SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF 1934

For the fiscal year ended June 30, 2004

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1934

         For the transition period from _____________ to _____________

                         Commission File Number: 0-14961

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

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

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

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

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


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

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

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

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act).                              Yes      No  X
                                                                   ------  -----
<PAGE>
The  estimated  aggregate  market  value  of the  voting  common  stock  held by
non-affiliates  of the registrant  was $61,841 as of December 31, 2003.  Because
PrimeSource's  common  stock  is not  listed  or  quoted  on an  exchange,  this
computation  is based on an  estimated  market value of $.01 per share of common
stock as of September 1, 2004.

As of September 1, 2004, 22,375,144 shares of common stock, $.01 par value, were
issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g.,  Part I, Part II,  etc.) into which the document is
incorporated:

     Portions of the registrant's definitive proxy statement for its 2004 annual
meeting of stockholders are incorporated by reference into Part III of this Form
10-K.



                                       2
<PAGE>

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

Part II
Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters.......18
Item 6.    Selected Financial Data.....................................................20
Item 7.    Management's Discussion and Analysis of Financial Condition and
              Results of Operations..................................................23
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk..................34
Item 8.    Financial Statements and Supplementary Data.................................35
Item 9.    Changes In and Disagreements with Accountants on Accounting and
              Financial Disclosure..................................................  .64
Item 9A    Controls and Procedures.....................................................64

Part III
Item 10.   Directors and Executive Officers of the Registrant                          64
Item 11.   Executive Compensation                                                      64
Item 12.   Security Ownerships of Certain Beneficial Owners and Mangement              64
Item 13.   Certain Relationships and Related Transactions                              65
Item 14.   Principal Accountant Fees and Service                                       65

Part IV
Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K......    ..66

Signatures                                                                             73

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

</TABLE>
                                        3
<PAGE>
                                     PART I

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

This document includes various  "forward-looking  statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent our expectations or
beliefs  concerning  future events.  Statements  containing  expressions such as
"believes," anticipates" or "expects", which might be used in our press releases
and  periodic  reports  on Forms 10-K and 10-Q  filed  with the  Securities  and
Exchange  Commission are intended to identify  forward-looking  statements.  All
forward-looking statements involve risks and uncertainties.  Although we believe
our expectations are based upon reasonable  assumptions within the bounds of our
knowledge and  operations,  there can be no assurances  that actual results will
not materially differ from expected  results.  We caution that these and similar
statements  included in this report and in previously  filed  periodic  reports,
including  reports  filed on  Forms  10-K and  10-Q  are  further  qualified  by
important  factors that could cause  actual  results to differ  materially  from
those  in  the  forward-looking   statements.   Such  factors  include,  without
limitation,  those listed under Item 7. "Management's Discussion and Analysis of
Financial  Condition  and Results of  Operations,"  under the  subheading  "Risk
Factors."

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



ITEM 1.  BUSINESS
                                     GENERAL


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

Today, we have two primary  businesses:  Specialty Medical  Distribution and the
Manufactured  Products  Division or  Manufactured  Products.  Information on our
business  segments  can be  found  in Note 13 to the  accompanying  consolidated
financial  statements.  The Company was incorporated on November 11, 1981. As of
June 30, 2004, we had 132 employees and generated total revenue of $48.8 million
for the fiscal year ending June 30, 2004.

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

                                       4
<PAGE>
During the year ended June 30,  2002,  we commenced a  restructuring  plan which
involved  narrowing  the  focus  of our  operations,  consolidation  of  certain
under-performing   sales  regions,   reduction  of  corporate  overhead  through
workforce  reductions and facility  consolidation,  restructuring of our balance
sheet through the  recapitalization of equity and refinancing of our senior bank
debt  and  reduction  of  debt  levels  through  cost  reductions  and  improved
efficiency of operations.

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

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

In December 2003, we consolidated  our senior debt  facilities.  Our senior debt
financing is now provided  under a revolving  $7,500,000  demand note from Wells
Fargo Business Credit,  Inc.  ("Wells Fargo").  As of June 30, 2004, the Company
had $5,204,139 of outstanding borrowings under the PrimeSource Healthcare Credit
and Security Agreement, dated as of December 10, 2003, by and among the Company,
PrimeSource  Surgical,  Bimeco, Inc. ("Bimeco") and Wells Fargo (the "Credit and
Security  Agreement")  as  further  discussed  in  Note  7 to  the  accompanying
consolidated financial statements.

                                BUSINESS STRATEGY

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

     o    hiring experienced territory sales representatives;

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

     o    selectively  acquiring  specialty medical products  manufacturers.  We
          expect to benefit from the  acquisition  of select  specialty  medical
          products  manufacturers  by increasing sales of acquired product lines
          through use of our direct specialty medical products sales force.

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

                                       5
<PAGE>

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

     o    favorable industry demographics;

     o    sustaining or increasing our market share;

     o    the acquisition of other specialty medical products manufacturers;

     o    expanding margin opportunities in our manufactured products business;

     o    further   penetration  of  existing   customer  accounts  due  to  our
          introduction  of new products and  services;  and o entrance  into new
          specialty domestic markets and expansion into international markets.

                                    INDUSTRY

The medical products  industry has grown in recent years due to the aging of the
population and the  development of new medical  products and  technologies  that
create new product  opportunities for  manufacturers  and suppliers.  Healthcare
industry  analysts  estimate  that the overall  market for medical  products and
supplies in the United  States is in excess of $45  billion.  An  estimated  $15
billion  is  distributed  by the  larger  medical  and  surgical,  or  med-surg,
distributors,  such as Owens & Minor, Inc.,  Cardinal Health,  Inc. and McKesson
Corporation. These distributors primarily market commodity products and supplies
to group  purchasing  organizations  ("GPOs") and integrated  delivery  networks
("IDNs").  It is estimated  that an  additional  $25 billion in medical  product
sales is sold directly by medical device  manufacturers to end customers.  Local
and  regional  distributors  account for an  estimated  $5 billion of  specialty
medical products sold to hospitals, clinics and physicians. PrimeSource competes
within this segment of the medical products and supplies market.

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

                                       6
<PAGE>

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

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

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

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

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

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

                              PRODUCTS AND SERVICES

SPECIALTY MEDICAL DISTRIBUTION

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

Within the Surgical segment, the primary specialties are:

     o    Cardio Vascular;

     o    Endoscopy;

     o    General Surgery; and

     o    Gynecology.

Within the Critical Care segment, the primary specialties are:

     o    Neonatal Intensive Care; and

     o    Maternal and Child Care.


                                       7
<PAGE>
Our products and services are  primarily  used in hospital  operating  rooms and
intensive  care units,  outpatient  surgery  centers  and,  to a lesser  degree,
doctors' offices.  Most of our products are  technologically  innovative medical
products,  or specialty  products,  that require hands-on training of clinicians
and  medical  personnel.  We  continue  to expand  our  product  base to include
additional instruments and equipment,  thereby allowing customers to use us as a
source for a greater percentage of their specialty products needs.

The sale of specialty disposable products and capital equipment accounts for the
majority of our revenues.  Our capital equipment  products are typically complex
and  require  significant  consultative  selling and  training of medical  staff
personnel.  Our  specialty  disposable  products  are often sold to support  the
growing base of installed capital  equipment  products and offer a recurring and
stable source of revenue.

MANUFACTURED PRODUCTS DIVISION

We operate the Manufactured Products business through our Luxtec division, which
designs,  manufactures  and  markets  fiber  optic  headlight  and video  camera
systems,  light sources,  cables,  retractors and surgical and other custom-made
equipment  for the  medical  and  dental  industries.  Luxtec  has  developed  a
proprietary, fiber optic drawing system designed to manufacture optical glass to
a specified diameter.  The fibers are utilized in fiber optic cables,  which are
incorporated with Luxtec's surgical  headlight systems and video camera systems,
as well as into an array of fiber optic transilluminators utilized with Luxtec's
surgical instruments. Luxtec also markets replacement fiber optic cables, bulbs,
and light sources for use with other manufacturers' products,  including various
endoscopic systems used in minimally invasive surgical procedures.

Fiber  optics allow for the  transmission  of a light or image from one place to
another through a flexible conduit of optical glass rods and tubes. The flexible
conduit  provides for an improved  ability to bend and transmit light and images
to and from places with limited or difficult access.

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

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

LIGHT SOURCES:  Luxtec manufactures a product line of high quality,  solid state
xenon and halogen fiber optic light sources. Luxtec's light sources offer a wide
range  of light  intensities  in order to  serve  the  varying  requirements  in
illuminating  surgical and diagnostic  procedures.  The lamps illuminate the end
surface of the fiber optic cable through which the light is transmitted, without
transmitting  heat.  Luxtec's  light  sources are designed and  manufactured  to

                                       8
<PAGE>
comply with  Underwriters  Laboratories  544 medical  safety  standards  and are
listed  domestically with ETL Laboratories.  Internationally,  Luxtec strives to
achieve  compliance  with all  applicable  international  standards  to  compete
effectively on a worldwide basis (including the CE mark, which has been attained
on the present product line).

FIBER OPTIC CABLES:  Luxtec  designs and  manufactures a complete range of fiber
optic  cables and holds  patents on certain  fiber optic cable  assemblies.  See
"Patents  and  Trademarks."  Luxtec  offers  surgeons  a range of  fiber  bundle
diameters in order to optimize the use of surgical instruments. Luxtec employs a
proprietary  technology  that  enables the fiber optic  interface  to  withstand
significantly  higher  temperatures  and permits the use of higher  output light
sources. In addition,  all of Luxtec's fiber optic cables are adaptable to light
sources made by other manufacturers.

FIBER OPTIC HEADLIGHT AND VIDEO CAMERA SYSTEMS:  Luxtec manufactures and markets
a series of video  products that are  currently  being used in the United States
and in over 25 countries around the world.  Luxtec's  Microlux  headlight camera
systems  are  designed  to televise  surgical  procedures.  The system is a very
small,  lightweight,  solid state  television  camera  mounted at the front of a
headband, manufactured by Luxtec, and integrated with fiber optic illumination.

                               SALES AND MARKETING

We sell our  products  and  services to  hospitals,  IDNs,  surgery  centers and
physician  offices.  In fiscal year ended June 30,  2004,  within the  Specialty
Medical Distribution  business, we sold specialty medical products to over 3,000
customers,  primarily in the United  States.  We are not dependent on any single
customer or geographic group of customers.  Our largest  customer  accounted for
2.3% of our gross profit during our fiscal year ended June 30, 2004.

We maintain an  extensive  sales  organization  that is highly  experienced  and
skilled   in   representing   clinical   products   and   services.   Our  sales
representatives  serve as a service and educational resource to the marketplace.
They assist  clinicians in selecting and  purchasing  products,  help  customers
better  manage   inventories  of  specialty  medical  products  and  direct  the
appropriate   utilization  of  our  clinically  focused  products.   Each  sales
representative works within an assigned sales territory under the supervision of
a dedicated  regional sales  manager.  Our sales  representatives  are primarily
compensated on a commission basis.

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

Our external  sales,  based upon the customer's  country of origin by geographic
area for the year  ended  June 30,  2004,  2003 and 2002,  totaled  $46,065,000,
$44,015,000 and  $51,688,000,  respectively,  for sales in the United States and
$2,698,000,  $2,345,000  and  $2,008,000,  respectively,  for  sales to  foreign
customers.


                                       9
<PAGE>
                                  DISTRIBUTION

We believe that responsive  delivery of quality  specialty  medical products and
supplies is a key  element to  providing  complete  customer  satisfaction.  Our
customers place orders for medical products and supplies by telephone, facsimile
or via EDI. All orders are routed  through our  centralized  computer  ordering,
shipping and inventory  management  system,  which is linked to our distribution
centers.  Rapid and accurate order  fulfillment is a principal  component of our
value-added approach.

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

                           MANUFACTURING AND SUPPLIERS

Manufacturer relationships are an integral part of our businesses. Our Specialty
Medical  Distribution  business represents more than 125 manufacturers with over
90% of our sales  concentrated among products purchased from approximately 30 of
these  manufacturers.  A majority  of the  business  is  comprised  of  stocking
relationships  whereby we stock the vendor's products and provide  substantially
all fulfillment services (i.e., customer service, shipping,  returns, etc.). The
remainder  of the revenue is received  on an  "agency"  basis  whereby we do not
stock the vendor's products and do not provide fulfillment services. In the case
of an agency sale,  the  manufacturer  provides  substantially  all  fulfillment
services for customers and we provide sales and marketing  support to facilitate
the sale of the vendor's product. For providing the sales and marketing support,
we are paid a sales commission on each sale of the vendor's products.

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

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

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

                                       10
<PAGE>
                               INFORMATION SYSTEMS

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

     o    increased inventory utilization;

     o    greater visibility as to sales performance; and

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

We continue to offer our web-based  Surg-E-Track (TM) system to our direct sales
force as well as  select  manufacturer  partners.  Surg-E-Track  provides  sales
personnel and manufacturer partners with comprehensive  customer purchasing data
in  a  variety  of  formats.  We  are  able  to  enhance  sales   representative
productivity,  customer service levels and assist our  manufacturer  partners to
more effectively manage their businesses through the Surg-E Track system.

                                   COMPETITION

We compete  with a variety of  companies  including  manufacturers  who  utilize
direct  sales  forces,   national   specialty   distributors  and  a  number  of
significantly smaller local and regional specialty distributors. We compete to a
lesser degree with national med-surg  distribution  companies,  such as Cardinal
Health,  Inc., McKesson  Corporation and Owens & Minor, Inc. A brief overview of
the Company's competition follows:

     o    PRODUCT  MANUFACTURERS'  DIRECT SALES FORCES.  Product  manufacturers'
          direct,  internal  sales forces offer  manufacturers  direct access to
          healthcare providers.  Manufacturers,  however, periodically outsource
          the sales and marketing of some of their  products to specialty  sales
          and marketing organizations such as PrimeSource.

     o    NATIONAL SPECIALTY DISTRIBUTORS.  Several companies serve the national
          specialty   medical   products   market.   These  national   specialty
          distributors tend to focus and specialize within a particular  segment
          of the specialty medical products market.

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

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

                                       11
<PAGE>
Within the  Manufactured  Products  business,  Luxtec  competes with a number of
manufacturers of proprietary light source systems. Competitors within the United
States  include the Cogent  division of Welch  Allyn and  Sunoptic  Technologies
(formerly Cuda  FiberOptics) and  Illumination  Industrial  Isolux,  SA. Some of
Luxtec's  competitors have historically relied on metal halide technology rather
than  the  state-of-the-art  xenon  technology  offered  by  Luxtec.  The  xenon
technology is more widely  accepted and provides a broader  color  spectrum than
metal halide technology.  Foreign competitors include Richard Wolf GMBH, Scholly
GMBH and those companies previously mentioned above.

                             PATENTS AND TRADEMARKS

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

     Patents
     -------
     o    Patent No. 4616257 for Headlight Camera System issued October 7, 1986.
     o    Patent No. 5295052 for a light source assembly issued March 15 1994.
     o    Patent No. D345368 for surgical telescopes issued March 22, 1994.
     o    Patent No. D349123 for spectacles having integral  illumination issued
          July 26, 1994.
     o    Patent No. D350760 for an eyeglass  frame temple issued  September 20,
          1994.
     o    Patent No.  D415285 for Pinhole  Headlamp Video Camera for Medical and
          Surgical Applications issued October 12, 1999.
     o    Patent No. D398403 for Headband for Surgeons with Removable  Headboard
          Hanger issued September 15, 1998.
     o    Patent No. 6258037 for blood pressure monitoring in noisy environments
          issued July 10, 2001.
     o    Patent No. 4998713 for needle connector issued March 12, 1991.
     o    Patent  No.  5893635  for  headlamp  with  enhanced  light   gathering
          condenser issued April 13, 1999.

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

                                       12
<PAGE>
     o    BIMECO,   U.S.  federal  trademark   registration   number  1,190,584,
          registered February, 23 1981
     o    MegaTech   Medical,   U.S.  federal  trademark   registration   number
          1,930,021, registered October 24, 1995
     o    TMC
     o    Clearfield
     o    ValueFlex

Luxtec relies on its development and manufacturing  efforts,  rather than patent
protection,  to establish  and maintain its industry  position.  In general,  we
treat  our  design,  technical,  customer,  vendor  and  other  Company  data as
confidential  and  rely on  nondisclosure  agreements,  trade  secrets  laws and
non-competition  agreements to protect our  proprietary  position;  however,  we
cannot  assure that these  measures  will  adequately  protect  our  proprietary
technologies.

                              GOVERNMENT REGULATION

The  manufacturing,  marketing,  distribution  and  sale  of  specialty  medical
products  sold by us are subject to  government  regulation in the United States
and other  countries.  Among the  federal  laws which  impact us are the Federal
Food,  Drug and Cosmetic Act, which regulates the  advertising,  record keeping,
labeling,  handling,  storage and distribution of drugs and medical devices, and
which  requires  us to be  registered  with  the  United  States  Food  and Drug
Administration  ("FDA"), and the Safe Medical Devices Act of 1990, which imposes
certain  reporting  requirements  on  distributors  in the event of an  incident
involving  serious  illness,  injury or death  caused by a  medical  device.  In
addition,  in order to clinically  test,  produce and market  products for human
diagnostic or  therapeutic  use, we must comply with  mandatory  procedures  and
safety  standards  established  by the  FDA and  comparable  state  and  foreign
regulatory agencies.  Typically, products must meet regulatory standards as safe
and  effective  for  their  intended  use  prior to  being  marketed  for  human
applications.  The  clearance  process is expensive and time  consuming,  and no
assurance can be given that any agency will grant  clearance for the sale of our
products  or that  the  length  of time the  process  will  require  will not be
extensive.  We believe  that we are in  substantial  compliance  with all of the
foregoing  laws and that we possess all licenses  required in the conduct of our
business.

                                   EMPLOYEES

As of September 1, 2004,  we had 136  employees,  of which 41 are engaged in the
Surgical  segment,  19 in the  Critical  Care  segment,  56 in the  Manufactured
Products  business and 20 in corporate and shared services.  We believe that our
continued  success depends on our ability to attract and retain highly qualified
personnel.  None  of  our  employees  are  covered  by a  collective  bargaining
agreement.


                                       13
<PAGE>
                 EXECUTIVE OFFICERS AND KEY MANAGEMENT PERSONNEL

Following  are the names and ages,  as of  September 1, 2004,  of our  executive
officers and key management  personnel,  their  positions and summaries of their
backgrounds and business experience.

       Name         Age             Position
       ----         ---             --------
Joseph H. Potenza   57  President and Chief Executive Officer
Shaun D. McMeans    42  Chief Operating Officer and Chief Financial Officer
Samuel M. Stein     64  Vice President & General Manager, Manufacturing Division
Mark A. Jungers     52  Regional Vice President, Distribution Division
Bruce R. Hoadley    45  Regional Vice President, Distribution Division
Scott F. Billman    48  Regional Vice President, Distribution Division

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

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

SAMUEL M. STEIN, VICE PRESIDENT & General Manager,  Manufacturing  Division: Mr.
Stein's  career  has  focused  on high  growth  technology  companies.  Prior to
becoming General Manager of the Company's  Luxtec Division,  Mr. Stein served as
Luxtec's  Chief  Financial  Officer.  Prior to joining Luxtec in 1993, Mr. Stein
served as Chief Operating and Chief Financial  Officer of Mitrol,  Inc. of which
he was also co-founder.  He has served as Chief Financial Officer with companies
ranging from start-ups to  subsidiaries of Fortune 500  corporations.  Mr. Stein
earned  a  Bachelor  of  Science  degree  in  Business  Administration  from the
University of Toledo and a Master of Science degree from Rensselaer  Polytechnic
Institute.

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

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

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

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

                                  RISK FACTORS

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

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

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

PRIMESOURCE  SURGICAL HAS A LIMITED OPERATING HISTORY,  WHICH MAKES IT DIFFICULT
TO PREDICT ITS FUTURE PERFORMANCE.  PrimeSource Surgical,  which is our material
subsidiary,   commenced  operations  in  1996,  and  grew  rapidly  through  the
acquisition  of a number of  specialty  medical  products  sales  and  marketing
organizations.  Accordingly,  PrimeSource  Surgical has only a limited operating

                                       15
<PAGE>
history  from  which to  evaluate  and  forecast  its  business.  As a result of
PrimeSource Surgical's limited operating history, we may be unable to accurately
forecast financial results going forward.  Moreover, failure to meet our revenue
targets and financial  projections  may have an immediate and negative impact on
our total results of operations.

IF WE ARE  UNABLE  TO  ACHIEVE  OUR  BUSINESS  OBJECTIVES  AND  COMPLY  WITH THE
COVENANTS IN OUR CREDIT  FACILITIES WE MAY HAVE TO SUSPEND OR CEASE  OPERATIONS.
We had net income of  $1,606,049  for our fiscal year ended June 30, 2004. If we
are unable to generate  sufficient  positive  cash flow and/or raise  additional
equity  or  debt  capital,  we may  have  insufficient  funds  to  continue  our
operations.  In addition,  if we are unable to comply with the  covenants of our
credit  facilities,  our creditors may  accelerate  repayment of the  borrowings
under our credit facility.

THE INDUSTRY IN WHICH WE PARTICIPATE  IS  INCREASINGLY  COMPETITIVE  WHICH COULD
MAKE IT MORE DIFFICULT FOR US TO IMPROVE OUR FINANCIAL PERFORMANCE. The changing
health-care  environment  in  recent  years  has led to  increasingly  inte  nse
competition  among  health-care  suppliers.  Competition  is  focused  on price,
service  and  product  performance.  Pressure  in  these  areas is  expected  to
continue. Increased competition may lead to price and other forms of competition
that could have a material  adverse  effect on our market  share,  business  and
results of operations.  Also, we may face increased  competition for acquisition
opportunities, which may inhibit our ability to consummate suitable acquisitions
on favorable  terms.  Many of our competitors are, or are affiliated with, major
companies.  These competitors have substantially greater financial and marketing
resources and greater name recognition and more established relationships with a
large base of current and potential customers than we do. Accordingly, it may be
more difficult to compete against these large competitors.

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

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

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

GOVERNMENTAL  OR PRIVATE  INITIATIVES  TO REDUCE  HEALTHCARE  COSTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE SPECIALTY MEDICAL PRODUCTS INDUSTRY.  The primary
trend in the United  States  healthcare  industry  is toward  cost  containment.
Comprehensive  government healthcare reform intended to reduce healthcare costs,
the growth of total healthcare expenditures and expanded healthcare coverage for
the uninsured have been proposed in the past and may be considered  again in the

                                       16
<PAGE>
near future. Implementation of government healthcare reform may adversely affect
specialty  medical  products  companies,   which  could  decrease  the  business
opportunities  available to us. In addition, the increasing use of managed care,
centralized  purchasing decisions and consolidations  among, and integration of,
healthcare  providers are continuing to affect  purchasing and usage patterns in
the healthcare system. Decisions regarding the use of specialty medical products
are  increasingly  being  consolidated  into  group  purchasing   organizations,
regional integrated delivery systems and similar  organizations and are becoming
more economically  focused, with decision makers taking into account the cost of
the  product and whether a product  reduces the cost of  treatment.  Significant
cost  containment  initiatives  adopted by government or private  entities could
have a material adverse effect on our business.

OUR MAJOR STOCKHOLDER HAS SUBSTANTIAL CONTROL OF US AND COULD DELAY OR PREVENT A
CHANGE IN CONTROL THAT STOCKHOLDERS MAY BELIEVE WOULD IMPROVE  MANAGEMENT AND/OR
OUR  BUSINESS.  As a result of its  ownership  of Series G  Preferred  Stock and
common  stock,  GE  Capital  Equity  Investments,  Inc.,  is  able  to  exercise
substantial  control  over the  election  of our  directors  and many  corporate
actions requiring the approval of such stockholders.

OUR COMMON STOCK IS NOT LISTED ON AN EXCHANGE  WHICH MAKES IT DIFFICULT  FOR OUR
STOCKHOLDERS TO SELL THEIR STOCK. Although we are a public reporting company and
incur the costs and regulatory burden associated with our reporting obligations,
our shares of capital  stock are not listed on any stock  exchange  or quoted on
any quotation system. We cannot assure that holders of our capital stock will be
able to dispose of their shares.  Our ability to use our stock as  consideration
in potential acquisition, will be hindered by the limited trading market for our
stock.


ITEM 2.  PROPERTIES

PrimeSource's  corporate  headquarters are located at 99 Hartwell  Street,  West
Boylston,  Massachusetts.  All of our  facilities  are leased and located in the
United States of America. A summary of the Company's  facilities and offices, as
of September 1, 2004, is as follows:

CITY, STATE                                    SQUARE                LEASE
                                                FEET            EXPIRATION DATE

Tucson, Arizona.............................     6,054              7/31/2006
Birmingham, Alabama.........................    18,356             11/30/2006
Atlanta, Georgia............................     1,200              9/30/2004
Atlanta, Georgia............................     1,750              9/30/2004
West Boylston, Massachusetts................    31,689             10/31/2005
                                                ------

                                                59,049
                                                ======


We believe that all of our facilities are in satisfactory condition and suitable
for the particular  purposes for which they were acquired or constructed and are
sufficient for the Company's current operations.

                                       17
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

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


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

Our  annual  meeting of  stockholders  was held on  December  12,  2003.  At the
meeting, the following items were submitted to a vote of the stockholders:

     (1) the election of a Class III director for a three-year term was approved
with the  election of Shaun D. McMeans  receiving  7,862,958  votes in favor,  0
votes against, 8,217,358 votes withheld and 0 broker non-votes.

     (2) an amendment to our 1997 Stock Option/Stock  Issuance Plan, as amended,
increasing  the  number  of  shares of common  stock  reserved  thereunder  from
10,000,000 to 12,000,000 was approved with  14,726,893  votes in favor,  295,691
votes against, 68,005 abstentions and 988,927 broker non-votes;

     (3) the appointment by our Board of Directors of Deloitte & Touche LLP, our
independent  auditors,  was ratified with 16,071,771 votes in favor, 5,230 votes
against, 2,515 abstentions and 0 broker non-votes.


                                     PART II

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

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

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

As of September 1, 2004,  there were  approximately  534  registered  holders of
record of our  common  stock.  We  estimate  that  there are  approximately  800
beneficial holders of our common stock.

We have not paid any cash  dividends on our common stock since our inception and
the Board of Directors does not contemplate doing so in the foreseeable  future.
The Board of Directors  currently  intends to retain any future earnings for use

                                       18
<PAGE>
in expanding  our business.  We may not declare or pay any dividend  without the
consent of lenders and our preferred stockholders.

On August 6, 2002, the Company created a new series of preferred stock, Series G
Convertible Redeemable Preferred Stock, no par value (the "Series G Stock"). The
Series G Stock has 230,000 authorized shares. In connection with the issuance of
the Series G Stock,  the Company  issued  warrants to purchase an  aggregate  of
3,300,000  shares of  common  stock at $.01 per  share.  These  warrants  became
exercisable  on December  31,  2002 and expire on August 6, 2012.  Each share of
Series G Stock is  convertible  into 100  shares of  common  stock,  subject  to
adjustment,  at the option of the  holder.  Each share of Series G Stock has one
vote for each  share of common  stock  into  which it would be  convertible.  In
addition,  Series G Stock  ranks  senior to all other  outstanding  stock of the
Company.  Series  G Stock  accrues  dividends  at the rate of 8% per year of the
original  issuance  price of $32.00 per share and has a  liquidation  preference
equal to  $64.00  per share  plus an  amount  equal to all  accrued  but  unpaid
dividends.  The Series G Stock has a mandatory  redemption date of June 3, 2005,
and is redeemable  at the original  issue price of $32.00 per share plus accrued
but unpaid  dividends.  The Series G Stock also has  special  consent  rights to
certain of the Company's activities, including, but not limited to, amendment of
the Company's articles or bylaws and merger or consolidation of the Company.

<TABLE>
<CAPTION>
<BTB>

                              EQUITY COMPENSATION PLAN INFORMATION
 -------------------------------------------------------------------------------
                                                                    JUNE 30, 2004

                                                                                      NUMBER OF SECURITIES
                               NUMBER OF SECURITIES                                  REMAINING AVAILABLE FOR
                                   TO BE ISSUED            WEIGHTED-AVERAGE           FUTURE ISSUANCE UNDER
                                 UPON EXERCISE OF          EXERCISE PRICE OF        EQUITY COMPENSATION PLANS
                               OUTSTANDING OPTIONS,      OUTSTANDING OPTIONS,         (EXCLUDING SECURITIES
                               WARRANTS AND RIGHTS        WARRANTS AND RIGHTS        REFLECTED IN COLUMN (a))
PLAN CATEGORY                         (a)                        (b)                            (c)
<S>                                     <C>                   <C>                     <C>
Equity compensation
     plans approved by            26,562,698                   $0.1930                        2,912,070
     security holders
Equity compensation
     plans not approved
     by security holders (1)           7,499                   16.0000                                0
                                  ----------                   -------                        ---------

               Total              26,570,197                   $0.1975                        2,912,070
                                  ==========                   =======                        =========
</TABLE>
(1) On August 6, 2002, we granted Bradford C. Walker an option to purchase 7,500
shares of our Series G  Convertible  Redeemable  Preferred  Stock at an exercise
price of $16.00 per share.  This option became fully vested and  exercisable  on
the  first  anniversary  of the grant  date and  expires  upon the tenth  (10th)
anniversary of the grant date. The stock option  agreement  provides that if Mr.
Walker is terminated for any reason other than  misconduct,  the option,  to the
extent vested on the termination date, becomes  exercisable at any time prior to
the  earlier of (i) five (5) years  following  the date he ceases to provide any
service to PrimeSource or (ii) one (1) year  following the  registration  of the
option shares under the  Securities Act of 1933. On October 15, 2003, one option
for the purchase of Series G Stock was exercised for $16.


                                       19
<PAGE>
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The selected  consolidated  financial data presented below has been derived from
our historical audited consolidated financial statements of PrimeSource for each
of the five years in the period ended June 30, 2004.  The following  data should
be read in conjunction with  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated  financial  statements
and the notes thereto. Data is in thousands except per share data.
<TABLE>
<CAPTION>
<BTB>
OPERATING DATA:                                                   FISCAL YEAR
                                                                 ENDED JUNE 30
                                  -----------------------------------------------------------------------------
                                   2004(1)(2)      2003(3)(4)     2002(5)(6)       2001(7)        2000(8)(9)

<S> <C>

NET SALES                           $   48,763     $   46,360      $   53,696     $   48,402      $   54,411

NET INCOME (LOSS)                   $    1,606     $   (3,629)     $   (6,191)    $   (4,382)     $   (1,384)

NET INCOME (LOSS) PER
  SHARE - BASIC                     $     0.07     $     0.33      $    (1.11)    $    (1.37)     $    (0.69)

TOTAL ASSETS                        $   29,899     $   31,665      $   37,587     $   45,450      $   31,297

LONG-TERM OBLIGATIONS               $    8,250     $    5,826      $   23,285     $   20,335      $   15,968

STOCKHOLDERS' EQUITY
 (CAPITAL DEFICIENCY)               $   10,433     $   10,686      $   (5,349)    $     (562)     $     (567)
</TABLE>
(1) In December 2003, the Company  refinanced  its senior debt  facilities.  The
Company  paid  off its  Luxtec  revolving  note  in the  amount  of  $1,271,585.
Simultaneously,  the Company paid off its PrimeSource Surgical revolving line of
credit in the amount of $4,793,944.

(2) Upon  adoption  of SFAS No. 150 as of July 1,  2003,  the Series G Stock was
reclassified in the Consolidated  Balance Sheets from presentation in the equity
section the liability  section.  Upon  original  issuance of the Series G Stock,
$2,062,000  relating  to warrants  issued was  recorded  to  additional  paid-in
capital.  These amounts were reversed out of additional  paid-in capital and the
book value of the Series G Stock was  increased  to the  redemption  amount upon
adoption of SFAS No. 150.

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

(4) In the  fiscal  year ended  June 30,  2003,  the  Company  restructured  its
outstanding preferred and common stock. The restructuring  resulted in preferred
stockholders exchanging preferred stock with a redemption value of approximately
$21,993,000  for preferred stock with a redemption  value of $3,250,000,  common

                                       20
<PAGE>
stock and common stock warrants.  As a result of the  restructuring,  net income
available for common  stockholders  was increased by  $11,809,741  (to $0.33 per
share) due to the effect of the equity recapitalization.

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

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

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

(8) In  June  2000,  PrimeSource  Surgical  sold  an  entity  for  approximately
$398,000,  which  resulted  in a recorded  loss of  approximately  $732,000.  In
addition,  in April 2000,  PrimeSource Surgical acquired an entity for $405,000.
The  acquisition  was accounted for using the purchase  method of accounting and
the results of operations are included in the consolidated  financial statements
from the date of acquisition.

(9) In the fiscal year ended June 30, 2000,  PrimeSource Surgical approved plans
for a major  restructuring  of its  operations  with  the  goal of  centralizing
distribution facilities,  eliminating unprofitable divisions and reducing costs.
The aggregate costs of the restructuring included total charges of $1,031,000.


                                       21
<PAGE>
OPERATING DATA:

The  following  table  sets forth  unaudited  quarterly  consolidated  operating
results for each of our last eight quarters.  We have prepared this  information
on a basis  consistent with our audited  consolidated  financial  statements and
included all adjustments,  consisting only of normal recurring adjustments, that
we consider  necessary  for a fair  presentation  of the data.  These  quarterly
results are not  necessarily  indicative of future results of  operations.  This
information  should be read in  conjunction  with  "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations" and our consolidated
financial  statements  and the notes thereto.  Data is in thousands,  except per
share data.
<TABLE>
<CAPTION>
<BTB>
                                         Sep-30,     Dec-31,     Mar-31,     Jun-30,     Sep-30,     Dec-31,     Mar-31,    Jun-30,
                                         2002(1)       2002       2003         2003       2003         2003        2004      2004

<S>  <C>
Net sales                               $11,789.8   $11,587.6   $11,127.0   $11,855.6   $12,162.3   $12,540.7   $12,253.4  $11,806.6

Cost of sales                             7,498.9     7,307.1     6,885.2     7,606.4     7,665.9     7,853.0     7,956.4    7,556.4
                                     ------------    --------   ---------   ---------    --------    --------     -------    -------

Gross profit                             $4,290.9    $4,280.5    $4,241.8    $4,249.2    $4,496.4    $4,687.7    $4,297.0   $4,250.2
                                     ============    ========   =========   =========    ========    ========     =======    =======


Net income (loss)                      $(3,970.5)     $ 416.1    $  (3.0)    $ (71.4)     $ 201.8     $ 286.0     $ 258.8    $ 859.4
                                     ============    ========   =========   =========    ========    ========     =======    =======
Net income (loss) per share-basic        $  0.45     $  0.01    $ (0.02)    $ (0.02)     $  0.01     $  0.01     $  0.01    $  0.04
                                     ============    ========   =========   =========    ========    ========     =======    =======

COMPUTED AS DESCRIBED IN OUR ACCOMPANYING  CONSOLIDATED  FINANCIAL  STATEMENTS AND RELATED NOTES.

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

(1) In accordance with SFAS No. 142, the Company recorded a non-cash charge of $4,454,656 to reduce the carrying value of its
goodwill.  This is a non-cash charge and is reflected as a cumulative  effect of a change in accounting principle, effective
July 1, 2002.
</TABLE>
                                       22
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

This  Overview is intended to provide a context for the  following  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operation.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation should be read in conjunction with our audited consolidated  financial
statements  for the fiscal year ended June 30, 2004 including the notes thereto.
We have attempted to identify the most important matters on which our management
focuses in evaluating our financial condition and operating  performance and the
short-term and long-term opportunities, challenges and risks (including material
trends and  uncertainties)  which we face.  We also  discuss  the actions we are
taking to address these opportunities, challenges and risks. The Overview is not
intended as a summary,  or a substitute for review,  of either the  Management's
Discussion and Analysis of Financial  Condition and Results of Operation section
nor of this Report as a whole.

                                BUSINESS SEGMENTS

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

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

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

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

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

                                       23
<PAGE>
                                BUSINESS STRATEGY

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

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

Our goal is to be a leading supplier of specialty  medical products to hospitals
and surgery centers. We intend to continue to grow by:

     o    hiring experienced territory sales representatives;

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

     o    selectively  acquiring  specialty medical products  manufacturers.  We
          expect to benefit from the  acquisition  of select  specialty  medical
          products  manufacturers  by increasing sales of acquired product lines
          through use of our direct specialty medical products sales force.

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

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

     o    favorable industry demographics;

     o    sustaining or increasing our market share;

     o    the acquisition of other specialty medical products manufacturers;

     o    expanding margin opportunities in our manufactured products business;

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

     o    entrance  into  new  specialty  medical  markets  and  expansion  into
          international markets; and

                                       24
<PAGE>
     o    marketing  efforts  which  foster   partnerships  with  other  medical
          products companies to widen the customer base for our products.

                             BUSINESS OPPORTUNITIES

The Company's historically  aggressive distribution growth strategy strained its
financial and managerial  resources,  leading the Board of Directors to initiate
and implement a  restructuring  plan in November  2001. The  restructuring  plan
included replacing senior  management,  refocusing the Company's strategy on its
core business and consolidating under-performing sales regions. In January 2002,
the Company ceased distribution of most products west of the Rocky Mountains.  A
portion of the Company's  critical care segment was divested in late 2002,  with
the  remainder  sold in June 2003.  During the past two years,  the  Company has
achieved several  significant  milestones;  strengthening its core business with
the  renewal of several key vendor  contracts,  attracting  new  product  lines,
simplifying its capital  structure and consolidating its senior debt facilities.
The Company believes it has validated the restructuring plan it began in 2001 by
improving  its  operating  income  (loss) from a loss of $5.6 million in 2002 to
income of $1.4  million  in 2003 and $2.5  million in 2004 and by  reducing  its
senior secured debt from $9.9 million in 2002 to $5.2 million in 2004.

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

                                 BUSINESS RISKS

We believe that the following represent our primary business risks:

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

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


                                       25
<PAGE>
IF SUPPLIERS  TERMINATE  THEIR  AGREEMENTS  WITH US, OUR PRODUCT  OFFERINGS  MAY
SUFFER.  Following  an initial  one-year  term,  many of our  standard  supplier
agreements may be terminated by either party on 90 days' notice or upon a change
in control of the Company.  After expiration of the initial term, such suppliers
may terminate or seek to renegotiate their agreements.  If a significant  number
of suppliers  terminate their  agreements with us, the range of products we will
be able to offer  would be  adversely  affected.  The  ability of  suppliers  to
terminate  their  agreements  may  result in new  agreement  terms that are less
favorable to us, which could have a material adverse effect on our earnings.

OUR MAJOR STOCKHOLDER HAS SUBSTANTIAL CONTROL OF US AND COULD DELAY OR PRESENT A
CHANGE IN CONTROL THAT STOCKHOLDERS MAY BELIEVE WOULD IMPROVE  MANAGEMENT AND/OR
OUR  BUSINESS.  As a result of its  ownership  of Series G  Preferred  Stock and
common  stock,  GE  Capital  Equity  Investments,  Inc.,  is  able  to  exercise
substantial control over the election of our directors and determine the outcome
of most corporate actions  requiring  stockholder  approval,  including a merger
with or into another company, the sale of all or substantially all of our assets
and amendment to our Articles of Organization.

The Company's capital structure at June 30, 2004 is summarized below:
<TABLE>
<CAPTION>
<BTB>
                                     SERIES G (1)                             COMMON STOCK
                             ----------------------------- --    ----------------------------------------
 SHAREHOLDER                    SHARES       OPTIONS (2)             SHARES      OPTIONS (3)   WARRANTS     TOTAL CSE       %


<S>  <C>
 GE Capital Equity             12,500,000                            7,967,374        3,721    9,398,639    29,869,734   41.5 %

 Coleman Swenson Booth          7,718,750                            3,573,089       23,721    4,380,356    15,695,916   21.8 %

 Robert Fisher Entities         1,484,375                            1,963,953        7,442    1,456,876     4,912,646   6.8 %

 William H. Lomicka               546,875                              621,328       30,605      186,694     1,385,502   1.9 %

 Brad Walker                          100         749,900                   50    3,249,950                  4,000,000   5.6 %

 PSHC Management                                                                  2,511,046                  2,511,046   3.5 %

 Others                                                              8,249,350    3,961,445    1,352,203    13,562,998   18.9 %
                              -----------     -----------           -----------   ----------  -----------   -----------


 Total                        22,250,100         749,900            22,375,144    9,787,930   16,774,768    71,937,842
                              ===========     ===========           ===========   ==========  ===========   ===========
</TABLE>
Note: All figures shown in common stock equivalents (CSE).

(1) Series G Preferred  Stock carries a preference of two times  original  price
per share plus accrued  dividends ($0.64 per CSE) and participates in additional
proceeds as Common Stock.

(2) Series G Preferred  Stock options  convert to Series G Preferred  Stock at a
strike price of $0.32 per CSE.

(3) Common  Stock  options and  warrants  convert at an average  strike price of
$0.49 and $0.02 per CSE, respectively.

We are a reporting  company under the  Securities  Exchange Act of 1934, but not
traded on a  recognized  stock  exchange.  The Company had  approximately  1,400
shareholders as of June 30, 2004.


                                       26
<PAGE>
As a result of its ownership of Series G Preferred  Stock and common  stock,  GE
Capital Equity Investments,  Inc., is able to exercise  substantial control over
the  election of our  directors  and many  corporate  actions  require the prior
approval of such stockholder.

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

                   APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

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

INVENTORY RESERVES FOR OBSOLESCENCE

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

GOODWILL AND OTHER INTANGIBLE ASSETS

We evaluate  goodwill  and other  intangible  assets with  indefinite  lives for
impairment  at  least  annually,  in  accordance  with  Statement  of  Financial
Accounting  Standard No. 142,  Goodwill and Other  Intangible  Assets ("SFAS No.
142").  For goodwill,  we first compare the fair value of a reporting  unit with
its carrying amount,  including goodwill.  If the carrying amount of a reporting
unit exceeds the fair value of a reporting unit,  additional tests would be used
to  measure  the  amount of  impairment  loss,  if any.  We use a present  value
technique to measure  reporting unit fair value.  If the carrying  amount of any
other  intangible asset exceeds its fair value, we would recognize an impairment
loss  for the  difference  between  fair  value  and  the  carrying  amount.  We
recognized  impairment  losses  in  the  year  ended  June  30,  2002  upon  the
disposition of a subsidiary  and an impairment  loss effective July 1, 2002 upon
completion  of  SFAS  No.  142   implementation.   If  other  events  occur  and
circumstances  change,  causing the fair value of a reporting unit to fall below
its carrying  amount,  impairment  losses may be  recognized  in the future.  In
accordance  with SFAS No. 142, the Company has performed  its annual  impairment
test in July 2003 and  found no  further  impairment  in its  existing  goodwill
balances.

DEFERRED TAX ASSETS

We  estimate  our actual  current tax  exposure  obligations  together  with the
temporary  differences that have resulted from the differing  treatment of items
dictated by  accounting  principles  generally  accepted in the United States of
America versus U.S. tax laws. These temporary differences result in deferred tax

                                       27
<PAGE>
assets and liabilities. On an on-going basis, we then assess the likelihood that
our deferred  tax assets will be recovered  from future  taxable  income.  If we
believe the recovery to be less than likely, we establish a valuation  allowance
against the deferred tax asset and charge the amount as an income tax expense in
the period in which such a determination is made.

SALES RECOGNITION POLICY

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

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

Provisions for discounts,  rebates to customers, and returns are provided for at
the time the related  sales are  recorded,  and are  reflected as a reduction of
sales.  These estimates are reviewed  periodically  and, if necessary,  revised,
with any revisions  recognized  immediately as adjustments to sales. The Company
periodically  and  systematically   evaluates  the  collectibility  of  accounts
receivable and  determines the  appropriate  reserve for doubtful  accounts.  In
determining the amount of the reserve,  management  considers  historical credit
losses,  the  past  due  status  of  receivables,   payment  history  and  other
customer-specific information, and any other relevant factors or considerations.

                              RESULTS OF OPERATIONS

The  following  table  sets  forth  certain  consolidated  financial  data  as a
percentage  of net revenues  for the fiscal years ended June 30, 2004,  2003 and
2002.

                                                 2004        2003        2002

Net sales                                       100.0 %     100.0 %     100.0 %
Cost of sales                                    63.6 %      63.2 %      65.8 %
Gross profit                                     36.4 %      36.8 %      34.2 %
Selling expenses                                 16.7 %      16.1 %      16.6 %
General and administrative expenses              13.4 %      15.1 %      16.1 %
Depreciation and amortization expenses            1.0 %       1.8 %       4.6 %
Restructuring expenses                            0.0 %       0.7 %       7.4 %
Interest expense                                  2.7 %       1.8 %       1.3 %
Net income (loss)                                 3.3 %      (7.8)%     (11.5)%


                                       28
<PAGE>
FISCAL YEAR ENDED JUNE 30, 2004 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2003

NET SALES--Net sales increased  $2,402,987,  or 5.2%, in fiscal 2004 compared to
fiscal 2003 primarily due to higher sales volume from existing product lines and
additional selling territory for our proprietary products provided by the Luxtec
division.  Sales in the new  territory  for the year ended June 30, 2004 totaled
$1,114,401.  In March 2004, we ended a key vendor  relationship  in our Surgical
division,  which contributed  approximately 15% of Surgical  divisions sales for
the twelve  months ended June 31, 2004.  This vendor made a decision to sell its
product  directly  to its  customers,  thereby  ending all of their  independent
distributor contracts.  Although we have replaced this product line with another
in the affected  territories  as of June 2004,  our Surgical  division sales did
underperform  historical levels in the fourth quarter. Any decrease in sales due
to the loss of this  vendor  has had a  corresponding  impact  on cost of sales,
gross  profit,  selling  expense and net income after the date the  relationship
terminated;  however,  we expect to recover lost revenue as we progress  through
fiscal 2005.

COST OF  SALES--Cost  of sales  increased  to 63.6% of net sales for fiscal 2004
from 63.2% of net sales for fiscal 2003. The increase of $1,734,128, or 5.9%, in
fiscal  2004   relative  to  fiscal  2003  was   primarily  the  result  of  the
corresponding  increase in net sales, as discussed above. The slight increase in
the  percentage  of cost of sales as a  percentage  of net sales in fiscal  2004
relative to fiscal 2003 is due is due to the effects of a large,  lower  margin,
Critical Care division  capital  equipment sale of $775,000 to a single customer
in March 2004 offset by a difference in product mix between  stocking  sales and
agency sales. A majority of our business is comprised of stocking  relationships
whereby we stock the vendor's products and provide substantially all fulfillment
services such as customer service and warehouse logistics.  The remainder of our
revenue  is  received  on an agency  basis  where we do not  stock the  vendor's
products and do not provide fulfillment services, but instead receive revenue in
the form of an agency  commission  from the vendor in return for  arranging  the
sale of a vendor's  products.  In the past nine months,  our product mix between
stocking  and  agency  based  sales  has  shifted  slightly  to a higher  agency
component.  Agency  sales  are  recorded  in an amount  equal to the  commission
received, and as a result have no direct cost of sales. As a result, an increase
in agency sales will  decrease cost of sales as a percentage of net sales as net
sales have increased with no associated increase in cost of sales.

GROSS  PROFIT--Gross  profit  decreased  to 36.4% of net  sales in  fiscal  2004
compared to 36.8% of net sales in fiscal  2003.  The increase in gross profit of
$668,859,  or 3.9%,  in fiscal 2004 compared to fiscal 2003 was primarily due to
higher  sales  volume  from  existing  product  lines and the  addition of a new
selling territory for our proprietary  products provided by the Luxtec division.
The decrease in gross  profit  margins,  as a percentage  of net sales in fiscal
2004 compared to fiscal 2003,  was due to the effects of a large,  lower margin,
Critical  Care  division  capital  equipment  sale as discussed in cost of sales
offset by a difference in product mix sold as discussed above. Gross profit from
our agency  business  for fiscal 2004 was  approximately  $492,000  more than in
fiscal 2003.

SELLING EXPENSES--Selling expenses increased $709,812 in fiscal 2004 compared to
fiscal 2003.  The  increase is primarily  due to higher sales volume and is also
attributable to a sales  representative  commission  program to sell through any

                                       29
<PAGE>
remaining  Surgical division inventory for the discontinued key vendor discussed
in net sales above. As a result of this program,  we liquidated the discontinued
inventory and created an additional incentive for the sales representatives most
impacted by the loss of the vendor. Selling commissions are paid on agency sales
at approximately  the same percentage as stocking sales, and as a result,  sales
commissions  as a percent of net sales revenue do not fluctuate when the product
mix of agency and stocking sales varies.

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

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

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

INTEREST EXPENSE--The increase in interest expense of $468,697, or 55.8%, is the
result of the costs incurred relating to the refinancing of the Company's senior
debt in the quarter ended December 31, 2003. Due to the demand  provision in the
line of credit, all financing costs relating to the refinancing were expensed as
incurred.  The increase also relates to the  implementation  of SFAS 150,  which
requires all dividends accrued on our preferred stock to be recorded as interest
expense  effective  July 1, 2003 because the preferred  stock is classified as a
liability in accordance  with the  provisions of SFAS 150.  These  increases are
offset by decreases  relating to lower  interest rates and fees on the Company's
senior  debt,  as compared to the prior  year,  as a result of the  refinancing.
Interest  expense on the Company's  senior debt,  excluding the financing costs,
actually decreased by $155,754, or 23%, during fiscal 2004 over fiscal 2003.

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

NET INCOME  (LOSS)--Net  income increased  $5,234,848 in fiscal 2004 compared to
the fiscal 2003 net loss.  The  increase  resulted  primarily  from the goodwill
impairment  charge of  $4,454,656  recorded in July 2002 as a result of SFAS No.
142  implementation.  In addition,  we recorded  other  income of  approximately
$370,000  resulting from the resolution of certain disputed  distribution  costs
which had been previously  accrued for. This increase is offset by the write off
of deferred financing fees of approximately  $190,000 for previously outstanding
debt related to the refinancing of our banking facilities during December 2003.

                                       30
<PAGE>
FISCAL YEAR ENDED JUNE 30, 2003 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 2002

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

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

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

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

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


                                       31
<PAGE>
DEPRECIATION AND AMORTIZATION  EXPENSES--Depreciation  and amortization expenses
decreased  to $843,500  for fiscal  2003,  from  $2,455,081  for fiscal  2002, a
decrease of $1,611,581,  or 65.6%. The decrease in depreciation and amortization
expense in fiscal 2003 is primarily  due to the  implementation  of SFAS No. 142
Goodwill and Other  Intangible  Assets  effective July 2002. As a result of this
adoption, goodwill was no longer amortized in fiscal 2003.

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

INTEREST  EXPENSE--Interest  expense increased $159,999,  or 23.6%. Our interest
cost increased as a result of increased interest rates and fees incurred related
to the  restructuring  of the PrimeSource  Healthcare and  PrimeSource  Surgical
debt.

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

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

                         LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2004, we had working capital of $1,688,823  compared to a deficit of
$793,154 at June 30, 2003. The increase in our working capital was primarily the
result of decreased  accounts  payable,  accrued  expenses,  lines of credit and
current  obligations  for long-term  debt,  offset by decreased  receivable  and
inventory  balances.  Accounts  payable,  accrued  expenses and  obligations for
long-term debt were paid with the increased  cash generated from  operations and
the increased availability of the line of credit, as discussed below.

In December 2003, we  consolidated  our senior debt facilities into a $7,500,000
revolving demand note (the  "PrimeSource  Healthcare Line of Credit") from Wells

                                       32
<PAGE>
Fargo under the PrimeSource  Healthcare Credit and Security Agreement,  dated as
of December 10, 2003, by and among the Company, PrimeSource Surgical, Bimeco and
Wells Fargo (the  "Credit and Security  Agreement").  Pursuant to the Credit and
Security Agreement, the maximum amount available to borrow under the PrimeSource
Healthcare  Line of Credit is limited to the lesser of  $7,500,000  or a certain
percentage of accounts  receivable and  inventory,  as defined by the Credit and
Security  Agreement  ($6,757,524  at  June  30,  2004).  As of  June  30,  2004,
borrowings  bore  interest at Wells  Fargo's prime rate plus 3.0% (7.25% at June
30,  2004).   Borrowings  are  secured  by  substantially  all  assets  held  by
PrimeSource  Healthcare  and its  subsidiaries.  At June  30,  2004,  there  was
$1,553,385 of availability under the PrimeSource Healthcare Line of Credit.

The  Credit  and  Security   Agreement   contains  covenants  that  require  the
maintenance of defined income levels and capital  expenditures.  The Company was
in compliance with these financial covenants as of June 30, 2004.

<TABLE>
<CAPTION>
<BTB>
CONTRACTUAL OBLIGATIONS                                  PAYMENTS DUE BY PERIOD
                                 -----------------------------------------------------------------------
                                     TOTAL       LESS THAN    1 - 3 YEARS     3-5 YEARS    MORE THAN 5
                                                  1 YEAR                                      YEARS

<S>  <C>
Long-term debt obligations      $    62,446     $   16,71 3    $  45,733

Capital lease obligations              -              -            -

Operating lease obligations        882,320        606,293       274,382        1,645

Series G Preferred Stock         8,138,933      8,138,933
                                ----------      ----------     ----------    ----------     ----------


Total                           $9,083,699      $8,761,939    $ 320,115      $  1,645
                                ==========      ==========    ==========    ==========     ==========
</TABLE>

                        RECENT ACCOUNTING PRONOUNCEMENTS

In May 2003, the Financial  Accounting Standards Board ("FASB") issued Statement
150, ACCOUNTING FOR CERTAIN FINANCIAL  INSTRUMENTS WITH  CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY ("SFAS No. 150"). SFAS No. 150 changes the classification
in the statement of financial  position of certain common financial  instruments
from either  equity or mezzanine  presentation  to  liabilities  and requires an
issuer of those financial  statements to recognize  changes in the fair value or
the redemption  amount, as applicable,  in earnings.  SFAS No. 150 was effective
for the  Company as of July 1, 2003.  The  Company  adopted  SFAS No. 150 in the
quarter  ended  September 30, 2003 and, as a result,  reclassified  its Series G
Convertible  Redeemable,  Preferred  Stock  ("Series G Stock")  from equity to a
liability.  Further  effects of this  adoption  are  discussed  in Note 8 to the
accompanying consolidated financial statements.

In December  2003,  the SEC issued Staff  Accounting  Bulletin  ("SAB") No. 104,
Revenue Recognition,  which codifies,  revises, and rescinds certain sections of
SAB No. 101, Revenue  Recognition,  in order to make this interpretive  guidance
consistent with current  authoritative  accounting and auditing guidance and SEC
rules and regulations. The changes in SAB No. 104 did not have a material impact
on our financial position or results of operations.


                                       33
<PAGE>
On March 31, 2004, the FASB issued an exposure draft,  Share-Based  Payment,  an
Amendment  of SFAS No. 123 and 95. The  exposure  draft  proposes to expense the
fair value of share-based  payments to employees  beginning in July 2005. We are
currently  evaluating  the impact of this  proposed  standard  on our  financial
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our  market  risk  exposure  relates to  outstanding  debt.  The  balance of our
outstanding  bank debt at June 30, 2004 was $5,204,139,  all of which is subject
to interest  rate  fluctuations.  A  hypothetical  10% change in interest  rates
applied  to the fair  value of debt  would  not have a  material  impact  on our
earnings or cash flows.





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

                  PRIMESOURCE HEALTHCARE, INC. and Subsidiaries


                        Consolidated Financial Statements
                          as of June 30, 2004 and 2003,
                             and for the Years Ended
                        June 30, 2004, 2003 and 2002 and
                          Independent Auditors' Report


                                                                         Page

Independent Auditors' Report                                                F-1

Consolidated Balance Sheets as of June 30, 2004 and 2003              F-2 - F-3

Consolidated Statements of Operations for the Years Ended
June 30, 2004, 2003 and 2002                                          F-4 - F-5

Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency) for the Years Ended June 30, 2004, 2003 and 2002                F-6

Consolidated Statements of Cash Flows for the Years Ended
June 30, 2004, 2003 and 2002                                          F-7 - F-8

Notes to Consolidated Financial Statements                            F-9 - F-26






                                       35
<PAGE>
INDEPENDENT AUDITORS' REPORT


Board of Directors
PrimeSource Healthcare, Inc.
Tucson, Arizona

We have audited the  accompanying  consolidated  balance  sheets of  PrimeSource
Healthcare, Inc. and subsidiaries (the "Company") as of June 30, 2004, and 2003,
and the related consolidated statements of operations, stockholders' equity (net
capital  deficiency),  and cash flows for each of the three  years in the period
ended June 30, 2004. Our audits also included the financial  statement  schedule
listed  in the  Index at Item  15.  These  financial  statements  and  financial
statement schedule are the responsibility of the Corporation's  management.  Our
responsibility  is to  express  an  opinion  on  the  financial  statements  and
financial statement schedule based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the financial position of PrimeSource  Healthcare,  Inc. and
subsidiaries  as of June 30, 2004 and 2003, and the results of their  operations
and their  cash flows for each of the three  years in the period  ended June 30,
2004, in conformity with accounting  principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  present  fairly  in all  material  respects  the  information  set forth
therein.

As discussed in Note 8 to the  consolidated  financial  statements,  the Company
changed  its  method of  accounting  for its  Series G  Redeemable,  Convertible
preferred stock as required by Statement of Financial  Accounting  Standards No.
150, ACCOUNTING FOR CERTAIN FINANCIAL  INSTRUMENTS WITH  CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY, which was effective for the Company July 1, 2003.



DELOITTE & TOUCHE LLP

Phoenix, Arizona
September 28, 2004

<PAGE>
<TABLE>
<CAPTION>
<BTB>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
-----------------------------------------------------------------------------------------------------------

ASSETS (Note 7)                                                                   2004              2003

CURRENT ASSETS:

<S>  <C>
  Cash and cash equivalents                                                  $    98,903      $    489,911
  Accounts receivable - net of allowance for doubtful accounts

    of approximately $132,000 (2004) and $214,000 (2003)                       5,718,346         6,111,062

  Inventories - net (Note 4)                                                   6,732,542         7,517,965

  Income taxes receivable (Note 11)                                              129,913            67,800

  Prepaid expenses and other current assets                                      224,865           172,397
                                                                              ----------      ------------

           Total current assets                                               12,904,569        14,359,135


PROPERTY AND EQUIPMENT - Net (Note 5)                                            887,325           996,358

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

INTANGIBLE ASSETS - Net of accumulated amortization

  of approximately $245,000 (2004) and $236,000 (2003) (Note 6)                   60,273           118,290


OTHER ASSETS - Net of accumulated amortization of

  approximately $782,000 (2003)                                                   90,196           233,874
                                                                              ----------      ------------

TOTAL                                                                        $29,899,246      $ 31,664,540
                                                                              ==========      ============

                                                                                               (Continued)
</TABLE>

                                      F-2
<PAGE>
<TABLE>
<CAPTION>
<BTB>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
-----------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY                                              2004              2003

CURRENT LIABILITIES:
<S> <C>
  Accounts payable                                                           $  4,253,295     $  5,636,333
  Accrued expenses                                                              1,509,432        2,240,770
  Accrued restructuring costs (Note 14)                                            43,726          690,968
  Customer deposits                                                               166,873           72,895
  Lines of credit (Note 7)                                                      5,204,139        5,926,021
  Current portion of long-term debt (Note 7)                                       16,713          559,877
  Current portion of capital lease obligations (Note 12)                           21,568           25,425
                                                                              -----------      -----------
           Total current liabilities                                           11,215,746       15,152,289


CAPITAL LEASE OBLIGATIONS - Net of current portion (Note 12)                       22,149           21,433


LONG-TERM DEBT - Net of current portion (Note 7)                                   88,983          105,696


SERIES G REDEEMABLE, CONVERTIBLE PREFERRED
 STOCK - No par value - authorized, 230,000 shares;
 issued and outstanding, 222,501 shares; aggregate liquidation
 preference of $15,258,964 (Note 8)                                             8,138,933
                                                                              -----------      -----------

TOTAL LIABILITIES                                                              19,465,811       15,279,418
                                                                              -----------      -----------
COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 9, 10 and 12)

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

STOCKHOLDERS' EQUITY:
  Common stock, $0.01 par value - authorized, 75,000,000 shares;
     issued and outstanding, 22,375,144 (2004) and 22,375,094 (2003)
     shares                                                                       223,751          223,750
  Additional paid-in capital                                                   19,295,451       21,347,451
  Accumulated deficit                                                          (9,085,767)     (10,885,200)
                                                                              -----------      -----------

           Total stockholders' equity                                          10,433,435       10,686,001
                                                                              -----------      -----------

TOTAL                                                                        $ 29,899,246      $31,664,540
                                                                              ===========      ============

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

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
--------------------------------------------------------------------------------------------------------------------

                                                                         2004               2003              2002

<S>  <C>
NET SALES                                                           $  48,763,006       $ 46,360,019   $  53,695,717
                                                                    -------------       ------------   -------------

COST OF SALES                                                          31,031,700         29,297,572      35,329,128
                                                                    -------------       ------------   -------------

GROSS PROFIT                                                           17,731,306         17,062,447      18,366,589
                                                                    -------------       ------------   -------------
OPERATING EXPENSES:
  Selling expenses                                                      8,160,206          7,450,394       8,890,380
  General and administrative expenses                                   6,541,025          7,015,217       8,625,555
  Depreciation and amortization expenses                                  493,525            843,500       2,455,081
  Restructuring expenses (Note 14)                                          4,817            345,507       3,954,498
                                                                    -------------       ------------   -------------
           Total operating expenses                                    15,199,573         15,654,618      23,925,514
                                                                    -------------       ------------   -------------

OPERATING INCOME (LOSS)                                                 2,531,733          1,407,829     (5,558,925)

INTEREST EXPENSE                                                      (1,307,940)          (839,243)       (679,244)

OTHER INCOME (EXPENSE)                                                    382,256            189,704       (115,357)
                                                                    -------------       ------------   -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
  BEFORE INCOME TAX BENEFIT                                             1,606,049            758,290     (6,353,526)

INCOME TAX BENEFIT (Note 11)                                                                  19,700          61,700
                                                                    -------------       ------------   -------------

INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
  AND CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE                                                  1,606,049            777,990     (6,291,826)
                                                                    -------------       ------------   -------------

DISCONTINUED OPERATIONS:
  INCOME FROM DISCONTINUED OPERATION -
    Net of income tax                                                                        121,697         101,263

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

           Total                                                                              47,867         101,263
                                                                    -------------       ------------   -------------

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

NET INCOME (LOSS)                                                       1,606,049        (3,628,799)     (6,190,563)
DIVIDENDS AND ACCRETION ON PREFERRED STOCK                                               (1,147,094)     (2,652,571)
EFFECT OF EQUITY RECAPITALIZATION                                                         11,809,741
                                                                    -------------       ------------   -------------
NET INCOME (LOSS) AVAILABLE FOR COMMON
  STOCKHOLDERS                                                       $  1,606,049       $  7,033,848   $ (8,843,134)
                                                                    =============       ============   =============


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

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
--------------------------------------------------------------------------------------------------------------------


                                                                    2004            2003           2002

INCOME (LOSS) PER SHARE BEFORE DISCONTINUED
 OPERATIONS AND CUMULATIVE EFFECT
 OF CHANGE IN ACCOUNTING PRINCIPLE:
<S>  <C>
    Basic                                                      $      0.07     $      0.54    $    (1.13)
                                                               ===========     ===========    ===========

    Diluted                                                    $      0.07     $      0.24    $    (1.13)
                                                               ===========     ===========    ===========

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

    Diluted                                                                                   $      0.02
                                                                                              ===========

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

    Diluted                                                                    $    (0.09)
                                                                               ===========

INCOME (LOSS) PER SHARE:
    Basic                                                      $      0.07     $     0.33     $    (1.11)
                                                               ===========     ===========    ===========

    Diluted                                                    $     0.07      $     0.15     $    (1.11)
                                                               ===========     ===========    ===========

WEIGHTED AVERAGE SHARES USED IN
  COMPUTATION OF INCOME (LOSS) PER SHARE:
    Basic                                                      $22,375,130     $21,059,853    $ 7,975,208
                                                               ===========     ===========    ===========

    Diluted                                                    $22,375,130     $53,024,512    $ 7,975,208
                                                               ===========     ===========    ===========


See notes to consolidated financial statements.                                               (Concluded)


</TABLE>
                                      F-5
<PAGE>
<TABLE>
<CAPTION>
<BTB>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    Total
                                                   Common Stock               Additional                         Stockholders'
                                            -------------------------           Paid-in      Accumulated            Equity
                                                Shares        Amount            Capital        Deficit     ( Net Capital Deficiency)

<S>  <C>
BALANCE, JULY 1, 2001                           7,959,704     $ 79,597        $ 8,434,697    $ (9,075,914)      $  (561,620)

  Issuance of common stock                         18,605          186             24,814                            25,000
  Warrants and beneficial conversion
     features of preferred stock                                                3,912,000                         3,912,000

  Preferred stock dividends and accretion                                                      (2,652,571)       (2,652,571)
  Restricted common stock vesting                                                 118,709                           118,709
  Refund fractional shares                                                            (18)                              (18)
  Net loss                                              -            -                  -      (6,190,563)       (6,190,563)
                                               ----------   ----------         ----------     -----------        ----------
BALANCE, JUNE 30, 2002                          7,978,309       79,783         12,490,202     (17,919,048)       (5,349,063)
  Equity recapitalization                      14,735,066      147,351          6,785,864      11,809,741        18,742,956
  Warrants issued with issuance of Series G
     preferred stock                                                            2,062,000                         2,062,000
  Preferred stock dividends and accretion                                                      (1,147,094)       (1,147,094)
  Cancellation of shares in legal settlement     (132,963)      (1,330)           (41,218)                          (42,548)
  Cancellation of shares in sale of PEC assets   (201,067)      (2,011)           (62,330)                          (64,341)
  Cancellation of shares in sale of Ruby Merger    (4,251)         (43)            (1,317)                           (1,360)

  Issuance of compensatory stock options                                          110,000                           110,000
  Restricted common stock vesting                                                   4,250                             4,250
  Net loss                                              -               -               -      (3,628,799)       (3,628,799)
                                               ----------   ----------         ----------     -----------        ----------

BALANCE, JUNE 30, 2003                         22,375,094      223,750         21,347,451     (10,885,200)       10,686,001
  Reclassification of Series G
    preferred stock to liability                                               (2,062,000)        193,384        (1,868,616)

  Issuance of compensatory stock options                                           10,000                            10,000
  Exercise of stock option                             50            1                                                        1
  Net income                                            -            -                  -       1,606,049         1,606,049
                                               ----------   ----------         ----------     -----------        ----------
BALANCE, JUNE 30, 2004                         22,375,144   $  223,751         19,295,451      (9,085,767)       10,433,435
                                               ==========   ==========         ==========     ===========        ==========
</TABLE>
See notes to consolidated financial statements.

                                       F-6
<PAGE>
<TABLE>
<CAPTION>
<BTB>
PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
-----------------------------------------------------------------------------------------------------------------------

                                                                             2004             2003             2002
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>  <C>
  Net income (loss)                                                     $ 1,606,049      $(3,628,799)     $ (6,190,563)
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization expenses                                  493,525          849,657         2,462,411
    Loss on disposal of property and equipment                               46,317           22,147           124,132
    Stock compensation expense                                               10,000          110,000           118,709
    Debt forgiveness                                                       (150,000)
    Goodwill impairment                                                                    4,454,656
    Loss on sale of division                                                                  73,830         1,038,823
    Issuance of common stock for services                                                      4,250            25,000
    Gain on legal settlement                                                                 (42,548)
    Change in fair value of warrant put obligation                                                             (95,000)
    Write-off of intangible assets                                                                              12,406
    Amortization of debt discount                                                                               28,600
    Changes in operating assets and liabilities - net of
      effect of business acquisitions and dispositions:
      Accounts receivable                                                   392,716         (313,913)        2,208,904
      Inventories                                                           785,423         (397,713)        1,978,659
      Income taxes receivable                                               (62,113)          42,200          (119,500)
      Prepaid expenses and other current assets                             (52,468)         (31,021)            4,644
      Other assets                                                           (9,688)         (80,723)         (181,504)
      Accounts payable                                                   (1,383,038)         578,565        (5,235,025)
      Accrued expenses                                                     (717,878)        (604,266)          568,636
      Accrued restructuring costs                                          (647,242)        (420,165)        1,111,133
      Customer deposits                                                      93,978         (148,006)         (347,215)
                                                                          -----------      ----------       -----------

           Net cash provided by (used in) operating activities              405,581          468,151        (2,486,750)
                                                                          -----------      ----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                       (199,356)        (255,320)          (86,828)
  Proceeds from sale of property and equipment                                5,233              157             6,462
  Purchase of intangible assets                                                                                (64,166)
  Acquisition of other assets                                                                                  (31,904)
  Proceeds from business disposition                                                       1,000,000
                                                                                           ----------
           Net cash (used in) provided by investing activities             (194,123)         744,837          (176,436)
                                                                          -----------      ----------       -----------

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
----------------------------------------------------------------------------------------------------------------

                                                                          2004           2003            2002
CASH FLOWS FROM FINANCING ACTIVITIES:

<S> <C>
  Borrowings under lines of credit                                    38,844,614     16,785,191     19,506,353
  Repayments under lines of credit                                   (39,566,496)   (18,390,045)   (20,027,304)
  Borrowings under long-term debt                                                                      600,000
  Repayment of long-term debt                                           (422,704)    (2,731,323)      (872,711)
  Repayment on capital leases                                            (29,076)       (36,666)       (47,192)
  Proceeds from issuance of stock                                             32
  Proceeds from issuance of preferred stock - net of costs               571,164      3,364,031      3,167,170
  Stock repurchases                                                                                        (18)


           Net cash (used in) provided by financing activities          (602,466)    (1,008,812)     2,326,298
                                                                      -----------    -----------    ----------


NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                    (391,008)       204,176       (336,888)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                             489,911        285,735        622,623
                                                                      -----------    -----------    ----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                    98,903        489,911        285,735
                                                                      ===========    ===========    ==========

SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION - Cash paid during
    the year for:
    Interest                                                             728,358        698,685        741,905
                                                                      ===========    ===========    ==========

    Income taxes                                                          60,910         30,000        256,100
                                                                      ===========    ===========    ==========

SUPPLEMENTAL DISCLOSURES OF NONCASH
  TRANSACTIONS:


  Forgiveness of notes payable                                          (150,000)
                                                                      ===========
  Equipment acquired under capital lease                                  25,304                        54,745
                                                                      ===========    ===========    ==========
  Issuance of note payable for debt refinancing cost                                    250,000
                                                                                     ===========
  Discount on issuance of note payable for legal services                 12,827        (12,827)
                                                                      ===========    ===========
  Fair value of common stock cancelled in sale of asset                                  64,341
                                                                                     ===========
  Fair value of common stock cancelled in legal settlement                               42,548
                                                                                     ===========
  Common stock issued for services                                                        4,250         25,000
                                                                                     ===========    ==========

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
--------------------------------------------------------------------------------


1.  NATURE OF BUSINESS

    PrimeSource   Healthcare,   Inc.   ("PrimeSource"   or  the  "Company"),   a
    Massachusetts  corporation formerly known as Luxtec Corporation  ("Luxtec"),
    is a specialty medical products sales, marketing, manufacturing, and service
    company.  The Company sells a broad portfolio of specialty medical products,
    some of which it manufactures,  to hospitals and surgery centers  nationwide
    through a dedicated organization of sales and marketing professionals.

    On June 30, 2003,  PrimeSource Surgical,  Inc., a wholly owned subsidiary of
    the Company ("PrimeSource Surgical"), sold all of the issued and outstanding
    capital stock of Ruby Merger Sub, Inc., an indirect wholly owned  subsidiary
    ("Ruby") for cash proceeds of $1,000,000 to New England Medical Specialties,
    Inc., a newly formed entity. The Company recognized a loss of $73,830 on the
    sale.  The cash  proceeds  were used to payoff a  portion  of the  Company's
    outstanding long-term debt.

    Prior to the sale of Ruby,  effective  June 30, 2002 the Company sold all of
    the assets of Professional Equipment Corporation,  a wholly owned subsidiary
    of Ruby  ("PEC"),  line of  business  in exchange  for the  cancellation  of
    previously  issued stock to the founder of PEC and the assumption of certain
    liabilities  with  respect to the PEC line of  business.  Goodwill and other
    impaired assets were written off in 2002, resulting in a loss of $1,038,823,
    which is recorded as restructuring expenses in the consolidated statement of
    operations.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

    CONCENTRATIONS OF CREDIT RISK - The Company's financial instruments that are
    exposed to  concentrations  of credit  risk  consist  primarily  of cash and
    accounts  receivable.  The Company  primarily  sells to hospitals  and other
    healthcare providers,  and ongoing customer credit evaluations are performed
    with  respect  to the  Company's  customers.  Collateral  is  generally  not
    required.  In addition,  the Company  does not  routinely  maintain  cash in
    excess of $100,000  and, as a result,  at June 30, 2004,  the Company had no
    uninsured cash balances.

                                      F-9
<PAGE>
    INVENTORIES consist of raw materials and finished goods, stated at the lower
    of cost or market.  Cost is recorded using the first-in first-out method for
    Luxtec and average costing for the remaining companies.

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

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

    LONG-LIVED  ASSETS - The Company accounts for the impairment and disposition
    of long-lived  assets in accordance  with Statement of Financial  Accounting
    Standards  ("SFAS") No. 144,  Accounting  for the  Impairment or Disposal of
    Long-Lived Assets. In accordance with SFAS No. 144, long-lived assets should
    be measured at the lower of carrying amount or fair value less cost to sell,
    whether reported in continuing operations or in discontinued operations. The
    Company  periodically  reviews the carrying  value of  long-lived  assets to
    determine whether impairment to such value has occurred.

    GOODWILL  AND OTHER  INTANGIBLE  ASSETS -  Effective  July 1, 2002,  for the
    Company  goodwill is no longer  amortized but instead is subject to periodic
    impairment  testing in  accordance  with SFAS No.  142,  Goodwill  and Other
    Intangible  Assets  ("SFAS No.  142").  See Note 6.  Intangible  assets with
    finite lives are stated at cost,  net of  accumulated  amortization  and are
    tested for  impairment  in  accordance  with SFAS No. 144.  These assets are
    amortized on the  straight-line  method over the  estimated  useful lives or
    periods  of  expected  benefit,  but not in excess  of 20 years.  Intangible
    assets with indefinite lives are no longer amortized but instead are subject
    to  periodic  impairment  testing  in  accordance  with  SFAS  No.  142.  In
    accordance  with SFAS No. 142, the Company  performed its annual  impairment
    test in July 2003 and found no further  impairment in its existing  goodwill
    balances.

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

    REVENUE RECOGNITION - The Company recognizes revenue at the time of shipment
    and passage of title.  The Company  also  receives  revenues  under  certain
    agency  arrangements and recognizes revenue, on a net basis, when the agency
    sale is complete.  Provision is made  currently for estimated  sales returns
    and allowances,  which have  historically  been  insignificant.  The Company
    expenses  warranty  costs as  incurred  as amounts  have  historically  been
    insignificant, and Luxtec offers minimal warranty of products. There were no
    warranty costs for the years ended June 30, 2004, 2003 and 2002.

    SHIPPING AND HANDLING COSTS are included in costs of sales.

    RESEARCH AND DEVELOPMENT COSTS are incurred by the Company's Luxtec division
    and are charged to operations as incurred.  Total  research and  development
    costs for the years ended June 30,  2004,  2003 and 2002 were  approximately
    $185,000, $253,000 and $87,000 respectively.

    INCOME TAXES - The Company accounts for income taxes in accordance with SFAS
    No. 109,  Accounting for Income Taxes ("SFAS No. 109").  Under SFAS No. 109,
    income  taxes  are  recognized  for:  (a) the  amount  of taxes  payable  or

                                      F-10
<PAGE>
    refundable for the current year, and (b) deferred tax liabilities and assets
    for the future tax  consequences  of events that have been recognized in the
    Company's  financial  statements  or tax returns.  A valuation  allowance is
    provided  when it is more  likely  than not that some  portion or all of the
    deferred tax asset will not be realized.

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

    Had  compensation  expense  for these  employee  stock  option  grants  been
    determined based on the fair value at the grant dates,  consistent with SFAS
    No. 123, the Company's net income (loss) for fiscal years ending 2004,  2003
    and 2002 would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<BTB>
                                                                 2004            2003            2002

Net income (loss) available to common stockholders, as
<S> <C>
reported                                                    $ 1,606,049     $ 7,033,848      $ (8,843,134)

Stock-based employee compensation expense determined under
fair-value method                                              (576,585)       (521,258)         (401,185)
                                                            ------------    ------------     -------------

Pro forma net income (loss)                                 $  1,029,464    $ 6,512,590      $ (9,244,319)
                                                            ============    ============     =============

Earnings (Loss) Per Share:
  Basic- as reported                                        $       0.07    $      0.33      $     (1.11)
  Basic- pro forma                                          $       0.05    $      0.31      $     (1.16)


  Diluted- as reported                                      $       0.07    $      0.15      $     (1.11)
  Diluted- pro forma                                        $       0.05    $      0.14      $     (1.16)

Black-Scholes Assumptions
  Risk-free interest rate                                          4.23%           3.10%           5.21%
  Expected volatility                                                50%             50%             50%
  Expected lives - in years                                           6               6               7
  Expected dividend yield                                             0%              0%              0%
</TABLE>
    FINANCIAL  INSTRUMENTS  - Pursuant to SFAS No. 107,  DISCLOSURES  ABOUT FAIR
    VALUE OF FINANCIAL INSTRUMENTS, the Company is required to disclose the fair
    value of all  financial  instruments  at June 30, 2004,  2003 and 2002.  The
    Company  generally  considers  the  carrying  value of such  amounts  in the
    financial  statements to approximate  their fair value due to the relatively
    short  period  of time  between  origination  of the  instruments  and their
    expected   realization  or  the  variable   interest  rate  nature  of  such
    instruments.  At June 30, 2004,  2003 and 2002,  the estimated fair value of
    the  company's  long-term  debt was  approximately  $106,000,  $666,000  and
    $3,100,000,  respectively.  The  Company  estimates  the  fair  value of its
    long-term  debt  generally  using  discounted  cash flow  analysis  based on
    current interest rates for instruments with similar maturities.

                                      F-11
<PAGE>
    USE  OF  ESTIMATES  IN  THE  PREPARATION  OF  FINANCIAL   STATEMENTS  -  The
    preparation of financial statements in conformity with accounting principles
    generally  accepted in the United States of America  requires  management to
    make estimates and  assumptions  that affect the reported  amounts of assets
    and liabilities  and disclosure of contingent  assets and liabilities at the
    date of the financial  statements  and the reported  amounts of revenues and
    expenses during the reporting period. Actual results could differ from those
    estimates.

    LOSS PER COMMON SHARE - SFAS No. 128, EARNINGS PER SHARE,  requires the dual
    presentation  of basic and diluted  earnings (loss) per share on the face of
    the statement of operations and the disclosure of the reconciliation between
    the numerators and  denominators  of basic and diluted  earnings  (loss) per
    share  calculations.  The following  represents a reconciliation  from basic
    earnings per share to diluted  earnings  per share.  Options and warrants to
    purchase  common stock  totaling  26,562,698,  1,640,185 and 5,713,342  were
    outstanding  at June 30,  2004,  2003 and 2002,  respectively,  but were not
    included in the computation of diluted earnings per share because the effect
    would be antidilutive. Put warrants totaling 282,022 for the year ended June
    30, 2002 were not included in the computation of diluted  earnings per share
    because the effect would also be antidilutive.
<TABLE>
<CAPTION>
<BTB>
<S> <C>
                                                                    2004           2003           2002


       Weighted-average shares outstanding - basic                 22,375,130     21,059,853     7,975,208

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

       Incremental shares due to assumed conversion of

          Series G preferred stock                                               17,484,715
                                                                 ------------   ------------     ---------

       Weighted average shares outstanding - diluted               22,375,130    53,024,512      7,975,208
                                                                 ============   ============     =========
</TABLE>
    RECENTLY  ISSUED  ACCOUNTING  PRONOUNCEMENTS  -In May  2003,  the  Financial
    Accounting  Standards  Board ("FASB") issued  Statement 150,  ACCOUNTING FOR
    CERTAIN FINANCIAL  INSTRUMENTS WITH  CHARACTERISTICS OF BOTH LIABILITIES AND
    EQUITY  ("SFAS No.  150").  SFAS No. 150 changes the  classification  in the
    statement of financial position of certain common financial instruments from
    either  equity or  mezzanine  presentation  to  liabilities  and requires an
    issuer of those financial  statements to recognize changes in the fair value
    or the  redemption  amount,  as  applicable,  in earnings.  SFAS No. 150 was
    effective for the Company as of July 1, 2003.  The Company  adopted SFAS No.
    150 in the quarter ended  September 30, 2003 and, as a result,  reclassified
    its Series G Convertible Redeemable, Preferred Stock ("Series G Stock") from
    equity to a liability.  Further  effects of this  adoption are  discussed in
    Note 8.

    In December 2003, the SEC issued Staff Accounting  Bulletin ("SAB") No. 104,
    REVENUE RECOGNITION,  which codifies, revises, and rescinds certain sections
    of SAB No.  101,  REVENUE  RECOGNITION,  in order to make this  interpretive
    guidance consistent with current  authoritative  accounting guidance and SEC
    rules and  regulations.  SAB No. 104 did not have a  material  impact on the
    Company's financial position or results of operations.

    On March 31, 2004, the FASB issued an exposure draft,  SHARE-BASED  PAYMENT,
    AN AMENDMENT OF SFAS NO. 123 AND 95. The exposure  draft proposes to expense
    the fair value of  share-based  payments to employees  beginning in 2005. We
    are  currently  evaluating  the  impact  of this  proposed  standard  on our
    financial statements.

                                      F-12
<PAGE>
    RECLASSIFICATIONS  -  Certain   reclassifications  were  made  to  the  2002
    consolidated financial statements to conform to the 2003 presentation.

3.  ACQUISITIONS AND DISPOSALS


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

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

    Revenues  and  income  from the  discontinued  operation,  net of income tax
    effect were as follows:
<TABLE>
<CAPTION>
<BTB>
                                                                               2003                                  2002

<S> <C>
     Net sales                                                             $5,740,135                            $5,249,566
                                                                           ==========                            ==========
     Income from discontinued operation - net
     of income tax effect                                                  $  121,697                            $  101,263
                                                                           ==========                            ==========
</TABLE>
                                      F-13

<PAGE>
4.  INVENTORIES

<TABLE>
<CAPTION>
<BTB>
    Inventories consist of the following at June 30:

                                                                               2004                                  2003
<S>  <C>
     Raw materials                                                         $  708,949                            $  776,468
     Finished goods                                                         6,693,999                             7,847,729
     Reserve for obsolescence                                               (670,406)                           (1,106,232)
                                                                           ----------                            ----------

     Inventories - net                                                     $6,732,542                            $7,517,965
                                                                           ==========                            ==========


5.  PROPERTY AND EQUIPMENT

    Property and equipment consist of the following at June 30:

                                                                               2004                                 2003

     Office equipment                                                      $  656,859                          $  466,598
     Furniture and fixtures                                                   394,740                             346,031
     Machinery and equipment                                                  665,750                             731,916
     Leasehold improvements                                                   503,540                            477,8009
                                                                           ==========                          ==========

     Total                                                                  2,220,889                           2,022,354
                                                                           ==========                          ==========
     Less accumulated depreciation and amortization                        (1,333,564)                         (1,025,996)
                                                                           ==========                          ==========
     Property and equipment - net                                          $  887,325                          $  996,358
                                                                           ==========                          ==========
</TABLE>
    Depreciation  expense totaled $321,596,  $381,145 and $536,707 for the years
    ended June 30, 2004,  2003 and 2002,  respectively.  Property and  equipment
    held under capital  leases  amounted to $82,178,  $46,291 and $81,194,  less
    accumulated  amortization of $33,548, $30,456 and $26,705, at June 30, 2004,
    2003 and 2002, respectively.

6.  GOODWILL AND OTHER INTANGIBLE ASSETS

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


                                      F-14
<PAGE>
    The  following  table  sets  forth,  for the year  ended  June 30,  2002,  a
    reconciliation of net income to conform to the requirements of SFAS No. 142.

                                                          2002

     Reported net loss                                 $(6,190,563)
     Add back -
       Goodwill amortization                             1,722,256
                                                      ------------

     Adjusted net loss                                 $(4,468,307)
                                                      ============

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

     Adjusted net loss                                 $     (0.90)
                                                      ============

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

     Adjusted net loss                                 $     (0.90)
                                                      ============


    There were no changes in the carrying  amount of goodwill for the year ended
    June 30, 2004.

7.  LINES OF CREDIT AND LONG-TERM DEBT

<TABLE>
<CAPTION>
<BTB>
    Lines of credit consisted of the following as of June 30:

                                                                     2004               2003
<S> <C>
     Line of credit - PrimeSource Healthcare                     $5,204,139
     Line of credit - PrimeSource Surgical                                              $4,654,436
     Line of credit - Luxtec                                                             1,271,585
                                                                                         ---------

     Total line of credit                                        $5,204,139             $5,926,021
                                                                 ===========            ==========
</TABLE>

    In December 2003, the Company consolidated its previously outstanding senior
    debt facilities. The Company's senior debt financing is now provided under a
    $7,500,000  revolving  demand  note  (the  "PrimeSource  Healthcare  Line of
    Credit") from Wells Fargo Business  Credit,  Inc.  ("Wells Fargo") under the
    PrimeSource  Healthcare Credit and Security Agreement,  dated as of December
    10, 2003, by and among the Company,  PrimeSource Surgical,  Bimeco and Wells
    Fargo (the  "Credit  and  Security  Agreement").  Pursuant to the Credit and
    Security  Agreement,  the  maximum  amount  available  to  borrow  under the
    PrimeSource Healthcare Line of Credit is limited to the lesser of $7,500,000
    or a certain percentage of accounts receivable and inventory,  as defined by
    the Credit and Security Agreement  ($6,757,524 at June 30, 2004). As of June
    30, 2004,  borrowings  bore  interest at Wells  Fargo's prime rate plus 3.0%
    (7.25% at June 30, 2004). Borrowings are secured by substantially all assets
    held by PrimeSource Healthcare and its subsidiaries. At June 30, 2004, there
    was $1,553,385 of  availability  under the  PrimeSource  Healthcare  Line of
    Credit.

                                      F-15
<PAGE>
    The Credit and Security  Agreement  contains  certain  covenants,  including
    covenants that require the  maintenance of defined income levels and maximum
    capital expenditures.  The Company was in compliance with these covenants as
    of June 30, 2004.

    Prior to December  2003,  the Company's  senior debt  financing was provided
    under separate lines of credit at Luxtec and PrimeSource Surgical.

    The Company's  Amended and Restated Security and Loan Agreement (the "Luxtec
    Credit  Agreement")  provided for a  $2,500,000  line of credit (the "Luxtec
    Line of Credit") with ARK CLO 2000-1 LIMITED ("ARK"). On August 6, 2002, the
    Company amended the Luxtec Credit  Agreement  whereby ARK waived and amended
    certain  provisions under the Luxtec Credit Agreement.  Under the amendment,
    as of June 30, 2003, the maximum amount available to borrow under the Luxtec
    Line of  Credit  was  limited  to the  lesser  of  $1,275,000  or a  certain
    percentage  of accounts  receivable  and inventory  ($1,271,585  at June 30,
    2003).  As of June 30, 2003,  borrowings  bore  interest at ARK's prime rate
    plus 3.0% (7.0% at June 30,  2003).  Unused  portions  of the Luxtec Line of
    Credit accrued a fee at an annual rate of 1.00%.  Borrowings were secured by
    substantially all of PrimeSource  Healthcare's assets, excluding the capital
    stock of, and assets held by,  PrimeSource  Surgical.  Borrowings  under the
    Luxtec Line of Credit were  payable upon  maturity on December 31, 2003.  In
    December 2003, the Company  refinanced its senior debt facilities,  and paid
    off the Luxtec Line of Credit in the amount of $1,271,585.

    The Company's  PrimeSource  Surgical  Amended and Restated Credit  Agreement
    (the  "PrimeSource   Surgical  Credit  Agreement")  with  Citizens  Bank  of
    Massachusetts  ("Citizens")  provided for a line of credit (the "PrimeSource
    Surgical Line of Credit") with a maturity date of March 31, 2004.  Under the
    PrimeSource  Surgical  Credit  Agreement,  as amended,  the  maximum  amount
    available  to  borrow  under the  PrimeSource  Surgical  Line of Credit  was
    limited to the lesser of  $8,000,000  or a certain  percentage  of  accounts
    receivable  and inventory,  as defined by the  PrimeSource  Surgical  Credit
    Agreement  ($5,281,805  at June 30, 2003).  As of June 30, 2003,  borrowings
    bore a variable step interest rate at Citizens' prime rate plus 4.50% (8.50%
    at June 30,  2003).  Unused  portions of the  PrimeSource  Surgical  Line of
    Credit accrued a fee at an annual rate of 0.375%. Borrowings were secured by
    substantially  all of the assets directly held by PrimeSource  Surgical.  In
    December 2003, the Company paid off the PrimeSource  Surgical Line of Credit
    in the amount of $4,793,944.

    On June 14, 1999,  as part of the  PrimeSource  Surgical  Credit  Agreement,
    PrimeSource  Surgical  executed  an  Amended  and  Restated  Term  Note (the
    "PrimeSource  Surgical Term Loan") in the original amount of $5,000,000 with
    Citizens.  On June 30,  2003,  the Company  paid off the entire  outstanding
    balance of the PrimeSource Surgical Term Loan in connection with the sale of
    Ruby and the funding of the last Preferred  Series G round.  The PrimeSource
    Surgical  Term  Loan was  collateralized  by  substantially  all the  assets
    directly held by PrimeSource Surgical.

    The PrimeSource  Surgical Term Loan was also subject to a term loan facility
    fee. In December  2003, in  connection  with the  refinancing  of its senior
    debt, the Company used proceeds from the refinancing with Wells Fargo to pay
    Citizens an $180,000 term loan facility fee.


                                      F-16
<PAGE>
<TABLE>
<CAPTION>
<BTB>
    Long term debt includes notes payable as follows:

                                                                June 30,         June 30,
                                                                  2004             2003
<S> <C>
Luxtec tenant note                                             $ 62,446          $ 77,650

PrimeSource legal counsel note, net of unamortized
  discount of $12,827                                                             357,173

PrimeSource Citizens Bank note                                                    187,500

Other long-term note                                             43,250            43,250
                                                               ---------        ----------

Total other notes payable                                       105,696           665,573

Less current portion                                            (16,713)         (559,877)
                                                               ---------        ----------

Total long-term debt                                           $ 88,983          $ 105,696
                                                               =========        ==========
</TABLE>
    The Luxtec  tenant  note is a note  payable for tenant  improvements  to the
    lessor of Luxtec's  leased premises in West Boylston,  Massachusetts,  which
    bears interest at 9.5% and is due September 19, 2005.  Payments are interest
    only for the first 12 months, with remaining payments calculated on a 7-year
    amortization table with a balloon payment due on September 19, 2005.

    The  PrimeSource  legal counsel note was a non-interest  bearing demand note
    payable with an original  balance of $559,977  (net of original  unamortized
    discount of $40,023 based on an imputed  interest rate of 8%) to its special
    legal counsel for payment of prior  accounts  payable.  This note matured on
    May 30,  2004.  Special  legal  counsel  reduced the balance of this note by
    $150,000 in  November  2003.  As of June 30, 2004 the note  payable had been
    paid off.

    The  PrimeSource  Citizens Bank note was a $250,000 note payable to Citizens
    for the bank  refinancing  amendment fee. This note was paid off in December
    2003 in connection  with the  refinancing  of the Company's  senior debt, as
    described above.

8.  PREFERRED STOCK

    SERIES G REDEEMABLE,  CONVERTIBLE  PREFERRED  STOCK - On August 6, 2002, the
    Company  created  a new  series of  preferred  stock,  Series G  Convertible
    Redeemable  Preferred Stock, no par value (the "Series G Stock"). The Series
    G Stock  has  230,000  authorized  shares.  Each  share of Series G Stock is
    convertible into 100 shares of common stock,  subject to adjustment,  at the
    option  of the  holder.  Each  share of Series G Stock has one vote for each
    share of common  stock  into  which it would be  convertible.  In  addition,
    Series G Stock ranks senior to all other  outstanding  stock of the Company.
    Series G Stock accrues  dividends at the rate of 8% per year of the original
    issuance price of $32.00 per share and has a liquidation preference equal to
    $64.00 per share plus an amount  equal to all accrued but unpaid  dividends.
    The Series G Stock has a mandatory  redemption  date of June 3, 2005, and is
    redeemable at the original  issue price of $32.00 per share plus accrued but
    unpaid  dividends.  The Series G Stock also has  special  consent  rights to

                                      F-17
<PAGE>
    certain  of  the  Company's  activities,  including,  but  not  limited  to,
    amendment of the Company's articles or bylaws and merger or consolidation of
    the Company.  Accordingly,  accrued dividends of $571,167 for the year ended
    June  30,  2004  are  included  in  interest  expense  in  the  consolidated
    statements of operations.  As of June 30, 2004,  cumulative unpaid dividends
    on the Series G Stock totaled $1,018,900,  and were included in the Series G
    Stock in the consolidated balance sheet.

    Upon  adoption  of SFAS No. 150 as of July 1,  2003,  the Series G Stock has
    been reclassified in the consolidated balance sheet from presentation in the
    equity  section to the  liability  section.  Upon  original  issuance of the
    Series G Stock,  $2,062,000  relating  to  warrants  issued was  recorded to
    additional  paid-in  capital.  These amounts were reversed out of additional
    paid-in  capital and the book value of the Series G Stock was  increased  to
    the redemption amount upon adoption of SFAS No. 150.

    During the year ended June 30, 2003,  the Company  granted  7,500 options to
    purchase  Series G Stock for $16.00 a share to an  executive of the Company.
    Options vested one year from August 6, 2002,  the date of grant,  and have a
    10 year life.

    On October  15,  2003,  one option  for the  purchase  of Series G Stock was
    exercised for $16. At June 30, 2004, the remaining 7,499 options were vested
    and exercisable.

9.  STOCK OPTIONS AND WARRANTS

    COMMON STOCK OPTIONS - In January 1997, PrimeSource Surgical adopted a stock
    option  plan (the  "1997  Plan")  for the grant of stock  options  and other
    awards to certain officers, key employees,  or other persons affiliated with
    the Company. The maximum number of shares of common stock that may be issued
    pursuant to the 1997 Plan is  12,000,000.  The 1997 Plan also  provides  for
    various vesting  schedules,  as determined by the compensation  committee of
    the Board of Directors,  and options have terms not to exceed 10 years.  The
    vested  options may be exercised at any time and  generally  expire 10 years
    from the date of grant.

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

    During fiscal year 2003, the Company also issued  equity-based  options to a
    certain  employee as required under the executed  employment  agreement with
    the Company.  The  exercise  price was below the deemed fair market value of
    the stock at the date of grant. In accordance  with the  requirements of APB
    Opinion No. 25, the Company has recorded  equity-based  compensation for the
    difference  between  the  exercise  price of the stock and the  deemed  fair
    market  value of the  Company's  stock at the date of  grant.  The  deferred
    equity-based  compensation is amortized to expense on a straight-line basis,
    over the one-year period during which the options become vested.  As of June
    30, 2004 and 2003, the Company had recorded cumulative deferred equity-based
    compensation related to these options of $10,000 and $110,000, respectively.

    On October 15,  2003,  fifty  options for the  purchase of common stock were
    exercised for $16.

    In addition to the 1997 Plan,  the Company has several  stock  option  plans
    sponsored by Luxtec.  The 1992 stock plan (the "1992 Plan") provides for the
    grant of incentive stock options,  nonqualified stock options, stock awards,
    and direct sales of stock. Under the 1992 Plan,  incentive stock options may
    be granted at an exercise  price not less than the fair market  value of the
    Company's  common stock on the date of grant.  The Board of Directors at its

                                      F-18
<PAGE>

    discretion may grant nonqualified  options.  The 1992 Plan also provides for
    various vesting  schedules,  as determined by the compensation  committee of
    the Board of Directors, and have options terms not to exceed 10 years. Under
    the 1992 Plan, 500,000 total shares are authorized for issuance.

    The 1995  directors'  plan  (the  "1995  Director  Plan")  was  adopted  for
    non-employee  directors  and  provides  that an  aggregate  of up to 200,000
    nonqualified options may be granted to non-employee directors, as determined
    by the compensation committee of the Board of Directors.  Under the terms of
    the 1995 Director Plan, options are granted at not less than the fair market
    value of the Company's  common stock on the date of grant. The 1995 Director
    Plan also provides that the options are  exercisable  at varying  dates,  as
    determined by the compensation committee of the Board of Directors, and that
    they have terms not to exceed 10 years.  At both June 30,  2004 and June 30,
    2003,  there were 64,000  shares  available for future grants under the 1995
    Director Plan.

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

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

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

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

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


                                      F-19
<PAGE>
    Related to a private placement of its preferred stock in September 2000, the
    Company granted  warrants to purchase 157,860 shares of the Company's common
    stock at $1.68 per share.  These warrants  vested  immediately and expire in
    September 2011.

    Changes in shares under options and warrants,  in common stock  equivalents,
    for the years ended June 30, 2002, 2003 and 2004 are as follows:
<TABLE>
<CAPTION>
<BTB>


                                                            Options                        Warrants
                                                     ----------------------------    ---------------------------
                                                                     Weighted                        Weighted
                                                                      Average                        Average
                                                       Shares        Exercise         Shares         Exercise
                                                    Outstanding        Price       Outstanding        Price
<S> <C>
     Balance, July 1, 2001                           3,393,030.00      $ 1.81       1,016,259.00      $ 3.15

       Grants                                          112,000.00        1.00       3,494,780.00        1.01
       Canceled                                     (1,864,554.00)       1.72           (438,173)       5.70
                                                     ------------                  -------------

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

       Grants                                        7,487,000.00        0.32         13,122,173        0.01
       Canceled                                       (525,212.00)       1.42           (356,485)       1.01
                                                     ------------                  -------------

     Balance, June 30, 2003                          8,602,264.00        0.53      16,838,554.00        0.02

        Grants                                       1,300,000.00        0.32
        Exercised                                          (50.00)       0.32
        Cancelled                                     (114,284.00)       1.86            (63,786)       1.18
                                                     ------------                  -------------

     Balance, June 30, 2004                          9,787,930.00        0.49      16,774,768.00        0.02
                                                     ============                  =============

     Vested and exercisable, June 30, 2004           6,544,957.00                  16,774,768.00
                                                     ============                  =============

     Vested and exercisable, June 30, 2003           1,474,960.00                  16,838,554.00
                                                     ============                  =============

     Vested and exercisable, June 30, 2002             996,076.00                   4,072,866.00
                                                     ============                  =============
</TABLE>
    The  weighted-average  per share fair value of option grants in fiscal 2004,
    2003 and 2002 was approximately $0.1147, $0.1602 and $0.5803, respectively.

                                      F-20
<PAGE>
    Outstanding  stock  options and  warrants  at June 30,  2004  consist of the
    following:
<TABLE>
<CAPTION>
<BTB>

<S> <C>
                                                Options                                        Warrants
                            ----------------------------------------    ----------------------------------------------
                                           Weighted                                     Weighted
                                           Average      Weighted                         Average      Weighted
                                          Remaining     Average                         Remaining     Average
      Range of                           Contractual    Exercise                       Contractual    Exercise
   Exercise Prices          Shares       Life (Years)    Price           Shares        Life (Years)    Price


$0.00 - $1.60                 9,077,745         6.8       $0.37          16,738,633           7.8       $0.02
$1.61 - $3.20                   693,185         5.3        1.98              36,135           6.5        2.03
$3.21 - $4.80                    17,000         0.5        4.57
                              ---------                                  ----------

                              9,787,930         6.7        0.49          16,774,768           7.8        0.02
                              =========                                  ==========
</TABLE>
    Compensation  expense in the amount of $10,000 and  $110,000 for fiscal 2004
    and 2003,  respectively,  has been  recognized  for certain  employee  stock
    options  granted  below  market  value.  No  compensation  expense  has been
    recognized for the remaining employee stock option grants.

10. 401(k) RETIREMENT PLAN

    The Company and PrimeSource  Surgical  separately  maintain qualified 401(k)
    retirement plans. The plans cover  substantially all employees who have over
    six months of service and have  attained  ages 18 and 21 for the Company and
    PrimeSource  Surgical  plans,  respectively.  The 401(k) plans provide for a
    contribution  by the Company each year. The Company match totaled  $145,426,
    $110,706 and  $169,347,  for the years ended June 30,  2004,  2003 and 2002,
    respectively.

11. INCOME TAXES

    The  benefit  (provision)  for income  taxes for the years  ended June 30 is
    based on the following components:
<TABLE>
<CAPTION>
<BTB>
                                            2004             2003             2002
Current income taxes
<S> <C>
  Federal                               $                $       1,600
  State                                                         18,100   $       61,700
                                       ----------------- --------------  ---------------


Total current                                                   19,700           61,700
                                       ----------------- --------------  ---------------


Deferred income taxes:
  Federal                                  (1,904,700)       (172,700)        1,458,900
  State                                      (407,100)        (18,800)          209,200
                                       ----------------- --------------  ---------------


Total deferred                             (2,311,800)      (191,500)         1,668,100
                                       ----------------- --------------  ---------------

Change in valuation allowance               2,311,800         191,500        (1,668,100)
                                       ----------------- --------------- ----------------

Total                                   $            -   $     19,700    $       61,700
                                       ----------------- --------------  ---------------
</TABLE>
                                      F-21
<PAGE>

    A  reconciliation  of the provision for income taxes to the amount of income
    tax benefit  (expense) that would result from applying the federal statutory
    rate (35%) to income  (loss)  before  income tax benefit  (provision)  is as
    follows:
<TABLE>
<CAPTION>
<BTB>
                                                               2004                 2003                2002
<S> <C>
Income tax (provision) benefit at statutory rate        $ (562,100)        $ 1,270,080          $ 2,223,700
Nondeductible warrant put expense (income)                                      66,500              (33,250)
State tax (expense) benefit, net of federal benefit        (73,500)            112,700              202,350
Meals and entertainment                                    (13,700)            (20,100)             (14,300)
Nondeductible goodwill                                      78,800          (1,448,700)            (613,100)
Change in valuation allowance                            2,311,800             191,500           (1,668,100)
Change in prior years estimastes                        (1,660,600)
General business credit                                                        (13,200)             (45,000)
Loss on sale of subsidiary                                                     (18,100)
Expiration and adjustments of net operating
  losses and income tax credits                            (85,800)           (118,000)
Other                                                        5,100              (2,980)               9,400
                                                         ---------             -------           -----------
Total                                                    $       -             $19,700           $   61,700
                                                         =========             =======           ===========
</TABLE>

    On an annual  basis,  the Company  reviews its  deferred tax assets based on
    open tax  years,  available  net  operating  loss  carryforwards  and  other
    factors.  Based on its 2004 review,  the Company  decreased its deferred tax
    assets by $1,660,600,  and decreased the offsetting  valuation  allowance by
    the same amount.

    Deferred  income taxes reflect the net tax effects of temporary  differences
    between  the  carrying  amounts  of assets  and  liabilities  for  financial
    reporting purposes and the amounts used for income tax purposes. Significant
    components  of the  Company's  deferred  tax assets and  liabilities  are as
    follows at June 30:
<TABLE>
<CAPTION>
<BTB>

                                                                         2004                 2003
Current:
<S> <C>
  Restructuring reserve                                                17,000              229,400
  Accrued vacation                                                     59,800               62,400
  Inventory valuation adjustment                                      139,000              453,600
  Bad debt reserve                                                     49,000               87,700
  Accrued distributor costs                                                                205,000
  Other                                                                25,300               46,400
                                                                   ----------           ----------

  Total current                                                       290,100            1,084,500
                                                                   ----------           ----------

Long-term:
  Depreciation and amortization                                       (39,800)             114,600
  Credit carryforwards                                                165,800              243,600
  Capital loss carryforwards                                          516,200              300,100
  Charitable loss carryforwards                                        14,600                6,800
  Net operating loss carryforwards                                  5,254,600            6,763,700
                                                                   ----------           ----------

  Total long-term                                                   5,911,400            7,428,800
                                                                   ----------           ----------


Total                                                               6,201,500            8,513,300
Valuation allowance                                                (6,201,500)          (8,513,300)
                                                                   ----------           ----------

Total                                                                       -                   -
                                                                   ==========           ==========
</TABLE>
                                      F-22
<PAGE>
Certain of the  Company's  current  deferred  tax  assets,  including  inventory
valuation  adjustment  and bad debt reserve,  are reduced due to  limitations in
deductible  amounts relating to the Company's prior  acquisition of these assets
in stock transactions.

At June 30, 2004,  the Company had federal net operating loss  carryforwards  of
approximately $13,266,700,  pre-tax, and state net operating loss carry forwards
of  approximately  $10,191,000,  pre-tax.  The  Company's  federal and state net
operating  losses  expire in the tax years ending June 30, 2005 through 2024. At
June 30, 2004, the Company had federal and State research and development credit
carryforwards of approximately $154,800 and $11,000, respectively. The Company's
federal and state credits will generally  expire in the tax years ended June 30,
2005 through 2021. The Company also has a federal  capital loss  carryforward of
approximately  $1,326,900,  pre-tax,  that will  begin to expire in the tax year
ending  June 30,  2006.  Certain  changes  in stock  ownership  may  result in a
limitation  on the  amount  of net  operating  loss  carryforwards  that  can be
utilized each year.

A full valuation  allowance has been provided against the Company's deferred tax
assets  as of June  30,  2004  and  2003,  as it is more  likely  than  not that
sufficient  taxable  income will not be  generated  to realize  these  temporary
differences.  Any future reduction of the valuation allowance established at the
dates of the acquisitions  (see Note 3) will reduce the goodwill related to such
acquisition.

12. COMMITMENTS AND CONTINGENCIES

LEASES - The Company  leases  office space and certain  computer  equipment  and
software under capital and noncancelable  operating leases. Rent expense for the
years ended June 30, 2004,  2003, and 2002 was $628,259,  $654,116 and $726,455,
respectively.  Minimum  annual lease  payments  under capital and  noncancelable
operating leases are as follows for the years ending June 30:

                                                             CAPITAL   OPERATING
                                                              LEASES    LEASES

2005                                                          26,124     606,293
2006                                                          19,691     266,250
2007                                                           4,411       8,132
2008                                                                       1,645
                                                             --------   --------

Total minimum lease payments                                  50,226    $882,320
                                                                        ========
Amount representing interest                                  (6,509)
                                                             --------

Present value of future minimum lease payments                43,717
Less current portion of capital lease obligations            (21,568)
                                                             --------

Capital lease obligations - net of current portion           $22,149
                                                             ========
EXECUTIVE  COMPENSATION - At June 30, 2004,  certain  executive  officers of the
Company  and  its  subsidiaries  had  employment  agreements  that  provide  for
compensation  and  certain  severance  benefits.  As a result  of an  employment
agreement with the Company's former  President/Chief  Executive  Officer certain
benefits  were accrued at June 30, 2003 in the amount of  $195,507.  All accrued
amounts were paid as of June 30, 2004.

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

                                      F-23

<PAGE>
On September 5, 2002,  former  executive  officers and  directors of the Company
filed a complaint  in Arizona  Superior  Court,  County of Pima.  The  complaint
alleged a breach by the  Company of the  severance  agreements  with each of the
officers.  The  complaint  was  settled  in  November  2003.  The  terms  of the
settlement  included  cash  payments  totaling  $125,000 to the officers  over a
period of four months, ended in February 2004.

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

13. BUSINESS SEGMENTS

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

    SPECIALTY  MANUFACTURED PRODUCTS - This segment includes the Luxtec division
    which  designs and  manufactures  fiber  optic  headlight  and video  camera
    systems,  light  sources,  cables,  retractors,  and  custom-made  and other
    surgical equipment for the medical and dental industries.

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

    SPECIALTY  MEDICAL  DISTRIBUTION - CRITICAL CARE - The critical care segment
    is a regional sales and marketing organization that sells products primarily
    to hospitals and surgery centers in the southeastern and northeastern United
    States and includes the Bimeco, Inc.  operations.  Within this segment,  the
    primary  specialties  include maternal and childcare and neonatal  intensive
    care. The results of the NEMS and PEC operations are only included in fiscal
    years prior to their sales in 2003 and 2002, respectively.

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

    Operations  that are not included in any of the segments are included in the
    category  "Other" and  consist  primarily  of  corporate  staff  operations,
    including  selling,  general,  and  administrative  expenses of  $2,867,349,
    $3,527,516 and $4,194,680 for 2004, 2003, and 2002, respectively.

    Operating  income for each segment consists of net sales less cost of sales,
    selling expenses,  depreciation and amortization expenses, and the segment's

                                      F-24
<PAGE>
    general and administrative  expenses. The sales between segments are made at
    market  prices and are  eliminated in  consolidation.  Cost of products sold
    reflects  current costs adjusted,  where  appropriate,  for lower of cost or
    market inventory adjustments.

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

    Certain products of the Specialty Medical Products Manufacturing segment are
    sold to the Specialty Medical  Distribution - PrimeSource  Surgical segment.
    Total sales  between  these  segments  totaled  $5,382,852,  $5,055,400  and
    $5,178,351 for the years ended June 30, 2004, 2003 and 2002.

    Disclosures   regarding  the  Company's   reportable  segments  including  a
    corporate  management fee allocation  with  reconciliation  to  consolidated
    totals are presented below.
<TABLE>
<CAPTION>
<BTB>
                               DISTRIBUTION -   DISTRIBUTION -
                               PRIMESOURCE      PRIMESOURCE                      CORPORATE/
                                SURGICAL        CRITICAL CARE    MANUFACTURING       OTHER          TOTAL

Net sales
<S><C>
       2004                   $27,330,958    $13,296,821       $ 8,135,227                    $ 48,763,006
       2003                    26,181,812     11,939,529         8,238,678                      46,360,019
       2002                    29,412,136     16,743,545         7,540,036                      53,695,717

Net income (loss)
       2004                   $   774,776    $   383,550         1,576,755      $(1,129,032)  $  1,606,049
       2003                       137,765        260,978       $(3,090,253)        (937,289)    (3,628,799)
       2002                       448,525       (242,670)          913,610       (7,310,028)    (6,190,563)

Total assets
       2004                   $23,524,547    $ 3,290,404         2,899,675      $   184,620   $ 29,899,246
       2003                    25,041,081      3,361,430         2,935,095          326,934     31,664,540
       2002                    14,827,268      6,895,708       $15,406,712          457,080     37,586,768

Restructuring expenses

       2004                                                                     $     4,817   $      4,817
       2003                                                                         345,507        345,507
       2002                                  $ 1,038,823                          2,915,675      3,954,498

Depreciation and amortization

       2004                   $   133,736    $     1,058       $   186,802      $   171,929   $    493,525
       2003                       195,959         24,048           155,984          467,509        843,500
       2002                       243,350        170,495         1,344,814          696,422      2,455,081

Interest expense
       2004                   $   219,370    $   152,790       $   121,078      $   814,702   $  1,307,940
       2003                       282,899        129,604           111,959          314,781        839,243
       2002                       273,612        207,856           159,218           38,558        679,244

</TABLE>
                                      F-25
<PAGE>
PrimeSource  Surgical and its subsidiaries  have no significant sales to foreign
companies; however, Luxtec has several foreign customers. The Company's external
sales,  based upon the customer's  country of origin by geographic  area for the
years ended June 30, 2004, 2003 and 2002, totaled  $46,065,000,  $44,015,000 and
$51,688,000  respectively  for  sales  in  the  United  States  and  $2,698,000,
$2,345,000 and $2,008,000, respectively, for sales to foreign companies.

14. RESTRUCTURING

In October  2001,  PrimeSource  engaged a  restructuring  agent to evaluate  the
Company's operations for possible reorganization.  In November 2001, the Company
commenced  with a  restructuring  plan  involving  narrowing  the  focus  of the
Company's  operations,   the  consolidation  of  certain  underperforming  sales
regions, the reduction of corporate overhead through workforce  reductions,  the
restructuring  of the Company's  balance sheet  through the  refinancing  of the
Company's and PrimeSource  Surgical's senior bank debt and the reduction of debt
levels through improved earnings.

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

In fiscal year 2003, the Company recorded  additional  severance amounts for the
resignation of its 2003 President and Chief Executive Officer, costs of probable
legal settlement for two former executive  officers and directors of the Company
and the sale of NEMS. Activity consists of the following:
<TABLE>
<CAPTION>
<BTB>
                                                             Loss on
                                              Employee      disposal        Other
                                              related      of division    contracts        Total

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

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

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



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

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

Balance, June 20, 2004                    $      -       $      -       $  43,726       $   43,726
                                          ==========     ===========    ==========      ===========


                                                                ******
</TABLE>
                                      F-26
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES.

    (a) Disclosure Controls and Procedures.  The Company's management,  with the
participation  of the  Company's  Chief  Executive  Officer and Chief  Financial
Officer,  has evaluated the effectiveness of the Company's  disclosure  controls
and procedures (as such term is defined in Rules  13a-15(e) and 15d-15(e)  under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of June
30, 2004.  Based on such evaluation,  the Company's Chief Executive  Officer and
Chief Financial  Officer have concluded that, as of June 30, 2004, the Company's
disclosure controls and procedures are effective.

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


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required  under this Item relating the  Executive  Officers is
incorporated   by   reference   from   the   material   captioned   "Directors",
"Identification of Executive Officers",  and "Section 16(A) Beneficial Ownership
Reporting  Compliance" in our definitive  proxy statement for our annual meeting
which will be filed  within 120 days after the end of the fiscal year covered by
this report.

ITEM 11. EXECUTIVE COMPENSATION

The  information  required under this Item is incorporated by reference from the
material  captioned  "Executive  Compensation" in our definitive proxy statement
for our annual  meeting which will be filed within 120 days after the end of the
fiscal year covered by this report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  Information  required under this Item is incorporated by reference from the
material captioned "Security Ownership of Management" and "Security Ownership of
Certain  Beneficial  Owners" in our  definitive  proxy  statement for our annual
meeting  which will be filed  within  120 days after the end of the fiscal  year
covered by this report.


                                       64
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required under this Item is incorporated by reference from the
material  captioned  "Certain  Relationships  and Related  Transactions"  in our
definitive  proxy  statement for our annual meeting which will be filed with 120
days after the end of the fiscal year covered by this report.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The  information  required under this Item is incorporated by reference from the
material captioned "Audit Fees" in our definitive proxy statement for our annual
meeting  which will be filed  within  120 days after the end of the fiscal  year
covered by this report.

                                       65
<PAGE>
                                     PART IV

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

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

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

       Independent Auditors' Report

       Consolidated Balance Sheets as of June 30, 2004 and June 30, 2003.

       Consolidated Statements of Operations
       for the years ended June 30, 2004, June 30, 2003 and June 30, 2002.

       Consolidated  Statements of Stockholders' Equity (Net Capital Deficiency)
       for the years ended June 30, 2004, June 30, 2003 and June 30, 2002.

       Consolidated Statements of Cash Flows for the years ended June 30, 2004,
       June 30, 2003 and June 30, 2002

       Notes to Consolidated Financial Statements

(2) Financial Statement Schedules - Schedule II


                                       66
<PAGE>
Schedule II
<TABLE>
<CAPTION>
<BTB>
                        VALUATION AND QUALIFYING ACCOUNTS

                                                      Additions
                                           --------------------------------
                                           Balance at the     Charged to                                      Balance at
                                            beginning of      costs and       Charged to                      the end of
                                                year           expenses      other amounts     Deductions      the year
FOR THE YEAR ENDED JUNE 30, 2003:
Accounts receivable allowances for
<S> <C>
     doubtful accounts                   $   400,373           $173,345      $    (92,964)     $  (266,859)   $  213,895
Inventory reserves for obsolescence        1,598,172            416,716           (80,869)        (827,787)    1,106,232
Deferred income tax valuation allowance    8,704,800                                              (191,500)    8,513,300
                                         -----------           --------      ------------       -----------    ---------


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

FOR THE YEAR ENDED JUNE 30, 2004:
Accounts receivable allowances for
     doubtful accounts                   $   213,895           $ 34,415                        $  (115,835)   $  132,475
Inventory reserves for obsolescence        1,106,232            159,406                           (595,232)      670,406
Deferred income tax valuation allowance    8,513,300                         $ (2,311,800)                     6,201,500
                                         -----------           --------      ------------       -----------    ---------


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

</TABLE>
                                       67
<PAGE>
3.       Exhibits
         --------

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

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

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

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

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

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

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

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

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

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

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

            3.11   Certificate  of Vote of Directors  Establishing a Series or a
                   Class of Stock, dated February 27, 2001 (Series B Convertible
                   Preferred  Stock).  (Incorporated  by  reference to Form 8-K,
                   File No. 0-14961, filed on March 16, 2001).

            3.12   Certificate  of Vote of Directors  Establishing a Series or a
                   Class of Stock, dated February 27, 2001 (Series C Convertible
                   Preferred  Stock).  (Incorporated  by  reference to Form 8-K,
                   File No. 0-14961, filed on March 16, 2001).

                                       68
<PAGE>

            3.13   Certificate  of Vote of Directors  Establishing a Series or a
                   Class  of  Stock,   dated   February   27,  2001   (Series  D
                   Exchangeable Preferred Stock).  (Incorporated by reference to
                   Form 8-K, File No. 0-14961, filed on March 16, 2001).

            3.14   Certificate  of  Correction  dated  March 2,  2001  (Series C
                   Convertible  Preferred Stock).  (Incorporated by reference to
                   Form 8-K, File No. 0-14961, filed on March 16, 2001).

            3.15   Certificate of Correction dated March 2, 2001.  (Incorporated
                   by reference to Form 8-K,  File No.  0-14961,  filed on March
                   16, 2001).

            3.16   Articles of Amendment to Articles of  Organization,  dated as
                   of June 27,  2001.  (Incorporated  by  reference to Form 8-K,
                   File No. 0-14961, filed on July 11, 2001).

            3.17   Certificate  of Vote of Directors  Establishing a Series or a
                   Class of Stock,  dated June 28,  2001  (Series E  Convertible
                   Preferred  Stock).  (Incorporated  by  reference to Form 8-K,
                   File No. 0-14961, filed on July 11, 2001).

            3.18   Certificate of Correction dated July 13, 2001.  (Incorporated
                   by reference to Form 10-K,  File No.  0-14961,  filed October
                   15, 2001).

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

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

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

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

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

            4.2    Registration  Rights  Agreement  made  as of  June  3,  1996,
                   between the Company and the  Purchasers  identified  therein.
                   (Incorporated  by reference to Form 10-Q,  File No.  0-14961,
                   filed September 13, 1996).

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


                                       69
<PAGE>

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

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

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

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

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

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

            10.5   Third  Amendment  to Amended and Restated  Credit  Agreement,
                   dated as of March 2, 2001, by and among PrimeSource Surgical,
                   Inc,  a  Delaware   corporation,   Bimeco,  Inc.,  a  Florida
                   corporation,  Ruby Merger Sub, Inc., a Delaware  corporation,
                   Luxtec Corporation,  a Massachusetts corporation and Citizens
                   Bank of  Massachusetts.  (Incorporated  by  reference to Form
                   10-Q, File No. 0-14961, filed May 21, 2001).

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

            10.7   Amended and Restated Loan and Security Agreement, dated March
                   2,  2001,  by and among  Luxtec  Corporation,  Fiber  Imaging
                   Technologies,  Inc., Cathtec Incorporated,  CardioDyne,  Inc.
                   and ARK CLO 2000-1,  Limited.  (Incorporated  by reference to
                   Form 10-Q, File No. 0-14961, filed May 21, 2001).

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


                                       70
<PAGE>

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

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

            10.11  Luxtec  Corporation  1995 Stock Option Plan for  Non-Employee
                   Directors.  (Incorporated by reference to Form 10-K, File No.
                   0-14961, filed January 27, 1996).

            10.12  Tucson Medical Corporation 1997 Stock Option / Stock Issuance
                   Plan, as amended. (Incorporated by reference to Schedule 14A,
                   File No. 0-14961, filed June 1, 2001).

            10.13  Unit Purchase  Agreement among PrimeSource  Healthcare,  Inc.
                   and the Purchasers  named in Schedule I thereto,  dated as of
                   June 28, 2001.  (Incorporated  by reference to Form 8-K, File
                   No. 0-14961, filed July 11, 2001).

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

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

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

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

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

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

                                       71
<PAGE>

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

            21.1   Subsidiaries of the Registrant.

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

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

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

         (b) Reports on Form 8-K:

             None.



                                       72

<PAGE>
                                   SIGNATURES
                                   ----------

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                           PRIMESOURCE HEALTHCARE, INC.

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


September 28, 2004
                                       73
<PAGE>
                   Pursuant to the  requirements of the Securities  Exchange Act
of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
<BTB>
Signature                                     Title                             Date
---------                                     -----                             ----
<S> <C>
/s/ William H. Lomicka                      Director                            September 28, 2004
----------------------
    William H. Lomicka


/s/ Larry H. Coleman                        Director                            September 28, 2004
---------------------------
    Larry H. Coleman


/s/ Joseph H. Potenza                                                           September 28, 2004
---------------------------                 President, Chief Executive
    Joseph H. Potenza                       Officer, Director, (Principal
                                            Executive Officer)


/s/ Shaun D. McMeans                                                            September 28, 2004
---------------------------                 Chief Operating Officer,
    Shaun D. McMeans                        Chief Financial Officer
                                            and Treasurer, Director,
                                            (Principal Accounting
                                             Officer)
</TABLE>

                                       74
<PAGE>