PRIMESOURCE HEALTHCARE INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

| | 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--000-14961

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 E. Columbia Street, Tucson, AZ 85714
(Address of principal executive offices) (Zip code)

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

Indicate by check mark 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 for 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes No X
--------- -------

On November 10, 2003, there were 22,375,144 shares of the Registrant's common
stock outstanding.

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PRIMESOURCE HEALTHCARE, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

PART I FINANCIAL INFORMATION PAGE

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2003
(unaudited) and June 30, 2003 3

Unaudited Consolidated Statements of Operations for the
three months ended September 30, 2003 and 2002 5

Unaudited Consolidated Statements of Stockholders'
Equity 7

Unaudited Consolidated Statements of Cash Flows for the
three months ended September 30, 2003 and 2002 8

Notes to Unaudited Consolidated Financial Statements 10

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24

Item 3. Quantitative and Qualitative Disclosure About Market
Risk 29

Item 4. Controls and Procedures 30

PART II OTHER INFORMATION

Item 1. Legal Proceedings 30

Item 2. Changes in Securities and Use of Proceeds 30

Item 6. Exhibits and Reports on Form 8-K 31

SIGNATURES 36

-2-

PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND JUNE 30, 2003
- --------------------------------------------------------------------------------------------------

SEPTEMBER 30, JUNE 30,
ASSETS 2003 2003
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 224,689 $ 489,911
Accounts receivable--net of allowance for doubtful accounts
of approximately $218,000 and $214,000, respectively 5,992,054 6,111,062
Inventories--net 7,420,498 7,517,965
Income taxes receivable 68,369 67,800
Prepaid expenses and other current assets 162,531 172,397
----------- -----------

Total current assets 13,868,141 14,359,135

PROPERTY AND EQUIPMENT--Net 961,911 996,358

INTANGIBLE ASSETS--Net of accumulated amortization
of approximately $238,000 and $236,000, respectively 116,085 118,290

GOODWILL--Net 15,956,883 15,956,883

OTHER ASSETS--Net of accumulated amortization of
approximately $859,000 and $782,000, respectively 182,682 233,874
----------- -----------

TOTAL $31,085,702 $31,664,540
=========== ===========

(Continued)

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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND JUNE 30, 2003
- --------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY September 30, June 30,
2003 2003
(Unaudited)
CURRENT LIABILITIES:

Accounts payable $5,098,471 $5,636,333
Accrued expenses 1,837,491 2,240,770
Accrued restructuring costs 561,272 690,968
Customer deposits 80,998 72,895
Lines of credit 6,270,170 5,926,021
Current portion of long-term debt 356,025 559,877
Current portion of capital lease obligations 20,998 25,425
------------ ----------

Total current liabilities 14,225,425 15,152,289

CAPITAL LEASE OBLIGATIONS--Net of current portion 18,095 21,433

LONG-TERM DEBT--Net of current portion 101,665 105,696

SERIES G CONVERTIBLE, REDEEMABLE PREFERRED STOCK-- No par value--authorized
230,000 shares; issued and outstanding,
222,500; aggregate liquidation preference of $14,831,308 7,711,308
------------ ----------

TOTAL LIABILITIES 22,056,493 15,279,418
------------ ----------

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

STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value--authorized 75,000,000 shares; issued and
outstanding, 22,375,094 shares 223,750 223,750
Additional paid-in capital 19,295,451 21,347,451
Accumulated deficit (10,489,992) (10,885,200)
------------ ----------

Net stockholders' equity 9,029,209 10,686,001
------------ ----------

TOTAL $31,085,702 $31,664,540
============ ===========

See notes to condensed consolidated financial statements. (Concluded)

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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
- ------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30,

2003 2002

NET SALES $12,162,316 $11,789,776

COST OF SALES 7,665,890 7,498,853
--------- ---------

GROSS PROFIT 4,496,426 4,290,923
--------- ---------

OPERATING EXPENSES:
Selling expenses 2,018,248 1,783,992
General and administrative expenses 1,740,322 1,602,237
Depreciation and amortization expenses 157,339 199,042
--------- ---------

Total operating expenses 3,915,909 3,585,271
--------- ---------

OPERATING INCOME 580,517 705,652

INTEREST EXPENSE (299,969) (326,967)

OTHER (EXPENSE) INCOME (78,724) 64,930
--------- ---------

INCOME BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 201,824 443,615

DISCONTINUED OPERATIONS-
INCOME FROM DISCONTINUED OPERATIONS 40,615

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

NET INCOME (LOSS) 201,824 (3,970,426)

DIVIDENDS AND ACCRETION ON PREFERRED STOCK (106,119)

EFFECT OF EQUITY RECAPITALIZATION 11,809,741
--------- ---------

NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS $201,824 $7,733,196
======== ==========

(Continued)

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PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
- -----------------------------------------------------------------------------------------------------------------

Three Months Ended
September 30,
2003 2002

INCOME PER SHARE BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE:

Basic $0.01 $0.71
===== =====
Diluted $0.01 $0.34
===== =====

INCOME PER SHARE FROM DISCONTINUED OPERATIONS:
Basic $ - $ -
===== =====
Diluted $ - $ -
===== =====

LOSS PER SHARE FROM CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE-
GOODWILL IMPAIRMENT:
Basic $ - $(0.26)
===== =====
Diluted $ - $(0.13)
===== =====

NET INCOME PER SHARE AVAILABLE FOR COMMON
STOCKHOLDERS:
Basic $0.01 $0.45
===== =====
Diluted $0.01 $0.22
===== =====

WEIGHTED AVERAGE SHARES USED IN COMPUTATION OF
INCOME (LOSS) PER SHARE
Basic 22,375,094 17,146,909
========== ==========
Diluted 22,375,094 36,018,121
========== ==========

See notes to condensed consolidated financial statements. (Concluded)

-6-

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
- -------------------------------------------------------------------------------------------------------------------------

ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
-------------------------
SHARES AMOUNT CAPITAL DEFICIT EQUITY

BALANCE, JULY 1, 2003 22,375,094 $223,750 $21,347,451 $(10,885,200) $10,686,001

Reclassification of Series G Convertible,
Redeemable Preferred Stock (2,062,000) 193,384 (1,868,616)
Issuance of compensatory stock options 10,000 10,000
Net income 201,824 201,824
---------- -------- ------------ ------------- ----------

BALANCE, SEPTEMBER 30,2003 22,375,094 $223,750 $19,295,451 $(10,489,992) $9,029,209
========== ======== =========== ============= ==========

See notes to condensed consolidated financial statements.

-7-

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
- -----------------------------------------------------------------------------------------------------
Three months ended
September 30,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $201,824 $(3,970,426)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 157,339 200,593
Goodwill impairment 4,454,656
Loss on disposal of property and equipment 64 244
Issuance of compensatory stock options 10,000 20,000
Gain on legal settlement (42,548)
Change in operating assets and liabilities:
Accounts receivable 119,008 141,256
Inventories 97,467 578,350
Income taxes receivable (569) 0
Prepaid expenses and other current assets 9,866 42,218
Other assets (26,151) (105,815)
Accounts payable (537,862) (1,095,253)
Accrued expenses (397,261) (727,418)
Accrued restructuring costs (129,696) (213,543)
Customer deposits 8,103 (136,446)
-------- --------

Net cash used in operating activities (487,868) (854,132)
-------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (43,449) (7,170)
Proceeds from the sale of property and equipment 40 24
Acquisition of other assets (700)
-------- --------

Net cash used in investing activities (43,409) (7,846)
-------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit 5,048,982 3,566,759
Repayments on lines of credit (4,704,833) (3,877,202)
Repayments of long-term debt (213,667) (1,061,671)
Repayments on capital leases (7,998) (10,613)
Accrued unpaid dividends on redeemable preferred stock- Series G 143,571
Proceeds from issuance of preferred stock-net of costs 2,214,550
-------- ---------

Net cash provided by financing activities 266,055 831,823
-------- --------

NET DECREASE IN CASH AND CASH EQUIVALENTS (265,222) (30,155)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 489,911 285,735
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $224,689 $255,580
======== ========
(Continued)

-8-

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
- -----------------------------------------------------------------------------------------------

Three months ended
September 30,
2003 2002

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

Interest $150,653 $166,307
======== ========

SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Issuance of note payable for debt refinancing costs $250,000
=========
Discount on issuance of note payable for legal services $(5,784) $(40,023)
======== =========
Fair value of common stock cancelled in sale of assets $64,160
=========
Fair value of common stock cancelled in legal settlement $42,548
=========
Issuance of compensatory stock options $20,000
=========

See notes to condensed consolidated financial statements. (Concluded)

-9-

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
- --------------------------------------------------------------------------------

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of PrimeSource
Healthcare, Inc. ("PrimeSource Healthcare") and its subsidiaries
(collectively, "PrimeSource" or the "Company"). The Company's wholly owned
operating subsidiaries include PrimeSource Surgical, Inc. ("PrimeSource
Surgical") and Bimeco, Inc. All intercompany balances and transactions are
eliminated in consolidation.

The Company's primary debt financing is provided under loans from two
different banks. As of September 30, 2003, the Company had $4,998,585 of
outstanding borrowings under the PrimeSource Surgical credit agreement
(the "PrimeSource Surgical Credit Agreement"), and $1,271,585 outstanding
under the Luxtec credit agreement (the "Luxtec Credit Agreement"), as
further discussed in Note 5. The two credit agreements discussed above
include certain financial covenants, with which the Company was in
compliance at September 30, 2003. The PrimeSource Surgical Credit
Agreement matures on March 31, 2004 and the Luxtec Credit Agreement
matures on December 31, 2003. The Company is evaluating refinancing its
credit agreements or raising additional funding through equity placements
to consolidate its credit agreements into a single agreement. Based upon
discussions to date, Company management believes it will obtain adequate
bank facilities and funding to continue to fund operations.

The accompanying unaudited consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in
the United States of America ("generally accepted accounting principles")
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable
presentation have been included and are of a normal recurring nature.
Operating results for the three months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the entire
year.

PrimeSource, 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 June 30, 2003, PrimeSource Surgical sold all of the issued and
outstanding capital stock of Ruby Merger Sub, Inc., the Company's indirect
wholly owned subsidiary ("Ruby") for cash proceeds of $1,000,000 to New
England Medical Specialties, Inc., a newly formed entity ("NMSI"). Peter
Miller, a stockholder of NMSI, was the Regional Manager of Ruby prior to
the disposition of the capital stock of Ruby. In connection with the sale
of the capital stock of Ruby, Mr. Miller concluded his employment
relationship with PrimeSource. The cash proceeds were used to pay off the
PrimeSource Term Note and reduce the revolving line of credit with
Citizens Bank of Massachusetts. The loss on the disposal of the operation

-10-

of $73,830 was included as discontinued operations in the fourth quarter
of fiscal year 2003, and the related results of operations for the
operation were reclassified as discontinued operations.

Certain reclassifications have been made to the fiscal 2003 consolidated
financial statements to conform to the current presentation. As a result
of the Company's disposal of Ruby in 2003, the Company's previously
reported consolidated financial statements for 2003 have been restated to
present the discontinued Ruby operations separate from continuing
operations.

2. NEW ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ACCOUNTING PRINCIPLE

In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS No. 150"). SFAS No.
150 changes the classification in the statement of financial position of
certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial
statements to recognize changes in the fair value or the redemption
amount, as applicable, in earnings. SFAS No. 150 was effective for the
Company as of July 1, 2003. The Company has adopted SFAS No. 150 in the
quarter ended September 30, 2003 and, as a result, has reclassified its
Series G Convertible Redeemable, Preferred Stock ("Series G Stock") from
equity to a liability. Further effects of this adoption are discussed in
Note 10.

3. INVENTORIES

At September 30, 2003 and June 30, 2003, inventories consisted of the
following:

September 30, June 30,
2003 2003

Raw materials $895,294 $775,583
Work-in-process 61,393 885
Finished goods 7,576,384 7,847,729
Reserve for obsolescence (1,112,573) (1,106,232)
----------- -----------

Inventories--net $7,420,498 $7,517,965
=========== ===========

4. GOODWILL, INTANGIBLE AND OTHER ASSETS

At September 30, 2003 and June 30, 2003, the Company had $15,956,883 of
recorded goodwill. In accordance with FASB Statement 142, Goodwill and
Other Intangible Assets ("SFAS No. 142"), beginning July 1, 2002 the
Company's goodwill is not subject to amortization.

In accordance with SFAS No. 142, the Company completed the test for
impairment as of July 1, 2002, and concluded that consolidated goodwill
was impaired. The Company recorded a non-cash charge of $4,454,656 to
reduce the carrying value of its goodwill. This charge was non-operational
in nature and was reflected as a cumulative effect of a change in
accounting principle, effective July 1, 2002, in the accompanying
consolidated statements of operations. No income tax effect was recognized
as the Company is in a loss position and any expense recorded would be
offset by a reduction in the corresponding valuation allowance.

-11-

The total impairment amount of $4,454,656 was attributable to the
Company's manufacturing reporting segment and represents a portion of the
previously unamortized goodwill resulting from the Company's reverse
merger with PrimeSource Surgical on March 2, 2001. In calculating the
impairment charge, the consolidated goodwill was allocated to the
reporting segment based upon the estimated fair value of each reporting
unit. The fair value of each reporting unit was estimated using a weighted
average of the income methodology approach, the market methodology
approach and the asset based approach.

In accordance with SFAS No. 142, the Company has performed its annual
impairment test in July 2003 and found no further impairment in its
existing goodwill balances.

Included in intangible assets at September 30, 2003 and June 30, 2003, the
Company had intangible assets, with useful lives of 4 to 20 years,
primarily consisting of trademarks and patents with a total cost of
$304,838 and $304,838, respectively, and accumulated amortization of
$237,950 and $235,744, respectively.

The Company also had other intangible assets included in other assets on
the balance sheet consisting primarily of deferred financing costs with a
total cost of $947,068 and $922,068, respectively, and accumulated
amortization of $859,048 and $781,705, at September 30, 2003 and June 30,
2003, respectively. These costs are being amortized over the life of the
related debt.

Intangible and other asset amortization expense for the three months ended
September 30, 2003 was approximately $79,000. Estimated amortization
expense remaining for the five succeeding fiscal years ending June 30 and
thereafter is as follows:

2004 $95,000
2005 9,000
2006 9,000
2007 8,000
2008 8,000
Thereafter 26,000
------

Total $155,000
========

5. LONG-TERM DEBT AND LINES OF CREDIT

At September 30, 2003 and June 30, 2003, long-term debt consisted of the
following:

September 30, June 30,
2003 2003

Other notes payable $457,690 $665,573

Less current portion (356,025) (559,877)
--------- ---------

Total long-term debt $101,665 $105,696
======== ========

-12-

At September 30, 2003 and June 30, 2003, lines of credit consisted of the
following:

September 30, June 30,
2003 2003

Line of credit--PrimeSource Surgical $4,998,585 $4,654,436
Line of credit--Luxtec 1,271,585 1,271,585
--------- ---------

Total lines of credit $6,270,170 $5,926,021
========== ==========

On March 2, 2001, the Company entered into an Amended and Restated
Security and Loan Agreement (the "Luxtec Credit Agreement") for a
$2,500,000 line of credit (the "Luxtec Line of Credit") with ARK CLO
2000-1 LIMITED ("ARK"). On August 6, 2002, the Company amended the Luxtec
Credit Agreement. Pursuant to the amendment to the Luxtec Credit
Agreement, ARK waived and amended certain provisions under the original
Luxtec Credit Agreement. Under the amendment the maximum amount available
to borrow under the Luxtec Line of Credit was limited to the lesser of
$1,275,000 or a certain percentage of accounts receivable and inventory,
as defined ($1,275,000 at September 30, 2003). As of September 30, 2003,
borrowings bore interest at ARK's prime rate plus 3.0% (7.00% at September
30, 2003). 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
PrimeSource Healthcare's assets, excluding the capital stock of, and
assets held by, PrimeSource Surgical. At September 30, 2003, there was
$3,415 of availability under the Luxtec Line of Credit. Borrowings under
the Luxtec Line of Credit are payable upon maturity on December 31, 2003.

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 as of September 30, 2003.

On June 14, 1999, the Company's wholly owned subsidiary, PrimeSource
Surgical, entered into an Amended and Restated Credit Agreement (the
"PrimeSource Surgical Credit Agreement") with Citizens Bank of
Massachusetts ("Citizens") for a line of credit (the "PrimeSource Surgical
Line of Credit"). On August 6, 2002, PrimeSource Surgical amended the
PrimeSource Surgical Credit Agreement, pursuant to which the maturity date
of the revolving line of credit under the original PrimeSource Surgical
Credit Agreement was extended to March 31, 2004 and certain other changes
were made including modifications to interest rates and covenant
requirements. Under the amendment the maximum amount available to borrow
under the PrimeSource Surgical Line of Credit is limited to the lesser of
$8,000,000 or a certain percentage of accounts receivable and inventory,
as defined by the PrimeSource Surgical Credit Agreement ($5,271,490 at
September 30, 2003). As of September 30, 2003, borrowings bore a variable
step interest rate at Citizens' prime rate plus 3.00% (7.00% at September
30, 2003). 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 of the assets directly held by PrimeSource Surgical. At
September 30, 2003, there was $272,905 of availability under the
PrimeSource Surgical Line of Credit. Borrowings under the PrimeSource
Surgical Line of Credit are payable upon maturity in March 31, 2004.

On June 14, 1999, as part of the PrimeSource Surgical Credit Agreement,
PrimeSource Surgical executed an Amended and Restated Term Note (the
"PrimeSource Surgical Term Loan") in the original amount of $5,000,000
with Citizens. On June 30, 2003, the Company paid off the entire

-13-

outstanding balance of the PrimeSource Surgical Term Loan in connection
with the sale of Ruby and the funding of the Series G Stock.

The PrimeSource Surgical Term Loan was subject to a term loan facility
fee. PrimeSource Surgical accrued a $75,000 fee on August 6, 2002, in
connection with the amendment to the PrimeSource Surgical Credit
Agreement. PrimeSource Surgical was obligated to pay an additional $75,000
fee under the PrimeSource Surgical Term Loan on the last day of each
calendar quarter, beginning on September 30, 2002 and for every quarter
thereafter until the earlier of payment in full of the PrimeSource
Surgical Term Loan or December 31, 2003. The accrued term loan facility
fees were reduced by 40% because on June 30, 2003, the Company paid off
the entire outstanding balance of the PrimeSource Surgical Term Loan in
connection with the sale of Ruby and the most recent offering of Series G
Stock. In connection with the PrimeSource Surgical Term Loan payoff on
June 30, 2003, the amount outstanding under this term loan facility fee is
$180,000, which is included in accrued expenses and is due on or before
December 31, 2003.

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. PrimeSource Surgical was
in compliance with these covenants as of September 30, 2003.

Other notes payable include:

September 30, June 30,
2003 2003

Luxtec tenant note $73,983 $77,650

PrimeSource legal counsel note, net of unamortized
discount of $7,042 and $12,827, respectively 277,957 357,173

PrimeSource Citizens Bank note 62,500 187,500

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

Total other notes payable 457,690 665,573

Less current portion (356,025) (559,877)
-------- --------

Total long-term debt $101,665 $105,696
======== ========

The Luxtec tenant note is a $100,000 note payable for tenant improvements
to Luxtec's leased premises in West Boylston, Massachusetts, which bears
interest at 9.5% and is due September 19, 2005. Payments are interest only
for the first 12 months, with remaining payments calculated on a 7-year
amortization table with a balloon payment in September 19, 2005.

The PrimeSource legal counsel note is a non-interest bearing demand note
payable with an original balance of $559,977 (net of unamortized discount
of $40,023 based on an imputed interest rate of 8%) to its special legal
counsel in payment of existing outstanding accounts payable, which matures
May 30, 2004. Special legal counsel reduced the balance of this note by
$150,000 in November 2003. Monthly principal payments are $30,000
commencing on March 20, 2004. (See Note 12).

-14-

The PrimeSource Citizen Bank note is a $250,000 note payable to Citizens
in payment of the bank refinancing amendment fee. Equal principal payments
on the note of $62,500 were due quarterly and the balance of the note is
due December 31, 2003. This note has been recorded as deferred financing
costs and is being amortized over the life of the PrimeSource Surgical
Credit Agreement.

6. RESTRUCTURING AND OTHER CHARGES

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

As a result of the restructuring plan, during fiscal year 2002, the
Company recorded restructuring costs of approximately $4.0 million
consisting of $800,000 in specialized restructuring consultants, $500,000
related to a remaining facility lease liability, $300,000 in costs for
exited product lines related to the closure of the western sales region,
$1.4 million in employee severance and $1.0 million attributable to the
loss on disposal of a division. Approximately 29 administrative employees
were released along with resignation of several members of the Company's
senior management team, including the Company's former Chief Executive
Officer, its former Chief Financial Officer and its former Chairman and
Executive Vice President. Activity related to accrued restructuring costs
for the three-month period ended September 30, 2003 consisted of the
following:

Employee Other
Related Contracts Total

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

Cash payments (88,116) (41,580 (129,696)
-------- -------- --------

Balance, September 30, 2003 $175,652 $385,620 $561,272
======== ======== ========

7. INCOME TAXES

At September 30, 2003 and June 30, 2003, the Company had deferred tax
assets resulting from federal net operating loss carryforwards of
approximately $6,683,700 and $6,763,700, respectively. A full valuation
allowance has been provided against these deferred tax assets as of
September 30, 2003 as it is more likely than not that sufficient taxable
income will not be generated to realize these temporary differences.

8. SEGMENT REPORTING

The Company is organized into three operating segments based on operating
criteria. These segments are Specialty Medical Products Manufacturing,

-15-

Specialty Distribution Services--Surgical, and Specialty Distribution
Services--Critical Care. A description of each segment and principal
products and operations 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.

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

SPECIALTY DISTRIBUTION SERVICES--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. Within this segment, the primary specialties
include maternal, 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 general and administrative expenses. 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 and are eliminated in consolidation. Cost of products
sold reflects current costs adjusted, where appropriate, for lower of cost
or market inventory adjustments.

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

Following the merger (the "Merger") of the Company with PrimeSource
Surgical on March 2, 2001, certain products of the Specialty Medical
Products Manufacturing segment were sold to the Specialty
Distribution--Surgical segment. Total sales between these segments totaled
approximately $1,449,569 for the three-month period ended September 30,
2003, and approximately $1,382,858 for the same period in 2002.

The Company utilizes a management fee allocation for financial statement
purposes. This allocation reclassifies a portion of the corporate expense
to the operating segments.

-16-

Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals are presented below for the three
months ending September 30 and total assets as of the end of each period:

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

Net sales

2003 $7,298,033 $2,927,299 $1,936,984 $12,162,316
2002 6,313,090 3,563,539 1,913,147 11,789,776

Net income (loss)
2003 $214,315 $(3,176) $295,349 $(304,664) $201,824
2002 64,040 140,226 (3,934,145) (240,547) (3,970,426)

Depreciation and amortization
2003 $32,850 $177 $44,764 $79,548 $157,339
2002 64,856 2,993 34,785 96,408 199,042

Interest expense
2003 $87,115 $31,152 $25,228 $156,474 $299,969
2002 84,025 58,234 33,869 150,839 326,967

Total assets
September 30, 2003 $25,453,299 $2,666,897 $2,859,314 $106,192 $31,085,702
June 30, 2003 25,041,081 3,361,430 2,935,095 326,934 31,664,540

-17-

9. NET INCOME PER SHARE

Net income per share amounts are calculated using net income available to
common stockholders and weighted average common shares outstanding, which
consisted of the following for the three months ended September 30:

THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
Numerator:
Net income before discontinued operations and

cumulative effect of change in accounting principle $201,824 $443,615
Discoutinued operations 40,615
Effect of change in accounting principle-
Goodwill impairment (4,454,656)
Preferred dividends and accretion (106,119)
Effect of equity recapitalization 11,809,741
---------- ----------

Net income available to common stockholders $201,824 $7,733,196
========== ==========

Denominator:
Basic weighted average common shares outstanding 22,375,094 17,146,909
Dilutive effect of:
Warrants 7,737,803
Assumed conversion of Series G Stock 11,133,409
---------- ----------
Weighted average common shares for the purpose
of calculating diluted earnings per share 22,375,094 36,018,121
========== ==========

For the three months ended September 30, 2003 and 2002, options and
warrants to purchase common stock totaling 1,632,363 and 7,653,822,
respectively were not included in weighted average common shares
outstanding for the purpose of calculating diluted earnings per share
because the result would be antidilutive because the exercise price
exceeded the average market price. Upon implementation of SFAS No. 150,
the Company's Series G Stock is no longer considered a dilutive equity
security and therefore there was no effect given to the potential dilutive
effect of these shares in the calculation of weighted average common
shares outstanding for the quarter ended September 30, 2003. Put warrants
outstanding totaling 282,022 at September 30, 2002 were not included in
weighted average common shares for the purpose of calculating diluted
earnings per share because the result would be antidilutive because the
put exercise price exceeded the average market price.

10. PREFERRED STOCK

On August 6, 2002, the Company created a new series of preferred stock,
Series G Stock, no par value, and the Company issued and sold 70,452
shares of Series G Stock on that date for proceeds of $1,866,037, net of
costs of $388,429. The Series G Stock has 230,000 authorized shares. In
connection with the issuance of the Series G Stock, the Company issued
warrants to purchase an aggregate of 3,300,000 shares of common stock at
$.01 per share. These warrants became exercisable on December 31, 2002 and
expire on August 6, 2012. In addition, on September 15, 2002, November 15,
2002, January 15, 2003 and June 30, 2003, the Company issued and sold an
additional aggregate 50,485.5 shares of Series G Stock for proceeds of
$1,497,994, net of costs of $117,542. Each share of Series G Stock is
convertible into 100 shares of common stock, subject to adjustment, at the

-18-

option of the holder. Each share of Series G Stock has one vote for each
share of common into which it would be convertible. In addition, Series G
Stock ranks senior to all other outstanding stock of the Company. Series G
Stock accrues dividends at the rate of 8% per year of the original
issuance price of $32.00 per share and has a liquidation preference equal
to $64.00 per share plus an amount equal to all accrued but unpaid
dividends. The Series G Stock has a mandatory redemption date of June 3,
2005, and is redeemable at the original issue price of $32.00 per share
plus accrued but unpaid dividends. The Series G Stock also has special
consent rights to certain of the Company's activities, including, but not
limited to, amendment of the Company's articles or bylaws and merger or
consolidation of the Company. As noted above, in connection with the
Series G Stock issuance, the Company issued warrants to purchase an
aggregate of 3,300,000 shares of common stock with an exercise price of
$.01 per share and a 10-year life. The value of these warrants was
calculated using the Black-Scholes method, an expected life of 7 years,
volatility of 50% and a zero-coupon bond rate of 4.09%. The resulting
value of $1,031,000 was recorded as additional paid-in capital on August
6, 2002 in connection with the sale of the Series G Stock. The resultant
beneficial conversion feature of $1,031,000 was recorded directly to
additional paid-in capital in December 2002 when the Series G Stock became
convertible.

Upon adoption of SFAS No. 150, the Company's Series G Stock has been
reclassified in the consolidated balance sheet as of July 1, 2003 from
equity presentation to the liability section. The unamortized portion of
the initial recorded amount for the warrants was reversed out of
additional paid-in capital and the book value of the Series G Stock was
increased to the redemption amount of $7,711,308.

On August 6, 2002 and prior to the issuance and sale of the Series G
Stock, the Company recapitalized its equity structure. Each outstanding
share of Series C Convertible Preferred Stock, par value $1.00 per share
(the "Series C Stock"), was converted into 27.5871 shares of the Company's
common stock. In connection with the conversion of the Series C Stock, the
Company issued the former holders of the Series C Stock warrants to
purchase an aggregate of 7,390,613 shares of our common stock with an
exercise price of $.01 per share and a 10-year life. These warrants became
exercisable on December 31, 2002 and expire on August 6, 2012.
Additionally, exercise prices on warrants to purchase an aggregate of
140,330 shares of our common stock previously issued to certain former
holders of the Series C Stock were repriced from $1.68 per share to $.01
per share. The value of the warrants issued and the warrants which were
repriced was recorded as additional paid-in capital. The value of these
warrants totaled $2,359,000 and was calculated using the Black-Scholes
method, an expected life of 7 years, volatility of 50% and a zero coupon
rate of 4.09%.

Simultaneously with the conversion of the Series C Stock, each outstanding
share of Series F Convertible Redeemable Preferred Stock, no par value
(the "Series F Stock"), was converted into one share of common stock. In
connection with the conversion of the Series F Stock, the Company issued
the former holders of the Series F Stock warrants to purchase an aggregate
of 1,614,560 shares of Company common stock with an exercise price of $.01
per share and a 10-year life. The warrants became exercisable on December
31, 2002 and expire on August 6, 2012. Additionally, the exercise price on
previously issued warrants to purchase an aggregate of 1,751,130 shares of
common stock was adjusted from $1.00 per share to $.01 per share. The
value of the warrants issued and the warrants which were repriced was
recorded as additional paid-in capital. The value of these warrants
totaled $1,052,000 and was calculated using the Black-Scholes method, an
expected life of 7 years, volatility of 50% and a zero coupon rate of
4.09%.

-19-

On August 6, 2002 and subsequent to the conversion of the Series C Stock
and Series F Stock, each outstanding share of Series E Convertible
Preferred Stock, no par value (the "Series E Stock"), was exchanged for
.3125 shares of Series G Stock. In connection with the exchange of the
Series E Stock, the Company issued the former holders of the Series E
Stock warrants to purchase an aggregate of 817,000 shares of Company
common stock with an exercise price of $.01 per share. These warrants
became exercisable on December 31, 2002 and expire on August 6, 2012.
Additionally, in accordance with their terms, exercise prices on 1,625,000
warrants to purchase common stock previously issued to certain Series E
Stockholders were repriced from $1.00 per share to $.01 per share. The
value of the warrants issued and the warrants which were repriced were
recorded as additional paid-in capital. The value of these warrants
totaled $763,000 and was calculated using the Black-Scholes method,
expected life of seven years, volatility of 50% and a zero coupon rate of
4.09%.

Under the restructuring, former holders of Series C Stock, Series F Stock
and Series E Stock received consideration totaling approximately
$10,183,000, including common stock, Series G Stock, new warrants and the
repricing of certain existing warrants, in exchange for the retirement of
Series C Stock, Series F Stock and Series E Stock with a carrying value of
approximately $21,993,000. The difference of $11,809,741 has been credited
to retained earnings.

11. STOCK OPTIONS AND WARRANTS

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

The Company issued 1,300,000 equity-based options to certain employees
during the three months ended September 30, 2003. The exercise price was
set at the estimated fair market value of the stock at the date of grant.

During fiscal year 2003, the Company issued equity-based 7,500 options to
a certain employee as required under the executed employment agreement
with the Company. The exercise price was below the deemed fair market
value of the stock at the date of grant. In accordance with the
requirements of Accounting Principles Board ("APB") Opinion No. 25, the
Company recorded equity-based compensation for the difference between the
exercise price of the stock and the deemed fair market value of the
Company's stock at the date of grant. The equity-based compensation is
charged to expense on a straight line basis, over the one year period
during which the options become vested. During the three months ended
September 30, 2003 and 2002 the Company had recorded equity-based
compensation expense related to these options in the amount of $10,000 and
$20,000, respectively.

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 sales of stock. Under the 1992 Plan, incentive
stock options may be granted at an exercise price not less than the fair
market value of the Company's common stock on the date of grant. The Board
of Directors at its discretion may grant nonqualified options. The 1992
Plan also provides for various vesting schedules, as determined by the
compensation committee of the Board of Directors, and have terms not to

-20-

exceed 10 years. Under the 1992 Plan, 500,000 total shares are authorized
for issuance.

The 1992 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 or issued under the 1992 Plan in the period from March
2, 2001 through September 30, 2003.

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 September 30, 2003 and June 30,
2003, there were 64,000 shares available for future grants under the 1995
Director Plan.

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

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

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

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

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

-21-

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

During the year ended June 30, 1999, the Company granted two employees
warrants to purchase 63,787 shares of the Company's common stock at $1.17
per share, 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 2004.

Changes in shares under options and warrants, in common stock equivalents,
for the period ended September 30, 2003 are as follows:

OPTIONS WARRANTS
--------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE

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

Grants 1,300,000 0.32
Canceled (7,822) 2.02
-------

Balance, September 30, 2003 9,894,442 $0.50 16,838,554 $0.02
========= ==========

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

Vested and exercisable, September 30, 2003 4,760,690 16,838,554
========= ==========

The weighted-average fair value of option grants per share for options
granted during the three months ended September 30, 2003 was approximately
$0.11 per share.

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. However, compensation expense in
the amounts of $10,000 and $20,000 for the three-month periods ended
September 30, 2003 and 2002, respectively, has been recognized for certain
employee stock options granted below market value. No compensation expense
has been recognized for the remaining employee stock option grants and
warrant grants. Had compensation expense for these employee stock option
grants been determined based on the fair value at the grant dates,
consistent with SFAS No. 123, the Company's net income for the three
months ended September 30, 2003 and 2002 would have been the pro forma
amounts indicated below:

-22-

THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002

Net income available to common stockholders, as
reported 201,824 $7,733,196

Stock-based employee compensation expense
determined under fair-value method (275,418) (79,164)
--------- --------

Pro forma net income (loss) $(73,594) $7,654,032
========= ==========

Earnings Per Share:
Basic- as reported 0.01 0.45
Basic- pro forma 0.00 0.45

Diluted- as reported 0.01 0.22
Diluted- pro forma 0.00 0.22

Black-Scholes Assumptions
Risk-free interest rate 2.32% 2.52%
Expected dividend yield 50% 50%
Expected lives- in years 3 3
Expected volatility 0% 0%

12. COMMITMENTS AND CONTINGENCIES

LITIGATION-- On September 5, 2002, John F. Rooney and Michael K. Bayley,
each former executive officers and directors of PrimeSource, filed a
complaint against the Company in Arizona Superior Court, County of Pima.
The complaint alleged a breach by the Company of the severance agreements
with each of Messrs. Rooney and Bayley and seeks an aggregate of at least
$1.2 million in compensatory damages. The complaint was settled in
November 2003. The terms of settlement include total cash payments of
$125,000 to Messrs. Rooney and Bayley over a period of four months,
beginning in November 2003.

The Company is also 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 financial position,
results of operations or liquidity.

EXECUTIVE COMPENSATION--In August 2002, the Company entered into a
two-year employment agreement with its President and Chief Executive
Officer. The employment agreement committed the Company to minimum
compensation, severance amounts, and future equity-based incentives.

In September 2003, the Company entered into a severance agreement with the
executive pursuant to which he resigned as the Company's President, Chief
Executive Officer and a member of our Board of Directors.

* * * * * *

-23-

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------

All statements contained herein that are not historical facts, including but not
limited to, statements regarding our expectations concerning future operations,
margins, profitability, liquidity, capital expenditures and capital resources,
are based on current expectations. These statements are forward-looking in
nature and involve a number of risks and uncertainties. Generally, the words
"anticipates," "believes," "estimates," "expects" and similar expressions as
they relate to us and our management are intended to identify forward-looking
statements. Although we believe that the expectations in such forward-looking
statements are reasonable, we cannot assure that any forward-looking statements
will prove to be correct. We wish to caution readers not to place undue reliance
on any forward-looking statements, which statements are made pursuant to the
Private Litigation Reform Act of 1995. The forward-looking statements contained
in this quarterly report on Form 10-Q speak only as of the date that we have
filed the report. We expressly disclaim any obligation or undertaking to update
or revise any forward-looking statement contained in this report, including to
reflect any change in our expectations with regard to that forward-looking
statement or any change in events, conditions or circumstances on which that
forward-looking statement is based.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We determine the
adequacy of this allowance by regularly evaluating individual customer
receivables and considering a customer's financial condition, credit history,
and current economic conditions. If the financial condition of our customers
were to deteriorate, additional allowances may be required. Our accounts
receivable are written off once an account is deemed uncollectible. This
typically occurs once we have exhausted all efforts to collect the account,
which includes collection attempts by company employees and outside collection
agencies.

-24-

INVENTORY RESERVES FOR OBSOLESCENCE

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

GOODWILL AND OTHER INTANGIBLE ASSETS

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

DEFERRED TAX ASSETS

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

STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the
intrinsic-value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and elected the
disclosure-only alternative under SFAS No. 123, Accounting for Stock-Based
Compensation. Common stock of the Company has been delisted since November 17,
2000 and does not trade on any exchange and is not quoted on any quotation
system. Fair value of the Company's common stock is determined by the Company's
Board of Directors based upon the most recent significant capital stock
transaction adjusted by current major events affecting the Company's financial
condition. Certain equity-based compensation cost is included in net income
(loss), as certain options granted during periods presented had an exercise
price below the market value of the stock on the date of grant. In accordance
with SFAS No. 148, Accounting for Stock Based Compensation - Transition and
Disclosure, the Company will continue to disclose the required pro-forma
information in the notes to the consolidated financial statements and will
disclose the required information in quarterly unaudited consolidated financial
statements.

SALES RECOGNITION POLICY

Sales are recorded upon transfer of title to customers, generally, upon shipment
of product.

-25-

RESULTS OF OPERATIONS

NET SALES--Net sales increased to $12,162,316 for the three months ended
September 30, 2003, compared to $11,789,776 for the same period in 2002. The net
sales increase of $372,540, or 3.2%, in the three-month period ended September
30, 2003 relative to the comparable period in 2002 was primarily due to sales
growth.

COST OF SALES--Cost of sales increased to $7,665,890, or 63.0% of net sales, for
the three months ended September 30, 2003, compared to $7,498,853, or 63.6% of
net sales, for the same period in 2002. The increase of $167,037, or 2.2%, in
the three-month period ended September 30, 2003 relative to the comparable
period in 2002 was primarily due to increased sales related to sales growth. The
decrease in cost of sales as a percentage of net sales in the three-month period
ended September 30, 2003 compared to the same period in 2002 is due to a
difference in product mix sold.

GROSS PROFIT--Gross profit was $4,496,426, or 37.0% of net sales, for the three
months ended September 30, 2003, compared to $4,290,923, or 36.4% of net sales,
for the same period in 2002. The increase of $205,503, or 4.8%, in the
three-month period ended September 30, 2003 relative to the comparable period in
2002 is primarily due to increased sales related to sales growth. The increase
in gross profit margins in the three-month period ended September 30, 2003
compared to the same period in 2002 is due to a difference in product mix sold.

SELLING EXPENSES--Selling expenses increased to $2,018,248, or 16.6% of net
sales, for the three months ended September 30, 2003, compared to $1,783,992, or
15.1% of net sales, for the same period in 2002. The increase of $234,256, or
13.1%, is due to increased commission expense related to increased sales in the
three months ended September 30, 2003, compared to the same period in 2002. The
remaining increase is the result of an increase in self insured health benefit
expenses.

GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased to $1,740,322, or 14.3% of net sales, for the three months ended
September 30, 2003, compared to $1,602,237, or 13.6% of net sales, for the same
period in 2002. The increase of $138,085, or 8.6%, for the three-month period is
primarily a result of investment consultant fees, increased legal fees due to a
complaint filed by two of the Company's former executives and increased self
insured health benefit expenses.

DEPRECIATION AND AMORTIZATION EXPENSES--Depreciation and amortization expenses
decreased to $157,339, or 1.3% of net sales, for the three months ended
September 30, 2003, compared to $199,042, or 1.7% of net sales, for the same
period in 2002. The decrease of $41,703, or 21.0%, in depreciation and
amortization expenses is primarily the result of certain assets and intangible
assets becoming fully depreciated.

INTEREST EXPENSE--Interest expense decreased to $299,969 for the three months
ended September 30, 2003, compared to $326,967 for the same period in 2002. The
decrease of $26,998, or 8.3%, is the result of decreased interest rates and fees
as a result of the payoff of the Citizens term loan in June 2003 offset by the
implementation of SFAS No. 150 which requires all accrued dividends to be
recorded as interest expense effective July 1, 2003.

INCOME TAX PROVISION--The Company recorded no income tax expense for the
three-month periods ended September 30, 2003 and 2002. Although the Company's
current year taxable income for federal and certain states was eliminated due to
the use of net operating loss carryforwards to offset federal and state income
tax liabilities, the Company may be subject to income taxes in 2004 based on
limitations on the use of its net operating loss carryforwards.

-26-

NET INCOME (LOSS)--Net income increased to $201,824 for the three months ended
September 30, 2003, compared to a net loss of ($3,970,426) for the same period
in 2002. The increase of $4,172,250, or 105.1%, resulted primarily from the
goodwill impairment charge of $4,454,656 recorded in July 2002 as a result of
SFAS No. 142 implementation.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2003, we had a working capital deficit of $357,284 compared to
a deficit of $793,154 at June 30, 2003. The decrease in our working capital
deficit was primarily the result of decreased receivable balances and increase
in lines of credit, offset by decreased accounts payable, accrued expenses and
current obligations for long-term debt.

On March 2, 2001, we entered into an Amended and Restated Security and Loan
Agreement (the "Luxtec Credit Agreement") for a $2,500,000 line of credit (the
"Luxtec Line of Credit") with ARK CLO 2000-1 LIMITED ("ARK"). On August 6, 2002,
we amended the original Luxtec Credit Agreement. Pursuant to the amendment to
the Luxtec Credit Agreement, ARK waived and amended certain provisions under the
Luxtec Credit Agreement. Under the amendment the maximum amount available to
borrow under the Luxtec Line of Credit was limited to the lesser of $1,275,000
or a certain percentage of accounts receivable and inventory, as defined
($1,275,000 at September 30, 2003). As of September 30, 2003, borrowings bore
interest at ARK's prime rate plus 3.0% (7.00% at September 30, 2003). 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 PrimeSource Healthcare's assets,
excluding the capital stock of, and assets held by, PrimeSource Surgical. At
September 30, 2003, there was $3,415 of availability under the Luxtec Line of
Credit. Borrowings under the Luxtec Line of Credit are payable upon maturity on
December 31, 2003.

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 as of September 30, 2003.

On June 14, 1999, the Company's wholly owned subsidiary, PrimeSource Surgical,
entered into an Amended and Restated Credit Agreement (the "PrimeSource Surgical
Credit Agreement") with Citizens Bank of Massachusetts ("Citizens") for a line
of credit (the "PrimeSource Surgical Line of Credit"). On August 6, 2002,
PrimeSource Surgical amended the original PrimeSource Surgical Credit Agreement,
pursuant to which the maturity date of the revolving line of credit under the
PrimeSource Surgical Credit Agreement was extended to March 31, 2004, the
maturity date of the term loan was extended to December 31, 2003, and certain
other changes were made including modifications to interest rates and covenant
requirements. Under the amendment the maximum amount available to borrow under
the PrimeSource Surgical Line of Credit is limited to the lesser of $8,000,000
or a certain percentage of accounts receivable and inventory, as defined by the
PrimeSource Surgical Credit Agreement ($5,271,490 at September 30, 2003). As of
September 30, 2003, borrowings bore a variable step interest rate at Citizens'
prime rate plus 3.00% (7.00% at September 30, 2003). 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 of the assets directly held by
PrimeSource Surgical. At September 30, 2003, there was $272,905 of availability
under the PrimeSource Surgical Line of Credit. Borrowings under the PrimeSource
Surgical Line of Credit are payable upon maturity in March 31, 2004.

On June 14, 1999, as part of the PrimeSource Surgical Credit Agreement,
PrimeSource Surgical executed an Amended and Restated Term Note (the
"PrimeSource Surgical Term Loan") in the original amount of $5,000,000 with
Citizens. On June 30, 2003, we paid off the entire outstanding balance of

-27-

the PrimeSource Surgical Term Loan in connection with the sale of Ruby and the
funding of the most recent Series G Convertible Redeemable, Preferred Stock
("Series G Stock").

The PrimeSource Surgical Term Loan was subject to a term loan facility fee.
PrimeSource Surgical accrued a $75,000 fee on August 6, 2002, in connection with
the amendment to the PrimeSource Surgical Credit Agreement. PrimeSource Surgical
was obligated to pay an additional $75,000 fee under the PrimeSource Surgical
Term Loan on the last day of each calendar quarter, beginning on September 30,
2002 and for every quarter thereafter until the earlier of payment in full of
the PrimeSource Surgical Term Loan or December 31, 2003. The accrued term loan
facility fees were reduced by 40% because on June 30, 2003, we paid off the
entire outstanding balance of the PrimeSource Surgical Term Loan in connection
with the sale of Ruby and the funding of the most recent Series G Stock. In
connection with the PrimeSource Surgical Term Loan payoff on June 30, 2003, the
amount outstanding under this term loan facility fee is $180,000, which is
included in accrued expenses and is due on or before December 31, 2003.

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. PrimeSource Surgical was in compliance with
these covenants as of September 30, 2003.

Other notes payable include:

September 30, June 30,
2003 2003

Luxtec tenant note $73,983 $77,650

PrimeSource legal counsel note, net of unamortized
discount of $7,042 and $12,827, respectively 277,957 357,173

PrimeSource Citizens Bank note 62,500 187,500

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

Total other notes payable $457,690 $665,573
======== ========

The Luxtec tenant note is a $100,000 note payable for tenant improvements to
Luxtec's leased premises in West Boylston, Massachusetts, which bears interest
at 9.5% and is due September 19, 2005. Payments are interest only for the first
12 months, with remaining payments calculated on a 7-year amortization table
with a balloon payment in September 19, 2005.

The PrimeSource legal counsel note is a non-interest bearing demand note payable
with an original balance of $559,977 (net of unamortized discount of $40,023
based on an imputed interest rate of 8%) to its special legal counsel in payment
of existing outstanding accounts payable, which matures May 30, 2004. Special
legal counsel reduced the balance of this note by $150,000 in November 2003.
Monthly principal payments are $30,000 commencing on March 20, 2004.

The PrimeSource Citizen Bank note is a $250,000 note payable to Citizens in
payment of the bank refinancing amendment fee. Equal principal payments on the
note of $62,500 each are due March 31, 2003, June 30, 2003, September 30, 2003
and December 31, 2003. This note has been recorded as deferred financing costs

-28-

and is being amortized over the life of the PrimeSource Surgical Credit
Agreement.

As of September 30, 2003, we had $224,689 of cash and cash equivalents. In
addition, the principal source of our short-term borrowing is the PrimeSource
Surgical Line of Credit. As of September 30, 2003, we had $272,905 available
under the PrimeSource Surgical Line of Credit. In addition, we may attempt to
raise additional equity or debt capital in the future.

The Company's primary debt financing is provided under loans from two different
banks. As of September 30, 2003, the Company had $4,998,585 of outstanding
borrowings under the PrimeSource Surgical credit agreement (the "PrimeSource
Surgical Credit Agreement"), and $1,271,585 outstanding under the Luxtec credit
agreement (the "Luxtec Credit Agreement"), as further discussed in Note 5. The
two credit agreements discussed above include certain financial covenants, with
which the Company was in compliance at September 30, 2003. The PrimeSource
Surgical Credit Agreement matures on March 31, 2004 and the Luxtec Credit
Agreement matures on December 31, 2003. The Company is evaluating refinancing
its credit agreements or raising additional funding through equity placements to
consolidate its credit agreements into a single agreement. Based upon
discussions to date, Company management believes it will obtain adequate bank
facilities and funding to continue to fund operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------

The Company's market risk exposure relates to outstanding debt. The outstanding
balance of the Company's credit facilities at September 30, 2003 is $6,270,170,
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 earnings or cash flows of the Company.

-29-

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------

(a) Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of September 30, 2003. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of September 30, 2003, the Company's disclosure controls and procedures
are effective

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------

On September 5, 2002, John F. Rooney and Michael K. Bayley, each former
executive officers and directors of PrimeSource, filed a complaint against the
Company in Arizona Superior Court, County of Pima. The complaint alleged a
breach by the Company of the severance agreements with each of Messrs. Rooney
and Bayley and seeks an aggregate of at least $1.2 million in compensatory
damages. The complaint was settled in November 2003. The terms of settlement
include total cash payments of $125,000 to Messrs. Rooney and Bayley over a
period of four months, beginning in November 2003.

We are also 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------------------------------------

None.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------

(a) Exhibits

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).

-31-

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. (Incorporated
by reference to Form 10-K, File No. 0-14961, filed October 15,
2001).

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

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

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

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

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

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

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

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

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

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

10.2 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).

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

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

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

10.6 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).

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

10.8 Amended and Restated Loan and Security Agreement, dated March
2, 2001, by and among Luxtec Corporation, Fiber Imaging

-33-

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).

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

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

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

10.12 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).

10.13 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).

10.14 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).

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

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

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

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

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

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

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

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

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

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

(b) Reports on Form 8-K - The Company filed the following current reports on
Form 8-K during the three-month period ended September 30, 2003:

(1) On July 2, 2003, the Company filed a current report on Form
8-K, announcing under Item 2, the sale of all of the issued
and outstanding capital stock of Ruby Merger Sub, Inc., and
announcing under Item 5, the issuance and sale of 17,812.50
shares of its Series G Convertible Redeemable Preferred Stock.

(2) On September 8, 2003, the Company filed a current report on
Form 8-K, concerning under Item 5, the resignation of Bradford
C. Walker as President and Chief Executive Officer and
director of the Company, and the related severance agreement
and general release. The Company also announced the
appointment of Joseph Potenza as its President and the
appointment of Mr. Potenza and Shaun McMeans to serve as
directors of the Company.

-35-

PRIMESOURCE HEALTHCARE, INC. AND SUBSIDIARIES

SIGNATURES
- --------------------------------------------------------------------------------

Pursuant to the requirements 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.
(Registrant)

November 13, 2003 /s/ Shaun D. McMeans
- ----------------- --------------------------------------
Date Shaun D. McMeans
Chief Financial Officer
(Principal Accounting Officer and Duly
Authorized Executive Officer)

-36-

INDEX TO EXHIBITS
- --------------------------------------------------------------------------------

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).

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).

-39-

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).

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

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

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

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

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

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

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

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

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

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

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

10.2 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).

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

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

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

10.6 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).

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

10.8 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).

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

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

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

10.12 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).

10.13 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).

10.14 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).

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

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

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

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

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

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

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

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

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

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

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