series A Preferred Stock                              $           -     $      76,666    $      80,000
                                                                     =============     =============    =============
</TABLE>


                  The   accompanying   notes  are  an  integral  part  of  these
consolidated financial statements.


<PAGE>

                               LUXTEC CORPORATION AND SUBSIDIARIES

                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                             OCTOBER 31, 1998

(1)    NATURE OF THE BUSINESS

       Luxtec Corporation (the Company) designs,  manufactures and markets fiber
       optic headlights and headlight television camera systems (for audio-video
       recordings of surgical procedures),  light sources,  cables,  retractors,
       loupes,   surgical   telescopes,   blood  pressure   monitors  and  other
       custom-made   surgical  specialty   instruments   utilizing  fiber  optic
       technology for the medical and dental industries.


(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a)    Principles of Consolidation

              The accompanying  consolidated  financial  statements  include the
              accounts of the Company and its majority-owned subsidiaries: Fiber
              Imaging Technologies,  Inc. (FIT),  CardioDyne,  Inc. (CardioDyne)
              and Cathtec,  Inc. All intercompany accounts and transactions have
              been  eliminated in  consolidation.  The minority  interest on the
              accompanying  balance sheet represents a 7.5% interest in FIT, not
              held by the Company (see Note 10).

       (b)    Inventories

              Inventories  are  stated at the lower of cost or  market.  Cost is
              determined  using  the  first-in,   first-out  (FIFO)  method  and
              includes materials, labor and manufacturing overhead.

       (c)    Property and Equipment

              Property  and  equipment  are  stated  at  cost.  Depreciation  is
              calculated  using  the  straight-line  method  over the  estimated
              useful life of the assets.

              Leasehold  improvements  are  amortized  using  the  straight-line
              method over the shorter of the lease term or estimated useful life
              of the assets.

       (d)    Other Assets

              Other  assets  consist  principally  of  patent  costs,  which are
              amortized using the straight-line method over five years.

       (e)    Revenue Recognition

              Revenue is  recognized  when goods are shipped,  at which time all
              conditions of sale have been met.
<PAGE>


       (f)    Research and Development Costs

              Research  and  development  costs are  charged  to  operations  as
              incurred.


       (g)     Net Income (Loss)  per Share

              In February 1997, the Financial  Accounting Standards Board (FASB)
              issued Statement of Financial Accounting Standards (SFAS) No. 128,
              Earnings  Per Share.  This  statement  established  standards  for
              computing  and  presenting  earnings  per  share  and  applies  to
              entities  with publicly  traded  common stock or potential  common
              stock.  This  statement is effective for fiscal years ending after
              December 15, 1997.

              Basic net income  (loss) per share is  computed  by  dividing  net
              income (loss) by the weighted  average number of common shares and
              warrants outstanding during the period.  Diluted net income (loss)
              per  share is  computed  by  dividing  net  income  (loss)  by the
              weighted  average  number of dilutive  common  shares and warrants
              outstanding  during the period.  Diluted  weighted  average shares
              reflects the  dilutive  effect,  if any, of common  stock  options
              based on the treasury  stock  method.  No common stock options are
              considered  dilutive  in periods,  such as the fiscal  years ended
              October 31, 1996 and 1997, in which a loss is reported because all
              such  common  equivalent  shares are  antidilutive.  The number of
              common  equivalent  shares excluded from the  calculation  because
              their  effect  would  have  been   antidilutive  was  604,671  and
              1,190,721 and 646,331 for the years ended  October 31, 1996,  1997
              and 1998, respectively.

              The  calculations  of basic and diluted  weighted  average  shares
              outstanding are as follows:

                ------------------October 31--------------------
                                      1996            1997             1998
Basic weighted average shares
outstanding                         2,574,705       2,849,538       2,863,147

Dilutive shares                         -                 -            73,879


Diluted weighted average
shares outstanding                  2,574,705       2,849,538       2,937,026
                                  =============== =============    ===========


(h) Realization of Long-Lived Assets

               In March 1995,  the FASB issues SFAS No. 121,  Accounting for the
          Impairment of Long-Lived  Assets and Long-Lived  Assets to be Disposed
          Of.  SFAS No. 121  requires  the  Company to  periodically  assess the
          future  recovery  of  the  carrying  amounts  of  long-lived   assets.
          Management  believes that the recorded value of its long-lived  assets
          are realizable and that no impairment  allowance is necessary pursuant
          to the provisions of SFAS No. 121.

<PAGE>


       (i)    Use of Estimates in the Preparation of Financial Statements

              The  preparation  of  financial   statements  in  conformity  with
              generally accepted  accounting  principles  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.

       (j)    New Accounting Standards

               In  June  1997,   the  FASB  issued   SFAS  No.  130,   Reporting
          Comprehensive   Income.  SFAS  No.  130  requires  disclosure  of  all
          components  of  comprehensive  income on an annual and interim  basis.
          Comprehensive  income is defined as the change in equity of a business
          enterprise  during a period  from  transactions  and other  events and
          circumstances from nonowner sources. SFAS No. 130 is effective for the
          fiscal years beginning after December 15, 1997.

              In July 1997,  the FASB  issued  SFAS No.  131,  Disclosure  About
              Segments of an Enterprise  and Related  Information.  SFAS No. 131
              requires  certain  financial and  supplementary  information to be
              disclosed  on an annual  and  interim  basis  for each  reportable
              segment of an  enterprise.  SFAS No. 131 is  effective  for fiscal
              years  beginning  after December 15, 1997.  Unless  impracticable,
              companies  would be required to restate  prior period  information
              upon adoption.

              In June  1998,  the FASB  issued  SFAS  No.  133,  Accounting  for
              Derivative  Instruments  and Hedging  Activities.  SFAS No. 133 is
              effective  for fiscal years  beginning  after June 15,  1999.  The
              Company does not believe the adoption of this accounting  standard
              will  have any  impact  on the  Company's  financial  position  or
              results of operations.

(3) MERGER WITH CARDIODYNE, INC.

       On October 23, 1995,  the Company  consummated  a merger  agreement  (the
       Merger) with CardioDyne, Inc., a development-stage company engaged in the
       development  of products  that  monitor  blood  pressure.  In addition to
       receiving shares of Luxtec common stock, shareholders of CardioDyne, Inc.
       are entitled to certain  earnout  payments  based on the  performance  of
       products and agreements  incorporating technology previously developed by
       CardioDyne,  Inc.,  as defined.  For a period of 17 years  following  the
       effective date of the Merger,  former CardioDyne,  Inc.  shareholders are
       entitled to receive, in proportion to their former ownership percentages,
       5% and 25% of revenues from product and license agreements, respectively,
       which incorporate  technology  previously  developed by CardioDyne,  Inc.
       Such earnout  payments  shall become payable 90 days after the end of the
       Company's fiscal year. Earnout payments shall be paid 50% in cash and 50%
       in  Luxtec  common  stock  and  will be  accounted  for as an  additional
       purchase price when paid. No earnout payments were required during fiscal
       1996, 1997 or 1998.

       At October 31, 1998, the level of CardioDyne  inventory is  significantly
       in excess of the Company's current year sales of its products. Management
       has  developed  a strategy  to reduce this  inventory  to desired  levels
       during  fiscal  1999  and  believes  no  loss  will  be  incurred  on its
       disposition.


<PAGE>


(4)    INVENTORIES

       Inventories consisted of the following at October 31, 1997 and 1998:

                                         1997              1998

        Raw material             $     1,357,761  $     1,580,002
        Work-in-process                  318,312          352,464
        Finished goods                   851,236          616,778
                                   ---------------  ---------------
                                 $     2,527,309  $     2,549,244
                                   ===============  ===============

(5)    PROPERTY AND EQUIPMENT

       Property and equipment and their  respective  useful lives are as follows
       at October 31, 1997 and 1998:

                               Estimated Useful         1997             1998
                                      Lives
Machinery and equipment        5-10 years    $     1,675,878   $     1,737,103
Molds and tooling                 5 years            221,818           248,893
Furniture and fixtures           10 years            342,753           348,262
Leasehold improvements       Life of lease           236,242           236,243
                                              ---------------   ---------------
                                             $     2,476,691   $     2,570,501
                                              ===============   ===============

(6)    ACCRUED EXPENSES

       Accrued expenses consisted of the following at October 31, 1997 and 1998:

                                                     1997              1998

Accrued payroll and related expenses          $     220,713    $     282,879
Other accrued expenses                              258,218          428,866
                                            ---------------  ---------------
                                              $     478,931    $     711,745
                                              =============    =============

(7)    INCOME TAXES

       As of October 31, 1998,  the Company had  available  net  operating  loss
       carryforwards  of  approximately  $2,034,000,  research  and  development
       credit  carryforwards  of  approximately  $175,000,  and general business
       credit carryforwards of approximately  $25,000 available to reduce future
       federal income taxes, if any. These carryforwards expire through 2012 and
       are subject to review and possible  adjustment  by the  Internal  Revenue
       Service.  The Tax Reform Act of 1986  limits a  corporation's  ability to
       utilize  certain  net  operating  loss  carryforwards  in the  event of a
       cumulative change in ownership in excess of 50%, as defined.


<PAGE>

       The Company  follows the liability  method of accounting for income taxes
       in accordance with the provisions of SFAS No. 109,  Accounting for Income
       Taxes,  whereby a deferred  tax  liability is measured by the enacted tax
       rates that will be in effect when any  differences  between the financial
       statement and tax bases of assets and liabilities reverse.

       The  components  of  the  net  deferred  tax  amount  recognized  in  the
       accompanying consolidated balance sheets are set forth below:

                                                    1997               1998

Deferred tax assets                         $     1,353,000  $     1,284,000
Deferred tax liabilities                                  -                -
Valuation allowance                              (1,353,000)      (1,284,000)
                                             ---------------  ---------------
                                            $             -  $             -
                                             ===============  ===============

       The  appropriate  tax  effect of each type of  temporary  difference  and
       carryforward  before allocation of the valuation  allowance is summarized
       as follows:

                                                    1997               1998

Net operating losses                        $       889,000  $       814,000
Inventory reserve                                    89,000           95,000
Bad debt reserve                                     74,000           34,000
Other temporary differences                         129,000          141,000
Research and development credits                    147,000          175,000
General business credits                             25,000           25,000
                                             ---------------  ---------------
                                            $     1,353,000  $     1,284,000
                                             ===============  ===============

       Due to the  uncertainty  surrounding the timing of realizing the benefits
       of its favorable tax attributes in future income tax returns, the Company
       has placed a valuation  allowance against its otherwise  recognizable net
       deferred tax assets.

(8)    DEBT

       (a)   Revolving Credit Line

            The Company has a $2,500,000 revolving line-of-credit agreement with
            a bank.  The maximum  amount  available  to borrow under the line is
            limited  to the  lesser  of the  total  line  committed  or  certain
            percentages  of  accounts  receivable  and  inventory,  as  defined.
            Borrowings bear interest at the bank's prime rate (8% at October 31,
            1998) plus .5%.  Unused  portions  of the  revolving  line of credit
            accrue a fee at an annual  rate of .25%.  Borrowings  are secured by
            substantially  all assets of the  Company.  The  agreement  contains
            covenants, including the maintenance of certain financial ratios, as
            defined.  The Company was in  compliance  with all covenants for the
            year ended October 31, 1998. At October 31, 1998, availability under
            the line of credit was  approximately  $314,000.  The line of credit
            expires on March 31, 1999, unless renewed.
<PAGE>

       (b)   Long-Term Debt

            The  Company  has an  equipment  facility  agreement  with  a  bank.
            Borrowings  bear interest at the bank's base rate (8% at October 31,
            1998) plus .5% and are  secured by  substantially  all assets of the
            Company. No further borrowings are available under this arrangement.
            At October  31,  1998,  the Company had  outstanding  borrowings  of
            $177,452 under this agreement, repayable as follows:

                       1999                               $        88,726
                       2000                                        88,726
                                                          ---------------
                                                          $       177,452


            On March 31, 1997,  the Company  entered  into a $500,000  term note
            agreement  with a bank. The term note bears interest at prime (8% at
            October  31,  1998) plus 1.0%.  Principal  payments  are  payable in
            consecutive  annual  installments  beginning on February 8, 1999 and
            continuing  annually  thereafter in an amount equal to the lesser of
            (a)  $200,000  or (b) the  greater of (i) zero and (ii)  excess cash
            flow as  defined.  If not paid  sooner,  the term note is due on the
            earlier of (a) March 31, 2002, (b) the date of an equity infusion or
            (c) the date of a  management  change.  At  October  31,  1998,  the
            Company had outstanding borrowings of $469,250 under this agreement.
            The  Company was in  compliance  with all  covenants  at October 31,
            1998.

            In  connection  with the term note  agreement,  the  Company  issued
            warrants to purchase  44,000  shares of common  stock at an exercise
            price of $3.00 per share, expiring on March 31, 2002. Management has
            estimated the value of these warrants to be  approximately  $45,000,
            which has been  recorded as a debt  discount  (amortized to interest
            expense over the payment term of 60 months).

(9)    SENIOR SUBORDINATED NOTES AND REDEEMABLE PREFERRED STOCK

       On December 18, 1995, the Company issued Senior  Subordinated  Notes (the
       Notes) to a stockholder for $1,000,000 in cash.  Interest  accrues on the
       Notes at the rate of 8% per annum and is  payable  annually  in  arrears.
       Principal on the Notes was due January 1, 2001.  In  connection  with the
       financing,  the Company issued a detachable stock warrant to an investor.
       The  warrant  entitles  the holder to purchase  450,000  shares of common
       stock at an exercise  price of $3.00 per share (fair market value at date
       of grant), adjusted for certain dilutive events, as defined.

       On November 14, 1996, the Company exchanged the Senior Subordinated Notes
       for 10,000 shares of the Company's  nonvoting  Series A preferred  stock,
       $1.00 par value per share (the  Series A Preferred  Stock).  The Series A
       Preferred Stock has the following rights and preferences:

<PAGE>

         Dividends

         The  holders of the  Series A  Preferred  Stock  shall be  entitled  to
         receive cash  dividends of $8.00 per share per annum,  payable when, as
         and if  declared  by the  Board  of  Directors  of  the  Company.  Such
         dividends  on  the  Series  A  Preferred  Stock  shall  accrue  and  be
         cumulative  from the date of issuance.  During the years ended  October
         31,  1997 and  1998,  the  Company  accrued  $119,768  and  $80,000  of
         dividends, respectively.

         Liquidation Preference

         Upon any liquidation,  dissolution or winding up of the Company,  after
         payment or provision for payment of all debts and other obligations and
         liabilities  of the  Company,  the  holders of the shares of  preferred
         stock shall be  entitled,  before any  distribution  or payment is made
         upon any common  stock,  to be paid an amount  equal to the  redemption
         price ($100 per share)  plus an amount  equal to all accrued but unpaid
         dividends, and the holders of the preferred stock shall not be entitled
         to any further payment.

         Redemption

         The Company  may, at the option of the  Company's  Board of  Directors,
         redeem part or all of the outstanding  shares of the Series A Preferred
         Stock at any time or times at a redemption price of $100 per share plus
         accrued but unpaid dividends.  However, on January 1, 2001, the Company
         shall redeem all outstanding  shares of the Series A Preferred Stock at
         a redemption price of $100 per share.


(10)    MINORITY INTEREST IN FIBER IMAGING TECHNOLOGIES, INC.

       On June 30, 1998,  the Company sold 8,108 shares of FIT common stock to a
       German-based company, representing a 7.5% ownership interest for $50,025.

(11)   PRIVATE PLACEMENT OF COMMON STOCK

       On June 3, 1996, the Company raised  approximately  $1,182,000  through a
       private placement of common stock. In conjunction with the offering,  the
       Company issued  "units" at a price of $3 each.  Each unit consists of one
       share of common  stock,  $0.01 par value per share,  and one warrant that
       can be  exchanged  into one  share of common  stock for $6.00 per  share,
       which  exceeded the fair market value at the date of grant.  The warrants
       (394,171 in total) are exercisable immediately and expire on December 31,
       2001.

(12)   STOCK PLANS

       The  Company  maintains  a stock  option  plan (the 1992 Stock Plan) that
       provides for the grant of incentive  stock  options,  nonqualified  stock
       options,  stock  awards and direct  sales of stock.  Under the 1992 Stock
       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.  Nonqualified  options may be granted by the Board of Directors
       at its discretion. The difference, if any, between the exercise price and
       the fair value of the underlying  common stock at the measurement date is
       charged  to  expense  over the  vesting  period  of such  options  with a
       corresponding  credit to additional paid-in capital.  The 1992 Stock Plan
       also  provides  that the options are  exercisable  at varying  dates,  as
       determined by the  Compensation  Committee of the Board of Directors (the
       Compensation Committee),  and have terms not to exceed 10 years. In 1996,
       the  Company's  Board of Directors  adopted an amendment to the Company's
       1992 Stock Plan.  The amendment to the 1992 Stock Plan (i) increased from
       300,000 to 400,000 the number of shares authorized for issuance under the
       plan and (ii) limits to 100,000  the  maximum  number of shares of common
       stock with respect to which options may be granted to any employee in any
       calendar year.
<PAGE>

       On April 21,  1994,  the Board of Directors  approved  the 1993  Employee
       Stock  Purchase Plan (the 1993 Plan) whereby the Company has reserved and
       may  issue  up to an  aggregate  of  25,000  shares  of  common  stock in
       semiannual  offerings.  Stock  is sold at 85% of fair  market  value,  as
       defined.  Shares subscribed to and issued under the 1993 Plan were 11,952
       and 9,311 in 1997 and 1998, respectively.

       On  December  8,  1994,  the  Company  adopted  a stock  option  plan for
       nonemployee  directors (the 1995 Director  Plan).  The 1995 Director Plan
       provides that an aggregate of up to 200,000  nonqualified  options may be
       granted to  nonemployee  directors,  as  determined  by the  Compensation
       Committee. Under the terms of the 1995 Director Plan, options are granted
       at not less than the fair market value of the  Company's  common stock on
       the date of grant.  The 1995 Director Plan also provides that the options
       are  exercisable  at varying  dates,  as determined  by the  Compensation
       Committee, and have terms not to exceed 10 years.

       The following  schedule  summarizes the stock option and warrant activity
       for the three years ended October 31, 1998:


                           Number of Shares   Option Price Per  Weighted Average
                                                   Share           Option Price



Outstanding at October 31, 1995    310,000        1.25 -   4.63           3.46
  Granted                          913,571        2.75 -   6.00           4.30
  Exercised                         (1,500)           1.63                1.63
                              ---------------   -----------------   ------------

Outstanding at October 31, 1996   1,222,071       1.25 -  6.00           4.08
   Granted                          178,200       2.63 -  6.00           4.05
   Cancelled                        (40,050)      1.25 -  4.63           3.25
                              ---------------   -----------------   ------------
Outstanding at October 31, 1997   1,360,221       1.25  - 6.00         $ 4.10
   Granted                           31,400           2.44               2.44
   Cancelled                         (7,300)      2.44 -  3.56           3.03
  Exercised                          (4,790)      1.63 -  3.56           2.39
                                --------------  ------------------  ------------
Outstanding at October 31, 1998    1,379,53  $    1.25-$  6.00         $ 4.08
                                ==============  =================      ======

Exercisable at October 31, 1998   1,140,645  $    1.25-$  6.00         $3.98
                              ==============    =================      ======

       As of October 31, 1997 and 1998, 600,000 shares of common stock have been
       reserved for issuance under the Company's stock option plans.
<PAGE>

       On June 18,  1998,  the Board of Directors of FIT approved the 1998 Stock
       Option Plan (the 1998 Plan)  whereby FIT has reserved and may issue up to
       an aggregate of 50,000 shares of common stock. The 1998 Plan provides for
       the grant of incentive stock options,  nonqualified stock options,  stock
       awards and direct sales of stock.  Under the 1998 Plan,  incentive  stock
       options may be granted at an exercise price not less than the fair market
       value of FIT's common stock on the date of grant.  Non qualified  options
       may  be  granted  by the  Board  of  Directors  at  its  discretion.  The
       difference,  if any, between the exercise price and the fair value of the
       underlying  common  stock at the  measurement  date is charged to expense
       over the vesting  period of such options with a  corresponding  credit to
       additional paid-in capital.  The 1998 Plan also provides that the options
       are  exercisable  at varying  dates,  as determined  by the  Compensation
       Committee and have terms not to exceed ten years.

       The following  schedule  summarizes  the stock option  activity under the
       1998 plan for the year ended October 31, 1998:
                                                                     Weighted
                           Number of Shares     Option Price     Average Option
                                                 Per Share             Price
Outstanding at October 31, 1997      -             $    -           $     -
   Granted                       20,000              6.17               6.17
                                 ------            -------           --------

Outstanding at October 31, 199   20,000              6.17               6.17
                                 ======             ======          =========

Exercisable at October 31, 1998  10,000           $  6.17          $    6.17
                                 ======            =======          =========


               In October  1995,  the FASB issued SFAS No. 123,  Accounting  for
          Stock-Based Compensation. SFAS No. 123 requires the measurement of the
          fair  value  of  stock  options  or  warrants  to be  included  in the
          statement of income or disclosed in the notes to financial statements.
          The  Company  has  determined  that it will  continue  to account  for
          stock-based  compensation  for employees under  Accounting  Principles
          Board Opinion No. 25 and elect the  disclosure-only  alternative under
          SFAS No.  123.  The  Company has  computed  the pro forma  disclosures
          required under SFAS No. 123 for options granted in 1996, 1997 and 1998
          using the  Black-Scholes  option pricing model  prescribed by SFAS No.
          123. The weighted average assumptions are as follows:

                                           1997            1997           1998

 Risk free interest rate                   6.18%           7.00%          4.35%
 Expected dividend yield                      -               -              -
 Expected lives                          10 years        10 years       10 years
 Expected volatility                         18%             41%            85%
 Weighted average value of grants           1.60            1.86           3.89
 Weighted average remaining
 contractual life of options
outstanding                                  5.2             4.7            3.9

       The total value of options  granted during the fiscal years ended October
       31, 1996, 1997 and 1998 was computed as approximately  $87,000,  $158,000
       and $108,000,  respectively.  Had compensation  cost for these plans been
       determined  consistent with SFAS No. 123, the Company's net income (loss)
       and income  (loss)  per share  would  have been the  following  pro forma
       amounts:


<PAGE>

<TABLE>
                                                      For the Years Ended October 31,
                                                   1996             1997              1998

<S>                                           <C>               <C>              <C>
Pro forma net (loss) income                   $     (657,676)   $     (630,408)  $       77,183
                                              ==============    ==============   ==============

Pro forma net (loss) income per share-
     Basic                                       $  (.26)          $  (.22)         $      .03
                                                 =======         ==========         ===========
     Diluted                                     $  (.26)          $  (.22)         $      .03
                                                 =======           =======          ===========
</TABLE>


(13)   COMMITMENTS

       The Company has  noncancelable  operating lease  commitments that consist
       principally of rentals of facilities and machinery. Its manufacturing and
       office  facilities  are leased with a  termination  date of September 30,
       1998. The Company is currently in the process of renegotiating this lease
       agreement and is occupying the facilities under a tenancy at will.

       The future minimum  operating  lease payments over their  remaining terms
       are as follows:

        Fiscal Year                                           Amount

        1999                                              $     201,640
        2000                                                    174,759
        2001                                                     18,097
                                                        ---------------

                 Total minimum lease payments             $     394,496
                                                          =============

     Rent expense charged to operations for operating  leases was  approximately
     $142,000, $169,000 and $170,000 in fiscal year 1996, 1997 and 1998,
     respectively.

(14)   BUSINESS SEGMENT AND EXPORT SALES

       The Company operates in one business segment:  the manufacture,  sale and
       distribution of a wide range of medical products using fiber optics.

       The Company  operates from one location in the United  States.  Sales for
this operation totaled the following:

        Geographic Destination               For the Years Ended October 31,
                                             1996          1997          1998

        Domestic                              84  %         84  %         81  %
        Europe                                 9             8            14
        All others                             7             8             5
                                            -------       -------       -------

                                             100  %        100  %        100  %

<PAGE>

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




(15)   SIGNIFICANT CUSTOMERS/RELATED PARTY

       One customer,  the president of which is a member of the Company's  Board
       of  Directors,  accounted  for 12%, 14% and 13% of net revenues in fiscal
       1996,  1997 and  1998,  respectively  and 20% of the  Company's  accounts
       receivable at the end of fiscal 1998.  Another customer accounted for 14%
       of the Company's accounts receivable at the end of fiscal 1998.

(15)   401(k) RETIREMENT PLAN

       The Company maintains a qualified 401(k) retirement plan. The plan covers
       substantially  all  employees  who have  satisfied  a  six-month  service
       requirement and have attained the age of 18. The 401(k) plan provides for
       an  optional  company  contribution  for any plan  year at the  Company's
       discretion.  The Company  contributed and charged to operations  $13,536,
       $18,397 and $17,576 for the years ended October 31, 1996,  1997 and 1998,
       respectively.


<PAGE>


                                    LUXTEC CORPORATION
                                     October 31, 1998

 ITEM 9.  CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
               DISCLOSURE
                                     None.

 ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For  information  with respect to the Directors  and  Executive  Officers of the
Corporation,  see the section entitled "Election of Directors"  appearing in the
Corporation's  Proxy  Statement in  connection  with its next Annual  Meeting of
Shareholders or special  meeting in lieu thereof,  which section is incorporated
herein by reference.

 ITEM 11.  EXECUTIVE COMPENSATION

See the section entitled "Executive Compensation" appearing in the Corporation's
Proxy  Statement in connection  with its next Annual Meeting of  Shareholders or
special  meeting  in lieu  thereof,  which  section  is  incorporated  herein by
reference.


 ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

See the section entitled "Election of Directors"  appearing in the Corporation's
Proxy  Statement in connection  with its next Annual Meeting of  Shareholders or
special  meeting  in lieu  thereof,  which  section  is  incorporated  herein by
reference.
<PAGE>

 ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr.  Louis C.  Wallace is  currently,  and has been since 1989,  a member of the
Board of Directors of the Corporation.  Mr. Wallace is the founder and President
of Specialty Surgical Instrumentation, Inc. (SSI), a surgical distributor in ten
(10) southeastern states. SSI is the largest single customer of the Corporation,
representing  approximately  13% of net revenues  during  fiscal  1998.  SSI and
Luxtec  operate at arms'  length with a contract  substantially  the same as the
other domestic  distributors  of the  Corporation's  products.  The  Corporation
expects  that SSI  will  represent  approximately  the  same  percentage  of net
revenues during fiscal 1999 as occurred during fiscal 1998.




<PAGE>


                                   LUXTEC CORPORATION
                                    October 31, 1998


                                       PART IV

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

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

     1. Consolidated Financial Statements

     Report of Independent Public Accountants

     Consolidated Balance Sheets as of October 31, 1997 and October 31, 1998.

     Consolidated Statements of Operations for the years ended October 31, 1996,
     October 31, 1997 and October 31, 1998.

     Consolidated Statements of Stockholders' Equity for the years ended October
     31, 1996, October 31, 1997 and October 31, 1998.

     Consolidated Statements of Cash Flows for the years ended October 31, 1996,
     October 31, 1997 and October 31, 1998.

     Notes to Consolidated Financial Statements

  2. Financial Statement Schedules

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




<PAGE>

<TABLE>

                                                  LUXTEC CORPORATION
                                                   October 31, 1998
3. Exhibits
Exhibit    Description                                                                Designation
-------    -----------                                                                 -----------
<S>                                                                                       <C>
2A         Merger Agreement                                                               2A****
3A         Articles of Organization                                                       3A*
3B         Amendment dated March 30, 1982 to Articles of Organization                     3B*
3C         Amendment dated August 9, 1984 to Articles of Organization                     3C*
3D         Amendment dated April 10, 1992 to Articles of Organization                     3D**
3E         Amendment dated October 20, 1995 to Articles of Organization                   3E****
3F         Amendment dated October 20, 1995 to Articles of Organization                   3F****
3G         Amendment dated September 16, 1996 to Articles of Organization                 3G
3H         Certificate of Vote of Directors Establishing a Series of a Class of Stock,    3H
           dated September 16, 1996
3I         Certificate of Correction dated October 4, 1996                                3I*********
3J         Certificate of Correction dated October 4, 1996                                3J*********
3K         By-Laws                                                                        3K*
4A         Specimen of Stock Certificate                                                  4A*
4B         Note Purchase Agreement dated as of December 18, 1995, by and between          4B*******
           the Company and Geneva Middle Market Investors, L.P. (`GMMI')
4C         8% Senior Subordinated Note due June 1, 2001, dated December 18, 1995          4C*******
           in the principal amount of $1,000,000,  made by the Company
           in favor of GMMI
4D         Rights Agreement made as of December 18, 1995, between the                     4D*******
           Company and GMMI
4E         Registration Rights Agreement made as of June 3, 1996, between the             4E********
           Company and the Purchasers (as defined therein)
10L        Lease for the premises in Worcester,  MA                                       10L*****
10N        Employment  Agreement with James Hobbs                                         10N**
10O        Luxtec  Corporation  1992 Stock Plan                                           10O**
10P        Luxtec Corporation 1995 Stock Option Plan for Non-Employee  Directors          10P****
10Q        Bank Agreement                                                                 10Q******
10R        Warrant Agreement made as of December 18, 1995, between the Company            10R*******
           and GMMI
10S        Warrant for 450,000 shares of Common Stock of the Company dated as of          10S*******
           December 18, 1995, in the name of GMMI
10T        Form of Subscription Agreement and Letter of Investment Intent                 10T********
           between the Purchaser named therein and the Company

</TABLE>

<PAGE>

                                                  LUXTEC CORPORATION
<TABLE>
                                                   October 31, 1998

3. Exhibits (Continued)
Exhibit    Description                                                                   Designation
-------    -----------                                                                   -----------
<S>                                          <C>                                         <C>
10U        Warrant Agreement made as of June 3, 1996, between the                        10U********
           Company and the Purchasers (as defined therein)
10V        Form of Warrant                                                               10V********
21         Luxtec Subsidiaries                                                           21
23         Consent of Independent Public Accountants                                     23
27         Financial Data Schedule                                                       27
</TABLE>

*Previously filed as exhibits to the Corporation's Registration Statement on
 Form S-18 SEC File No.  33-5514B declared effective on July 7, 1986.

**Previously  filed as  exhibit  to the  Corporation's  Report  on Form 10-K for
  fiscal year ended October 31, 1993.

***Previously  filed as  exhibits to the  Corporation's  Report on Form 10-Q for
   quarter ended July 31, 1994.

****Previously  filed as exhibits to the  Corporation's  Proxy  Statement  dated
    October 20, 1995.

*****Previously  filed as exhibit to the  Corporation's  Report on Form 10-K for
     fiscal year ended October 31, 1994.

******Previously filed as exhibit to the  Corporation's  Report on Form 10-K for
      fiscal year ended October 31, 1995.

*******Previously  filed as exhibit to the  Corporation's  Proxy Statement date
       June 21, 1996.

********Previously  filed as exhibits to the  Corporation's  Report on Form 10-Q
        for quarter ended July 31, 1996.

*********Previously  filed as exhibit to the  Corporation's  Report on Form 10-K
         for fiscal year ended October 31, 1996.







<PAGE>


                                 LUXTEC CORPORATION
                                   October 31, 1998

     3. Exhibits (Continued)

         (b) Reports on Form 8-K:

              None.

         (c)  Exhibits.

              The  Corporation  hereby files as exhibits to this Form 10-K those
              exhibits listed in Item 14 (a)(3), above, as being filed herewith.

         (d)  Financial Statement Schedules.

              None.







<PAGE>


                                   LUXTEC CORPORATION
                                    October 31, 1998

                                     SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(D) of the  Securities
Exchange Act of 1934, the  Corporation  has duly caused this report to be signed
on its behalf by the  undersigned,  thereunto  duly  authorized,  in the Town of
Worcester, Commonwealth of Massachusetts, on the 29th day of January 1999.

                                             LUXTEC CORPORATION


                                            by_______________________________
                                            James W. Hobbs, President



<PAGE>


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed by the  following  persons in the  capacities  and on the
dates indicated:
<TABLE>
<CAPTION>


<S>                                  <C>
Signature                            Title                                   Date


                                    President, Chief                     January 22, 199
James W. Hobbs                      Executive Officer, Director


                                    Chief Financial Officer,             January 22, 1999
Samuel M. Stein                     Treasurer, Assistant Clerk


                                    Director                             January 22, 1999
James Berardo


                                    Director                             January 22, 1999
Paul Epstein


                                    Director                             January 22, 1999
James J. Goodman


                                    Director                             January 22, 1999
Patrick G. Phillipps


                                    Director                             January 22, 1999
Thomas J. Vander Salm


                                    Director                             January 22, 1999
Louis C. Wallace

</TABLE>



<PAGE>

<TABLE>

                                Exhibits furnished pursuant to requirements
                                               of FORM 10K
3. Exhibits
Exhibit    Description                                                                         Designation
-------    -----------                                                                         -----------
<S>                                                                                           <C>   
2A         Merger Agreement                                                                    2A****
3A         Articles of Organization                                                            3A*
3B         Amendment dated March 30, 1982 to Articles of Organization                          3B*
3C         Amendment dated August 9, 1984 to Articles of Organization                          3C*
3D         Amendment dated April 10, 1992 to Articles of Organization                          3D**
3E         Amendment dated October 20, 1995 to Articles of Organization                        3E****
3F         Amendment dated October 20, 1995 to Articles of Organization                        3F****
3G         Amendment dated September 16, 1996 to Articles of Organization                      3G
3H         Certificate of Vote of Directors Establishing a Series of a Class of Stock,         3H
           dated September 16, 1996
3I         Certificate of Correction dated October 4, 1996                                     3I*********
3J         Certificate of Correction dated October 4, 1996                                     3J*********
3K         By-Laws                                                                             3K*
4A         Specimen of Stock Certificate                                                       4A*
4B         Note Purchase Agreement dated as of December 18, 1995, by and between               4B*******
           the Company and Geneva Middle Market Investors, L.P. (`GMMI')
4C         8% Senior Subordinated Note due June 1, 2001, dated December 18, 1995               4C******* 
           in the principal amount of $1,000,000,  made by the Company
           in favor of GMMI
4D         Rights Agreement made as of December 18, 1995, between                              4D*******
           the Company and GMMI
4E         Registration Rights Agreement made as of June 3, 1996, between the                  4E********
           Company and the Purchasers (as defined therein)
10L        Lease for the premises in Worcester,  MA                                            10L***** 
10N        Employment  Agreement with James Hobbs                                              10N** 
10O        Luxtec  Corporation  1992 Stock Plan                                                10O** 
10P        Luxtec Corporation 1995 Stock Option Plan for Non-Employee  Directors               10P**** 
10Q        Bank Agreement                                                                      10Q****** 
10R        Warrant Agreement made as of December 18, 1995, between the Company                 10R*******
           and GMMI
10S        Warrant for 450,000 shares of Common Stock of the Company dated as of               10S*******
           December 18, 1995, in the name of GMMI

</TABLE>
<PAGE>

                                    Exhibits furnished pursuant to requirements
                                                    of FORM 10K
<TABLE>

3. Exhibits  (Continued)
Exhibit    Description                                                                     Designation
<S>                                                                                       <C>        
10T        Form of Subscription Agreement and Letter of Investment Intent                  10T********
           between the Purchaser named therein and the Company
10U        Warrant Agreement made as of June 3, 1996, between the Company                  10U********
           and the Purchasers (as defined therein)
10V        Form of Warrant                                                                 10V********
21         Luxtec Subsidiaries                                                             21
23         Consent of Independent Public Accountants                                       23
27         Financial Data Schedule                                                         27
</TABLE>

*Previously filed as exhibits to the Corporation's Registration Statement on 
 Form S-18 SEC File No. 33-5514B declared effective on July 7, 1986.

**Previously  filed as  exhibit  to the  Corporation's  Report  on Form 10-K for
  fiscal year ended October 31, 1993.

***Previously  filed as  exhibits to the  Corporation's  Report on Form 10-Q for
   quarter ended July 31, 1994.

****Previously  filed as exhibits to the  Corporation's  Proxy  Statement  dated
    October 20, 1995.

*****Previously  filed as exhibit to the  Corporation's  Report on Form 10-K for
     fiscal year ended October 31, 1994.

******Previously filed as exhibit to the  Corporation's  Report on Form 10-K for
      fiscal year ended October 31, 1995.

*******Previously  filed as exhibit to the  Corporation's  Proxy Statement dated
       June 21, 1996.

********Previously  filed as exhibits to the  Corporation's  Report on Form 10-Q
        for quarter ended July 31, 1996.

*********Previously  filed as exhibit to the  Corporation's  Report on Form 10-K
         for fiscal year ended October 31, 1996.




<PAGE>


                                LUXTEC CORPORATION
                                 October 31, 1998

                                    EXHIBIT 21

                      Luxtec Corporation Subsidiaries


1.    Cathtec, Inc., a Massachusetts Corporation.

2.    Fiber Imaging Technologies, Inc., a Massachusetts Corporation.

3.    CardioDyne, Incorporated, a Massachusetts Corporation.





<PAGE>


                                EXHIBIT 23


                 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

     As  independent  public  accountants,  we hereby  consent to the use of our
reports  and to all  references  to our Firm  included in or made a part of this
Form 10-K, into the Company's  previously filed Registration  Statements on Form
S-8 (File Nos. 33-83510, 333-19087 and 333-19107).


                                                    S/Arthur Andersen LLP
                                                    ARTHUR ANDERSEN LLP



Boston, Massachusetts
January 20, 1999


<PAGE>


                                                   Federal Identification
                                                    No.       04-2741310

                        The Commonwealth of Massachusetts
                              William Francis Galvin
                          Secretary of the Commonwealth
                One Ashburton Place, Boston, Massachusetts 02108-1512

                                   ARTICLES OF AMENDMENT
                         General Laws, Chapter 156B, Section 72)

We,                 James W. Hobbs                      ,  President,
and                 Justin P. Morreale                  ,  Clerk

of                            Luxtec Corporation
                                              (Exact name of corporation)

located at:            326 Clark Street,  Worcester, Massachusetts  01606
                        (Street address of corporation in Massachusetts)

certify that these Articles of Amendment effecting articles numbered:

                                3, 4
              (Number those articles 1, 2, 3, 4, 5 and/or 6 being amended)

of the Articles of Organization  were duly adopted at a meeting held on July 25,
1996, by vote of:

1,695,941   shares of Common Stock   out of 2,449,480      shares outstanding,
                       type, class & series (if any)

            shares of                          out of      shares outstanding, 
                        type, class & series (if any)      and

            shares of                          out of      shares outstanding,
                        type, class & series (if any)

being at least a  two-thirds  of each  type,  class or  series  outstanding  and
entitled to vote thereon and of each type, class or series of stock whose rights
are adversely affected thereby:

          VOTED: To amend the Articles of  Organization  of the  Corporation  to
               authorize  500,000 shares of preferred stock, par value $1.00 per
               share, with such designations, powers, privileges and rights, and
               qualifications,  limitations and  restrictions in respect of each
               class or series of preferred  stock as  determined by vote of the
               Board of Directors or a committee  thereof,  and to authorize the
               Board of Directors to issue the  preferred  stock in such classes
               or series and to determine the powers, privileges and rights, and
               the  qualifications,  limitations and  restrictions in respect to
               each  class  or  series  of   preferred   stock  by  vote.   (See
               Continuation Page IV attached hereto as Exhibit A) 

Note:  If the  space  provided  under  any  article  or  item  on  this  form is
insufficient,  additions shall be set forth on one side only of separate 8 1/2 x
11 sheets of paper with a left margin of at least 1 inch. Additions to more than
one article may be made on a single sheet so long as each article requiring each
addition is clearly indicated.



<PAGE>


To change the number of shares and the par value (if any) of any type,  class or
series of stock  which  the  corporation  is  authorized  to issue,  fill in the
following:

To total presently authorized is:
<TABLE>
<CAPTION>
<S>                             <C>
WITHOUT PAR VALUE STOCKS        WITH PAR VALUE STOCK

--------------------- ----------------------------     ------------------- --------------------------- -----------------
TYPE                  NUMBER OF SHARES                 TYPE                NUMBER OF SHARES            PAR VALUE
--------------------- ----------------------------     ------------------- --------------------------- -----------------
--------------------- ----------------------------     ------------------- --------------------------- -----------------
COMMON:                                                COMMON:                     10,000,000                $.01

--------------------- ----------------------------     ------------------- --------------------------- -----------------
--------------------- ----------------------------     ------------------- --------------------------- -----------------
PREFERRED:                                             PREFERRED:

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


Change the total authorized to:

WITHOUT PAR VALUE STOCKS        WITH PAR VALUE STOCK

--------------------- ----------------------------     ------------------- --------------------------- -----------------
TYPE                  NUMBER OF SHARES                 TYPE                NUMBER OF SHARES            PAR VALUE
--------------------- ----------------------------     ------------------- --------------------------- -----------------
--------------------- ----------------------------     ------------------- --------------------------- -----------------
COMMON:                                                COMMON:                     10,000,000                $.01

--------------------- ----------------------------     ------------------- --------------------------- -----------------
--------------------- ----------------------------     ------------------- --------------------------- -----------------
PREFERRED:                                             PREFERRED:                   500,000                 $1.00

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

</TABLE>





<PAGE>






The  foregoing  amendment(s)  will  become  effective  when  these  Articles  of
Amendment are filed in accordance  with General  Laws,  Chapter 156B,  Section 6
unless  these  articles  specify,  in  accordance  with  the vote  adopting  the
amendment,  a later  effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.

Later effective date: __________________________

SIGNED UNDER THE PENALTIES OF PERJURY, this 16th day of September, 1996.


/s/ James W. Hobbs                              , President


/s/ Justin P. Morreale                           , Clerk



<PAGE>


                        THE COMMONWEALTH OF MASSACHUSETTS


                                ARTICLES OF AMENDMENT
                         (General Laws, Chapter 156B, Section 72)


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


                  I hereby  approve the within  Articles of  Amendment,  and the
                  filing  fee in the  amount of $ 600  having  been  paid,  said
                  articles  are  deemed to have been filed with me this 19th day
                  of September, 1996.



                  Effective Date:








                              WILLIAM FRANCIS GALVIN
                           Secretary of the Commonwealth







                        TO  BE  FILLED  IN  BY   CORPORATION
                        Photocopy of document to be sent to:


                         Victor J. Paci, Esq.
                         Bingham, Dana & Gould LLP
                         150 Federal Street, Boston, MA  02110
                         Telephone: (617) 951-8000
<PAGE>


                             The Commonwealth of Massachusetts
                                 William Francis Galvin
                              Secretary of the Commonwealth                   
                     One Ashburton Place, Boston, Massachusetts 02108  


                                                         Federal Identification
                                                         No. 04-2741310


                CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING
                           A SERIES OF A CLASS OF STOCK

                      General Laws, Chapter 156B, Section 26


We                     James W. Hobbs, President and
                       Justin P. Morreale, Clerk


                              Luxtec Corporation
                             (Name of Corporation)

located at 326 Clark Street,  Worcester, Massachusetts  01606

do hereby certify that by unanimous  written consent in lieu of a meeting of the
directors  of the  corporation  dated as of May 31,  1996,  the  following  vote
establishing  and  designating a series of a class of stock and  determining the
relative rights and preferences thereof was duly adopted:


          VOTED: That,  subject  to  obtaining  the  requisite  approval  of the
               Amendment by  stockholders of the Corporation and pursuant to the
               authority  vested in the Board of  Directors by Article IV of the
               Charter,  as  amended  by the  Amendment,  a series of  preferred
               stock,  par value $1.00 per share,  be and hereby is  established
               and designated as Series A Preferred Stock,  consisting of 10,000
               shares,  with, in addition to any set forth in the Charter,  such
               designations,  powers, privileges and rights, and qualifications,
               limitations  and  restrictions in respect thereof as contained in
               the  Certificate of Vote of Directors  Establishing A Series of a
               Class of Stock (the "Directors  Certificate"),  substantially  in
               the  form  attached  hereto  as  Exhibit  B; and that the form of
               Directors  Certificate  attached  hereto as Exhibit B be, and the
               same hereby is, adopted and approved by the Board of Directors of
               the Corporation.

                (See Continuation Page 2 attached as Exhibit B hereto)




Note:  Votes for which the space provided above is not sufficient  should be set
out on continuation sheets to be numbered 2A, 2B, etc.  Continuation sheets must
have a left-hand  margin 1 inch wide for binding and shall be 8 1/2" x 11". Only
one side should be used.


<PAGE>



IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY,  we have signed our names
this 16th day of September, in the year 1996.


/s/ James W. Hobbs                                   President


/s/ Justin P. Morreale                               Clerk




<PAGE>


                         THE COMMONWEALTH OF MASSACHUSETTS


                        Certificate of Vote of Directors Establishing
                               A Series of a Class of Stock

                         (General Laws, Chapter 156B, Section 26)


                           I hereby  approve  the within  certificate  and,  the
                  filing  fee in the  amount of $ 100  having  been  paid,  said
                  certificate is hereby filed this 19th day of September, 1996.





                                    William Francis Galvin
                                 Secretary of the Commonwealth













                             TO BE FILLED IN BY CORPORATION

                          PHOTOCOPY OF CERTIFICATE TO BE SENT

                  TO:

                                    Victor J. Paci, Esq.
                                    Bingham, Dana & Gould
                                    150 Federal Street, Boston, MA  02110
                                    Telephone: (617) 951-8000

<PAGE>


                                                                    EXHIBIT A

                                  ARTICLES OF AMENDMENT
                                           to
                                 ARTICLES OF ORGANIZATION
                                           of
                                    LUXTEC CORPORATION

                                  Continuation Sheet VI


                                         ARTICLE VI


         Other  lawful  provisions,  if any, for the conduct and  regulation  of
business and affairs of the corporation,  for its voluntary dissolution,  or for
limiting,  defining,  or  regulating  the powers of the  corporation,  or of its
directors or  stockholders,  or of any class of  stockholders:  (If there are no
provisions state "None".)

         1. No director shall be personally  liable to the corporation or to any
of its  stockholders  for monetary  damages for any breach of fiduciary  duty by
such director as a director  notwithstanding  any provision of law imposing such
liability;  provided, however, that, to the extent required from time to time by
applicable  law, this provision shall not eliminate the liability of a director,
to the extent such  liability is provided by applicable  law, (a) for any breach
of the director's  duty of loyalty to the corporation or its  stockholders,  (b)
for acts or omissions not in good faith which involve intentional  misconduct or
a knowing  violation of law, (c) under  Section 61 or Section 62 of the Business
Corporation Law of The Commonwealth of Massachusetts, or (d) for any transaction
from which the director derived an improper personal benefit. No amendment to or
repeal of this Article  VI-A shall apply to or have any effect on the  liability
or  alleged  liability  of any  director  for or  with  respect  to any  acts or
omissions  of  such  director  occurring  prior  to the  effective  date of such
amendment or repeal.

      2.  Indemnification.

                  2.1. Right to Indemnification. The corporation shall indemnify
         and hold harmless each person who was or is a party or is threatened to
         be made a party to or is otherwise involved in any threatened,  pending
         or completed action, suit, proceeding or investigation,  whether civil,
         criminal or administrative (a "Proceeding"), by reason of being, having
         been  or  having  agreed  to  become,  a  director  or  officer  of the
         corporation,  or serving,  having served or having agreed to serve,  at
         the  request of the  corporation,  as a director or officer of, or in a
         similar  capacity with,  another  organization  or in any capacity with
         respect to any employee benefit plan (any such person being referred to
         hereafter as an  "Indemnitee"),  or by reason of any action  alleged to
         have been taken or  omitted  in such  capacity,  against  all  expense,
         liability and loss (including without limitation  reasonable attorneys'
         fees, judgments,  fines, "ERISA" excise taxes or penalties) incurred or
         suffered by the Indemnitee or on behalf of the Indemnitee in connection
         with such  Proceeding and any appeal  therefrom,  unless the Indemnitee
         shall have been  adjudicated  in such  Proceeding  not to have acted in
         good faith in the  reasonable  belief that his or her action was in the
         best interest of the  corporation or, to the extent such matter relates
         to  service  with  respect to an  employee  benefit  plan,  in the best
         interests of the participants or beneficiaries of such employee benefit
         plan.  Notwithstanding anything to the contrary in this Article, except
         as set forth in Section 2.6 below, the corporation  shall not indemnify
         or  advance  expenses  to  an  Indemnitee  seeking  indemnification  in
         connection  with  a  Proceeding  (or  part  thereof)  initiated  by the
         Indemnitee,  unless the initiation thereof was approved by the Board of
         Directors of the corporation.
<PAGE>

                  2.2. Settlements. Subject to compliance by the Indemnitee with
         the  applicable   provisions  of  Section  2.5  below,   the  right  to
         indemnification conferred in this Article shall include the right to be
         paid by the  corporation  for amounts  paid in  settlement  of any such
         Proceeding  and  any  appeal  therefrom,  and all  expenses  (including
         attorneys' fees) incurred in connection with such settlement,  pursuant
         to a consent  decree  or  otherwise,  unless  it is held or  determined
         pursuant to Section 2.5 below that the  Indemnitee  did not act in good
         faith in the  reasonable  belief that his or her action was in the best
         interest of the  corporation  or, to the extent such matter  relates to
         service with respect to an employee benefit plan, in the best interests
         of the participants or beneficiaries of such employee benefit plan.

                  2.3.  Notification and Defense of Proceedings.  The Indemnitee
         shall  notify  the   corporation  in  writing  as  soon  as  reasonably
         practicable  of any  Proceeding  involving  the  Indemnitee  for  which
         indemnity  or  advancement  of expenses  is intended to be sought.  Any
         omission  so to notify the  corporation  shall not  relieve it from any
         liability that it may have to the Indemnitee under this Article unless,
         and only to the extent that, such omission results in the forfeiture of
         substantive rights or defenses by the corporation.  With respect to any
         Proceeding of which the  corporation  is so notified,  the  corporation
         shall be entitled, but not obligated, to participate therein at its own
         expense and/or to assume the defense  thereof at its own expense,  with
         legal  counsel  reasonably  acceptable  to the  Indemnitee,  except  as
         provided in the last  sentence of this Section  2.3.  After notice from
         the  corporation  to the  Indemnitee  of its election so to assume such
         defense  (subject  to the  limitations  in the  last  sentence  of this
         Section 2.3), the corporation shall not be liable to the Indemnitee for
         any  fees  and  expenses  of  counsel  subsequently   incurred  by  the
         Indemnitee in connection with such  Proceeding,  other than as provided
         below in this  Section  2.3.  The  Indemnitee  shall  have the right to
         employ his or her own counsel in connection with such  Proceeding,  but
         the fees and  expenses of such counsel  incurred  after notice from the
         corporation  of its  assumption  of the defense  thereof at its expense
         with  counsel  reasonably  acceptable  to  Indemnitee  shall  be at the
         expense of the  Indemnitee  unless (i) the employment of counsel by the
         Indemnitee  at the  corporation's  expense has been  authorized  by the
         corporation,  (ii)  counsel to the  Indemnitee  shall  have  reasonably
         concluded  that there may be a conflict  of interest or position on any
         significant  issue between the  corporation  and the  Indemnitee in the
         conduct of the  defense of such action or (iii) the  corporation  shall
         not  in  fact  have  employed  counsel  reasonably  acceptable  to  the
         Indemnitee to assume the defense of such Proceeding within a reasonable
         time after receiving  notice  thereof,  in each of which cases the fees
         and expenses of counsel for the  Indemnitee  shall be at the expense of
         the  corporation,  except  as  otherwise  expressly  provided  by  this
         Article. The corporation shall not be entitled,  without the consent of
         the Indemnitee,  to assume the defense of any Proceeding  brought by or
         in  the  right  of the  corporation  or as to  which  counsel  for  the
         Indemnitee  shall have reasonably  made the conclusion  provided for in
         clause (ii) above.
<PAGE>

                  2.4.  Advancement  of Expenses.  Except as provided in Section
         2.3 of this Article, as part of the right to indemnification granted by
         this Article,  any expenses (including  attorneys' fees) incurred by an
         Indemnitee in defending any Proceeding  within the scope of Section 2.1
         of  this  Article  or  any  appeal  therefrom  shall  be  paid  by  the
         corporation  in  advance  of the  final  disposition  of  such  matter,
         provided,  however,  that the payment of such  expenses  incurred by an
         Indemnitee in advance of the final  disposition of such matter shall be
         made only upon receipt of a written  undertaking by or on behalf of the
         Indemnitee  to repay all amounts so advanced in the event that it shall
         ultimately  be  determined  that the  Indemnitee  is not entitled to be
         indemnified by the  corporation as authorized by Section 2.1 or Section
         2.2 of this Article.  Such undertaking need not be secured and shall be
         accepted without  reference to the financial  ability of the Indemnitee
         to make such repayment.  Such  advancement of expenses shall be made by
         the  corporation  promptly  following  its receipt of written  requests
         therefor  by  the  Indemnitee,   accompanied  by  reasonably   detailed
         documentation, and of the foregoing undertaking.

                  2.5.  Certain  Presumptions  and  Determinations.   If,  in  a
         Proceeding brought by or in the right of the corporation, a director or
         officer of the  corporation  is held not liable for  monetary  damages,
         whether  because  that  director  or officer is  relieved  of  personal
         liability  under  the  provisions  of  Section  1 of  this  Article  or
         otherwise,  that  director  or officer  shall be deemed to have met the
         standard of conduct set forth in Section 2.1 and thus to be entitled to
         be  indemnified  by the  corporation  thereunder.  In  any  adjudicated
         Proceeding  against an Indemnitee brought by reason of the Indemnitee's
         serving,  having  served  or agreed to  serve,  at the  request  of the
         corporation,  an organization other than the corporation in one or more
         of the capacities indicated in Section 2.1, if the Indemnitee shall not
         have been adjudicated not to have acted in good faith in the reasonable
         belief that the  Indemnitee's  action was in the best  interest of such
         other  organization,  the  Indemnitee  shall be  deemed to have met the
         standard of conduct set forth in Section 2.1 and thus be entitled to be
         indemnified  thereunder.  An adjudication in such a Proceeding that the
         Indemnitee did not act in good faith in the reasonable  belief that the
         Indemnitee's action was in the best interest of such other organization
         shall not  create a  presumption  that the  Indemnitee  has not met the
         standard  of  conduct  set  forth in  Section  2.1.  In order to obtain
         indemnification  of amounts paid in settlement  pursuant to Section 2.2
         of this  Article,  the  Indemnitee  shall submit to the  corporation  a
         written  request,  including  in such request  such  documentation  and
         information  as is  reasonably  available  to  the  Indemnitee  and  is
         reasonably  necessary  to  determine  whether  and to what  extent  the
         Indemnitee   is   entitled   to   such   indemnification.    Any   such
         indemnification  under Section 2.2 shall be made  promptly,  and in any
         event within 60 days after  receipt by the  corporation  of the written
         request of the  Indemnitee,  unless a court of  competent  jurisdiction
         holds within such 60-day  period that the  Indemnitee  did not meet the
         standard  of  conduct  set  forth  in  Section  2.2 or the  corporation
         determines, by clear and convincing evidence, within such 60-day period
         that the  Indemnitee  did not meet such  standard.  Such  determination
         shall be made by the Board of  Directors of the  corporation,  based on
         advice of  independent  legal counsel (who may, with the consent of the
         Indemnitee,   be  regular  legal  counsel  to  the  corporation).   The
         corporation and the directors shall be under no obligation to undertake
         any such determination or to seek any ruling from any court.
<PAGE>

                  2.6.  Remedies.  The right to  indemnification  or advances as
         granted by this Article shall be  enforceable  by the Indemnitee in any
         court  of  competent  jurisdiction  if the  corporation  denies  such a
         request,  in whole or in part,  or,  with  respect  to  indemnification
         pursuant to Section 2.2, if no  disposition  thereof is made within the
         60-day  period  referred  to above in  Section  2.5.  Unless  otherwise
         provided  by law,  the burden of  proving  that the  Indemnitee  is not
         entitled to  indemnification  or  advancement  of  expenses  under this
         Article  shall  be  on  the   corporation.   Neither   absence  of  any
         determination   prior  to  the   commencement   of  such   action  that
         indemnification  is proper in the circumstances  because the Indemnitee
         has met any applicable standard of conduct, nor an actual determination
         by the corporation  pursuant to Section 2.5 that the Indemnitee has not
         met such  applicable  standard  of  conduct,  shall be a defense to the
         action  or create a  presumption  that the  Indemnitee  has not met the
         applicable  standard of conduct.  The Indemnitee's  expenses (including
         reasonable  attorneys'  fees) incurred in connection with  successfully
         establishing his or her right to indemnification,  in whole or in part,
         in any such Proceeding shall also be paid by the corporation.

                  2.7.  Contract  Right;  Subsequent  Amendment.  The  right  to
         indemnification  and advancement of expenses  conferred in this Article
         shall be a contract right. No amendment,  termination or repeal of this
         Article  or  of  the  relevant   provisions  of  Chapter  156B  of  the
         Massachusetts General Laws or any other applicable laws shall affect or
         diminish in any way the rights of any Indemnitee to  indemnification or
         advancement of expenses under the provisions hereof with respect to any
         Proceeding  arising  out  of  or  relating  to  any  action,  omission,
         transaction  or facts  occurring  prior to the final  adoption  of such
         amendment,  termination  or  repeal,  except  with the  consent  of the
         Indemnitee.

                  2.8.  Other Rights.  The  indemnification  and  advancement of
         expenses  provided by this Article shall not be deemed exclusive of any
         other  rights  to  which  an  Indemnitee  seeking   indemnification  or
         advancement  of  expenses  may be  entitled  under any law  (common  or
         statutory),   agreement  or  vote  of   stockholders  or  directors  or
         otherwise,  both as to action in his or her official capacity and as to
         action in any other capacity while holding office for the  corporation,
         and shall  continue as to an Indemnitee who has ceased to be a director
         or  officer,  and shall  inure to the  benefit  of the  estate,  heirs,
         executors and  administrators  of the Indemnitee.  Nothing contained in
         this  Article  shall be  deemed to  prohibit,  and the  corporation  is
         specifically  authorized to enter into,  agreements with any Indemnitee
         providing  indemnification  rights and procedures  different from those
         set forth in the Article.

                  2.9.  Partial  Indemnification.  If an  Indemnitee is entitled
         under  any  provision  of  this  Article  to   indemnification  by  the
         corporation for some or a portion of the expenses (including attorneys'
         fees),  judgments,  fines or amounts  paid in  settlement  actually and
         reasonably  incurred  by the  Indemnitee  or on his  or her  behalf  in
         connection  with  any  Proceeding  and any  appeal  therefrom  but not,
         however,   for  the  total  amount  thereof,   the  corporation   shall
         nevertheless  indemnify the Indemnitee for the portion of such expenses
         (including  attorneys'  fees),  judgments,  fines  or  amounts  paid in
         settlement to which the Indemnitee is entitled.

                  2.10.  Insurance.  The  corporation  may purchase and maintain
         insurance, at its expense, to protect itself and any director, officer,
         employee  or  agent  of the  corporation  or  another  organization  or
         employee  benefit plan against any expense,  liability or loss incurred
         by such person in any such  capacity,  or arising out of such  person's
         status as such,  whether or not the corporation would have the power to
         indemnify  such person  against such  expense,  liability or loss under
         Chapter 156B of the Massachusetts General Laws.
<PAGE>

                  2.11.  Merger or  Consolidation.  If the corporation is merged
         into or  consolidated  with another  corporation and the corporation is
         not the surviving  corporation,  the surviving corporation shall assume
         the obligations of the  corporation  under this Article with respect to
         any  Proceeding  arising out of or  relating  to any action,  omission,
         transaction  or facts  occurring on or prior to the date of such merger
         or consolidation.

                  2.12.  Savings  Clause.  If this Article or any portion hereof
         shall  be   invalidated  on  any  ground  by  any  court  of  competent
         jurisdiction,  then the corporation  shall  nevertheless  indemnify and
         advance  expenses  to each  Indemnitee  as to any  expenses  (including
         attorneys'  fees),  judgments,  fines and amounts paid in settlement in
         connection with any Proceeding,  including an action by or in the right
         of the  corporation,  to the fullest extent permitted by any applicable
         portion of this Article that shall not have been invalidated and to the
         fullest extent permitted by applicable law.

                  2.13.  Subsequent  Legislation.  If the Massachusetts  General
         Laws are amended after  adoption of this Article to expand  further the
         indemnification  permitted to Indemnitees,  then the corporation  shall
         indemnify  such  persons  to  the  fullest  extent   permitted  by  the
         Massachusetts General Laws as so amended.

                  2.14.  Indemnification  of Others. The corporation may, to the
         extent  authorized  from time to time by its Board of Directors,  grant
         indemnification  rights to  employees or agents of the  corporation  or
         other persons serving the corporation who are not Indemnitees, and such
         rights may be equivalent  to, or greater or less than,  those set forth
         in this Article.

      3.  Meeting of the stockholders of the corporation may be held anywhere in
          the United States.

      4. The  directors  may make,  amend,  or repeal the By-Laws in whole or in
part except with respect to any  provision  thereof  which by law or the By-Laws
requires action by the stockholders.

      5. The corporation may be a partner in any business  enterprise  which the
corporation would have power to conduct by itself.

         6. The  corporation  may at any time  enter into  agreements  to redeem
an/or redeem its outstanding stock from any stockholder or stockholders  without
having to extend the same offer to its other stockholders.




<PAGE>


                                                                     EXHIBIT B

                             LUXTEC CORPORATION

                 TERMS, RIGHTS, PREFERENCES AND PRIVILEGES OF

                  SERIES A PREFERRED STOCK, $1.00 PAR VALUE

                            CONTINUATION PAGE 2


      The following is a description  of the Series A Preferred  Stock of Luxtec
Corporation (the Company") and a statement of the  preferences,  qualifications,
privileges,  limitations,  restrictions,  and other  special or relative  rights
granted to or imposed upon the shares of such class:

      Series A Preferred Stock.

      (a)  Designation: Number of Shares.

      There is hereby  established  a series of Preferred  Stock  consisting  of
10,000 shares of Preferred  Stock par value $1.00 per share and the  designation
of such series shall be "Series A Preferred Stock" (the "Preferred Stock")

      (b)  Voting.

      Except  as  otherwise   provided  by  the  laws  of  The  Commonwealth  of
Massachusetts,  and except as  hereinafter  provided,  the  holders of shares of
Preferred  Stock  shall have no right to vote with  respect to any matters to be
voted on by the stockholders of the Company,  nor to take any action in meetings
with respect to any such matters.

      (c)  Dividends.

      The holders of record of shares of the  Preferred  Stock shall be entitled
to receive cash  dividends,  when,  as and if declared by the Board of Directors
out of assets which are legally available for the payment of such dividends,  at
the annual  rate of $8.00 per share of  Preferred  Stock,  and no more,  payable
quarterly  on the last day of  January,  April,  July and  October in each year.
Dividends  shall be cumulative and will accrue on each share of Preferred  Stock
from  the  date of  issue  thereof,  whether  or not  declared  by the  Board of
Directors.  Dividends  payable on the Preferred Stock for any period less than a
full quarter shall be computed on the basis of the actual number of days elapsed
and a 360-day year, consisting of four 90-day quarters.



<PAGE>


      (d)  Redemption.

           (i)  Redemption  Price.  The  Preferred  Stock shall be redeemable as
hereinafter  provided,  upon notice given as hereinafter provided, by paying for
each share in cash the sum of $100 (the  "Redemption  Price").  Not less than 10
days' prior  written  notice  shall be given by mail,  postage  prepaid,  to the
holders  of record of the  Preferred  Stock to be  redeemed,  such  notice to be
addressed to each such  stockholder  at its post office  address as shown by the
records of the  Company.  Said notice  shall  specify the place at which and the
date,  which  date  shall be a  business  day,  on which the  shares  called for
redemption  will be redeemed and shall specify the shares called for redemption.
If such notice of redemption  shall have been duly given and if on or before the
redemption date specified in such notice the funds necessary for such redemption
shall have been set aside so as to be and  continue  to be  available  therefor,
then,  notwithstanding  that any certificate for shares so called for redemption
shall not have been surrendered for cancellation, after the close of business on
such  redemption  date, the shares so called for  redemption  shall no longer be
deemed outstanding,  the dividends thereon shall cease to accrue, and all rights
with respect to shares so called for redemption,  including the rights,  if any,
to receive notice and to vote,  shall  forthwith  after the close of business on
such redemption  date cease and determine,  except only the right of the holders
thereof to receive the amount payable upon redemption thereof, without interest.
Subject to the provisions hereof, the Board of Directors shall have authority to
prescribe the manner in which the Preferred Stock shall be redeemed from time to
time.

           (ii) Shares to be Redeemed.  In case of the redemption of only a part
of the outstanding  shares of the Preferred Stock, all shares of Preferred Stock
to be redeemed  shall be selected pro rata there shall be so redeemed  from each
registered  holder in whole  shares,  as nearly as  practicable  to the  nearest
share,  that  proportion of all of the shares to be redeemed which the number of
shares  held of record  by such  holder  bears to the total  number of shares of
Preferred Stock at the time outstanding.

           (iii) All Past  Dividends  Must Be Paid Prior to  Redemption.  Except
with the consent of the holders of all the shares of Preferred Stock at the time
outstanding,  the Company  shall not,  and shall not permit any  subsidiary  to,
purchase or redeem shares of the Preferred Stock at the time outstanding  unless
all dividends on such shares for all past quarterly  dividend periods shall have
been paid or declared and a sum sufficient for the payment thereof set apart.

           (iv)  Required  Redemptions.  On January 1, 2001,  the Company  shall
redeem,  in the manner and with the effect  provided in this  paragraph,  at the
Redemption  Price  of all  shares  of  Preferred  Stock  as  shall  then  remain
outstanding,  or at such other time or times as may be provided  for in the Note
Purchase  Agreement dated as of December 18, 1995 between the Company and Geneva
Middle Market Investors, L.P.

           (v) Optional  Redemptions.  The Company at the option of the Board of
Directors  may  redeem,  in the  manner  and with the  effect  provided  in this
paragraph,  on or at any time or times part or all of the outstanding  shares of
Preferred Stock at the Redemption Price.
<PAGE>

      (e)  Liquidation.

      Upon any  liquidation,  dissolution  or winding up of the  Company,  after
payment  or  provision  for  payment  of all  debts and  other  obligations  and
liabilities of the Company,  the holders of the shares of Preferred  Stock shall
be entitled,  before any  distribution or payment is made upon any Common Stock,
to be paid an amount equal to the  Redemption  Price plus an amount equal to all
accrued dividends,  and the holders of the Preferred Stock shall not be entitled
to any further payment. Upon any such liquidation,  dissolution or winding up of
the Company,  after the holders of the Preferred Stock, at the time outstanding,
shall have been paid in full the  amounts to which they shall be  entitled,  the
remaining net assets of the Company may be  distributed to the holders of Common
Stock. If, upon any such liquidation,  dissolution or winding up of the Company,
the assets of the Company  distributable  as aforesaid  among the holders of the
Preferred  Stock at the time  outstanding  shall be  insufficient  to permit the
payment to them of the full  preferential  amounts  to which they are  entitled,
then the entire  assets of the Company so available  for  distribution  shall be
distributed  ratably  among  the  holders  of the  Preferred  Stock  at the time
outstanding  in  proportion to the full  preferential  amounts to which they are
entitled. Written notice of such liquidation, dissolution or winding up, stating
a payment date, the amount of the Redemption Price and the place where said sums
shall be payable shall be given by mail,  postage prepaid,  not less than thirty
(30) days prior to the payment date stated therein,  to the holders of record of
the Preferred Stock, such notice to be addressed to each stockholder at its post
office  address as shown by the records of the  Company.  The  consolidation  or
merger of the Company into or with any other corporation or corporations, or the
sale  or  transfer  by the  Company  of all or any  part of its  assets,  or the
reorganization  or  recapitalization  of the  Company,  or the  reduction of the
capital stock of the Company,  shall be deemed to be a liquidation,  dissolution
or winding up of the Company within the meaning of any of the provisions of this
paragraph.

      (f)  Restrictions.  At  any  time  when  shares  of  Preferred  Stock  are
outstanding,  except  where the vote or  written  consent  of the  holders  of a
greater number of shares of the Company is required by law or by the Articles of
Organization,  and in addition to any other vote required by law or the Articles
of Organization, without the approval of the holders of at least 60% of the then
outstanding shares of Preferred Stock, given in writing or by vote at a meeting,
consenting  or voting (as the case may be)  separately  as a class,  the Company
will not:

           (i) Create or  authorize  the  creation  of any  additional  class or
series of shares of stock unless the same ranks equal or junior to the Preferred
Stock as to the  distribution  of  assets  on the  liquidation,  dissolution  or
winding up of the Company,  or increase the  authorized  amount of the Preferred
Stock or increase the authorized  amount of the Preferred  Stock or increase the
authorized  amount of any  additional  class or series of shares of stock unless
the same ranks equal or junior to the Preferred Stock as to the  distribution of
assets on the liquidation,  dissolution or winding up of the Company,  or create
or  authorize  any  obligation  or  security,  convertible  into  shares  of the
Preferred  Stock or into shares of any other class or series of stock unless the
same ranks  equal or junior to the  Preferred  Stock as to the  distribution  of
assets on the liquidation, dissolution or winding up of the Company, whether any
such creation,  authorization  or increase shall be by means of amendment to the
Articles of Organization or by merger, consolidation or otherwise; or

           (ii)  Purchase or set aside any sums for the  purchase of, or pay any
dividend  or make any  distribution  on,  any  shares  of stock  other  than the
Preferred  Stock,  except for  dividends or other  distributions  payable on the
Common Stock solely in the form of additional shares of Common Stock.



<PAGE>