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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, 2001

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

For the transition period from to
------------ ------------

Commission File Number: 0-14961

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


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


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

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

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


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

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

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

The estimated aggregate market value of the voting Common Stock held by
non-affiliates of the registrant was $5,414,485 as of August 31, 2001. Because
PrimeSource's Common Stock is not listed or quoted on an exchange, this
computation is based on an estimated market value of $1.00 per share of Common
Stock as of August 31, 2001.

As of August 31, 2001, 8,013,590 shares of Common stock, $.01 par value, were
issued and outstanding.



DOCUMENTS INCORPORATED BY REFERENCE

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

None.






















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TABLE OF CONTENTS

Part I

Item 1. Business................................................................................... 4
Item 2. Properties................................................................................. 19
Item 3. Legal Proceedings.......................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders........................................ 19

Part II
Item 5. Market for Registrant's Common Shares and related Stockholder Matters...................... 21
Item 6. Selected Financial Data.................................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results.................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................. 35
Item 8. Financial Statements and Supplementary Data................................................ 36
Item 9. Changes In and Disagreements with Accountants on Accounting Disclosure..................... 64

Part III Item 10. Directors and Executive Officers of the Registrant......................................... 64
Item 11. Executive Compensation..................................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 72
Item 13. Certain Relationships and related Transactions............................................. 76

Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 77

Signatures ...................................................................................................... 82

Index to
Exhibits ...................................................................................................... 84
















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PART I

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

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

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


ITEM 1. BUSINESS

GENERAL

We are a leading specialty medical products sales, marketing, manufacturing and
service company. We sell a broad portfolio of specialty medical products, some
of which we manufacture, to hospitals and surgery centers nationwide through a
dedicated organization of sales and marketing professionals. We have expanded
rapidly through the acquisition and integration of a number of leading regional
specialty sales and marketing organizations and select specialty medical
products manufacturing companies. Since January 1998, we have acquired eleven
regional specialty sales and marketing organizations and one specialty medical
products manufacturer. We have consolidated and integrated each of the twelve
acquired businesses in order to create a uniform operational platform and to
help facilitate further expansion of our business. Today, we have two primary
businesses: Specialty Distribution Services, or SDS, and the Manufactured
Products Division, or Manufactured Products. As of August 31, 2001, we had 205
employees and generated total revenue of $51.0 million for the fiscal year
ending June 30, 2001.

On March 2, 2001, we completed a merger with PrimeSource Surgical, Inc., a
Delaware Corporation, or PrimeSource Surgical, resulting in PrimeSource Surgical
becoming our wholly-owned subsidiary. Pursuant to the Agreement and Plan of
Merger, dated November 27, 2000, as amended, or the Merger Agreement, the former
stockholders of PrimeSource Surgical received capital stock in our company
representing approximately 80% of the fully-diluted voting power of our common
stock in exchange for their PrimeSource Surgical capital stock. On June 22,
2001, our shareholders approved a motion to change our name from "Luxtec
Corporation" to "PrimeSource Healthcare, Inc."

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A report by our auditors, dated October 3, 2001, raises doubt about our ability
to continue as a going concern. This means that there is doubt that we can
continue with our proposed business operations for the next twelve months. To a
large extent, this doubt stems from our failure to be in compliance with the
terms of one of our credit agreements. We are in the process of renegotiating
the terms of this credit agreement and believe that following such
renegotiation, we will have sufficient funds to carry out our operations for the
next twelve months. We cannot assure, however, that we will be able to
renegotiate the terms of the credit facility on favorable terms, or at all, or
that we will have sufficient funds to carry out our operations for the next
twelve months even if we do. For additional information concerning our ability
to continue operating during the next twelve months, see the discussion under
the headings "Liquidity and Capital Resources" and "Risk Factors" in Item 7
"Management's Discussion and Analysis."

BUSINESS STRATEGY

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

* hiring experienced sales representatives;

* hiring and training college graduates as territory sales representatives;

* adding additional specialty product lines to our product offering;

* and by selectively acquiring companies in three primary areas:

* 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.

* Specialty medical products distributors - We expect to increase our
market share within the specialty medical products market by
acquiring leading local and regional specialty medical products
distributors, primarily in the surgical and critical care areas.

* Service providers - We expect to benefit from the acquisition of
select providers of key services to the specialty medical products
marketplace by increasing sales of acquired service providers through
use of our specialty sales and marketing organizations.

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

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* favorable industry demographics;

* increases in our market share;

* the acquisition of select specialty medical products manufacturers,
distributors and service providers;

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

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

INDUSTRY

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

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



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

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

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

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

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

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

PRODUCTS AND SERVICES

SPECIALTY DISTRIBUTION SERVICES

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

Within the Surgical segment, the primary specialties are:

* Cardio Vascular;

* Endoscopy;

* General Surgery; and

* Gynecology.

Within the Critical Care segment, the primary specialties are:

* Neonatal Intensive Care; and

* Maternal and Child Care.


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

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

THE MANUFACTURED PRODUCTS DIVISION

Through our Luxtec division, we design, manufacture and market 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 in an array of fiber optic
transilluminators utilized with Luxtec's surgical instruments. Luxtec also
markets replacement fiber optic cables and bulbs as well as 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

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comply with Underwriters Laboratories 544 medical safety standards and are
listed domestically with ETL Laboratories. Internationally, Luxtec works to
achieve compliance with as many international standards as necessary 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 most surgical procedures. The system is a very
small, lightweight, solid state television camera mounted at the front of a
headband, manufactured by Luxtec, and integrated with fiber optic illumination.

SALES AND MARKETING

We sell our products and services to acute care hospitals, clinics and surgery
centers. In fiscal 2001, within the SDS business, we sold specialty medical
products to over 3,000 customers, primarily in the United States and Canada. We
are not dependent on any single customer or geographic group of customers, with
no single customer accounting for more than 4% of our sales during fiscal 2001.

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 all
PrimeSource employees and are primarily compensated on a commission basis.

Through our Partnership Program, we offer individual hospitals, regional IDNs
and larger multi-facility hospital purchasing organizations the ability to
consolidate purchases of specialty medical products through a single source. The
Partnership Program offers customers several important benefits including the
ability to better manage their specialty medical products purchases across a
span of hospitals and the opportunity to lower their cost of procuring specialty
medical products and services by reducing the number of vendors through which
they purchase such products and services. Through the Partnership Program,
customers designate PrimeSource as their primary provider of specialty medical
products and services. In exchange, we provide those customers with clinical
expertise on specialty products and services spanning all of their facilities
while reducing the costs of procuring those specialty medical products and
services.

9

Within the Manufactured Products business, Luxtec is the market leader in
surgical headlights with an estimated 60,000 surgeons using their products on a
worldwide basis. Within the United States, the Luxtec fiber optic and
illumination products are primarily distributed through our sales force,
supported by Luxtec field specialists and a customer support team located in our
West Boylston facility. Internationally, Luxtec distributes through a network of
local distributors.

DISTRIBUTION

We believe that responsive delivery of quality specialty medical products and
supplies is a key element to providing complete customer satisfaction. Our
customers place orders for medical products and supplies by telephone or
facsimile or electronically. Our customer service call centers answer
approximately 95% of all calls by the third ring and have a call abandonment
rate of less than 2%. All orders are routed through our centralized computer
ordering, shipping and inventory management system, which is linked to each of
our distribution centers. We ship our medical products and supplies from two
primary and two secondary distribution centers. If an item is not available in
the distribution center nearest to the customer, the computer system facilitates
direct shipment of the item, if available from another center. Rapid and
accurate order fulfillment is a principal component of our value-added approach.
We estimate that 91% of our disposable, consumable product orders are shipped
complete within 24 hours. We estimate that we average only one error per every
1,150 orders.

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. Materials management is centralized with inventory levels
managed by a purchasing department using an integrated inventory control system.
Our inventory consists primarily of medical products and supplies.

MANUFACTURING AND SUPPLIERS

Vendor relationships are an integral part of our businesses. Our SDS business
represents more than 150 manufacturers with over 75% of sales concentrated among
approximately 25 key manufacturers. A majority of the SDS business is comprised
of stocking relationships whereby we stock the vendors products and provide
substantially all fulfillment services (i.e., customer service, shipping,
returns, etc.). The remainder of SDS revenue is received on an "agency" basis
whereby we do not stock the vendor's products and do not provide fulfillment
services. In the case of an agency sale, the manufacturer provides substantially
all fulfillment services for customers and we provide sales and marketing
support in helping facilitate the sale of the vendor's product. For providing
the sales and marketing support, we are paid a sales commission on each sale of
the vendor's products.

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

Our SDS 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 selected
group of distributors and are increasingly seeking to reduce the number of
distributors selling their products to end users in an effort to reduce the
overall costs associated with selling and marketing their products. We have been
successful in assisting manufacturers in their development and marketing plans
and in obtaining the exclusive rights to sell certain products. We believe that
our ability to capture and retain such distribution rights represents a barrier
to the entry of competitors.

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

INFORMATION SYSTEMS

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

* increased inventory utilization;

* greater visibility as to sales performance; and

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

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

COMPETITION

We compete with a variety of companies including manufacturers that utilize
direct sales forces, other national specialty distributors and a number of
significantly smaller local and regional specialty distributors. We compete to a
lesser degree with national med/surg distribution companies such as Cardinal
Health, Inc., McKesson HBOC, Inc. and Owens & Minor, Inc. A brief discussion of
each of the Company's competitors is as follows:

* 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.


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* National Specialty Distributors. In addition to PrimeSource, several other
companies serve the national specialty medical products market. These
national specialty distributors tend to focus and specialize within a
particular segment of the specialty medical products market. Management
believes that we are the only national specialty surgical distributor
focusing on the hospital operating room.

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

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

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

PATENTS AND TRADEMARKS

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

Patents
-------

* Patent No. 4516190 for Surgical Headlight issued May 7, 1985.
* Patent No. 4534617 for Fiber Optic Cable issued August 13, 1985.
* Patent No. 4616257 for Headlight Camera System issued October 7, 1986.
* Patent No. 4653848 for 45 degree and 90 degree Fiber Optic Cables issued
March 31, 1987.
* Patent No. 4797736 for Videolux Television Fiber Optic Headlight Camera
System issued January 10, 1989.
* Patent No. 5003605 for an electronically augmented stethoscope with timing
sound issued March 26, 1991.
* Patent No. 5220453 for telescopic spectacles with coaxial illumination
issued June 15, 1993.
* Patent No. 5295052 for a light source assembly issued March 15 1994.

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* Patent No. D345368 for surgical telescopes issued March 22, 1994.
* Patent No. 5331357 for an illumination assembly issued July 19, 1994.
* Patent No. D349123 for spectacles having integral illumination issued July
26, 1994.
* Patent No. D350760 for an eyeglass frame temple issued September 20, 1994.
* Patent No. 5392781 for blood pressure monitoring in noisy environments
issued February 28, 1995.
* Patent No. D415285 for Pinhole Headlamp Video Camera for Medical and
Surgical Applications issued October 12, 1999.
* Patent No. D398403 for Headband for Surgeons with Removable Headboard
Hanger issued September 15, 1998.
* Patent No. 6258037 for blood pressure monitoring in noisy environments
issued July 10, 2001.

Trademarks
----------

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

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

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

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GOVERNMENT REGULATION

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


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EMPLOYEES

As of August 31, 2001, we had approximately 205 employees, of which
approximately 75 are engaged in the Surgical segment, approximately 39 in the
Critical Care segment, approximately 57 in the Manufactured Products Division
and approximately 34 in corporate and shared services. None of our employees are
covered by a collective bargaining agreement. We believe our employee relations
are good. Executive Officers and Key Management Personnel

EXECUTIVE OFFICERS AND KEY MANAGEMENT PERSONNNEL

Following are the names and ages, as of August 31, 2001, of our, and our
principal subsidiaries, executive officers and key management personnel, their
positions and summaries of their backgrounds and business experience.



Name Age Position
---- --- --------

James L. Hersma 53 President and Chief Executive Officer and Director
John F. Rooney 38 EVP of Corporate Development and Chairman
Michael K. Bayley 41 EVP and Chief Financial Officer and Director
Gary L. Gregory 39 Senior Vice President of Marketing
Shaun D. McMeans 40 Vice President of Operations
Joseph H. Potenza 54 Vice President of Corporate Accounts
Patrick M. Rooney 35 Dir. of Information Technologies and Services
Margeret A. Terry 54 Manager of Human Resources
Donella J. Fones 30 Corporate Controller
Samuel M. Stein 61 General Manager, Luxtec Illumination Division
Bruce R. Hoadley 42 Regional Vice President, Surgical
Mark A. Jungers 49 Regional Vice President, Critical Care
Peter A. Miller 56 Regional Manager, Critical Care

JAMES L. HERSMA, PRESIDENT AND CHIEF EXECUTIVE OFFICER AND DIRECTOR - Mr. Hersma
has an extensive background in various sectors of the healthcare industry,
including distribution, manufacturing, information systems, services and
e-commerce. Mr. Hersma has served as our President and Chief Executive Officer
since December, 2000. Prior to joining PrimeSource in December 2000, Mr. Hersma
served as Executive Vice President and Director of Medibuy.com, a leading
healthcare e-commerce firm, from February 1999 to May 2000. Prior to Medibuy,
Mr. Hersma served as Chief Executive Officer of Novation, the largest GPO in the
United States with over $14 billion in annual purchases from January 1998 to
February 1999. He also served as President and Chief Operating Officer of CIS
Technologies, a NASDAQ listed healthcare information systems company, from
November 1993 to May 1996, and spent 17 years at Baxter and American Hospital
Supply in various sales, marketing and executive management roles. Mr. Hersma is
a graduate of Northern Illinois University and serves on the board of its
business school.

JOHN F. ROONEY, EXECUTIVE VICE PRESIDENT OF CORPORATE DEVELOPMENT AND CHAIRMAN -
Mr. Rooney has an extensive background in the medical device industry. Prior to
becoming our Executive Vice President of Corporate Development in December,
2001, Mr. Rooney served as the PrimeSource Surgical's President and Chief
Executive Officer. Prior to co-founding PrimeSource Surgical in June 1996, Mr.
Rooney served as a sales and marketing executive at Birtcher Medical Systems,
Inc., a Nasdaq listed company specializing in the manufacturing and marketing of
electrosurgery products. Mr. Rooney also served as an executive at Computer
Motion, Inc., a leader in medical robotic devices. Mr. Rooney graduated with
honors from the University of Montana in business administration.


15

MICHAEL K. BAYLEY, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AND
DIRECTOR - Mr. Bayley has an extensive background in the medical device
industry. Mr. Bayley has served our Company's Chief Financial Officer since
1996. Prior to co-founding PrimeSource Surgical in June 1996, Mr. Bayley was a
Vice President with Chase Manhattan Bank in New York City. Mr. Bayley helped
establish Chase's Health Care Services Finance Division and spent a number of
years in Chase's Merchant Banking and Private Equity Group where he helped
manage a number of the bank's portfolio companies. He has served as a board
member of a number of privately held companies. He graduated with honors from
the University of Arizona with a bachelor's degree in geological engineering,
and he earned his M.B.A. from the Fuqua School of Business at Duke University.

GARY L. GREGORY, SENIOR VICE PRESIDENT OF MARKETING - Mr. Gregory has an
extensive background in sales and marketing within the medical device industry.
Mr. Gregory has served as our Senior Vice President of Marketing since June
2001. Prior to joining PrimeSource in April 2000, Mr. Gregory served as the
Director of Strategic Marketing for Health Care Systems, a $5 billion division
of Johnson & Johnson. Prior to Johnson & Johnson, Mr. Gregory held senior sales
and marketing positions with Baxter Healthcare and Kendall Healthcare. Mr.
Gregory received his bachelor's degree in economics and business administration
from Pennsylvania State University.

SHAUN D. MCMEANS, VICE PRESIDENT OF OPERATIONS - Mr. McMeans has 15 years
experience in manufacturing and distribution businesses, specializing in
accounting and financial management. Prior to becoming our Vice President of
Operations in May 2001, Mr. McMeans served as the PrimeSources's Corporate
Controller. Prior to joining PrimeSource in April 2000, Mr. McMeans held a
number of operational and financial positions with Burnham Corporation, a
leading domestic manufacturer and distributor of residential and commercial
boilers for residential heating and commercial process applications. He holds a
bachelor's degree in accounting from Pennsylvania State University and is a
certified public accountant.

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

16

PATRICK M. ROONEY, DIRECTOR OF INFORMATION TECHNOLOGIES AND SERVICES - Mr.
Rooney has an extensive background in the information technology industry. Prior
to becoming our Director of Information Technologies and Services in May 2001,
Mr. Rooney was Manager of Information Systems at PrimeSource. Before joining
PrimeSource in May 1998, Mr. Rooney was a Software Systems Analyst for
Micrographic Technology in Mountain View, CA and Product Marketing Engineer in
the Microprocessor Division of Integrated Device Technology, a semiconductor
company of Santa Clara, CA. Mr. Rooney holds a bachelor degree from Montana
State University in Electrical Engineering. Mr. Rooney is the brother of Mr.
John Rooney, the Company's Executive Vice President of Corporate Development.

MARGARET A. TERRY, MANAGER OF HUMAN RESOURCES - Ms. Terry has a diverse
background in commercial banking as well as corporate administration and human
resources. Ms. Terry has served as our Manager of Human Resources since June
2000. Prior to joining PrimeSource in 1999 she held several corporate legal
positions in the software industry and most recently was Manager of HR Benefits
and Administration for MIDS, a leading healthcare software company. Ms. Terry
holds a bachelor degree in nursing from the University of Arizona and one in
management from the University of Phoenix.

DONELLA J. FONES, CORPORATE CONTROLLER - Ms. Fones has a diverse background in
finance and accounting. Prior to becoming our Corporate Controller in May 2001,
she served as PrimeSource's Assistant Controller. Prior to joining PrimeSource
in 1996, Ms. Fones served as Controller for Guthrie Latex's subsidiary,
Envirotech Enterprises. Ms. Fones holds a bachelor's degree in accounting and
finance from the University of Arizona and is a certified public accountant.

SAMUEL M. STEIN, GENERAL MANAGER, LUXTEC ILLUMINATION DIVISION - Mr. Stein has
an extensive background in the development of young, high growth, technically
oriented companies. Prior to becoming the General Manager of the Luxtec Division
in March 2001, Mr. Stein served as Luxtec's Chief Financial Officer. Prior to
joining Luxtec in 1993, Mr. Stein served as Chief Operating and Chief Financial
Officer of Mitrol, Inc. of which he was also co-founder. He has held the
position of Chief Financial Officer with companies ranging from young start-ups
to subsidiaries of Fortune 500 corporations. He holds a bachelor's degree in
Business Administration from the University of Toledo.

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


17

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

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




18

ITEM 2. PROPERTIES

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

Lease
Square Expiration
City, State Feet Date
----------- ------ --------
Tucson, Arizona................................... 25,544 02/28/05
Birmingham, Alabama............................... 25,913 12/31/01
Atlanta, Georgia.................................. 4,800 07/31/04
Guilford, Connecticut............................. 7,300 07/31/03
West Boylston, Massachusetts...................... 31,689 10/31/05
------
95,246
======
We believe that the all of our facilities are in satisfactory condition and
suitable for the particular purposes for which they were acquired or constructed
and are sufficient for the Company's current operations. The Company is
negotiating a lease for a new facility in Birmingham, Alabama. The new facility
will replace the existing Birmingham facility and lease expiring on December 31,
2001. The new facility is approximately 18,000 square feet in size and the
proposed lease term is five (5) years, commencing in December 2001.

ITEM 3. LEGAL PROCEEDINGS

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

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

Our annual meeting of stockholders was held on June 22, 2001. At the meeting,
the following items were submitted to a vote of the stockholders:

(1) the election of three Class I directors for a three-year term was
approved with the election of Larry H. Coleman receiving 14,024,709 votes in
favor, 35,480 votes against, 0 abstentions and 0 broker non-votes, the election
of William H. Lomicka receiving 14,025,634 votes in favor, 34,555 votes against,
0 abstentions and 0 broker non-votes, and the election of Nicholas C. Memmo
receiving 14,025,634 votes in favor, 34,555 votes against, 0 abstentions and 0
broker non-votes;

(2) an amendment to the our Articles of Organization increasing the
authorized number of shares of common stock from 10,000,000 to 50,000,000 was
approved with 13,998,580 votes in favor, 60,599 votes against,1,010 abstentions
and 0 broker non-votes;


19

(3) an amendment to the our Articles of Organization creating a new class
of preferred stock, no par value, with rights, privileges and preferences to be
determined by our board of directors, consisting of 10,000,000 shares was
approved with 13,241,869 votes in favor, 58,360 votes against, 2,000 abstentions
and 757,960 broker non-votes;

(4) an amendment to our Articles of Organization changing the
Corporation's name to "PrimeSource Healthcare, Inc." was approved with
14,012,300 votes in favor, 41,804 votes against, 6,085 abstentions and 0 broker
non-votes;

(5) an amendment to the our Articles of Organization altering certain of
the rights pertaining to our Series C Convertible Preferred Stock was approved
with 13,248,844 votes in favor, 50,645 votes against, 2,740 abstentions and
757,960 broker non-votes;

(6) the adoption of our Tucson Medical Corporation 1997 Stock Option/Stock
Issuance Plan, as amended, was ratified with 13,246,079 votes in favor, 52,740
votes against, 3,410 abstentions and 757,960 broker non-votes; and

(7) the appointment by our Board of Directors of Deloitte & Touche, LLP,
our independent auditors, was ratified with 14,038,442 votes in favor, 19,957
votes against, 1,790 abstentions and 0 broker non-votes.


20

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 the Company's Common Stock was delisted by the AMEX, the
closing price was $1.00.

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


Common Stock
---------------
High Low
---- ---

Fiscal Year Ended 10/31/99

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

Fiscal Year Ended 10/31/00

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



Our Common Stock is not currently listed on any public exchange or market. We
are evaluating various options with respect to the trading of our Common Stock
on a public market or exchange. We cannot assure that we will be able to
establish trading of our Common Stock on a public market or exchange.

As of August 31, 2001, there were approximately 534 holders of record of our
Common Stock. We estimate that there are approximately 1,400 beneficial holders
of our Common Stock.

We have not paid any cash dividends since our inception and the board of
directors does not contemplate doing so in the near future. The board of
directors currently intends to retain any future earnings for use in expanding
our business. We are limited in our ability to pay dividends. We may not declare
or pay any dividend without the consent of the holders of at least a majority of
each of our Series C Convertible Preferred Stock, and Series E Convertible
Preferred Stock. In addition, we may not declare or pay any dividend without the
consent of lenders.

21


On July 2, 2001, we issued and sold 325,000 units (the "Units"), each comprised
of a share of our Series E Convertible Preferred Stock and a warrant to purchase
five (5) shares of our Common Stock. We sold 200,000 Units to GE Capital Equity
Investments, Inc., 100,000 Units to Coleman Swenson Hoffman Booth IV L.P.,
20,000 Units to Webbmont Holdings, L.P. and 5,000 Units to William H. Lomicka.
The aggregate offering price for the Units was $3,250,000. Our sale of the Units
was exempt from registration with the Securities Exchange Commission pursuant to
Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder because the purchasers of the Units acquired the securities for their
own respective accounts and not with a view to distribution.

The Series E Preferred Stock is convertible, at the option of the holder thereof
at any time, into ten shares of our Common Stock, subject to adjustment. Each
share of our Series E Preferred Stock is subject to automatic conversion upon
our consummation of a firm commitment public offering or upon a date specified
by written consent of the holders of 66 2/3% of the outstanding shares of Series
E Preferred Stock. In addition, the shares of Series E Preferred Stock have a
mandatory redemption date of June 3, 2005. Each share of Series E Preferred
Stock has one vote for each share of our Common Stock into which it would be
convertible on all matters submitted to a vote of the holders of our Common
Stock. The warrants we issued as part of the Units are exercisable by the holder
thereof at any time prior to June 28, 2011, at an exercise price of $1.00 per
share, subject to adjustment.


22

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below has been derived from
historical audited consolidated financial statements of the Company for each of
the five years in the period ended June 30, 2001. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and the notes thereto. Data is in thousands except per share data.





OPERATING DATA: YEAR ENDED JUNE 30
--------------------------------------------------------------------------------
2001(6) 2000(4)(5) 1999(3) 1998(2) 1997(1)
------- ---------- ------- ------- -------


NET SALES . . . . . . . . . . $51,032 $54,411 $15,114 $6,362 $763

NET LOSS. . . . . . . . . . . $(4,382) $(1,384) $(744) $(116) $(75)

NET LOSS PER SHARE. . . . . . $(1.03) $(.41) $(0.17) $(0.04) -



BALANCE SHEET DATA: YEAR ENDED JUNE 30
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------- ---------- ------- ------- -------



TOTAL ASSETS. . . . . . . . . . . . $45,450 $31,297 $30,380 $7,261 $758

LONG-TERM OBLIGATIONS. . . $20,335 $15,968 $1,516 $776 $4,000

STOCKHOLDERS' EQUITY (CAPITAL
DEFICIENCY). . . . . $(562) $(567) $2,622 $3,646 $580


(1) Represents financial data for the period from July 25, 1996 (inception)
through June 30, 1997.

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

(3) In July 1999, PrimeSource Surgical acquired four entities for $17,000,000.
In March 1999, PrimeSource Surgical acquired an entity for approximately
$196,000. The acquisitions were accounted for using the purchase method of
accounting, and the results of operations of the acquired entities have been
included in the consolidated financial statements from the date of acquisition.

23


(4) 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 audited financial statements from the
date of acquisition.

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

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

24

OPERATING DATA: (In thousands, except per share 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 the Company's
consolidated financial statements and the notes thereto.



SEP-30, DEC-31, MAR-31, JUN-30, SEP-30, DEC-31, MAR-31, JUN-30,
1999 1999 2000 2000 2000 2000 2001 2001
---- ---- ---- ---- ---- ---- ---- ----
(1)

Net Revenues $14,322.9 $14,153.8 $13,658.6 $ 12,275.8 $12,504.9 $ 11,436.0 $12,691.6 $14,399.1
Cost of Sales 9,354.9 9,333.9 9,145.8 8,728.0 8,413.7 8,524.9 8,362.8 10,153.7
------- ------- ------- ------- ------- ------- ------- --------
Gross Profit $ 4,968.0 $ 4,819.9 $ 4,512.8 $ 3,547.8 $ 4,091.2 $ 2,911.1 $ 4,328.8 $ 4,254.4
======== ======== ======== ======== ======== ======== ======== ========


Net Income (Loss) $ 338.2 $ 189.7 $ (27.3) $(1,884.3) $ (148.7) $(2,702.3) $ (639.1) $ (892.1)
Net Income (Loss) per share $ .10 $ .05 $ (.01) $ (.57) $ (.05) $ (.94) $ (.14) $ (.19)


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

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

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


25

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

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

In October 2001 we engaged a restructuring agent to evaluate our operations for
possible reorganization. We have not determined the impact if any, of any
possible reorganization on our financial statements.

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, 1999, 2001 and
1999.


2001 2000 1999
--------------- ------------------ ------------------

NET SALES 100.0% 100.0% 100.0%
COST OF SALES 69.5% 67.2% 69.0%
GROSS PROFIT 30.5% 32.8% 31.0%
SELLING, GENERAL AND ADMIN. EXPENSE 36.9% 31.1% 34.1%
INTEREST EXPENSE 1.8% 2.0% 1.6%
------- ------ ------
NET LOSS (8.6%) (2.5%) (4.9%)

FISCAL 2001 COMPARED WITH FISCAL 2000

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

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

GROSS PROFIT: Gross Profit decreased to $15,576,523 or 30.5% of net sales for
fiscal 2001, as compared to $17,848,431 or 32.8% of net sales for fiscal 2000.
The production in gross profit is primarily due to lower sales levels. The
reduction in gross profit margins is primarily due to the loss of several higher
margin product lines during fiscal 2001 as well as an increase in the amount of
lower-margin capital equipment sales.

26

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

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

NET LOSS: Our net loss increased to $4,382,164 during fiscal 2001, compared to
$1,383,654 during fiscal 2000, an increase of $2,998,510 or 215%. Our net loss
increased in fiscal 2001 as a result of lower net sales and gross profits and
increased operating expenses.

FISCAL 2000 COMPARED WITH FISCAL 1999

NET SALES: Net sales of $54,411,055 for fiscal 2000 were $39,296,818 or 260%
higher than the $15,114,237 reported for fiscal 1999. The increase in net sales
in fiscal year 2000 was primarily a result of our having completed a significant
acquisition in June 1999.

COST OF SALES: Cost of sales increased to $36,562,624 for fiscal 2001 compared
to $10,427,563 for fiscal 1999. The cost of sales for fiscal 2000 was 67.2% of
net sales compared to 69.0% of net sales for fiscal 2000. The increase in cost
of sales in fiscal year 2000 was primarily a result of our having completed a
significant acquisition in June 1999. The decrease in the cost of sales as a
percent of net sales in fiscal year 2000 was largely a result of the
contribution of higher margin product lines from the June 1999 acquisition.

GROSS PROFIT: Gross Profit increased to $17,848,431 or 32.8% of net sales for
fiscal 2000, as compared to $4,686,674 or 31.0% of net sales for fiscal 1999.
The increase in gross profit in fiscal year 2000 was primarily a result of our
having completed a significant acquisition in June 1999. The increase in the
gross profit as a percent of net sales in fiscal year 2000 was largely a result
of the contribution of higher margin product lines from the June 1999
acquisition.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and administrative
expense increased to $16,940,243 for fiscal 2000, compared to $5,160,642 for
fiscal 1999. The increase in expenses in fiscal year 2000 was primarily a result
of our having completed a significant acquisition in June 1999.

INTEREST EXPENSE: Interest expense increased to $1,104,115 during fiscal 2000,
compared to $240,112 during fiscal 1999, an increase of $864,003. Our interest
cost increase was primarily the result of increased borrowings related to our
June 1999 acquisition.

NET LOSS: Our net loss increased to $1,383,654 during fiscal 2000, compared to
$744,384 during fiscal 1999, an increase of $639,270 or 86%. Our net loss
increased in fiscal 2000 as a result of increased operating expenses and
interest expense.

27

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2001, we had a working capital deficit of ($6,309,266) compared to a
deficit of ($984,066) at June 30, 2000. The increase in our working capital
deficit was primarily a result of the reclassification of all debt to current
liabilities as a result of the factors discussed below. Operating losses during
the twelve month period ended June 30, 2001 were primarily offset by proceeds
from preferred stock offerings.

On March 2, 2001, we entered into an Amended and Restated Security and Loan
Agreement, or, the "Luxtec Credit Agreement," for a $2,500,000 line of credit,
or, the "Luxtec Line of Credit," with ARK CLO 2000-1 LIMITED, or, ARK. The
maximum amount available to borrow under the Luxtec Line of Credit is limited to
the lesser of $2,500,000 or a certain percentage of accounts receivable and
inventory, as defined. Borrowings bear interest at ARK's prime rate (6.75% at
June 30, 2001) plus 2.0%. Unused portions of the Luxtec Line of Credit accrue a
fee at an annual rate of 1.00%. Borrowings are secured by substantially all of
our assets, excluding assets held by PrimeSource Surgical. At June 30, 2001,
there was no availability under the Luxtec Line of Credit. Borrowings under the
Luxtec Line of Credit are payable upon maturity on March 31, 2005.

On March 2, 2001, as part of the Luxtec Credit Agreement, we executed an Amended
and Restated Term Note, or the "Luxtec Term Note," in the amount of $300,000
with ARK. The Luxtec Term Note bears interest at prime (6.75% at June 30, 2001)
plus 0.5% and is secured by substantially all of our assets, excluding the
capital stock of, and assets held by, PrimeSource Surgical. The Term Note
requires monthly principal payments of $10,000 commencing on March 31, 2001. The
Luxtec Term Note matures on March 31, 2002. At June 30, 2001, we had outstanding
borrowings of $250,000 under the Luxtec Term Note.

On March 2, 2001, as part of the Luxtec Credit Agreement, we executed an Amended
and Restated Equipment Note, or, the "Luxtec Equipment Note," in the amount of
$131,000 with ARK. Borrowings bear interest at the bank's prime rate (6.75% at
June 30, 2001) plus 1.0% and are secured by substantially all of our assets,
excluding the capital stock of, and assets held by, PrimeSource Surgical. The
Luxtec Equipment Note requires monthly principal payments of $8,333 commencing
on March 31, 2001. The Luxtec Equipment Note matures on June 30, 2002. At June
30, 2001, we had outstanding borrowings of $89,191 under the Luxtec Equipment
Note.

The Luxtec Credit Agreement contains covenants that require the maintenance of
defined financial ratios and income levels and limit additional borrowings and
capital expenditures. The Company was in compliance with these financial
covenants or had received all required waivers as of June 30, 2001. Subsequent
to June 30, 2001, the Company negotiated and executed an amendment to revise
some of the financial covenants in the Luxtec Credit Agreement. Management
believes that they will be able to meet the revised covenants in the Luxtec
Credit Agreement for the fiscal year ended June 30, 2002.

On June 14, 1999, our wholly-owned subsidiary, PrimeSource Surgical entered into
an Amended and Restated Credit Agreement, or the "PrimeSource Surgical Credit
Agreement" with Citizens Bank of Massachusetts, or Citizens for a line of
credit, or the "PrimeSource Surgical Line of Credit." The maximum amount
available to borrow under the PrimeSource Surgical Line of Credit is limited to
the lesser of $12,000,000 or a certain percentage of accounts receivable and

28


inventory, each as defined by the PrimeSource Surgical Credit Agreement
(approximately $7,370,000 at June 30, 2001). Borrowings bear interest at
Citizen's prime rate (6.75% at June 30, 2001) plus 0.75%. Unused portions of the
PrimeSource Surgical Line of Credit accrue a fee at an annual rate of 0.375%.
Borrowings are secured by substantially all assets directly held by PrimeSource
Surgical. At June 30, 2001, there was $843,373 of availability under the
PrimeSource Surgical Line of Credit. Borrowings under the PrimeSource Surgical
Line of Credit are payable upon maturity in June 2003.

On June 14, 1999, as part of the PrimeSource Surgical Credit Agreement,
PrimeSource Surgical executed an Amended and Restated Term Note, or, the
"PrimeSource Surgical Term Loan" in the original amount of $5,000,000 with
Citizens. The PrimeSource Surgical Term Loan is collateralized by substantially
all of the assets directly held PrimeSource Surgical. The PrimeSource Surgical
Term Loan bears interest at Citizen's prime rate (6.75% at June 30, 2001) plus
0.75%. The PrimeSource Surgical Term Loan requires monthly principal payments of
$95,834 through June 2001, $112,500 between July 2001 and June 2002 and $133,334
between July 2002 and June 2003. The PrimeSource Surgical Term Loan matures on
June 1, 2003. At June 30, 2001, PrimeSource Surgical had outstanding borrowings
of $2,904,709 under the PrimeSource Surgical Term Loan.

The PrimeSource Surgical Credit Agreement contains covenants that require the
maintenance of defined financial ratios and income levels and limit additional
borrowings and capital expenditures. Although PrimeSource Surgical was in
compliance with those financial covenants or had received all required waivers
as of June 30, 2001, management believes it will need to amend certain financial
covenants under the PrimeSource Surgical Credit Agreement in order to avoid a
default during fiscal 2002. Management has initiated discussions with Citizens
concerning restructuring and refinancing PrimeSource Surgical's credit
facilities so that PrimeSource Surgical will not be in default. We cannot assure
that we will be successful in restructuring and refinancing PrimeSource
Surgical's credit facilities or amending the PrimeSource Surgical Credit
Agreement. In the event that we are not successful in restructuring and
refinancing PrimeSource Surgical's credit facilities or amending the PrimeSource
Surgical Credit Agreement, we may not be able to meet the financial covenants in
the PrimeSource Surgical Credit Agreement for the fiscal year ended June 30,
2002.

The principal source of short-term borrowings are the Luxtec Line of Credit and
the PrimeSource Surgical Line of Credit, comprised of separate $2,500,000 and
$12,000,000 revolving credit facilities with available borrowings at June 30,
2001 of $1,225,000 and $7,370,000, respectively. The Luxtec Line of Credit is
secured by all of our assets other than those held by PrimeSource Surgical. The
PrimeSource Surgical Line of Credit is secured by substantially all assets held
directly by PrimeSource Surgical and certain of its subsidiaries. At June 30,
2001, both lines of credit utilized a significant portion of their respective,
available borrowing bases. The interest rates on the lines of credit as of June
30, 2001 were 8.75% and 7.5%, respectively. The balances outstanding under the
Luxtec Line of Credit and the PrimeSource Surgical Line of Credit at June 30,
2001 were $1,249,667 and $6,526,627, respectively.


29

On July 2, 2001, we raised $3,250,000 in additional equity capital through the
issuance and sale of the Units comprised of Series E Preferred Stock and
warrants to purchase Common Stock. The proceeds from the offering were used to
pay certain trade payables and to reduce outstanding borrowings under the
PrimeSource Surgical Line of Credit.

Management is currently engaged in discussions with current investors and
potential new investors concerning additional investments in our equity
securities. In addition, management is in discussions with our lenders and new
lenders concerning a restructuring and refinancing of our credit facilities. We
cannot assure, however, that we will be successful in restructuring and
refinancing our credit facilities or that current investors or potential new
investors will make additional equity investments in us. In that event, we may
not have sufficient funds to continue our operations for the next twelve months.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS.
SAB No. 101 summarizes some views of the SEC on applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements. The SEC believes that revenue is realized or realizable and earned
when all of the following criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
seller's price to the buyer is fixed or determinable and collectibility is
reasonable assured. The Company believes that its current revenue recognition
policy complies with the SEC guidelines.

In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB OPINION NO.
25. This interpretation provides guidance on the application of Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
including (i) the definition of an employee, (ii) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (iii) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award and (iv) the accounting for an exchange of stock compensation
awards in a business combination. The interpretation is effective July 1, 2000
and the effects of applying the interpretation are recognized on a prospective
basis. The adoption of this interpretation did not have a material impact on the
Company's results of operations or financial condition.

In September 2000, the FASB issued SFAS No. 140, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, a replacement
of SFAS No. 125. This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The Company does not expect the adoption of SFAS No.
140 to have a material impact on the results of its operations or financial
position.

30

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS. SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The Company is required to implement
SFAS No. 141 on July 1, 2001 and it has not determined the impact, if any, that
this statement will have on its consolidated financial position or results of
operations.

In June 2001, the FASB also issued SFAS No. 142 GOODWILL AND OTHER INTANGIBLE
ASSETS, which is effective for the Company on July 1, 2002. SFAS No. 142
requires, among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company is currently assessing but has
not yet determined the impact of SFAS No. 142 on the Company's financial
position and results of operations.

RISK FACTORS

OUR AUDITORS HAVE RAISED DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN BECAUSE WE MAY NOT BE ABLE TO ACHIEVE OUR OBJECTIVES AND WE MAY HAVE TO
SUSPEND OR CEASE OPERATIONS. Our independent auditors have included an
explanatory paragraph in their opinion regarding certain issues which raise
doubt about our ability to continue as a going concern. This means that there is
substantial doubt that our cash flow from operations and cash available from
external financing will be sufficient to meet our working capital requirements.
Additionally, we expect to be in default of covenants contained in the
PrimeSource Surgical Credit Agreement during fiscal 2002. As a result, Citizens
can terminate the PrimeSource Surgical Term Loan and the PrimeSource Surgical
Line of Credit and accelerate repayment of borrowings under those facilities. We
believe that if we do not raise additional capital and enter into a new credit
agreement to replace, or amend, the PrimeSource Surgical Credit Agreement,
Citizens may accelerate our repayment obligations and we will not be able to
continue our business operations. Moreover, we cannot assure, even if Citizens
does not accelerate our repayment obligations, that we will have sufficient
funds to continue our operations.

THE INDUSTRY IN WHICH WE PARTICIPATE IS INCREASINGLY COMPETITIVE WHICH
COULD MAKE IT MORE DIFFICULT FOR US TO IMPROVE OUR FINANCIAL PERFORMANCE. The
changing health-care environment in recent years has led to increasingly intense
competition among health-care suppliers. Competition is focused on price,
service and product performance. Pressure in these areas is expected to
continue. Increased competition may lead to price and other forms of competition
that could have a material adverse effect on our market share, business and
results of operations. Also, we may face increased competition for acquisition
opportunities, which may inhibit our ability to consummate suitable acquisitions
on favorable terms.

31

WE MAY NOT BE ABLE TO IDENTIFY OR INTEGRATE ACQUISITIONS OR MANAGE OUR
GROWTH WHICH WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Our strategy for
growing our business includes identifying and pursuing acquisition
opportunities. Identifying and pursuing acquisition opportunities, integrating
acquired products and businesses, and managing growth requires a significant
amount of management time and skill. Acquisitions may expose us to the following
risks, among others:

* diversion of our management's attention;
* the inability to integrate acquired companies' into our
operations;
* the assumption of liabilities;
* an adverse affect on our liquidity; and
* dilution to our current stockholders.

We cannot assure that we will be effective in identifying and effecting
attractive acquisitions, assimilating acquisitions or managing future growth.
The failure to do so may have a material adverse effect on our business,
operating results and financial condition.

OUR COMMON STOCK IS NOT LISTED ON AN EXCHANGE WHICH MAKES IT DIFFICULT FOR
OUR STOCKHOLDERS TO SELL THEIR STOCK. Although we are a public reporting
company, our shares of capital stock are not listed on any stock exchange or
quoted on any quotation system. We cannot assure that holders of our capital
stock will be able to dispose of their shares.

PROVISIONS IN OUR ARTICLES OF INCORPORATION AND BY-LAWS COULD MAKE IT
HARDER FOR A THIRD PARTY TO ACQUIRE CONTROL OF US AND COULD DETER AN
ACQUISITION. Provisions of our Articles of Organization, as amended, and the
Amended and Restated By-Laws of the Massachusetts Business Corporation Law could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. Our Board
of Directors has the authority to issue shares of preferred stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by our
stockholders, subject to certain limitations. The rights of the holders of our
Common Stock may be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that we may issue in the future. The issuance
of preferred stock by us may have the effect of delaying, deferring or
preventing a change of our control without further action by our stockholders
and may adversely affect the voting and other rights of the holders of our
Common Stock. In addition, our Articles of Organization do not permit cumulative
voting. Further, our Board of Directors is divided into three classes, each of
which serves for a staggered three-year term, which may also make it more
difficult for a third-party to gain control of our Board of Directors.

32

PRIMESOURCE SURGICAL HAS A LIMITED OPERATING HISTORY, WHICH MAKES IT
DIFFICULT TO PREDICT ITS FUTURE PERFORMANCE. PrimeSource Surgical, which is a
material subsidiary of the Company, commenced operations in 1996, and has grown
rapidly through the acquisition of a number of specialty medical products sales
and marketing organizations. Accordingly, PrimeSource Surgical has only a
limited operating history from which to evaluate and forecast its business. As a
result of PrimeSource Surgical's limited operating history, we may be unable to
accurately forecast financial results going forward. Moreover, failure to meet
our revenue, targets and financial projections may have an immediate and
negative impact on our total results of operations.

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

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

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

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

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

33

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

GOVERNMENTAL OR PRIVATE INITIATIVES TO REDUCE HEALTHCARE COSTS COULD HAVE
A MATERIAL ADVERSE EFFECT ON THE SPECIALTY MEDICAL PRODUCTS INDUSTRY. The
primary trend in the United States healthcare industry is toward cost
containment. Comprehensive government healthcare reform intended to reduce
healthcare costs, the growth of total healthcare expenditures and expanded
healthcare coverage for the uninsured have been proposed in the past and may be
considered again in the near future. Implementation of government healthcare
reform may adversely affect specialty medical products companies, which could
decrease the business opportunities available to us. In addition, the increasing
use of managed care, centralized purchasing decisions and consolidations among,
and integration of, healthcare providers are continuing to affect purchasing and
usage patterns in the healthcare system. Decisions regarding the use of
specialty medical products are increasingly being consolidated into group
purchasing organizations, regional integrated delivery systems and similar
organizations and are becoming more economically focused, with decision makers
taking into account the cost of the product and whether a product reduces the
cost of treatment. Significant cost containment initiatives adopted by
government or private entities could have a material adverse effect on the
business of the Company.

IF WE ISSUE ADDITIONAL CAPITAL STOCK OUR CURRENT STOCKHOLDERS RIGHTS MAY
BE ADVERSELY AFFECTED. We may issue additional securities which would dilute the
ownership interests of our current stockholders. The terms and preferences of
any securities we may issue could be superior to those of our currently
outstanding capital stock. Current stockholders' rights to dividends and upon
liquidation may be adversely affected. We may undertake business combination
transactions wherein we would issue equity as consideration. Such transactions
would have a dilutive effect on our stockholders.

OUR MAJOR STOCKHOLDER HAS SUBSTANTIAL CONTROL OF US AND COULD DELAY OR
PREVENT A CHANGE IN CONTROL THAT STOCKHOLDERS MAY BELIEVE WOULD IMPROVE
MANAGEMENT AND/OR OUR BUSINESS. As a result of its ownership of Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred 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.

OUR LACK OF AUDITED FINANCIAL STATEMENTS FOR CERTAIN OF OUR INDIRECT
SUBSIDIARIES COULD, AMONG OTHER THINGS, PRECLUDE THE EXERCISE OF OPTIONS GRANTED
BY US AND LIMIT OUR ABILITY TO USE OUR STOCK IN ACQUISITIONS. Because
PrimeSource Surgical does not have stand alone audited financial statements for
the four subsidiaries it acquired in June 1999, or the "HTD Subsidiaries," for
periods prior to that acquisition, we will not be able to use any effective
registration statement or file any new registration statements until the audited
financial statements for the HTD Subsidiaries are filed with the SEC or such
financial statements are no longer required to be filed. We believe that we will

34

not be able to use or file a registration statement until after the completion
of our June 2002 audit, although there is a possibility that we could use or
file registration statements after the completion of our June 2001 audit. The
inability to use or file registration statements, among other things, would
prevent the exercise of options granted by us and limit our ability to use our
stock in acquisitions until the audited financial statements of the HTD
Subsidiaries are filed with the SEC or such financial statements are no longer
required to be filed.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our market risk exposure relates to outstanding debt. The balance of outstanding
bank debt at June 30, 2001 is approximately $11,020,194, 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.


35

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PRIMESOURCE HEALTHCARE, INC. and Subsidiaries


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




Independent Auditors' Report.............................................F-1

Consolidated Balance Sheets as of June 30, 2001 and 2000..............F-2 - F-3

Consolidated Statements of Operations for the Years Ended
June 30, 2001, 2000 and 1999.............................................F-4

Consolidated Statements of Stockholders' Equity (Capital
Deficiency) for the Years Ended June 30, 2001, 2000 and 1999.............F-5

Consolidated Statements of Cash Flows for the Years Ended
June 30, 2001, 2000 and 1999..........................................F-6 - F-7

Notes to Consolidated Financial Statements............................F-8 - F-27





36

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, 2001 and 2000,
and the related consolidated statements of operations, stockholders' capital
deficiency, and cash flows for each of the three years in the period ended June
30, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of PrimeSource Healthcare, Inc. and
subsidiaries as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001 in conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements at June 30, 2001, the Company would not have
been in compliance with certain covenants of one of its loan agreements had the
lender not temporarily waived the covenants. The Company is attempting to
negotiate the terms and covenants of the loan agreement and is also seeking
other sources of long-term financing. The Company's difficulties in meeting its
loan agreement covenants and financing needs, its recurring losses, and
stockholders' capital deficiency raise substantial doubt about its ability to
continue as a going concern. Management's plan concerning these matters is also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.


Deloitte & Touche, LLP
Phoenix, Arizona

October 11, 2001

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000

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

ASSETS 2001 2000

CURRENT ASSETS:

Cash and cash equivalents $ 622,623 $ 126,690
Accounts receivable - net of allowance for doubtful accounts
of approximately $622,000 (2001) and $427,000 (2000) 8,771,207 7,396,800
Inventories - net 9,821,232 6,268,248
Income taxes receivable 836,116
Prepaid expenses and other current assets 152,260 244,797
------------- -------------

Total current assets 19,367,322 14,872,651

PROPERTY, PLANT, AND EQUIPMENT - net 1,635,390 866,277

INTANGIBLE ASSETS - Net of accumulated amortization
of approximately $62,000 (2001) and $42,000 (2000) 140,479 137,629

GOODWILL - Net of accumulated amortization
of approximately $2,167,000 (2001) and $1,030,000 (2000) 23,844,720 14,935,044

OTHER ASSETS 462,043 485,628
------------- -------------

TOTAL $ 45,449,954 $ 31,297,229
============= =============


(Continued)


F-2

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND 2000

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

LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY 2001 2000

CURRENT LIABILITIES:

Accounts payable $ 11,269,607 $ 6,260,934
Accrued expenses 2,783,516 1,105,096
Customer deposits 532,557 153,101
Income taxes payable 9,500
Lines of credit 7,776,294 7,157,714
Current portion of long-term debt 3,259,885 1,150,003
Current portion of capital lease obligations 45,229 29,869
------------- -------------

Total current liabilities 25,676,588 15,856,717
------------- -------------

CAPITAL LEASE OBLIGATIONS - Net of current portion 72,339 12,330
------------- -------------

LONG-TERM DEBT - Net of current portion 84,015 2,837,387
------------- -------------

WARRANT PUT OBLIGATION 95,000 267,000
------------- -------------

COMMITMENTS AND CONTINGENCIES

SERIES C REDEEMABLE, CONVERTIBLE PREFERRED STOCK - $1.00 par value - authorized,
344,864 shares; issued and outstanding, 344,864 (2001) and 281,311 (2000)
shares; aggregate liquidation preference of $17,803,482 (2001) and
$14,206,206 (2000) 15,134,235 12,850,960
------------- -------------

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

STOCKHOLDERS' CAPITAL DEFICIENCY:
Series B convertible preferred stock, $1.00 par value - authorized, 46,889
shares (2000); issued and outstanding, 46,889 shares (2000);
aggregate liquidation preference of $1,195,543 (2000) 1,195,543
Common stock, $0.01 par value - authorized, 50,000,000 shares;
issued and outstanding, 7,959,704 (2001) and 2,874,166
(2000) shares 79,597 28,742
Additional paid-in capital 8,434,697 1,523,186
Accumulated deficit (9,075,914) (3,274,636)
------------- -------------

Total stockholders' capital deficiency (561,620) (527,165)
------------- -------------

TOTAL $ 45,449,954 $ 31,297,229
============= =============

See notes to consolidated financial statements (Concluded)

F-3


PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
------------------------------------------------------------------------------------------------------------------------------------


2001 2000 1999


NET SALES $ 51,031,610 $ 54,411,055 $ 15,114,237

COST OF SALES 35,455,087 36,562,624 10,427,563
-------------- -------------- --------------

GROSS PROFIT 15,576,523 17,848,431 4,686,674
-------------- -------------- --------------

OPERATING EXPENSES:
Selling, general, and administrative expenses 18,813,441 16,940,243 5,160,642
Restructuring expenses 1,031,011
-------------- -------------- --------------

Total operating expenses 18,813,441 17,971,254 5,160,642
-------------- -------------- --------------
OPERATING LOSS (3,236,918) (122,823) (473,968)

INTEREST EXPENSE (920,862) (1,104,115) (240,112)

OTHER EXPENSE (11,184) (115,716) (30,304)
-------------- -------------- --------------

LOSS BEFORE INCOME TAX PROVISION (4,168,964) (1,342,654) (744,384)

INCOME TAX PROVISION (213,200) (41,000)
-------------- -------------- --------------

NET LOSS (4,382,164) (1,383,654) (744,384)

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

NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS $ (5,801,278) $ (2,339,135) $ (744,384)
============== ============== ==============

LOSS PER SHARE:
Basic $ (1.37) $ (0.69) $ (0.17)
============== ============== ==============

Diluted $ (1.37) $ (0.69) $ (0.17)
============== ============== ==============


See notes to consolidated financial statements.

F-4

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
YEARS ENDED JUNE 30, 2001, 2000, AND 1999

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


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


BALANCE, JULY 1, 1998 876,724 $ 583,571 5,838,535 $ 5,839 $ 3,247,945 $ (191,117) $3,646,238 $3,646,238
Effect of .744183-for-1 reverse stock
split and change in par value (850,627) (1,493,645) 37,611 (37,611)
Issuance of preferred stock 18,500 621,500 621,500 621,500
Exercise of preferred stock warrants 2,646 889 889 889
Issuance of common stock 231,837 2,318 290,707 293,025 293,025
Repurchase of common stock (1,160,925) (11,609) (1,183,391) (1,195,000 (1,195,000)
Net loss (744,384) (744,384) (744,384)
-------- --------- --------- -------- ----------- ----------- ------------ ---------
BALANCE, JUNE 30, 1999 47,243 1,205,960 3,415,802 34,159 2,317,650 (935,501) 2,622,268 2,622,268
Repurchase of preferred stock (354) (10,417) (10,417) (10,417)
Issuance of common stock 260,227 2,602 434,501 437,103 437,103
Repurchase of common stock (1,036,398) (10,364) (1,268,220) (1,278,584) (1,278,584)
Exercise of stock options 234,535 2,345 39,255 41,600 41,600
Preferred stock dividends (955,481) (955,481) (955,481)
Net loss 1,383,654) (1,383,654) (1,383,654)
-------- --------- --------- -------- ----------- ----------- ------------ ---------
BALANCE, JUNE 30, 2000 46,889 1,195,543 2,874,166 28,742 1,523,186 (3,274,636) (527,165) (527,165)
Issuance of common stock in and
effect of reverse merger 3,335,000 33,350 4,649,905 4,683,255 4,683,255
Issuance of common stock 578,324 5,783 1,077,785 1,083,568 1,083,568
Conversion of preferred stock to common(46,889) (1,195,543) 1,172,214 11,722 1,183,821
Preferred stock dividends (1,419,114) (1,419,114) (1,419,114)
Net loss (4,382,164) (4,382,164) (4,382,164)
-------- --------- --------- -------- ----------- ----------- ------------ ---------
BALANCE, JUNE 30, 2001 - $ - 7,959,704 $ 79,597 $ 8,434,697 $9,075,914) $ (561,620) $(561,620)
======== ========= ========= ======== =========== =========== ============ =========


See notes to consolidated financial statements.

F-5

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999

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

2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss $(4,382,164) $(1,383,654) $ (744,384)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,727,082 1,210,506 409,410
Loss on sale of subsidiary 731,947 41,594
Change in fair value of warrant put obligation (172,000) 124,000
Loss on disposal of property, plant, and equipment 8,179
Issuance of common stock for services 25,132
Changes in operating assets and liabilities - net of
effect of business acquisitions and dispositions:
Accounts receivable 873,575 (856,749) (686,703)
Inventories (822,554) (555,764) (632,632)
Income taxes receivable and payable 859,666 (836,116)
Prepaid expenses and other current assets 131,166 (145,312) (20,474)
Other assets (381,710) (252,582)
Accounts payable 779,767 2,651,440 (2,040,155)
Accrued expenses 316,944 (1,502,609) 1,621,935
Customer deposits 379,456
---------- ---------- ----------

Net cash used in operating activities (657,461) (562,311) (2,303,991)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment (475,280) (606,385) (22,364)
Proceeds from business disposition 198,130
Proceeds from sale of property, plant, and equipment 7,200
(Cash paid) purchase price refunded for business
acquisitions - net (391,000) 945,000 (17,046,400)
Payment of business acquisition costs (685,159)
Acquisition of other assets (210,444)
---------- ---------- ----------
Net cash (used in) provided by investing activities (1,544,239) 326,301 (17,068,764)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit 28,043,512 27,583,557 12,713,211
Repayments under lines of credit (28,674,599) (26,885,104) (7,583,571)
Proceeds from long-term debt 11,854 4,032,380
Repayment of long-term debt (2,361,116) (900,000)
Repayment on capital leases (31,340) (41,716) (57,767)
Proceeds from issuance of common stock 3,261 200,000 143,025
Proceeds from issuance of preferred stock - net of costs 5,706,061 904,360 11,772,389
Proceeds from the exercise of options 41,600
Stock repurchases (1,089,001) (1,195,000)
---------- ---------- ----------
Net cash provided by (used in) financing activities 2,697,633 (186,304) 19,824,667
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 495,933 (422,314) 451,912
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 126,690 549,004 97,092
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 622,623 $ 126,690 $ 549,004
========== ========== ==========

(Continued)

F-6

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999

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

2001 2000 1999

SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION - Cash paid during
the year for:

Interest $ 945,393 $ 1,023,288 $ 221,260
============ ============ ============

Income taxes $ 109,638 $ 1,220,582 $ -
============ ============ ============


SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS - During the years ended
June 30, 2001, 2000, and 1999, the Company
acquired entities in transactions
summarized as follows:
Fair value of assets acquired, including
transaction costs $ 17,076,173 $ 594,089 $ 21,464,702
Issuance of common stock (4,254,000) (237,104) (150,000)
Issuance of series D preferred stock (1,456,180)
Cash paid in business acquisition - net of refund (391,000) 945,000 (17,046,400)
============ ============ ============

Liabilities assumed $ 10,974,993 $ 1,301,985 $ 4,268,302
============ ============ ============

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

Common stock issued for services in connection
with business acquisition $ 100,000
============


See notes to consolidated financial statements. (Concluded)

F-7

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

1. NATURE OF BUSINESS

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

On March 2, 2001, Luxtec Corporation ("Luxtec"), a Massachusetts publicly
held corporation, completed a merger (the "Merger") with PrimeSource Surgical,
Inc., a Delaware corporation ("PrimeSource Surgical"), resulting in PrimeSource
Surgical becoming a wholly owned subsidiary of Luxtec. Pursuant to the agreement
and Plan of Merger, dated November 27, 2000, as amended, the former stockholders
of PrimeSource Surgical received Luxtec capital stock in exchange for their
PrimeSource Surgical capital stock. On June 22, 2001, the stockholders of Luxtec
approved a name change to PrimeSource Healthcare, Inc.

Luxtec's year-end was previously October 31 but changed to June 30,
PrimeSource Surgical's year-end. Luxtec was a delisted public company at the
time of the acquisition. For accounting purposes, the acquisition has been
treated as the acquisition of Luxtec by PrimeSource Surgical with PrimeSource as
the acquirer (reverse acquisition). The acquisition has been accounted for using
the purchase method of accounting, and the results of operations have been
included from March 2, 2001, the date of acquisition. The historical financial
statements prior to March 2, 2001 are those of PrimeSource Surgical. All shares
and per share data prior to the acquisition have been restated to reflect the
par value and capital structure of Luxtec.

The Merger between PrimeSource Surgical and Luxtec was effected by
acquiring 100 percent of the issued and outstanding common stock of PrimeSource
Surgical in exchange for 3,301,239 shares of common stock, par value $.01 per
share (the "Common Stock"), 46,889 shares of Series B Convertible Preferred
Stock, par value $1.00 per share (the "Series B Stock"), 344,864 shares of
Series C Redeemable, Convertible Preferred Stock, par value $1.00 per share (the
"Series C Stock"), and 9,674 shares of Series D Exchangeable, Convertible
Preferred Stock, par value $1.00 per share (the "Series D Stock") of Luxtec. In
addition, the Company assumed options to purchase 2,519,542 shares of common
stock and warrants to purchase 578,088 shares of common stock. On March 3, 2001,
the Company issued 4,334 shares of Series D Stock and 450,000 shares of common
stock in exchange for 10,000 shares of the Company's Series A Redeemable
Preferred Stock and warrants to purchase 450,000 shares of common stock at $3.00
per share (Note 3).

On December 29, 2000, PrimeSource Surgical acquired all the outstanding
common stock of New England Medical Specialties, Inc. ("NEMS") and Professional
Equipment Co., Inc. ("PEC"), two specialty distribution organizations in the
northeastern United States. The transaction was accounted for using the purchase



F-8

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

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

2001 2000

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

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

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The financial statements do not include any adjustments relating to
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern depends upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, obtain refinancing of certain of its debt, comply
with the terms and covenants of its financing agreements, and achieve profitable
operations.

The Company has incurred losses of $4,382,164 in 2001, $1,383,654 in 2000,
and $744,384 in 1999. The Company's business plan continues to focus on
improving operations through internal growth of its specialty medical products
lines through additional acquisitions of strategic businesses. During the fiscal
year ended June 30, 2001, the Company completed the acquisitions of three
additional businesses. One of these acquisitions provided the Company with
manufacturing capabilities to supplement the specialty medical products which it
already had available through its distribution business. The Company is focusing
its marketing efforts on forming partnerships with other medical products
companies to widen the customer base for its products. The Company intends to
continue with its current strategy during fiscal 2002.

The Company's primary debt financing is provided under loans from two
different banks. As of June 30, 2001, the Company had $9,431,336 of outstanding
borrowings under the PrimeSource Surgical credit agreement (the "PrimeSource
Surgical Credit Agreement"), and $1,249,667 outstanding under the Luxtec credit
agreement (the "Luxtec Credit Agreement"), as further discussed in Notes 6 and
7. The two credit agreements discussed above include certain financial
covenants, with which the Company was out of compliance at June 30, 2001. The

F-9

Company has received waivers as of June 30, 2001 and for all prior periods.
Subsequent to June 30, 2001, the Company amended the Luxtec Credit Agreement to
revise certain financial covenants; however, the Company anticipates that it
will be out of compliance with certain existing covenants of the PrimeSource
Surgical Credit Agreement at its next measurement date, and, as a result has
reclassified this debt as a current liability. The Company is currently seeking
refinancing from its current lender as well as other lenders.

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

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

CONCENTRATIONS OF CREDIT RISK - The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash and
accounts receivable. The Company primarily sells to hospitals and other
healthcare providers, and ongoing customer credit evaluations are performed with
respect to the Company's customers. Collateral is generally not required. In
addition, the Company routinely maintains cash in excess of $100,000 in certain
banks to pay general accounts payable, payroll, etc. The Company, by policy,
places the investments with financial institutions evaluated as highly
creditworthy. At June 30, 2001, the Company's uninsured cash balances total
approximately $465,000.

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

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

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

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


F-10

In June 2001, the Financial Accounting Standards Board ("FASB") issued two
new accounting standards, SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. Under SFAS No. 142, goodwill will no
longer be amortized but will be subjected to an annual impairment review. The
standards are effective for the Company's fiscal year beginning July 1, 2002;
however, early adoption is permitted. The Company is in the process of
evaluating the impact these new standards will have on its financial position
and results of operations, and expects to make a decision with respect to early
adoption after completing such evaluation.

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

REVENUE RECOGNITION - The Company recognizes stocking revenue at the time
of shipment and passage of title. The Company also receives revenues under
certain agency arrangements and recognizes revenue when the agency sale is
complete. Provision is made currently for estimated sales returns and
allowances, which have historically been insignificant. The Company accrues for
any warranty costs, and total costs for the year ended June 30, 2001 were
approximately $11,000, and are included in cost of goods sold in the
accompanying consolidated statements of operations. Warranty costs are provided
for Luxtec's sales of manufactured product.

RESEARCH AND DEVELOPMENT COSTS are incurred by Luxtec and are charged to
operations as incurred. Total research and development costs for the year ended
June 30, 2001 were approximately $76,000.

INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109, income taxes are
recognized for: (a) the amount of taxes payable or refundable for the current
year, and (b) deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax asset will not be
realized.

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

FINANCIAL INSTRUMENTS - Pursuant to SFAS No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, the Company is required to estimate the fair
value of all financial instruments included on its balance sheets at June 30,
2001 and 2000. The Company 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.

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

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

F-11

LOSS PER COMMON SHARE - SFAS No. 128, EARNINGS PER SHARE, requires the
dual presentation of basic and diluted earnings (loss) per share on the face of
the statement of operations and the disclosure of the reconciliation between the
numerators and denominators of basic and diluted earnings (loss) per share
calculations. Earnings (loss) per share amounts for the years ended June 30,
2001, 2000, and 1999 are calculated using only weighted-average outstanding
shares of 4,249,494, 3,383,382, and 4,367,399, respectively. Options and
warrants to purchase common stock totaling 4,409,289, 1,951,549, and 1,107,800
at June 30, 2001, 2000, and 1999, respectively, and shares to be issued upon
conversion of preferred stock were not used for computing diluted earnings
(loss) per share because the result would be antidilutive. Put warrants totaling
282,022 for each of the years ended June 30, 2001, 2000, and 1999 were not used
for computing diluted earnings (loss) per share because the result would be
antidilutive.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 2001, the FASB issued
SFAS No. 141, BUSINESS COMBINATIONS. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. The Company is required to implement SFAS No. 141 on July 1, 2002 and
it has not determined the impact, if any, that this statement will have on its
financial position or results of operations.

In June 2001, the FASB also issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, which is effective for the Company on July 1, 2002. SFAS No.
142 requires, among other things, the discontinuance of goodwill amortization.
In addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill, and identification of reporting
units for purposes of assessing potential future impairments of goodwill. SFAS
No. 142 also requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption. The Company is currently assessing
but has not yet determined the impact of SFAS No. 142 on the Company's financial
position and results of operations.

In March 2000, the FASB issued FASB Interpretation ("FIN") No. 44,
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, an
interpretation of APB Opinion No. 25. FIN No. 44 clarifies the application of
Opinion No. 25 for: (a) the definition of an employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN No.
44 became effective July 1, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998 or January 12, 2000. Implementation
did not have a material impact on the Company's financial position or results of
operations.

F-12

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. Implementation of SAB No. 101, which was delayed by the issuance of
SAB No. 101A on March 27, 2000, and SAB No. 101B on June 26, 2000, was required
by the fourth quarter of fiscal 2001. Implementation as of July 1, 2000 did not
have a material impact on the Company's financial position or results of
operations.

In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE AND
HEDGING ACTIVITIES. SFAS No. 133 establishes new accounting and reporting
standards for derivative financial instruments and for hedging activities. SFAS
No. 133 requires the Company to measure all derivatives at fair value and to
recognize them in the balance sheet as an asset or liability, depending on the
Company's rights or obligations under the applicable derivative contract.
Implementation did not have a material impact on the Company's financial
position or results of operations.

RECLASSIFICATIONS - Certain reclassifications have been made to the 2000
and 1999 consolidated financial statements to conform to the 2001 presentation.

F-13


3. ACQUISITIONS AND DISPOSALS

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

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

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

For each share of PrimeSource Surgical Series B-3 preferred stock, par
value $0.001 per share, Series C convertible preferred stock, par value $0.001
per share, Series C-2 convertible preferred stock, par value $0.001 per share,
the PrimeSource Surgical stockholders received .02976732 of a share of Luxtec
Series C Stock, par value $1.00 per share.

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

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

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

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

F-14


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

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

4. INVENTORIES

Inventories consist of the following at June 30:

2001 2000

Raw materials $ 1,346,752
Work-in-process 62,884
Finished goods 10,071,006 $ 7,441,599
Reserve for obsolescence (1,659,410) (1,173,351)
------------ ------------

Inventories - net $ 9,821,232 $ 6,268,248
============ ============


5. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consist of the following at June 30:


2001 2000

Office equipment $ 510,883 $ 489,486
Furniture and fixtures 575,915 408,326
Machinery and equipment 563,710 196,898
Automobiles 151,843 30,216
Leasehold improvements 407,487 75,913
------------ ------------

Total 2,209,838 1,200,839
Less accumulated depreciation and amortization (574,448) (334,562)
------------ ------------

Property, plant, and equipment - net $ 1,635,390 $ 866,277
============ ============


Depreciation expense totaled $355,313, $285,237 and $44,552 in 2001, 2000
and 1999, respectively. Property and equipment held under capital leases
amounted to $191,107 and $93,427, less accumulated amortization of $9,817 and
$24,376, at June 30, 2001 and 2000, respectively.

F-15


6. LINES OF CREDIT

PrimeSource Surgical has a line of credit with a bank (the "PrimeSource
Surgical Line of Credit") in connection with the PrimeSource Surgical Credit
Agreement, which allows for maximum borrowings up to the lesser of $12,000,000
or certain eligible accounts receivable and eligible inventories, as defined. As
of June 30, 2001, total borrowing availability was approximately $7,370,000, of
which $6,526,627 was outstanding. Amounts due under the PrimeSource Surgical
Line of Credit bear interest at the bank's prime rate (6.75% at June 30, 2001)
plus 0.75 percent per annum. Unused portions of the PrimeSource Surgical Line of
Credit accrue a fee at an annual rate of 0.375 percent. Borrowings are
collateralized by substantially all assets of PrimeSource Surgical and are
payable upon maturity in June 2003.

The PrimeSource Surgical Credit Agreement contains covenants that require
the maintenance of certain defined financial ratios and income levels and limit
additional borrowings and capital expenditures. PrimeSource Surgical was not in
compliance with the covenants at June 30, 2001; however, it received waivers as
of June 30, 2001 and for all prior periods. Management is currently in
negotiation with the lender and potential other lenders to modify or refinance
the Company's credit facilities.

On March 2, 2001, the Company entered into an amended and restated
security and loan agreement for a $2,500,000 line of credit (the "Luxtec Line of
Credit") with a bank in connection with the Luxtec Credit Agreement, which
allows for maximum borrowings up to the lesser of $2,500,000 or a certain
percentage of eligible accounts receivable and eligible inventories, as defined.
There was approximately $1,225,000 of borrowing availability at June 30, 2001,
of which $1,249,667 was outstanding. Borrowings in excess of borrowing
availability at June 30, 2001 were repaid in July 2001. Borrowings bear interest
at the bank's prime rate (6.75% at June 30, 2001) plus 2.0 percent. Unused
portions of the Luxtec Line of Credit accrue a fee at an annual rate of 1.00
percent. Borrowings are collateralized by substantially all assets of the
Company, excluding the assets of PrimeSource Surgical, and are payable upon
maturity at March 1, 2005.

The Luxtec Credit Agreement contains certain covenants that require the
maintenance of certain defined financial ratios and income levels and limit
additional borrowings and capital expenditures. The Company was not in
compliance with the loan covenants at June 30, 2001; however, it received
waivers as of June 30, 2001 and for all prior periods. Subsequent to June 30,
2001, the Company negotiated and executed an amendment to revise certain
financial covenants in the Luxtec Credit Agreement. The Company's management
believes it will be able to meet the revised covenants for the fiscal year
ending June 30, 2002.


F-16

7. LONG-TERM DEBT

Long-term debt at June 30 consists of the following:


2001 2000

Term loan payable to bank - PrimeSource Surgical $ 2,904,709 $ 3,987,390
Term note payable to bank - Luxtec 250,000
Equipment note - Luxtec 89,191
Other note payable 100,000
------------

Total 3,343,900 3,987,390
Less current portion (3,259,885) (1,150,003)
------------ ------------

Total $ 84,015 $ 2,837,387
========= ============

PrimeSource Surgical has a term loan with a bank (the "PrimeSource
Surgical Term Loan") with an original amount of $5,000,000. The borrowings are
collateralized by substantially all of PrimeSource Surgical's assets and bear
interest at the bank's prime rate (6.75% at June 30, 2001) plus 0.75 percent per
annum, and is due in June 2003. The PrimeSource Surgical Credit Agreement
contains certain covenants, with which PrimeSource Surgical was not in
compliance at June 30, 2001. The Company has received waivers as of June 30,
2001 and for all prior periods and is currently in negotiation with the lender
and potential other lenders to modify or refinance the PrimeSource Surgical
Credit Agreement. The Company anticipates that it will be out of compliance with
certain existing covenants of the PrimeSource Surgical Credit Agreement at the
next measurement date and have therefore presented the PrimeSource Surgical Term
Loan totaling $2,904,709 as a current liability as of June 30, 2001.

In connection with the credit facility from the current PrimeSource
Surgical lender, PrimeSource Surgical issued detachable warrants to purchase
282,022 shares of the Company's common stock at $1.01 per share. The estimated
fair value of the warrants, $143,000 (determined using the Black-Scholes
option-pricing model using a zero-dividend yield, a volatility of 50 percent, an
option life of five years, and an risk free rate of 5.5 percent), was allocated
to the promissory note as a debt discount, which is being amortized using the
effective interest method over the five-year term of the promissory note.
Amortization of the debt discount totaled $28,500, $28,500, and $28,500 for the
years ended June 30, 2001, 2000, and 1999, respectively.

Additionally, the holder of the warrants has the right to require the
Company to repurchase any unexercised warrants through February 2003 at the
difference between the warrants' exercise price and the fair market price of the
stock at the date of repurchase. The estimated fair value of the warrant put
obligation was $95,000 and $267,000 as of June 30, 2001 and 2000, respectively.
Changes in such fair value are included in other expense in the accompanying
consolidated financial statements.

On March 2, 2001, as part of the Luxtec Credit Agreement, the Company
executed an Amended and Restated Term Note (the "Luxtec Term Note") in the
amount of $300,000 with a bank. The Luxtec Term Note bears interest at the
bank's prime rate (6.75% at June 30, 2001) plus 0.5 percent and is
collateralized by substantially all assets of the Company, excluding the assets
of PrimeSource Surgical. The Luxtec Term Note contains certain covenants with

F-17

which the Company was not in compliance at June 30, 2001; however, the Company
has received waivers as of June 30, 2001 and for all prior periods. Subsequent
to June 30, 2001, the Company negotiated and executed an amendment to revise
certain financial covenants in the Luxtec Term Note. At June 30, 2001, there was
$250,000 outstanding under this agreement, which was due upon maturity on March
31, 2002.

In addition, on March 2, 2001, in connection with the Luxtec Credit
Agreement, the Company executed an amended and restated Equipment Note (the
"Luxtec Equipment Note") in the amount of $131,000 with a bank. Borrowings bear
interest at the bank's prime rate (6.75% at June 30, 2001) plus 1.0 percent and
are collateralized by substantially all assets of the Company, excluding the
assets of PrimeSource Surgical. The Luxtec Credit Agreement contains certain
covenants with which the Company was not in compliance at June 30, 2001;
however, the Company has received waivers as of June 30, 2001 and for all prior
periods. Subsequent to June 30, 2001, the Company negotiated an amendment to
revise certain financial covenants in the Luxtec Credit Agreement. At June 30,
2001, the Company had outstanding borrowings of $89,191 under the Luxtec
Equipment Note, which are due and payable upon maturity on May 30, 2002.

Other note payable consists of a $100,000 note payable for tenant
improvements to Luxtec's leased premises, which bears interest at 9.5 percent
and is due September 19, 2005. Payments are interest only for the first 12
months. Future minimum payments total $15,985 (2002), $23,157 (2003), $25,456
(2004), $27,982 (2005), and $7,420 (2006).

8. CAPITAL STOCK

SERIES B CONVERTIBLE PREFERRED STOCK - Series B Stock was issued in the
Merger and was convertible into 25 shares of common stock automatically upon
amendment of the Company's articles of organization to increase the authorized
number of shares of common stock to 50,000,000. In June 2001, the Company's
stockholders approved the amendment to increase the Company's authorized number
of common shares to 50,000,000. As a result, the 46,889 shares of Series B Stock
automatically converted into 1,172,214 shares of common stock.

SERIES C REDEEMABLE, CONVERTIBLE PREFERRED STOCK - Series C Stock issued
in the Merger is convertible into approximately 28 shares of common stock at the
option of the holder at any time, based upon the conversion ratio at June 30,
2001, as defined. Each share of Series C Stock has one vote for each share of
common stock into which it would be convertible. In addition, Series C Stock
ranks senior to Series B Stock and common stock and ranks junior to the Series D
Stock. Series C Stock accrues dividends at 8 percent per annum of the original
issue price of $42.76 per share. Series C Stock has a liquidation preference
equal to the greater of (i) $50.50 per share plus an amount in cash equal to all
accrued but unpaid dividends or (ii) the amount the holders would have received
had the holders converted their shares of Series C Stock into common stock
immediately prior to a liquidation event. The Series C Stock has a mandatory
redemption date of June 3, 2005, and is redeemable at the original issue price
of $42.76 per share plus accrued but unpaid dividends. Due to the redemption
feature, the Series C Stock has been excluded from stockholders' equity. The
Series C 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. Accrued dividends for the
year ended June 30, 2001 totaled $387,850.


F-18

SERIES D EXCHANGEABLE, CONVERTIBLE PREFERRED STOCK - Series D Stock issued
in the Merger is exchangeable for equity securities of the Company to be issued
in the future and is convertible into 200 shares of common stock at the option
of the holder. Each share of Series D Stock has one vote for each share of
common stock into which it would be convertible. In addition, Series D Stock
ranks senior to Series C Stock and common stock. Series D Stock accrues
dividends at the rate of 10 percent per year of the stated liquidation value of
$342.08 per share and has a liquidation preference equal to $342.08 per share
plus an amount in cash equal to all accrued but unpaid dividends. The Series D
Stock will be exchanged for equity securities of the Company issued in the
future upon the earlier of a qualified equity financing, as defined, or January
23, 2002. Based on the exchange feature, and management's intent to exchange the
Series D Stock for equity securities with a redemption feature, the Series D
Stock has been excluded from stockholders' equity. Accrued dividends for the
year ended June 30, 2001 totaled $157,540. Series D stockholders are entitled to
receive warrants to purchase common stock dependent upon when and at what price
the Company consummates a qualified equity financing, as defined. At June 30,
2001, the number of warrants was not determined, as no qualified equity
financing had been completed.

SERIES E REDEEMABLE, CONVERTIBLE PREFERRED STOCK - On June 29, 2001, the
Company created a new stock class, Series E preferred stock (the "Series E
Stock"), with 1,000,000 authorized shares and a par value of $10.00 per share.
In July 2001, the Company issued 325,000 shares for gross proceeds of
$3,250,000. Warrants to purchase five shares of common stock at $1.00 per share
were issued with each share of Series E Stock. These warrants vested immediately
and expire June 28, 2011. Series E Stock is convertible into 10 shares of common
stock at the option of the holder at any time. Each share of Series E Stock has
one vote for each share of common into which it would be convertible. In
addition, Series E Stock ranks senior to all other stock of the Company. Series
E Stock accrues dividends at the rate of 8 percent per year of the original
issuance price of $10.00 per share and has a liquidation preference equal to
$30.00 per share plus an amount equal to all accrued but unpaid dividends. The
Series E Stock has a mandatory redemption date of June 3, 2005, and is
redeemable at the original issue price of $10.00 per share plus accrued but
unpaid dividends. The Series E 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. The
Series E Stock has detachable warrants and certain beneficial conversion
features, which will be separately accounted for in the first quarter of 2002.

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

9. STOCK OPTIONS AND WARRANTS

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


F-19

In addition to the 1997 Plan, the Company has adopted several stock option
plans sponsored by Luxtec. The 1992 stock plan (the "1992 Plan") provides for
the grant of incentive stock options, nonqualified stock options, stock awards,
and direct stales of stock. Under the 1992 Plan, incentive stock options may be
granted at an exercise price not less than the fair market value of the
Company's common stock on the date of grant. The Board of Directors at its
discretion may grant nonqualified options. The 1992 Plan also provides that the
options are exercisable at varying dates, as determined by the compensation
committee of the Board of Directors, and have terms not to exceed 10 years.
Under the 1992 Plan, 500,000 total shares are authorized for issuance.

The 1993 plan, previously sponsored by Luxtec, is available to issue up to
an aggregate of 25,000 shares of common stock in semiannual offerings. Stock is
sold at 5 percent of fair market value, as defined. No shares were subscribed to
and issued under the 1993 Plan in the period from March 2, 2001 through June 30,
2001.

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

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

In connection with a private placement of preferred stock, the Company
issued warrants to purchase 2,646 shares of Series B Stock (convertible to
66,139 shares of common stock) at $0.01 per share of common stock acquired. In
December 1998, the warrants were exercised.

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

Related to a private placement of its preferred stock, in September 2000,
the Company granted warrants to purchase 157,861 shares of the Company's common
stock at $1.68 per share. The warrants vested immediately and expire in
September 2011.

Prior to the merger with PrimeSource Surgical, Luxtec issued warrants to
certain lenders and other purchasers of Luxtec's stock. Total warrants issued
entitled the holders to purchase 438,171 shares of the Company's common stock,
at exercise prices of $3.00 to $6.00 per share. The warrants expire December 31,
2001.

F-20

Changes in shares under options and warrants, in common stock equivalents,
for the years ended June 30 are as follows:



Options Warrants
--------------------------- ---------------------------

Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Outstanding Price Outstanding Price


Balance, July 1, 1998 640,007 $ 0.73 356,441 $ 1.01

Grants 147,100 1.05 129,925 1.18
Canceled (99,534) 1.30
Exercised (66,139)
---------- ----------

Balance, June 30, 1999 687,573 0.78 420,227 1.03

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

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

Grants 1,903,210 1.58 157,861 1.68
Options assumed in acquisition 454,500 3.03 438,171 5.70
Canceled (496,002)
---------- ----------

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

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

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

Vested and exercisable, June 30, 1999 139,601 420,227
========== ==========


The weighted-average fair value of option and warrant grants in fiscal
2001, 2000, and 1999 was $972,000, $1,020,000, and $68,000, respectively.

F-21

Outstanding stock options and warrants at June 30, 2001 consist of the
following:




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


$1.00 - $1.35 785,475 6.48 $ 1.04 420,227 1.75 $ 1.03
$1.68 - $2.50 2,361,055 6.85 $ 1.83 157,861 5.05 $ 1.68
$2.63 - $6.00 246,500 4.86 $ 4.02 438,171 0.34 $ 5.70
---------- ----------

3,393,030 6.62 $ 1.81 1,016,259 2.31 $ 3.15
========== ==========

SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but
does not require, companies to record compensation cost based on the fair value
of employee stock option and warrant grants. The Company has chosen to continue
to account for employee option and warrant grants using intrinsic value under
APB Opinion No. 25. Accordingly, no compensation expense has been recognized for
employee stock option and warrant grants. Had compensation expense for the
employee stock option and warrant grants been determined based on the fair value
at the grant dates, consistent with SFAS No. 123, the Company's net loss for the
years ended June 30, 2001, 2000, and 1999 would have been increased to the pro
forma amounts indicated below:




2001 2000 1999

Net loss:

As reported $ (4,352,883) $ (1,383,654) $ (744,384)
Pro forma (4,964,219) (1,523,459) (829,056)
Pro forma loss per share - basic and diluted $ (1.17) $ (0.45) $ (0.19)


The fair value of each option and warrant grant is estimated on the date
of grant using the Black-Scholes option-pricing model, with the following
weighted-average assumptions:


2001 2000 1999


Risk-free interest rate 5.28% 6% 6%
Expected dividend yield 0% 0% 0%
Expected lives 7 years 10 years 10 years
Expected volatility 50% 50% 50%



F-22

10. 401(k) RETIREMENT PLAN

Luxtec 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 Luxtec and
PrimeSource Surgical plans, respectively. The 401(k) plans provide for a
contribution by the Company each year, at the Company's discretion. The Company
match totaled $148,959, $129,400, and $22,860 for the years ended June 30, 2001,
2000, and 1999, respectively.

11. INCOME TAXES

The provision for income taxes for the years ended June 30 is based on the
following components:




2001 2000 1999

Current income taxes -

State $ 213,200 $ 41,000 $ -
------------ ------------ ------------

Deferred income taxes:
Federal (1,269,400) (248,400) (169,400)
State (217,900) (49,200) (30,900)
------------ ------------ ------------

Total deferred (1,487,300) (297,600) (200,300)
------------ ------------ ------------

Change in valuation allowance 1,487,300 297,600 200,300
------------ ------------ ------------

Total $ 213,200 $ 41,000 $ -
============ ============ ============

A reconciliation of the provision for income taxes to the amount of income
tax expense that would result from applying the federal statutory rate (35%) to
loss before income tax provision is as follows:



2001 2000 1999


Income tax benefit at statutory rate $ (1,459,100) $ (469,900) $ (252,900)
Nondeductible warrant (income) expense (60,200) 43,400
State tax expense, net of federal benefit (3,100) 26,600 (20,100)
Meals and entertainment 22,800 29,600 5,700
Nondeductible goodwill 225,500 79,000 67,000
Change in valuation allowance 1,487,300 297,600 200,300
Other 34,700
------------ ------------ ------------

Total $ 213,200 $ 41,000 $ -
============ ============ ============



F-23


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:

2001 2000
Current:
Accrued vacation $ 51,400 $ 25,900
Inventory valuation adjustment 858,500 736,400
Bad debt reserve 256,300 175,100
State taxes (89,600) (51,000)
Accrued distributor costs 410,000
Other 165,600 83,400
-------------- -------------

Total current 1,652,200 969,800
-------------- -------------

Long-term:
Depreciation and amortization (24,700) (2,900)
State taxes (235,100) (51,400)
Credit carryforward 301,900
Capital loss carryforward 300,100 300,100
Net operating loss carryforward 5,066,000 660,700
-------------- -------------

Total long-term 5,390,200 906,500
-------------- -------------

Total 7,042,400 1,876,300
Valuation allowance $ (7,042,400) $(1,876,300)
-------------- -------------

Total - -
============== =============

At June 30, 2001, the Company has federal and state net operating loss
carryforwards of approximately $12,843,200 and $9,512,800, respectively. The
Company's federal and state net operating losses will begin to expire in the tax
years ending June 30, 2017 and 2002, respectively. The Company has federal and
state credit carryforwards of approximately $189,800 and $112,100, respectively.
The Company's federal and state credits will both begin to expire in the tax
year ended June 30, 2001. The Company also has a federal capital loss
carryforward of approximately $732,000. The Company's federal capital loss
carryforward will begin to expire in the tax year ending June 30, 2005.

A full valuation allowance has been provided against the Company's
deferred tax assets as of June 30, 2001 and 2000, as it is more likely than not
that sufficient taxable income will not be generated to realize these temporary
differences. Any future reduction of the valuation allowance established at the
dates of the acquisitions (Note 3) will reduce the goodwill related to such
acquisition.

F-24

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, 2001, 2000, and 1999 was $584,944, $475,037, and
$100,940, respectively. Minimum annual lease payments under capital and
noncancelable operating leases are as follows:


Capital Operating
leases leases


2002 $ 54,526 $ 631,243
2003 51,965 532,099
2004 27,158 477,077
2005 2,102 384,591
2006 87,928
---------- -------------

Total minimum lease payments 135,751 $ 2,112,938
---------- =============
Amount representing interest (18,183)
----------

Present value of future minimum lease payments 117,568
Less current portion of capital lease obligations (45,229)
-----------
Capital lease obligations - net of current portion 72,339
===========

EXECUTIVE COMPENSATION - In May 2001, the Company entered into an
employment agreement with its President and Chief Executive Officer. The
employment agreement commits the Company to a minimum compensation, severance
amounts, and future equity-based incentives. Two other executive officers have
employment agreements that provide for compensation and severance amounts.

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

13. BUSINESS SEGMENTS

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

SPECIALTY MEDICAL PRODUCTS MANUFACTURING - This segment includes
the Luxtec division acquired in March 2001, which designs and
manufactures fiber optic headlight and video camera systems, light
sources, cables, retractors, and custom-made and other surgical
equipment for the medical and dental industries. There were no
operations for this segment in either 2000 or 1999.

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

F-25

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

Operations that are not included in any of the segments are
included in the category "Other" and consist primarily of corporate
staff operations, including selling, general, and administrative
expenses of $5,838,381, $2,011,185, and $372,192 for 2001, 2000, and
1999, respectively.

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

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

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

Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals are presented below.


2001
-------------------------------------------------------------------------------
Distribution - Distribution -
PrimeSource PrimeSource Corporate/
Surgical Critical Care Manufacturing Other Total

Net sales $33,698,000 $ 14,453,934 $ 2,879,676 $ 51,031,610
=========== ============= ============ =============

Net (loss)
income $(1,339,461) $ 977,917 $ 1,817,761 $(5,838,381) $ (4,382,164)
=========== ============= ============ ============= =============

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

Depreciation and
amortization $ 1,061,475 $ 79,961 $ 324,743 $ 138,652 $ 1,604,831
=========== ============= ============ ============= =============

Interest expense $ 527,003 $ 325,425 $ 68,434 $ 920,862
=========== ============= ============ =============

F-26

PrimeSource Surgical and its subsidiaries have no significant sales to
foreign companies; however, Luxtec has several foreign customers. The
Company's external sales, based upon the customer's country of origin
by geographic area for the year ended June 30, 2001, totaled
$50,401,000 and $631,000 for sales in the United States and other
foreign companies, respectively. There were no significant sales to
foreign companies in the years ended June 30, 2000 or 1999.


2000
------------------------------------------------------------------
Distribution - Distribution -
PrimeSource PrimeSource Corporate/
Surgical Critical Care Other Total

Net sales $43,096,162 $ 11,314,893 $ 54,411,055
=========== ============= =============

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

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

Depreciation and
amortization $ 959,252 $ 96,254 $ 142,619 $ 1,198,125
=========== ============= ============ =============

Interest expense $ 901,963 $ 202,152 $ 1,104,115
=========== ============= =============

14. RESTRUCTURING

In fiscal year 2000, PrimeSource Surgical approved plans for a major
restructuring of its operations, with the goal of centralizing distribution
facilities, eliminating unprofitable divisions, and reducing costs. The
aggregate costs of the restructuring included a loss of $732,000 from the sale
of a division, facility closure and lease termination costs of $24,000, employee
severance and related costs of $258,000, and professional service fees directly
related to the above of $17,000. As of June 30, 2000, remaining accrued
restructuring costs amounted to approximately $65,000. The restructuring was
substantially completed in the first quarter of fiscal 2001.

15. SUBSEQUENT EVENTS

In October 2001 we engaged a restructuring agent to evaluate our
operations for possible reorganization. We have not determined the impact, if
any, of any possible reorganization on our financial statements.

******
F-27

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Directors of the Company

Board of Directors



Name Age Director Since Position Term Ends
---- --- -------------- -------- ---------


Larry H. Coleman, Ph.D 58 2001 Director 2004
William H. Lomicka 64 2001 Director 2004
Nicholas C. Memmo 39 2001 Director 2004
Michael K. Bayley 41 2001 Director, Executive Vice President, Chief 2002
Financial Officer
James J. Goodman 42 1996 Director 2002
John F. Rooney 38 2001 Chairman of the Board, Executive Vice 2002
President, Corporate Development
James Berardo 41 1995 Director 2003
James L. Hersma 53 2001 Director, Chief Executive Officer and 2003
President
James W. Hobbs 52 1993 Director 2003



CLASS I DIRECTORS SERVING A TERM
EXPIRING AT THE 2004 ANNUAL MEETING

LARRY H. COLEMAN, PH.D., DIRECTOR-- Dr. Coleman was appointed to our Board of
Directors on March 2, 2001, pursuant to our merger with PrimeSource Surgical.
Dr. Coleman is the founder and Managing General Partner of Coleman Swenson Booth
Inc., a private venture capital fund established in 1986. Dr. Coleman began his
venture capital career in 1983 as President of HCA Capital, a wholly-owned
subsidiary of Columbia/HCA Healthcare Corporation. Dr. Coleman has served as a
director on the boards of over 20 companies and is currently a board member of
MediSphere Health Partners, Inc., LifeMetrix, Inc., ClearTrack Information
Network, Inc., and Active Services Corporation. Dr. Coleman graduated from the
University of North Carolina with an A.B. and earned his Ph.D. from the
University of South Dakota.

WILLIAM H. LOMICKA, DIRECTOR-- Mr. Lomicka was appointed to our Board of
Directors on March 2, 2001, pursuant to our merger with PrimeSource Surgical.
Mr. Lomicka is the Chairman of Coulter Ridge Capital, a private investment firm.
From 1989 to 1998, Mr. Lomicka was President of Mayfair Capital, a private
investment firm. Mr. Lomicka, formerly the Senior V.P. Finance of Humana, Inc.,
presently serves on the boards of numerous companies, both public and private.
Representative companies include: Pomeroy Computer Resources, Spectracare,
Medventure Technologies, Broadband Laboratories and Franklin Health. Mr. Lomicka
graduated from the College of Wooster in Wooster, Ohio, and earned his M.B.A.
from the Wharton Graduate School of the University of Pennsylvania.

64

NICHOLAS C. MEMMO, DIRECTOR-- Mr. Memmo was appointed to our Board of Directors
on March 2, 2001, pursuant to our merger with PrimeSource Surgical. Mr. Memmo is
a Partner with Kline Hawkes & Co., a venture capital firm with interests in
information technology, telecommunications and services. Previously, Mr. Memmo
was a founding executive and member of the Board of Directors of U.S. Filter
Corporation, a Fortune 300 company and the leading global provider of water and
wastewater treatment systems, products and services. Mr. Memmo received his B.S.
degree in chemical engineering from Drexel University and his M.B.A. from the
Anderson School at U.C.L.A.

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

MICHAEL K. BAYLEY, EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, CLERK AND
DIRECTOR -- Mr. Bayley was appointed as our Chief Financial Officer, Clerk and a
Director on March 2, 2001, pursuant to our merger with PrimeSource Surgical.
From June 1996 until our merger with PrimeSource Surgical, Mr. Bayley was Chief
Financial Officer of PrimeSource Surgical, a leading distributor and
manufacturer of specialty surgical and critical care products in the United
States. Prior to co-founding PrimeSource Surgical in June 1996, Mr. Bayley was a
Vice President with Chase Manhattan Bank in New York City. Mr. Bayley helped
establish Chase's Health Care Services Finance Division and spent a number of
years in Chase's Merchant Banking and Private Equity Group where he helped
manage a number of the bank's portfolio companies. He has served as a board
participant or board member of a number of companies. He graduated with honors
from the University of Arizona with a bachelor's degree in geological
engineering, and he earned his M.B.A. from the Fuqua School of Business at Duke
University.

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

JOHN F. ROONEY, CHAIRMAN OF THE BOARD, EXECUTIVE VICE PRESIDENT, CORPORATE
DEVELOPMENT -- Mr. Rooney was appointed to our board of directors on March 2,
2001, pursuant to our merger with PrimeSource Surgical. From June 1996 until our
merger with PrimeSource Surgical, Mr. Rooney was President and Chief Executive
Officer of PrimeSource Surgical, a leading distributor and manufacturer of
specialty surgical and critical care products in the United States. Prior to
co-founding PrimeSource Surgical in June 1996, Mr. Rooney served as a sales and
marketing executive at Birtcher Medical Systems, Inc., a Nasdaq listed company
specializing in the manufacturing and marketing of electrosurgery products. Mr.
Rooney also served as an executive at Computer Motion, Inc., a leader in medical
robotic devices. Mr. Rooney graduated with honors from the University of Montana
in Business Administration.

65

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

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

JAMES L. HERSMA, PRESIDENT AND CHIEF EXECUTIVE OFFICER AND DIRECTOR -- Mr.
Hersma was appointed as our President and Chief Executive Officer and a Director
on March 2, 2001, pursuant to our merger with PrimeSource Surgical. Mr. Hersma
served as executive vice president and director of Medibuy.com, a leading
healthcare e-commerce firm, from February, 1999 to May, 2000. Prior to Medibuy,
Mr. Hersma served as CEO of Novation, the largest group purchasing organization
in the United States with over $14 billion in annual purchases from January,
1998 to February, 1999. He also served as president and COO of CIS Technologies,
a Nasdaq-listed healthcare information systems company, from November, 1993 to
May, 1996, and spent 17 years at Baxter and American Hospital Supply in various
sales, marketing and executive management roles. Mr. Hersma is a graduate of
Northern Illinois University and serves on the board of its Business School.

JAMES W. HOBBS, DIRECTOR-- Mr. Hobbs has been on our Board of Directors since
1993. From March, 1993, to March 1, 2001, Mr. Hobbs served as our President and
Chief Executive Officer. Prior to that, Mr. Hobbs was the Chief Executive
Officer of Graylyn Associates from 1992 to 1993, where he currently serves as
Chairman. Graylyn is an investment firm founded by Mr. Hobbs to invest in early
stage medical technology. Prior to Graylyn, Mr. Hobbs served as the President
and Chief Executive Officer of Genica Pharmaceutical Inc. from 1989 to 1992.
Acquired by Elan Corporation, Genica Pharmaceutical Inc. was a corporation
engaged in providing new diagnostic assays and conducting therapeutic research
for neurological disorders. Mr. Hobbs was with Johnson and Johnson as the Vice
President and General Manager of Johnson and Johnson Professional Diagnostics
from 1985 to 1989. Mr. Hobbs received his B.S. degree from Wake Forest
University and earned his M.B.A. from the University of North Carolina.

(b) Executive Officers of the Company

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under Section 16(a) of the Securities Exchange Act of 1934, as amended,
our directors, some of our officers and persons holding more than ten percent of
our Common Stock are required to report their ownership of our Common Stock and
any changes in such ownership to the Securities and Exchange Commission and us.
To our knowledge, based solely on a review of copies of those reports furnished
to us, all Section 16(a) filing requirements applicable to these persons were
complied with during our fiscal year ended June 30, 2001, other than as follows:
our Chief Executive Officer filed a Statement of Changes in Beneficial Ownership
on July 31, 2001, relating to acquisitions of our Common Stock on December 4,
2000 and May 4, 2001.

66

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth, for the period from November 2000 to
June 30, 2001, and the fiscal year ended October 31, 2000 and October 31, 1999,
the compensation of our Chief Executive Officer, and the other executive
officers of the Company as of June 30, 2001, or, collectively, the "Named
Executive Officers":


SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------- Awards
------
Securities
Underlying
Fiscal Other Annual Options (#) /
Year Compensation Restricted Stock
Name and Principal Position Ended(2) Salary($) Bonus($) ($)(1) Severance Awards ($)
--------------------------- ------------- ----------- -------- ------------- --------- -----------------

James L. Hersma(3) June 30, 2001 $159,359 0 $8,868 1,166,274/59,535
President, Chief Executive Officer Oct. 31, 2000 N/A N/A N/A N/A
and Director Oct. 31, 1999 N/A N/A N/A N/A

James W. Hobbs(4) June 30, 2001 127,144 0 3,250 54,490 0
Former President and Chief Executive Oct. 31, 2000 183,374 0 7,800 0
Officer, current Director Oct. 31, 1999 178,148 18,000 7,800 0

John F. Rooney(5) June 30, 2001 134,500 105,809 3,600 0
Executive Vice President, Corporate Oct. 31, 2000 N/A N/A N/A N/A
Development Oct. 31, 1999 N/A N/A N/A N/A
and Chairman

Michael K. Bayley(6) June 30, 2001 134,500 105,809 3,600 0
Executive Vice President, Chief Oct. 31, 2000 N/A N/A N/A N/A
Financial Officer and Director Oct. 31, 1999 N/A N/A N/A N/A

Samuel M. Stein June 30, 2001 81,834 0 5,200 125,000
General Manager, Luxtec Illumination Oct. 31, 2000 106,110 0 7,800 0
Division Oct. 31, 1999 99,680 18,000 7,800 0

Shaun D. McMeans June 30, 2001 77,500 0 0 50,000
Vice President of Operations Oct. 31, 2000 N/A N/A N/A N/A
Oct. 31, 1999 N/A N/A N/A N/A

---------
(1) Automobile allowance for all listed employees. For Mr. Hersma also includes
a monthly living allowance pursuant to Mr. Hersma's Employment Agreement.
(2) Effective March 2, 2001, we changed our fiscal year end to June 30 from
October 31. Accordingly, our last three fiscal year ends are June 30, 2001,
October 31, 2000 and October 31, 1999.
(3) We hired and appointed Mr. Hersma as our President and Chief Executive
Officer on March 2, 2001.
(4) Mr. Hobbs served as our President and Chief Executive Officer from March,
1993, to March 1, 2001.
(5) We hired and appointed Mr. Rooney as our Executive Vice President,
Corporate Development on March 2, 2001.
(6) We hired and appointed Mr. Bayley as our Executive Vice President, Chief
Financial Officer on March 2, 2001.

67

The following table sets forth the stock options that were granted to
the Named Executive Officers during the our fiscal year ended June 30, 2001:

OPTION GRANTS IN FISCAL YEAR ENDED JUNE 30, 2001


GRANT DATE
INDIVIDUAL GRANTS VALUE
-----------------------------------------------------------------------
NUMBER OF % OF TOTAL EXERCISE
SECURITIES OPTIONS OR BASE
UNDERLYING GRANTED TO PRICE / FAIR
OPTIONS EMPLOYEES MARKET VALUE GRANT DATE
GRANTED IN FISCAL ON GRANT DATE EXPIRATION PRESENT VALUE
NAME (#) YEAR ($/SH) DATE $
---- ---------- ------- ------------ ---------------- ------------

James L. Hersma 1,166,274 63.35% (1) December 4, 2010 $1,141,800
(2)
59,535(3) 3.23% $.01 / $1.25 May 4, 2011 $99,605(4)
Samuel M. Stein 125,000 6.80% $1.00 May 2, 2011 $72,843(5)
Shaun D. McMeans 50,000 2.72% $1.00 May 1, 2011 $29,137(5)


----------
(1) The exercise price per share per share is equal to the lesser of $1.68 or
the fair market value on the date of grant as determined by our board of
directors. The exercise price may be repriced to a lower amount if the
price of our Common Stock on the earlier of January 23, 2002 or the date of
a "qualified equity financing" as defined in the Company's Series D
Preferred Stock Agreement, is lower than $1.68 per share.
(2) The grant date present value has been calculated using the Black-Scholes
stock option valuation methodology. The applied model used a grant date of
December 4, 2000 and an option price of $1.68 per share. It also assumed a
risk-free rate of return of 5.28%, a dividend yield of 0% and a stock price
volatility of 50% and an expected life of seven years. The options have an
exercise period of ten years from the date of grant.
(3) Effective December 4, 2001, Mr. Hersma was entitled to a grant of 59,535
shares of our Common Stock, with a purchase price per share of $.01. The
stock is subject to repurchase by us, with our repurchase right lapsing as
to 50% of the initial grant on the anniversary of the date of grant, and as
to the remaining 50% on the second anniversary of the date of grant. If,
upon the earlier of January 23, 2002 or the date of a "qualified equity
financing," the price of the our Common Stock is lower than $1.25 per
share, Mr. Hersma is entitled to purchase, at the same terms of his initial
grant, additional shares of our Common Stock such that the total value of
stock purchasable by Mr. Hersma is equal to $74,419.
(4) The grant date present value has been calculated using the Black-Scholes
stock option valuation methodology. The applied model used a grant date of
May 4, 2001 and an option price of $1.25 per share. It also assumed a
risk-free rate of return of 5.28%, a dividend yield of 0% and a stock price
volatility of 50%. The options have an exercise period of ten years from
the date of grant.
(5) The grant date present value has been calculated using the Black-Scholes
stock option valuation methodology. The applied model used a grant date of
May 1, 2001 (McMeans) and May 2, 2001 (Stein) and an option price of $1.00
per share. It also assumed a risk-free rate of return of 5.28%, a dividend
yield of 0% and a stock price volatility of 50%. The options have an
exercise period of ten years from the date of grant.


68

The following table sets forth information with respect to options to
purchase our Common Stock granted to the Named Executive Officers:


NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON OPTIONS AT YEAR-END(#) AT YEAR-END($)(1)
EXERCISE (#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------ ----------------- ------------------------- -------------------------
NAME

James L. Hersma 0 $0 437,364 / 728,910 $73,823 / 0
James W. Hobbs 0 0 60,300 / 63,700 0 / 0
John F. Rooney 0 0 111,626 / 186,048 0 / 0
Michael K. Bayley 0 0 111,626 / 186,048 0 / 0
Samuel M. Stein 0 0 25,000 / 100,000 0 / 0
Shaun D. McMeans 0 0 9,302 / 27,907 0 / 0

(1) Value is based on an estimated fair market value of our Common Stock on
June 30, 2001 of $1.00 minus the exercise price under such options.

COMPENSATION OF NON-EMPLOYEE DIRECTORS

We pay our non-employee directors $500 for attendance at each meeting of
the board of directors, $250 for each meeting of a committee thereof ($150 for
each meeting of a committee if such meeting is concurrent with a meeting of the
board of directors) and $100 for each meeting held by telephone conference. We
also pay expenses for attendance at meetings of the board of directors and
committees thereof. In addition, non-employee directors are compensated with
options to purchase shares of our Common Stock, in accordance with the 1995
Stock Option Plan for Non-Employee Directors, or the "Directors Plan." Under the
terms of the Directors Plan, we grant our non-employee directors non-qualified
stock options to purchase a total of 12,000 shares of Common Stock upon their
election or appointment to the board of directors, with 4,000 options vesting on
the date of grant, and 4,000 shares vesting annually thereafter provided the
individual continues to serve on the board of directors. The options granted
pursuant to the 1995 Director Plan have an exercise price equal to one-hundred
percent of the fair market value per share of our Common Stock on the date the
option is granted.

EMPLOYMENT CONTRACTS

HERSMA EMPLOYMENT AGREEMENT

On May 4, 2001, we entered into an employment agreement with James L.
Hersma, our President, Chief Executive Officer, and Director, or the "Hersma
Agreement." The initial term of the Hersma Agreement will expire on December 3,
2001, but will be extended automatically for successive one-year terms unless we
notify Mr. Hersma that we will not renew the Hersma Agreement.

69

Mr. Hersma is entitled to a base salary of $275,000 per year for the first
year of his employment and a base salary of $325,000 his second year, should we
choose to extend the Hersma Agreement. Mr. Hersma's base salary beyond the
second year shall be determined by the Board of Directors, but will not be less
than $325,000 per year. Mr. Hersma is also entitled to receive an annual bonus
of up to 55% of his base salary.

The Hersma Agreement entitles Mr. Hersma to receive an option to purchase
1,166,274 shares of our Common Stock for an exercise price per share of the
lesser of $1.25 per share or the fair market value on the date of grant as
determined by our board of directors. The exercise price may be repriced to a
lower amount if the price of our Common Stock on the earlier of January 23, 2002
or the date of a "qualified equity financing" is lower than $1.25 per share.
Twenty-five percent (25%) of Mr. Hersma's stock options are vested upon the date
of grant, and the remaining 75% of his stock options vest in 36 equal monthly
installments beginning with the completion of Mr. Hersma's first full month of
employment after December 4, 2001. If Mr. Hersma is terminated by us other than
for death, disability or cause, stock options that would have vested within the
365 days following his termination shall become vested. Additionally, upon a
change in control of us (as defined in the Hersma Agreement), all unvested stock
options will become vested.

The Hersma Agreement also entitles Mr. Hersma to a grant of 59,535 shares
of our Common Stock. Mr. Hersma must pay par value ($0.01 per share, or $595.35)
for this stock. The stock is subject to repurchase by us, with our repurchase
right lapsing as to 50% of the initial grant on the anniversary of the date of
grant, and as to the remaining 50% on the second anniversary of the date of
grant. If Mr. Hersma is terminated by us other than for death, disability or
cause, our repurchase right shall lapse with respect to shares of stock that we
would have otherwise been entitled to repurchase within the 365 days following
his termination. Additionally, upon a change in control of us (as defined in the
Hersma Agreement), our repurchase right as to all shares of stock shall lapse.
If, upon the earlier of January 23, 2002 or the date of a "qualified equity
financing," the price of our Common Stock is lower than $1.25 per share, Mr.
Hersma shall be entitled to purchase, at the same terms as his initial grant,
additional shares of our Common Stock such that the total value of stock
purchasable by Mr. Hersma is equal to $74,419.

If we terminate Mr. Hersma for any reason other than for cause (as defined
in the Hersma Agreement), or we do not renew the Hersma Agreement, Mr. Hersma is
entitled to continuation of base salary and medical benefits for 18 months. If
such termination or non-renewal is made within 18 months following a change in
control (as defined in the Hersma Agreement), Mr. Hersma is entitled to a lump
sum payment equal to 2.99 times his base salary in lieu of the 18 months of
salary continuation.

If Mr. Hersma's employment with us terminates for any reason, Mr. Hersma
may not compete with us or solicit our employees for a period of one (1) year
from his date of termination or during any period he is receiving severance
payments from us.

BAYLEY EMPLOYMENT AGREEMENT

Michael K. Bayley, our Executive Vice President, Chief Financial Officer,
Clerk and Director, entered into a three-year employment agreement with
PrimeSource Surgical, dated as of July 1, 1999, or the "Bayley Agreement." The
Bayley Agreement was assumed by us in connection with our acquisition of
PrimeSource Surgical. Under the Bayley Agreement, Mr. Bayley is entitled to
receive an annual base salary of $225,000 for the 2001 calendar year. This
amount may be increased by our board of directors beginning on January 1, 2002.
Mr. Bayley is entitled to an annual bonus in an amount determined by our board
of director's Compensation Committee and upon our achievement of specified
management objectives.

70

Mr. Bayley is entitled to severance benefits if he terminates his
employment with us due to our breach of a material term in the Bayley Agreement,
if we terminate him without cause (as defined in the Bayley Agreement) or upon
expiration of the term of the Bayley Agreement. Under these circumstances, Mr.
Bayley would be entitled to continued payment of his base salary and employee
benefits (including health insurance) for one year from the date of his
termination of employment. If Mr. Bayley obtains other employment while
receiving severance benefits, unless his termination was in connection with a
change in control (as defined in the Bayley Agreement), Mr. Bayley's severance
benefits will terminate on the later of (1) the date six months following his
date of termination with us or (2) the date he obtains employment at a salary
level greater than or equal to his salary with us. Mr. Bayley will not be
entitled to any severance benefits, however, if, in connection with a change in
control, he is terminated following an offer to continue employment with the
surviving company at the same location, in the same position and with the same
salary as provided in the Bayley Agreement.

If Mr. Bayley's employment with us terminates in such a manner that he is
not entitled to severance benefits, Mr. Bayley may not compete with us or
solicit our employees for a period of two (2) years from his date of
termination.

ROONEY EMPLOYMENT AGREEMENT

John F. Rooney, our Executive Vice President, Corporate Development and
Chairman of the Board, entered into a three-year employment agreement with
PrimeSource Surgical, dated as of July 1, 1999, or the "Rooney Agreement." The
Rooney Agreement was assumed by us in connection with our acquisition of
PrimeSource Surgical. Under the Rooney Agreement, Mr. Rooney is entitled to
receive an annual base salary of $225,000 for the 2001 calendar year. This
amount may be increased by the Board of Directors beginning on January 1, 2002.
Mr. Rooney is entitled to an annual bonus in an amount determined by our board
of director's Compensation Committee and upon our achievement of specified
management objectives.

Mr. Rooney is entitled to severance benefits if he terminates his
employment with us due to our breach of a material term in the Rooney Agreement,
if we terminate him without cause (as defined in the Rooney Agreement) or upon
expiration of the term of the Rooney Agreement. Under these circumstances, Mr.
Rooney would be entitled to continued payment of his base salary and employee
benefits (including health insurance) for one year from the date of his
termination of employment. If Mr. Rooney obtains other employment while
receiving severance benefits, unless his termination was in connection with a
change in control (as defined in the Rooney Agreement), Mr. Rooney's severance
benefits will terminate on the later of (1) the date six months following his
date of termination with us or (2) the date he obtains employment at a salary
level greater than or equal to his salary with us. Mr. Rooney will not be
entitled to any severance benefits, however, if, in connection with a change in
control, he is terminated following an offer to continue employment with the
surviving company at the same location, in the same position and with the same
salary as provided in the Rooney Agreement.

71

If Mr. Rooney's employment with us terminates in such a manner that he is
not entitled to severance benefits, Mr. Rooney may not compete with us or
solicit our employees for a period of two years from his date of termination.

In addition, the Company has entered into Employment Agreements with Mr.
Samuel M. Stein, the Company's General Manager of the Luxtec Illumination
Division, Mr. Peter A. Miller a Regional Manager within PrimeSource Critical
Care, and Mr. Peter M. Eule, a Regional Manager with Primesource Critical Care.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During our last fiscal year ended June 30, 2001, James Berardo, James J.
Goodman, William H. Lomicka and Louis C. Wallace served as members of the
Company's Compensation Committee of the Board of Directors. None of Messrs.
Berardo, Goodman, Lomicka or Wallace have ever been an officer or employee of us
or any of our subsidiaries, nor have they ever had any relationship with us or
any officers requiring disclosure.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

BENEFICIAL OWNERSHIP OF COMPANY SECURITIES

The following tables furnish certain information as of August 31, 2001
(except as otherwise noted), as to our equity securities beneficially owned by
each of our directors, by each of the individuals named in the Summary
Compensation Table and by all of our directors and executive officers as a
group, and, to our knowledge, by any beneficial owner of more than 5% of any
class or series of our outstanding equity securities.


----------------------------------------- --------------- --------------- -------------- -------------- --------------- ------------
Name of Beneficial Owner Number of Number of Number of Number of Aggregate Percent of
Shares of Shares of Shares of Shares of Number of Class Voting
Common Stock Series C Series D Series E Shares of Power
Beneficially Convertible Exchangeable Convertible Common Stock Presently
Owned Preferred Preferred Preferred Beneficially Held(5)
Stock Stock Stock Owned or
Beneficially Beneficially Beneficially Underlying
Owned(1) Owned(2) Owned(3) Preferred
Stock
Beneficially
Owned(4)
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------

GE Capital Equity Investments, Inc.(6) 1,000,930(7) 208,371.24 5,953.464 200,000 9,938,501(8) 33.43%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Coleman Swenson Booth IV L.P.(9) 504,930(10) 89,301.96 2,976.732 100,000 4,563,224(8) 15.35%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Webbmont Holdings L.P.(11) 912,929(12) 38,612.44(13) 595.346 20,000 2,296,929(8) 7.73%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Geneva Middle Market
Investors, SBIC,L.P.(14) 450,000 0 4,333.87 0 1,316,774(8) 4.43%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Michael K. Bayley 831,283(15) 0 0 0 831,283 2.80%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
James Berardo 180,520(16) 0 0 0 180,520 *
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Larry H. Coleman, Ph.D. (17) 504,930(10) 89,301.96 2,976.732 100,000 4,563,224(8) 15.35%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
James J. Goodman 470,000(18) 0 4,333.87(19) 0 1,336,774(8) 4.50%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
James L. Hersma 351,117(20) 0 0 0 351,117 1.2%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
James W. Hobbs 147,039(21) 0 0 0 147,039 *
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
William H. Lomicka 638,935(22) 425.256 148.837 5,000 730,430(8) 2.46%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Nicholas C. Memmo 85,729(23) 850.512 0 0 109,186 *
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
Samuel M. Stein 34,198(24) 0 0 0 34,198 *
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
John F. Rooney 848,173(25) 446.51(26) 0 0 860,487 2.9%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------
All directors and executive officers as
a group (10 persons)
4,091,924 91,024.238 7,459.439 5,000 9,144,258 30.76%
----------------------------------------- --------------- --------------- -------------- -------------- ---------------- -----------

72

------------------------------
Unless otherwise indicated, the address of each person is care of PrimeSource
Healthcare, Inc. 3700 E. Columbia Street, Tucson, Arizona 85714. Shares of
Common Stock subject to options or warrants exercisable within sixty days of
August 31, 2001, are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options or warrants but are not outstanding
for purposes of computing the percentage of any other person.

* Less than 1%.

1 Each share of Series C Convertible Preferred Stock entitles its holder
to approximately 27.58 votes, subject to adjustment, in any vote of the
holders of our Common Stock and may be converted into approximately
27.58 shares of our Common Stock, subject to adjustment.

2 Each share of Series D Exchangeable Preferred Stock entitles its holder
to two-hundred votes in any vote of the holders of our Common Stock.
Each share of Series D Exchangeable Preferred Stock will be exchanged
for a number of our shares of a yet to be issued series of preferred
stock, that, in the aggregate, will be convertible into 200 shares of
our Common Stock.

3 Each share of Series E Convertible Preferred Stock entitles its holder
to ten votes, subject to adjustment, in any vote of the holders of our
Common Stock and may be converted into ten shares of our Common Stock,
subject to adjustment.

4 Includes Common Stock, Common Stock underlying the Series C Preferred
Stock, Series D Preferred Stock and the Series E Preferred Stock owned
as of August 31, 2001 and Common Stock underlying options and warrants
that are exercisable within sixty days of August 31, 2001.

5 Based upon the aggregate number of shares of our Common Stock
outstanding, underlying outstanding shares of the Series C Preferred
Stock, Series D Preferred Stock and the Series E Preferred Stock owned
as of August 31, 2001 and options and warrants exercisable within sixty
days of August 31, 2001 to acquire our Common Stock.

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

7 Includes 930 shares of our Common Stock underlying options that are
exercisable within sixty days of August 31, 2001. Also includes
1,000,000 shares of our Common Stock subject to purchase pursuant to
warrants that are exercisable within sixty days of August 31, 2001.


8 Excludes an undetermined number of shares underlying warrants to
purchase shares of our Common Stock in an amount equal to a number
based upon the time between the issuance of the warrants and our
completion of an equity financing that satisfies certain requirements
set forth in the warrants, or if such financing is not completed by
January 19, 2002, based upon the value of our Common Stock at that
time.

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

74

10 Includes 4,930 shares of our Common Stock underlying options that are
exercisable within sixty days of August 31, 2001. Also includes 500,000
shares of our Common Stock subject to purchase pursuant to warrants
that are exercisable within sixty days of August 31, 2001.

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

12 Includes 236,079 Shares of our Common Stock subject to purchase
pursuant to warrants that are exercisable within sixty days of August
31, 2001. Includes 7,016 shares of our Common Stock held of record by
Robert Neale Fisher, 3,508 shares of our Common Stock held of record by
Virginia A. Fisher, 290,179 shares of our Common Stock held of record
by Investors Equity, Inc. and 190,713 shares of our Common Stock held
of record by Webbmont Holdings, L.P., all of which are considered
beneficially held by Robert W. Fisher. Mr. Fisher is the President of
Woodcrest Associates, Ltd., the general partner of Webbmont Holdings,
L.P. Also includes 5,581 shares of our Common Stock underlying options
held by Mr. Fisher that are exercisable within sixty days of August 31,
2001.

13 Includes 322.975 shares of Series C Preferred Stock held of record by
Robert Neale Fisher and 2,279.343 shares of Series C Preferred Stock
held of record by Investors Equity, Inc.

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

15 Includes 167,440 shares of our Common Stock underlying options which
are exercisable within sixty days of August 31, 2001. Also includes
69,102 shares of our Common Stock underlying warrants that are
exercisable within sixty days of August 31, 2001.

16 Includes 154,520 shares of our Common Stock held by various trusts of
which Mr. Berardo is a trustee and over which Mr. Berardo shares
investment and voting control. Mr. Berardo disclaims beneficial
ownership of such shares. Also includes 24,000 shares of our Common
Stock underlying options that are exercisable within sixty days of
August 31, 2001.

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

18 Consists of 450,000 shares of our Common Stock held of record by Geneva
Middle Market Investors SBIC, L.P., of which Mr. Goodman is President.
Also includes 20,000 shares of Common Stock underlying options that are
exercisable within sixty days of August 31, 2001.

19 Consists of 4,333.87 shares held by Geneva Middle Market Investors
SBIC, L.P., of which Mr. Goodman is President.

20 Includes 291,582 shares of our Common Stock underlying options that are
exercisable within sixty days of August 31, 2001. Also includes 59,535
shares of our Common Stock that Mr. Hersma may purchase pursuant to a
Restricted Stock Agreement.

21 Includes 60,300 shares of our Common Stock underlying options that are
exercisable within sixty days of August 31, 2001. Also includes 33,334
shares of our Common Stock underlying warrants that are exercisable
within sixty days of August 31, 2001.

22 Includes 15,162 shares of our Common Stock underlying options that are
exercisable within sixty days of August 31, 2001. Also includes 29,253
shares of our Common Stock underlying warrants that are exercisable
within sixty days of August 31, 2001.

23 Includes 12,371 shares of our Common Stock underlying options that are
exercisable within sixty days of August 31, 2001. Also includes 8,505
shares of our Common Stock underlying warrants that are exercisable
within sixty days of August 31, 2001.

24 Includes 25,000 shares of our Common Stock underlying options that are
exercisable within sixty days of August 31, 2001.

25 Includes 167,440 shares of our Common Stock underlying options that are
exercisable within sixty days of August 31, 2001. Also includes 69,102
shares of our Common Stock underlying warrants that are exercisable
within sixty days of August 31, 2001.

26 Includes 446.51 Shares of Series C Preferred Stock owned by BAM
Enterprises, LLC, an entity in which Mr. Rooney exercises investment
and voting power.

75

ITEM 13. CERTAIN RELATIONSHIPS AMD RELATED TRANSACTIONS


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Louis C. Wallace was a member of our board of directors from 1989 until
March 2, 2001. Mr. Wallace is the founder and President of Specialty Surgical
Instrumentation, Inc., or "SSI," a surgical distributor in ten southeastern
states. SSI is one of our largest customers, representing approximately 12.6% of
our net sales during our fiscal year ended June 30, 2001. We operate at arms
length with SSI pursuant to a contract with terms and conditions substantially
the same as our other domestic distributors.

PrimeSource Surgical, a distributor and manufacturer of specialty surgical
and critical care products, was our largest customer during our fiscal year
ended June 30, 2001, representing approximately 24.1% of our net sales for that
period. Messrs. Bayley, Coleman, Memmo, Lomicka and Rooney, who each currently
serve on our board of directors, were directors of PrimeSource Surgical prior to
our Merger with PrimeSource Surgical. Messrs. Rooney and Bayley also served as
President and Chief Executive Officer and Chief Financial Officer, respectively,
of PrimeSource Surgical. During the period June 30, 2000 through March 2, 2001
(the date that PrimeSource Surgical became our wholly-owned subsidiary), we
operated at arms length with PrimeSource Surgical.


76

PART IV

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


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

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

Independent Auditor's Report

Consolidated Balance Sheets as of June 30, 2001 and June 30, 2000.

Consolidated Statements of Operations
for the years ended June 30, 2001, June 30, 2000 and June 30, 1999.

Consolidated Statements of Stockholders' Equity (Capital Deficiency) for
the years ended June 30, 2001, June 30, 2000 and June 30, 1999.

Consolidated Statements of Cash Flows for the years ended June 30, 2001,
June 30, 2000 and June 30, 1999

Notes to Consolidated Financial Statements

2. Financial Statement Schedules
-----------------------------

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


77

3. Exhibits
--------

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

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

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

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

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

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

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

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

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

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

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

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


78

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).

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.

3.19 Amended and Restated By-Laws (Incorporated by reference to Form
10-Q, File No. 0-14961, filed May 21, 2000).

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 Amended and Restated Registration Rights, dated June 28, 2001,
by and among PrimeSource Healthcare, Inc. and the persons
listed as Stockholders therein.

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.


79

10.1 Amended and Restated Employment Agreement, entered into as of
July 1, 1999, by and among PrimeSource Surgical, Inc., a
Delaware corporation, and Michael K. Bayley. (Incorporated by
reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).

10.2 Amended and Restated Employment Agreement, entered into as of
July 1, 1999, by and among PrimeSource Surgical, Inc., a
Delaware corporation, and John F. Rooney. (Incorporated by
reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).

10.3 Employment Agreement entered into between James L. Hersma and
Luxtec Corporation, a Massachusetts corporation, dated as of
May 4, 2001. (Incorporated by reference to Form 10-Q, File No.
0-14961, filed May 21, 2001).

10.4 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).

10.5 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).

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

10.7 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).

10.8 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).

10.9 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).

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

10.11 Lease Agreement, dated as of March 1, 2000, by and between
Holualoa Butterfield Industrial, L.L.C. and PrimeSource
Surgical, Inc.

21.1 Subsidiaries of the Registrant.

80

(b) Reports on Form 8-K:

The Company filed a current report on Form 8-K dated July 11,
2001, announcing under Item 5 the issuance of the Series E
Preferred Stock and warrants to purchase Common Stock.


81

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/James L. Hersma
---------------------
James L. Hersma, President and
Chief Executive Officer


October 11, 2001
--
82

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

Signature Title Date



s/Michael K. Bayley Chief Financial Officer, October 11, 2001
---------------------- Secretary and Treasurer, Director
Michael K. Bayley


s/James Berardo Director October 11, 2001
----------------------
James Berardo


s/Larry H. Coleman Director October 11, 2001
----------------------
Larry H. Coleman


s/James J. Goodman Director October 11, 2001
----------------------
James J. Goodman


s/James L. Hersma President, Chief October 11, 2001
---------------------- Executive Officer, Director
James L. Hersma


s/James W. Hobbs Director October 11, 2001
----------------------
James W. Hobbs


s/William H. Lomicka Director October 11, 2001
----------------------
William H. Lomicka


s/Nicholas C. Memmo Director October 11, 2001
-------------------
Nicholas C. Memmo


s/John F. Rooney Executive Vice President, October 11, 2001
--------------------------- Chairman of the Board
John F. Rooney


83

Exhibit Index
-------------

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

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

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

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

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

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

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

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

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

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

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

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


84

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

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

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

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

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

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

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

3.18 Certificate of Correction dated July 13, 2001.

3.19 Amended and Restated By-Laws (Incorporated by reference to Form
10-Q, File No. 0-14961, filed May 21, 2000).

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 Amended and Restated Registration Rights, dated June 28, 2001,
by and among PrimeSource Healthcare, Inc. and the persons
listed as Stockholders therein.

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.

10.1 Amended and Restated Employment Agreement, entered into as of
July 1, 1999, by and among PrimeSource Surgical, Inc., a
Delaware corporation, and Michael K. Bayley. (Incorporated by
reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).


85

10.2 Amended and Restated Employment Agreement, entered into as of
July 1, 1999, by and among PrimeSource Surgical, Inc., a
Delaware corporation, and John F. Rooney. (Incorporated by
reference to Form 10-Q, File No. 0-14961, filed May 21, 2001).

10.3 Employment Agreement entered into between James L. Hersma and
Luxtec Corporation, a Massachusetts corporation, dated as of
May 4, 2001. (Incorporated by reference to Form 10-Q, File No.
0-14961, filed May 21, 2001).

10.4 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).

10.5 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).

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

10.7 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).

10.8 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).

10.9 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).

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

10.11 Lease Agreement, dated as of March 1, 2000, by and between
Holualoa Butterfield Industrial, L.L.C. and PrimeSource
Surgical, Inc.

21.1 Subsidiaries of the Registrant.

86