<PAGE>   1

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    Form 10-K

(MARK ONE)

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

                  For the fiscal year ended December 31, 1997

                                       OR

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

                  For the transition period from _____________ to ______________

                         Commission File Number 0-27212
                                 ENDOCARE, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                              33-0618093
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                             Identification No.)

   7 Studebaker, Irvine, California                                 92618
(Address of principal executive offices)                          (Zip code)

Registrant's telephone number, including area code: (714) 595-4770

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

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.001 par value
                                (Title of Class)

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

        The number of shares of the registrant's common stock outstanding as of
March 24, 1998 was 8,386,167.

The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was $26,206,772 (computed using the average bid
and asked prices quoted on the NASDAQ Small Cap Market on March 24, 1998).

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


<PAGE>   2
                                 ENDOCARE, INC.
                       INDEX TO ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997


                            ITEM NUMBER AND CAPTION
                            -----------------------

<TABLE>
<CAPTION>
                                                                       PAGE
    PART I                                                            NUMBER
    ------                                                            ------
<S>                                                                    <C>
    Item 1.  Business................................................    3
    Item 2.  Properties..............................................   14
    Item 3.  Legal Proceedings.......................................   14
    Item 4.  Submission of Matters to a Vote of Security Holders.....   14


    PART II
    -------

    Item 5.  Market for Registrant's Common Equity
             and Related Shareholder Matters.........................   15
    Item 6.  Selected Financial Data.................................   16
    Item 7.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations.....................   17
    Item 7A. Quantitative and Qualitative Disclosures about
             Market Risk.............................................   20
    Item 8.  Financial Statements and Supplementary Data.............   20
    Item 9.  Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure.....................   20


    PART III
    --------

    Item 10.  Directors and Executive Officers of the Registrant......  21
    Item 11.  Executive Compensation..................................  22
    Item 12.  Security Ownership of Certain Beneficial
              Owners and Management...................................  25
    Item 13.  Certain Relationships and Related Transactions..........  26


    PART IV
    -------

    Item 14.  Exhibits, Financial Statement Schedules, and Reports on
              Form 8-K................................................  26
</TABLE>



                                       2
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                                     PART I
ITEM 1.     BUSINESS


GENERAL
   ENDOcare, Inc., a Delaware corporation ("ENDOcare" or the "Company")
develops, manufactures and markets minimally invasive medical
devices to treat a variety of urological conditions. The Company has focused its
efforts on the development of surgical devices for the treatment of the two most
common diseases of the prostate: Benign Prostate Hyperplasia ("BPH") and
prostate cancer. To date, the Company has received marketing clearance by the
FDA for several of its products and has a research and development
pipeline for the development of other novel urological devices.

   ENDOcare has developed and recently introduced an innovative, second
generation cryosurgical system for the treatment of prostate cancer. The
CRYOcare System(TM) offers the advantage of controlled, targeted freezing of the
tumor with the benefit of faster patient recovery and minimal complications. In
November 1996, the Company entered into an exclusive worldwide distribution
agreement with Boston Scientific Corporation ("Boston Scientific") to market and
sell the CRYOcare System for urological applications.

   ENDOcare also is developing new therapies for the improved treatment of BPH.
The Company's initial product development efforts for BPH involve the use of
stent technology to provide both immediate and long-term relief to BPH patients.
ENDOcare is implementing a two-part strategy for the commercialization of its
stent-based BPH therapies. The first stage is the development of the Company's
Horizon Temporary Stent. This nitinol-based stent has shape memory
characteristics for easy placement via a catheter following surgical
intervention of the prostate and convenient atraumatic removal of the stent
following the healing process. The Company believes that its Horizon Temporary
Stent will address one of the major issues of BPH therapy, the immediate relief
of patients following thermotherapy and surgical resection. ENDOcare has
recently filed an investigational device exemption ("IDE") with the U.S. Food
and Drug Administration to initiate human clinical studies of the Horizon
Temporary Stent and expects to begin clinical trials in mid 1998.

   The second stage in developing the Company's stent technology will combine a
nitinol stent with a catheter system to deliver thermotherapy. The Company
believes that this ThermaStent(TM) will provide immediate and long-term therapy
in a one-step process. Both stent applications are being designed to be
performed on an outpatient basis. The Company believes that its ability to
perform BPH therapy in this manner could result in an increase in the number of
BPH sufferers who will seek curative surgical procedures.

   Since its formation in 1990, ENDOcare operated first as a research and
development department, then later as a division of Medstone International, Inc.
("Medstone"). Effective January 1, 1996, ENDOcare became a totally independent,
publicly-owned corporation. At the beginning of 1996, ENDOcare issued
5,616,528 shares of ENDOcare common stock to Medstone in exchange for $500,000
cash and the accounts receivable, inventory, and other net assets of the
ENDOcare Division. On February 6, 1996, Medstone distributed to existing
Medstone shareholders a stock dividend of one share of ENDOcare common stock for
each share of Medstone common stock outstanding on December 29, 1995.

   On January 27, 1997, ENDOcare completed a $7,765,499 private placement of its
common stock whereby 2,218,714 shares were placed with qualified institutional
investors at a price of $3.50 per share. Net proceeds after deducting
commissions and other expenses of sale were approximately $7,050,000.
Oppenheimer & Co., Inc. served as the placement agent for the offering.

   On January 27, 1997, an aggregate of 332,000 shares of common stock were
issued upon conversion of $750,000 in promissory note payables plus accrued
interest on such promissory notes.

MARKET BACKGROUND

PROSTATE CANCER
   The incidence of prostate cancer has risen steadily since 1980 to become the
second most common cause of cancer-related deaths among men. The dramatic
increase in prostate cancer cases has led to heightened awareness of the
disease, which has led to increased rates of testing and improved diagnostic
methods.

   Therapeutic alternatives for patients with prostate cancer have been both
limited and unattractive. Current treatment options include radical surgery,
radiation therapy, hormone therapy, cryotherapy and "watchful waiting." These
options are evaluated using a number of criteria, including the patient's age,
physical condition and stage of the disease. However, due to the slow
progression of the disease, the decision for treatment typically is based upon
the severity of the condition and the resulting quality of life.

                                       3
<PAGE>   4

   Radical prostatectomy is most often the therapy of choice due to the high
degree of confidence in surgically removing the cancerous tissue, particularly
for patients having more advanced stages of the disease and those who fail to
respond to less invasive alternatives. The procedure is dependent on the skill
of the surgeon and is highly morbid, often associated with high rates of
impotence, incontinence and operative mortality.

   Cryosurgery, freezing tissue to destroy tumor cells, was first developed in
the 1960's. During this period, the use of "cold probes," or cryoprobes, was
explored as a method to kill prostate tissue without having to use radical
surgery. Although effective in killing cancer cells, the lack of control as to
the amount of tissue frozen prevented broad use and development of cryotherapy
for prostate cancer.

   In the late 1980's, progress in ultrasound imaging allowed for a revival in
the use of cryosurgery. Using ultrasound, the cryoprobe may be guided to the
targeted tissue from outside the body through a small incision. The physician
activates the cryoprobe and uses ultrasound to monitor the growth of ice in the
prostate as it is occurring. When the ice encompasses the entire prostate, the
probe is turned off. This feedback mechanism of watching the therapy as it is
administered allows the physician precise control during application. Recent
published studies suggest that cryosurgery may be able to deliver disease free
rates comparable to radical surgery, but with the benefit of being performed in
an outpatient setting and with lower rates of incontinence and mortality.

BENIGN PROSTATE HYPERPLASIA
   BPH, which affects a large number of adult men, is a non-cancerous
enlargement of the innermost part of the prostate. BPH frequently results in a
gradual squeezing of the part of the urethra which runs through the prostate.
This causes patients to experience a frequent urge to urinate because of the
incomplete emptying of the bladder and a burning sensation or similar discomfort
during urination. The obstruction of urinary flow can also lead to a general
lack of control over urination, including difficulty initiating urination when
desired as well as difficulty preventing urinary flow because of the residual
volume of urine in the bladder (a condition known as urinary incontinence). BPH
symptoms may disturb sleep by causing the BPH sufferer to awaken frequently to
urinate. Although symptoms occasionally stabilize or diminish without
intervention, they generally become more severe over the course of the disease.
Left untreated, the obstruction caused by BPH can lead to acute urinary
retention (complete inability to urinate), serious urinary tract infections and
permanent bladder and kidney damage.

   Most males will eventually suffer from BPH. The incidence of BPH for men in
their fifties is approximately 50% and rises to approximately 80% by the age of
80. The general aging of the United States population, as well as increasing
life expectancies, is anticipated to contribute to the continued growth in the
number of BPH sufferers.

   Patients diagnosed with BPH generally have four options for treatment: (i)
"watchful waiting," (ii) drug therapy; (iii) surgical intervention, including
transurethral resection of the prostate ("TURP") and laser assisted
prostatectomy; and (iv) new, less invasive thermal therapies. Currently the
number of patients who are actually treated by surgical approaches is
approximately 2% to 3% of patients with BPH. Treatment is generally reserved for
patients with intolerable symptoms or those with significant potential symptoms
if treatment were withheld. A large number delay discussing their symptoms or
elect "watchful waiting" to see if the condition remains tolerable. The Company
believes the development of less invasive procedures for treatment of BPH could
result in a substantial increase in the number of BPH patients who elect to
receive interventional therapy.

   Drug Therapies: Some drugs are designed to shrink the prostate by inhibiting
or slowing the growth of prostate cells. Other drugs are designed to relax the
muscles in the prostate and bladder neck to relieve urethral obstruction.
Current drug therapy generally requires daily administration for the duration of
the patient's life.

   Surgical Interventions: The most common surgical procedure, transurethral
resection of the prostate ("TURP"), involves the removal of the prostate's
innermost core in order to reduce pressure on the urethra. TURP is performed by
introducing an electrosurgical cutting loop through a cystoscope into the
urethra and "chipping out" both the prostatic urethra and surrounding prostate
tissue up to the surgical capsule, thereby completely clearing the obstruction.
The average TURP procedure costs approximately $8,000 and requires a hospital
stay of approximately four days.

   Modified Electrosurgical Electrodes: These devices have made it possible to
surgically remove prostate tissue in a "near bloodless" procedure using an
electrode which cauterizes as it removes tissue. Introduced in 1995, this new
technology has rapidly gained acceptance in the urology community as a means of
ablating prostate tissue in a well controlled and near-bloodless fashion.
However, like a conventional TURP, this procedure must be performed in a
hospital under general or spinal anesthesia, results in destruction of the
prostatic urethra and requires insertion of a urinary catheter post-surgery.

   Laser Ablation of the Prostate: Laser assisted prostatectomy includes two
similar procedures, visual laser ablation of the prostate ( V-LAP ) and contact
laser ablation of the prostate ( C-LAP ), in which a laser fiber catheter is
guided through a cystoscope and used to ablate and coagulate the prostatic
urethra and prostatic tissue. Typically, the procedure is performed in the
hospital under either general or spinal anesthesia, and an overnight hospital
stay is required. In V-LAP, the burnt prostatic tissue then necroses, or dies,


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<PAGE>   5

and over four to twelve weeks is sloughed off during urination. In C-LAP, the
prostatic and urethral tissue is burned on contact and vaporized.

   Less Invasive Thermal Therapies: Other technologies under development are
non-surgical, catheter based therapies that use thermal energy to preferentially
heat diseased areas of the prostate to a temperature sufficient to cause cell
death. Thermal energy forms being utilized include microwave, radio frequency
("RF") and ultrasound energy. The procedures are typically performed in an
outpatient setting under local anesthesia. Both microwave and RF therapy systems
are currently being marketed worldwide, including the United States, where the
first FDA clearances were obtained in May and October 1996, for microwave and
RF, respectively.


ENDOCARE PRODUCTS
<TABLE>
<CAPTION>
                         TARGETED INDICATION
PRODUCT NAME                                     STATUS            LAUNCH DATE
<S>                      <C>                     <C>               <C>
Prolase II               General Urology         Marketing         October 1993
Prolase I                General Urology         Marketing         November 1994
Vaporbar                 BPH                     Marketing         November 1995
Uroloop                  BPH                     Marketing         November 1995
CRYOcare-8 Probe System  Prostate Cancer         Marketing         May 1996
CRYOcare-4 Probe System  General Surgery         Marketing         May 1996
Horizon Temporary Stent  BPH                     Pre-Clinical         ------
                                                 Studies
ThermaStent              BPH                     Development          ------
</TABLE>


CRYOCARE SYSTEM
   ENDOcare has developed the CRYOcare System, a second generation cryosurgery
system designed to overcome the limitations of existing systems and to allow the
urologist to treat prostate cancer in a minimally invasive manner in an
outpatient setting. The CRYOcare System has been designed to freeze tissue much
faster and with more control than existing systems. This product is marketed in
the field of urology by Boston Scientific pursuant to an exclusive worldwide
distribution agreement.

   The Company believes the CRYOcare System is significantly more efficient than
current competitive cryosurgical technology in creating the lethal temperatures
in the cryoprobe necessary to kill cancer cells. Current cryosurgical technology
employs a tank of liquid nitrogen, which is at -186 degrees C, and pumps it
through a tube to the cryoprobe. The challenge for current liquid nitrogen
technology is to not "leak" the cold prior to delivering it to the tumor site.
Liquid nitrogen technology starts out coldest at the storage tank and can only
get warmer and less effective by the time it reaches the tumor site and attempts
to freeze the tissue.

   ENDOcare's CRYOcare System utilizes a system that converts argon gas to a
liquid form at the tip of the probe. The gas itself is at room temperature until
reaching the tip, making it easier to handle and eliminating the need to store
liquid nitrogen. In addition, a temperature of -150 degrees C is achieved at the
tip of the cryoprobe, considerably colder than the -90 degrees C achieved using
liquid nitrogen systems, which results in substantially faster tissue freezing
rates.

   The CRYOcare System incorporates enhanced control mechanisms to minimize the
risk of unintended damage to tissue surrounding the prostate. Most
significantly, the CRYOcare probes stop freezing instantly, whereas probes using
liquid nitrogen take up to one minute to stop freezing tissue. Use of four to
six temperature probes selectively placed in the prostate near the rectal
tissue, sphincter muscles (which control continence) and neurovascular bundles
(which control potency) enables the physician to monitor temperatures of tissue
adjacent to the prostate. Combining these control features allows the physician
to treat prostate cancer with a high degree of control and precision that was
not previously possible. The CRYOcare System is approximately one quarter of the
size of currently available systems and one tenth of the weight.

   The CRYOcare System has been cleared for marketing by the FDA and was
introduced in May 1996. The Company has installed several CRYOcare Systems in
North America, with over 400 patients treated to date. Early clinical data at
the CRYOcare Systems clinical sites are encouraging; however, further clinical
work is needed to establish cryotherapy as a primary treatment for prostate
cancer. The Company expects that further studies will be required prior to the
establishment of national reimbursement by Medicare. Until such time as Medicare
reimbursement is approved, sales of CRYOcare Systems may be limited within the
urology market to small commercial, self-paying, and international customers.

   The Company has filed patent applications relating to the technology used to
create the freezing process and to precisely control the shape of the freeze
zone produced by the cryoprobes and has received notice of allowance from the
U.S. Patent and Trademark


                                       5
<PAGE>   6

Office for it patent application covering the Company's CRYOprobe technology.
This also may allow for expanded therapeutic applications by tailoring the
cryoprobe performance to other anatomical targets, such as liver cancer and
gynecology applications.


OFFICE-BASED BPH THERAPY
   The goal of developing bloodless, anesthesia free, and pain free BPH
therapies has resulted in a category of new devices called thermotherapy
systems. In thermotherapy, a device is introduced into the prostate in the
gentlest manner possible and heat is delivered very slowly to thermally destroy
the enlarged tissue. The advantage of these thermotherapy systems is their
ability to destroy the obstruction without bleeding or anesthesia, thus allowing
the patient to be treated in the urologist's office. The less-invasive nature of
the therapy allows for faster and easier recovery periods.

   The disadvantage of thermotherapy based systems is the manner in which the
obstructive tissue is removed. The tissue temperature of the obstructive tissue
is slowly raised to the point the cells can no longer survive. The dead tissue
is left in place, in contrast to the traditional surgical techniques, in which
the obstructive tissue is removed immediately. The period it takes for the dead
cells to be completely cleared, and thus for the obstruction to be removed, can
be up to six months. Patients who are treated by thermotherapy typically recover
quickly, but need to be catheterized for up to one week post treatment to
maintain urine flow.

   ENDOcare is developing innovative products that will address BPH therapy to
include thermotherapy approaches. The development process will occur in two
discrete steps. The first step will deliver an immediate relief component to be
used with existing thermotherapy systems. The second step will offer a
combination device that will be able to provide immediate relief and long-term
removal of the obstructive tissue without bleeding or anesthesia.

   Horizon Temporary Stent(TM). ENDOcare is developing a new urological stent
which has been designed to provide immediate relief for BPH patients who undergo
thermotherapy. The Company's Horizon Temporary Stent is made of nitinol, a new
titanium metal alloy that employs a feature called shape memory. This shape
memory feature allows the Horizon Temporary Stent to be soft and flexible in its
relaxed state, allowing the device to be introduced in a relatively pain free
manner using a catheter. When the device is heated to its transition
temperature, the device self-expands to a pre-determined shape. In the case of
the Horizon Temporary Stent, the predetermined shape is that of a rigid tube, or
stent. The catheter will be inserted using a local anesthetic, and positioned in
the prostatic urethra under direct vision. The stent will be activated by
flowing warm water through the catheter, causing the shape memory to open to its
tube-like position. After approximately 30 days, the stent is removed by the
physician by flushing cold water through a flexible endoscope, causing the stent
to return to its soft, relaxed state. The stent will be removed by retrieving it
through the working channel of the flexible endoscope.

   ENDOcare has completed the design of its Horizon Temporary Stent and has
recently filed an IDE to commence human clinical trials. Because the stent will
be removed from the patients within 30 to 60 days, the Company expects that the
regulatory process may be expedited. However, there can be no assurance that the
FDA will not require more time consuming and extensive clinical studies.

   ThermaStent(TM). ENDOcare's ThermaStent(TM) is expected to be the second
product developed for the Company's office-based therapy product line. The
ThermaStent(TM) is being designed to combine thermotherapy with the Company's
nitinol stent.

   The Company has secured a patent position on the ThermaStent(TM) device. In
April 1996, ENDOcare licensed from the Brigham and Women's Hospital an issued
patent covering urological applications of the delivery of thermal energy by a
stent. The Company has filed an additional patent application which describes
the device under development and its use to achieve temporary relief.


SURGICAL DISPOSABLES
   Since its formation, ENDOcare has developed a line of surgical disposables
targeting improved treatment of BPH. The common element in the development of
each of the disposable devices is the ability to remove tissue in a near
bloodless manner.

   In 1993, ENDOcare received FDA clearance to market a laser fiber which allows
urologists to heat the prostate tissue which causes the obstructive symptoms of
BPH. The device, Prolase, is a fiber optic catheter which bends the laser energy
sideways, enabling urologists to more easily reach the obstructive tissue.
Although lasers are effective in bloodlessly treating BPH, sales of Prolase
fibers have been inhibited by the high capital cost of purchasing laser
generators that has impacted the use of V-LAP generally.

   In 1995, ENDOcare developed a line of disposable electrodes that vaporize
prostate tissue while cutting. The combination of vaporization and cutting
results in near bloodless removal of the obstructed tissue. The Uroloop and
Vaporbar electrodes represent the next step in the evolution of near bloodless,
outpatient procedures for BPH.


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<PAGE>   7

PATENTS AND INTELLECTUAL PROPERTY
   The Company's policy is to secure and protect intellectual property rights
relating to its technology. While ENDOcare believes that the protection of
patents and licenses is important to its business, it also relies on trade
secrets, know-how and continuing technological innovation to maintain its
competitive position. The Company has received patents relating to its Prolase
line of side-firing laser fibers and notice of allowance from the U.S. Patent
and Trademark Office for its patent application covering the Company's CRYOprobe
technology. The Company entered into a worldwide licensing agreement relating to
urological applications of a patent from Brigham and Women's Hospital for the
ThermaStent(TM) product ENDOcare is developing. This issued patent covers the
concept of a variety of methods to heat occluded body passageways by use of a
stent. The Company has filed a patent application which focuses on the use of a
combination therapy of a stent for short term relief of the occlusion and
thermotherapy for long-term relief. Certain patents for some of the new products
described under "Products" have been filed or are in the process of being filed.

   No assurance can be given that ENDOcare's processes or products will not
infringe patents or proprietary rights of others or that any license required
would be made available under any such patents or proprietary rights, on terms
acceptable to ENDOcare or at all. From time to time, the Company has received
correspondence alleging infringement of proprietary rights of third parties. No
assurance can be given that any relevant claims of third parties would not be
upheld as valid and enforceable, and therefore that the Company could be
prevented from practicing the subject matter claimed or would be required to
obtain licenses from the owners of any such proprietary rights to avoid
infringement.

   The Company seeks to preserve the confidentiality of its technology by
entering into confidentiality agreements with its employees, consultants,
customers and key vendors and by other means. No assurance can be given,
however, that these measures will prevent the unauthorized disclosure or use of
such technology.


SALES AND MARKETING

   In November 1996, the Company entered into an eight-year worldwide (excluding
Canada) exclusive distribution agreement with Boston Scientific Corporation
("BSC") to market the CRYOcare System for urology. As a result, future sales of
the CRYOcare System, the Company's main current product, will be dependent upon
the marketing efforts of BSC.

   The Company derives a majority of its revenues from the sales of CRYOcare
Systems and expects that sales of CRYOcare Systems will continue to constitute
the majority of net sales for the foreseeable future. Accordingly, any factor
adversely affecting the sales of CRYOcare Systems would have a material adverse
effect on the Company's business, financial condition and results of its
operations. Although the distributorship agreement requires Boston Scientific to
purchase a minimum number of products, if and when there were a lack of sales as
a result of unforeseen regulatory or clinical circumstances relating to a
product or failure of the Company to deliver products in a timely manner, the
minimum purchase requirements can be renegotiated. Currently, Medicare does not
provide reimbursement for cryosurgical ablation of the prostate, one of the
approved uses of the Company's eight probe CRYOcare System.

   In addition, under the distribution agreement, Boston Scientific has a right
of first refusal to match any offer received by the Company from a third party
to purchase the assets related to the CRYOcare System for urological
applications, and a right to buy the assets and technology related to the
CRYOcare System for urological applications at purchase dates of twenty-four,
thirty-six and forty-eight months after the date that Medicare provides
reimbursement for cryosurgical ablation of the prostate, for a purchase price of
1.7, 1.5 and 1.3 times net sales for the product for the preceding twelve
months, but not less than $40 million, $50 million and $60 million,
respectively.

   For urological applications, ENDOcare's CRYOcare System is distributed
worldwide by BSC. In Canada it is distributed by Mentor Medical Systems Canada
under a three-year distribution agreement. For the years ended December 31, 1996
and 1997, BSC accounted for 12% and 59%, respectively, of the Company's
revenues. The loss of this distributor could have a material adverse effect on
the Company. With the exception of the CRYOcare System for urological
applications, the Company sells its products domestically and internationally
primarily through independent distributors. Overall, international sales for
urological applications represented approximately 50% of revenue during 1996 and
such sales were insignificant in 1997. The Company's distributor agreements
typically provide the distributor with exclusive selling rights to certain
products in a particular territory, and are terminable by either party on 180
days notice. Each party bears its own expenses in performing under the
agreement. The Company's ability to distribute its products depends
substantially on the capabilities of its distributors. There can be no assurance
that the Company will be able to maintain or expand its relationships with its
distributors or to replace a distributor in the event any such relationship were
terminated. In the event that the Company's relationships with any of its
distributors were terminated and the Company was unable to replace the
distribution capability, the Company's ability to distribute its products would
be materially adversely affected, which would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, in such event, the Company's current sales and marketing personnel and
financial resources might not be sufficient to enable the Company to establish
its own distribution capability to market and sell its products. See Note 11 to
the Financial Statements.

                                       7
<PAGE>   8

BACKLOG
   At December 31, 1997, the Company maintained minimal backlog. ENDOcare's
policy is to stock enough inventory to be able to ship most orders within a few
days of receipt of order. Historically, most of the Company's orders have been
for shipment within 30 days of the placement of the order. Therefore, backlog
information as of the end of a particular period is not necessarily indicative
of future levels of the Company's revenue.


MANUFACTURING
   The Company uses a combination of internal manufacturing capacity and third
party manufacturers in its manufacturing efforts. Most of the Company's
purchased components and processes are available from more than one vendor.
However, certain components and processes are currently available from or
performed by a single vendor. The ability of third party manufacturing sources
to deliver components or finished goods will affect the Company's ability to
commercialize its products, and the Company's dependence on third party sources
may adversely affect the Company's profit margins. Further, although the Company
is in the process of identifying alternative vendors, the qualification of
additional or replacement vendors for certain components or services could be a
lengthy process. Any supply interruption from a single source vendor would have
a material adverse effect on the Company's ability to manufacture its products
until a new source of supply was qualified and, as a result, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

   Additionally, the Company's success will depend in part upon its ability to
manufacture its products in compliance with the FDA's current Good Manufacturing
Practices ("GMP") regulations and other regulatory requirements, in sufficient
quantities and on a timely basis, while maintaining product quality and
acceptable manufacturing costs. Failure to increase production volumes in a
timely or cost effective manner or to maintain compliance with current GMP or
other regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations. ENDOcare also
has obtained from the California Department of Health Services a license to
manufacture medical devices and is subject to periodic inspections and other
regulation by that agency.

   Further, the Company has limited experience in producing its products in
commercial quantities. Manufacturers often encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company's failure to overcome these manufacturing problems could
have a material adverse effect on the Company's business, financial condition
and results of operations.


GOVERNMENT REGULATION
   Governmental regulation in the United States and other countries is a
significant factor affecting the research and development, manufacture and
marketing of the Company's products. In the United States, the FDA has broad
authority under the Federal Food, Drug and Cosmetic Act and the Public Health
Service Act to regulate the distribution, manufacture and sale of medical
devices. Foreign sales of medical devices are subject to foreign governmental
regulation and restrictions which vary from country to country.

   Medical devices intended for human use in the United States are classified
into one of three categories, depending upon the degree of regulatory control to
which they will be subject. Such devices are classified by regulation into
either class I (general controls), class II (performance standards) or class III
(pre-market approval) depending upon the level of regulatory control required to
provide reasonable assurance of the safety and effectiveness of the device. Good
Manufacturing Practices, labeling, maintenance of records and filings with the
FDA also apply to medical devices.

   A subset of medical devices categorized as class I or II devices that were
commercially distributed before March 28, 1976 or are substantially equivalent
to a device that was in commercial distribution before that date may be marketed
after the acceptance of the pre-market notification under a 510(k) exemption.
The 510(k) section of the Federal Food, Drug and Cosmetic Act allows an
exemption from the requirement of pre-market notification. Generally, devices
that have an existing history or track record are included in this category.

   The process of obtaining FDA and other required regulatory clearances or
approvals is lengthy and expensive. There can be no assurance that ENDOcare will
be able to obtain necessary clearances or approvals for clinical testing or for
manufacturing or marketing of its products. Failure to comply with applicable
regulatory approvals can, among other things, result in warning letters, fines,
suspensions of regulatory approvals, product recalls, operating restrictions and
criminal prosecution. In addition, governmental regulation may be established
which could prevent, delay, modify or rescind regulatory clearance or approval
of ENDOcare's products. For example, in January 1993, the FDA, subsequent to
approving the use of lasers as in the Company's Prolase products, deemed such
use "experimental" for a particular procedure, which dramatically decreased
sales of the Company's Prolase products. Although such designation was later
rescinded by the FDA, there can be no assurance that any such position by the
FDA, or change of position by the FDA, would not adversely impact the Company's
business, financial condition or results of operations.

                                       8
<PAGE>   9

   Regulatory clearances or approvals, if granted, may include significant
limitations on the indicated uses for which the Company's products may be
marketed. In addition, to obtain such clearances or approvals, the FDA and
foreign regulatory authorities may impose numerous other requirements on the
Company. FDA enforcement policy strictly prohibits the marketing of approved
medical devices for unapproved uses. In addition, product approvals can be
withdrawn for failure to comply with regulatory standards or the occurrence of
unforeseen problems following initial marketing. There can be no assurance that
the Company will be able to obtain regulatory clearances or approvals for its
products on a timely basis or at all, and delays in receipt of or failure to
receive such approvals, the loss of previously obtained approvals, or failure to
comply with existing or future regulatory requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations.

   ENDOcare's current surgical disposable products and its new eight probe
CRYOcare System have received FDA clearance for sale in the United States for
approved urological uses. ENDOcare's previous manufacturing facility was subject
to an FDA audit in August 1996, and the Company received no notice that it did
not comply with the FDA's current GMP regulations. In addition, ENDOcare has
obtained from the California Department of Health Services a license to
manufacture medical devices, subject to periodic inspections and other
regulation by that agency.


COMPETITION
   Currently, the Company markets products in the following categories:
side-firing laser fibers, electrosurgical disposables and cryosurgical systems.
Significant competitors include Cryomedical Sciences, Inc., Urologix, Inc.,
VidaMed, Inc., EDAP/TMS, S.A., C.R. Bard, Inc. and ACMI/Circon Corporation.

   Many of the Company's competitors are significantly larger than the Company
and have greater financial, technical, research, marketing, sales, distribution
and other resources than the Company. Additionally, the Company believes there
will be intense price competition for products developed in the Company's
market. There can be no assurance that the Company's competitors will not
succeed in developing or marketing technologies and products that are more
effective or commercially attractive than any that are being developed or
marketed by the Company, or that such competitors will not succeed in obtaining
regulatory approval, introducing or commercializing any such products prior to
the Company. Such developments could have a material adverse effect on the
Company's business, financial condition and results of operations. Further,
there can be no assurance that, even if the Company is able to compete
successfully, that it would do so in a profitable manner.


EMPLOYEES
   As of December 31, 1997, ENDOcare had a total of 31 employees. Of the 31
employees, 7 are engaged directly in research and development activities, 3 in
regulatory affairs/quality assurance, 11 in manufacturing, 4 in sales and
marketing, and 3 in general and administrative positions. The Company expects to
substantially increase employment in anticipation of a commercial launch of the
CRYOcare System with Boston Scientific and expanded research and development
activities related to the Horizon Temporary Stent(TM) and ThermaStent(TM)
programs. The Company has never experienced a work stoppage, none of its
employees are represented by a labor organization, and the Company considers its
employee relations to be good.

   Although ENDOcare conducts most of its research and development using its own
employees, the Company occasionally has funded and plans to continue to fund
research using consultants. Consultants provide services under written
agreements and are paid based on the amount of time spent on Company matters.
Under their consulting agreements, such consultants are required to disclose and
assign to the Company any ideas, discoveries and inventions developed by them in
the course of providing consulting services.


CERTAIN CONSIDERATIONS
   This report for the year ended December 31, 1997 contains forward-looking
statements that involve risks and uncertainties, including those discussed below
and in the Management's Discussion and Analysis of Financial Condition and
Results of Operations section and Notes to Financial Statements. The actual
results that the Company achieves may differ materially from any forward-looking
statements due to such risks and uncertainties. All such factors should be
considered by investors in the Company.

   Limited Operating History; History of Losses: The Company has a limited
history of operations as an independent operating entity. Since its inception,
the Company has engaged primarily in research and development, and the Company
has minimal experience in manufacturing, marketing and selling its products in
commercial quantities. Additionally, the Company has incurred annual operating
losses since its inception, and expects to continue to incur operating losses as
new products will require substantial development, clinical, regulatory,
manufacturing and other expenditures. As of December 31, 1997, the Company's
accumulated deficit was approximately $5.4 million. There can be no assurance
that the Company will successfully develop or commercialize its current or
future products, that the Company will achieve significant revenues from sales,
or that the Company will achieve or sustain


                                       9
<PAGE>   10

profitability in the future. Additionally, successful completion of the
Company's development program and its transition to attaining profitable
operations is dependent upon achieving a level of revenues adequate to support
the Company's cost structure and obtaining additional financing adequate to
fulfill its research and development activities to continue refinement of
existing products and to develop and commercialize new products.

   Declining Sales of Existing Products; Uncertain Market Acceptance of the
Company's New Products: Sales of certain of the Company's existing products,
including Prolase(R) and Diolase(TM), have declined and are expected to continue
to decline over the next few years. Certain of the Company's products, including
its CRYOcare Systems, which were introduced in the second quarter of 1996, are
in the early stages of development or market introduction. There can be no
assurance that any of the Company's products will be accepted by potential
customers. The Company's ability to successfully market its CRYOcare System is
dependent upon acceptance of cryosurgical procedures in the United States and
certain international markets. Although cryosurgery has existed for many years,
cryosurgery has not been widely accepted due to cost, competing products and
limited reimbursement by third party payors. The acceptance of cryosurgery by
the general population also may be affected adversely by its price, concerns
relating to its safety and efficacy, the accepted effectiveness of alternative
methods of correcting urological disorders and lack of reimbursement from third
party payors. Medicare does not currently reimburse for cryosurgical ablation of
the prostate, one of the approved uses of the Company's eight probe CRYOcare
System. In addition, any future reported adverse events or other unfavorable
publicity involving patient outcomes from the use of cryosurgery, whether from
the Company's products or the products of the Company's competitors, could
adversely affect acceptance and reimbursement for cryosurgery. Emerging new
technologies and procedures to treat cancer, prostate enlargement and other
prostate disorders also may adversely affect the market acceptance of
cryosurgery. There can be no assurance that the Company's CRYOcare Systems will
gain any significant degree of market acceptance among physicians, patients and
health care payers.

   Uncertainty of Product Development; Risks Related to Clinical Trials: The
Company's growth is substantially dependent upon its continued ability to
successfully develop, commercialize and market new products. The Company's
future products are in varying stages of development. There can be no assurance
that the Company will be successful in developing and commercializing new
products that achieve market acceptance or that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new products. There can be no assurance that the
Company's products in development will prove to be safe and effective in
clinical trials under applicable regulatory guidelines, and clinical trials may
identify significant technical or other obstacles that must be overcome prior to
obtaining necessary regulatory or reimbursement approvals. Even if a product
overcomes these obstacles, the Company's products will not be used unless they
present an attractive alternative to other treatments and the clinical benefits
to the patient and cost savings achieved through use of the Company's products
outweigh the cost of such products. The Company believes that recommendations
and endorsements of physicians and patients and reimbursement by health care
payers will be essential for market acceptance of its products, and there can be
no assurance that any such recommendations, endorsements or reimbursements will
be obtained. Failure of the Company to successfully develop, commercialize and
market new products or the failure of the Company's products to achieve
significant market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations.

   Dependence on BSC; Limited Sales and Marketing Experience: The Company has
only limited experience marketing and selling its products, and does not have
experience marketing and selling its products in commercial quantities. In
November 1996, the Company entered into an eight year exclusive distribution
agreement whereby BSC agreed to market and distribute the Company's CRYOcare
Systems for urology worldwide. As a result, future sales of the CRYOcare System,
the Company's main product, will be dependent on the marketing efforts of BSC.
The Company derives a majority of its revenues from the sales of CRYOcare
Systems and expects that sales of CRYOcare Systems will continue to constitute
the majority of net sales for the foreseeable future. Accordingly, any factor
adversely affecting the sales of CRYOcare Systems would have a material adverse
effect on the Company's business, financial condition and results of its
operations. Although the distributorship agreement requires BSC to purchase a
minimum number of products, if and when there were a lack of sales as a result
of unforeseen regulatory or clinical circumstances relating to a product or
failure of the Company to deliver products in a timely manner, the minimum
purchase requirements can be renegotiated. Currently, Medicare does not provide
reimbursement for cryosurgical ablation of the prostate, one of the approved
uses of the Company's eight probe CRYOcare System.

   The Company believes that to become and remain competitive, it will need to
continue to develop third party distribution channels and/or a substantial
direct sales force for its new and other products. Establishing marketing and
sales capabilities sufficient to support sales in commercial quantities will
require significant resources, and there can be no assurance that the Company
will be able to recruit and retain direct sales personnel, or that the Company
will succeed in establishing and maintaining any third party distribution
channels, or that the Company's future sales and marketing efforts will succeed
at all.

   In addition, under the distribution agreement, BSC has a right of first
refusal to match any offer received by the Company from a third party to
purchase the assets related to the CRYOcare System for urological applications,
and a right to buy the assets and technology related to the CRYOcare System for
urological applications at purchase dates of twenty-four, thirty-six and

                                       10
<PAGE>   11

forty-eight months after the date that Medicare provides reimbursement for
cryosurgical ablation of the prostate, for a purchase price of 1.7, 1.5 and 1.3
times net sales for the product for the preceding twelve months, but not less
than $40 million, $50 million and $60 million, respectively. This buyout
provision may have the impact of creating a theoretical cap on the value of the
CRYOcare System for urological applications and, indirectly, the market value of
the Company.

   Prior Reliance on Mestone; Need for Additional Financing: The Company
operated as a division or wholly owned subsidiary of Medstone from its
commencement of operations until January 1996 and relied upon Medstone for
financial support and for assistance with personnel management and financial
administration. The Company anticipates that its need for working capital
through the end of 1998 should be satisfied with existing working capital and a
$1 million bank line of credit. Insofar as the Company may elect to undertake or
accelerate significant research and development projects for new products or may
pursue corporate acquisitions, it may require additional outside financing prior
to such time. The Company expects that to meet its long-term needs it will need
to raise substantial additional funds through the sale of its equity securities,
the incurrence of indebtedness or through funds derived through entering into
collaborative arrangements with third parties. Any additional equity financing
may be dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require the Company to relinquish rights to certain of its
technologies, products or marketing territories. The failure of the Company to
raise capital when needed could have a material adverse effect on the Company's
business, financial condition and results of operations.

   Competition; Rapid Technological and Industry Change: The Company competes in
an established field of surgical device manufacturers, and the competition in
this field is intense. Many of the Company's competitors are significantly
larger than the Company and have greater financial, technical, research,
marketing, sales, distribution and other resources than the Company.
Additionally, the Company believes there will be intense price competition for
products developed in the Company's markets. There can be no assurance that the
Company's competitors will not succeed in developing or marketing technologies
and products, including drug-based treatments, that are more effective or
commercially attractive than any that are being developed or marketed by the
Company, or that such competitors will not succeed in obtaining regulatory
approval, introducing or commercializing any such products prior to the Company.
Such developments could have a material adverse effect on the Company's
business, financial condition and results of operations. Further, there can be
no assurance that, even if the Company is able to compete successfully, it would
do so in a profitable manner. The medical device industry generally, and the
urological disease treatment market in particular, are characterized by rapid
technological change, changing customer needs, and frequent new product
introductions. The Company's future success will depend upon its ability to
develop and introduce new cost effective products in a timely manner. There can
be no assurance that the Company's products will not be rendered obsolete as a
result of future innovations.

   Limited Manufacturing Experience: The Company has limited experience in
producing its products in commercial quantities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. The Company's failure to overcome these
manufacturing problems could materially adversely affect the Company's business,
financial condition and results of operations. The Company uses a combination of
internal manufacturing capacity and third party manufacturers in its
manufacturing efforts. Most of the Company's purchased components and processes
are available from more than one vendor. However, certain components and
processes are currently available from or performed by a single vendor. Any
supply interruption from a single source vendor would have a material adverse
effect on the Company's ability to manufacture its products until a new source
of supply was qualified and, as a result, could have a material adverse effect
on the Company's business, financial condition and results of operations.
Further, the ability of third party manufacturing sources to deliver components
or finished goods will affect the Company's ability to commercialize its
products, and the Company's dependence on third party sources may adversely
affect the Company's profit margins. Additionally, the Company's success will
depend in part upon its ability to manufacture its products in compliance with
the FDA's Good Manufacturing Practices ("GMP") regulations and other regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. Failure to increase
production volumes in a timely or cost effective manner or to maintain
compliance with GMP or other regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.

   Dependence Upon Key Personnel: The Company's future success depends to a
significant degree upon the continued service of key technical and senior
management personnel, including Paul W. Mikus, the President of the Company,
none of whom is bound by an employment agreement or covered by an insurance
policy of which the Company is the beneficiary. The Company's future success
also depends on its continuing ability to attract, retain and motivate highly
qualified technical, managerial and sales personnel. The inability to retain or
attract qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.

   Government Regulation: Governmental regulations in the United States and
other countries are a significant factor affecting the research and development,
manufacture and marketing of the Company's products. In the United States, the


                                       11
<PAGE>   12

FDA has broad authority under the Federal Food, Drug and Cosmetic Act and
the Public Health Service Act to regulate the distribution, manufacture and sale
of medical devices. Foreign sales of drugs and medical devices are subject to
foreign governmental regulation and restrictions which vary from country to
country. The process of obtaining FDA and other required regulatory approvals is
lengthy and expensive. There can be no assurance that the Company will be able
to obtain necessary approvals for clinical testing or for manufacturing or
marketing of its products. Failure to comply with applicable regulatory
approvals can, among other things, result in fines, suspension of regulatory
approvals, product recalls, operating restrictions and criminal prosecution. In
addition, governmental regulation may be established which could prevent, delay,
modify or rescind regulatory approval of the Company's products. There can be no
assurance that any such position by the FDA, or change of position by the FDA,
would not adversely impact the Company's business, financial condition or
results of operations. Regulatory approvals, if granted, may include significant
limitations on the indicated uses for which the Company's products may be
marketed. In addition, to obtain such approvals, the FDA and foreign regulatory
authorities may impose numerous other requirements on the Company. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for failure
to comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. There can be no assurance that the Company will be
able to obtain regulatory approvals for its products on a timely basis or at
all, and delays in receipt of or failure to receive such approvals, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.

   Uncertainty Relating to Third Party Reimbursement: In the United States,
health care providers, such as hospitals and physicians, that purchase medical
devices such as the Company's products, generally rely on third party payors,
principally Federal Medicare, state Medicaid and private health insurance plans,
to reimburse all or part of the cost of medical procedures involving the
Company's products. Currently, Medicare does not reimburse for cryosurgical
ablation of the prostate, one of the approved uses of the Company's eight probe
CRYOcare System. Without such reimbursement, market acceptance and use of the
product will be limited and may adversely affect the Company's revenues from
sales of the product. There can be no assurance that the cost of medical
procedures involving the Company's products will be reimbursed by Medicare or
other governmental, insurance or third party payers. In addition, the Company
anticipates that in a prospective payment system, such as the DRG system
utilized by Medicare, and in many managed care systems used by private health
care payers, the cost of the Company's products will be incorporated into the
overall cost of the procedure and that there will be no separate, additional
reimbursement for the Company's products. Separate reimbursement for the
Company's products is not expected to be available in the United States and
there can be no assurance that reimbursement for the Company's products will be
available in international markets under either governmental or private
reimbursement systems. Furthermore, the Company could be adversely affected by
changes in reimbursement policies of governmental or private health care payors,
particularly to the extent any such changes affect reimbursement for procedures
in which the Company's products are used. Failure by physicians, hospitals and
other users of the Company's products to obtain sufficient reimbursement from
health care payers for procedures involving the Company's products, or adverse
changes in governmental and private third party payors' policies toward
reimbursement for such procedures, could have a material adverse effect on the
Company's business, financial condition and results of operations.

   Risks Related to Acquisitions: As part of its strategy to develop and market
its products, the Company may acquire a business or businesses that the Company
believes might enhance and speed up the development of its products through
clinical trials, such as a surgical center or related company that would use the
Company's products in clinical applications. There is no assurance, however,
that the Company will be able to identify suitable acquisition candidates, or,
if it identifies such candidates, that it would be able to consummate the
acquisition of such candidates. Furthermore, there is no assurance that if the
Company acquires a suitable acquisition candidate, the Company will be able to
effectively integrate the operations of the company acquired into the operations
of the Company, or effectively utilize the company acquired to develop and
market the Company's products. The failure to integrate an acquired company into
the operations of the Company may cause a drain on the financial and managerial
resources of the Company, and thereby materially adversely effect the financial
results of operations of the Company.

   Product Liability and Recall Risks: The manufacture and sale of medical
products entails significant risk of product liability claims or product
recalls. There can be no assurance that the Company's existing insurance
coverage limits are adequate to protect the Company from any liabilities it
might incur in connection with the clinical trials or sales of its products. In
addition, the Company may require increased product liability coverage as its
products are commercialized. Such insurance is expensive and in the future may
not be available on acceptable terms, if at all. A successful product liability
claim or series of claims brought against the Company in excess of its insurance
coverage, or a recall of the Company's products, could have a material adverse
effect on the Company's business, financial condition and results of operations.

   Uncertainty Related to Health Care Reform: Political, economic and regulatory
influences are subjecting the health care industry in the United States to
fundamental change. The Company anticipates that Congress, state legislatures
and the private sector will continue to review and assess alternative health
care delivery and payment systems. Potential approaches that have been
considered include mandated basic health care benefits, controls on health care
spending through limitations on the growth of private purchasing groups, price
controls and other fundamental changes to the health care delivery system.
Legislative debate is expected to continue in


                                       12
<PAGE>   13

the future, and market forces are expected to demand reduced costs. The Company
cannot predict what impact the adoption of any Federal or state health care
reform measures, future private sector reform or market forces may have on its
business.

   Dependence on Patent and Proprietary Rights: The Company's success will
depend in part on its ability to secure and protect intellectual property rights
relating to its technology. While the Company believes that the protection of
patents or licenses is important to its business, it also relies on trade
secrets, know-how and continuing technological innovation to maintain its
competitive position. No assurance can be given that the Company's patent
applications will be approved, that the Company will develop any additional
proprietary products that are patentable and/or that any issued patents will
provide the Company with a competitive edge or will not be challenged by any
third parties. No assurance can be given that the Company's processes or
products will not infringe patents or proprietary rights of others or that any
license required would be made available under any such patents or proprietary
rights, on terms acceptable to the Company or at all. From time to time, the
Company has received correspondence alleging infringement of proprietary rights
of third parties. No assurance can be given that any relevant claims of third
parties would not be upheld as valid and enforceable, and therefore that the
Company could be prevented from practicing the subject matter claimed or would
be required to obtain licenses from the owners of any such proprietary rights to
avoid infringement. The Company seeks to preserve the confidentiality of its
technology by entering into confidentiality agreements with its employees,
consultants, customers, and key vendors and by other means. No assurance can be
given, however, that these measures will prevent the unauthorized disclosure or
use of such technology.

   Liquidity: The Company Common Stock began trading on the Nasdaq SmallCap
Market on February 28, 1997. Between February 20, 1996 and February 28, 1997,
the Common Stock traded on the Nasdaq electronic bulletin board. As a result,
the Common Stock has a limited trading history. If the Company is unable to
maintain the standards for quotation on the Nasdaq Small Cap Market, the ability
of investors to resell their shares after registration with the Securities and
Exchange Commission may be limited. In addition, the Company's securities may be
subjected to so-called "penny stock" rules that impose additional sales practice
and market making requirements on broker-dealers who sell and/or make a market
in such securities. This could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Company's securities and the
ability of holders of the Company's securities to sell their securities in the
secondary market. There can be no assurance regarding the price at which the
Company Common Stock will trade. The market prices for securities of emerging
companies have historically been highly volatile. Future announcements
concerning the Company or its competitors, including the Company's operating
results, technological innovations or new commercial products, corporate
collaborations, government regulations, developments concerning proprietary
rights, litigation or public concern as to safety of the Company's products, as
well as investor perception of the Company and industry and general economic and
market conditions, may have a significant impact on the market price of the
Company's Common Stock. In addition, the stock market is subject to price and
volume fluctuations that affect the market prices for companies in general and
small capitalization, high technology companies in particular, and are often
unrelated to their operating performance.

   Shares Eligible for Future Sale; Dilution: Future sales of Common Stock
(including shares issued upon the exercise of outstanding options and warrants)
could materially adversely affect the market price of the Common Stock. Such
sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company would deem appropriate. As of March 24, 1998, the Company had
8,386,167 shares of Common Stock outstanding, all of which may be freely traded
(unless held by an affiliate of the Company). In addition, as of March 24, 1998
warrants to purchase 382,497 shares of Common Stock were outstanding. Also, as
of March 24, 1998 stock options to purchase 1,866,480 shares of Common Stock had
been granted under the Company's stock option plans, subject to various vesting
schedules. Stock options to purchase an additional 233,520 shares of Common
Stock may be issued by the Company from time to time under such option plans and
up to 250,000 shares of Common Stock may be purchased under the Company's
Employee Stock Purchase Plan. An aggregate of 2,000,000 shares of Common Stock
may be issued under the Company's 1995 Stock Plan, 150,000 shares of Common
Stock may be issued under the Company's 1995 Director Option Plan and up to
250,000 shares of Common Stock may be issued under the Company's Employee Stock
Purchase Plan. The Company expects to request its shareholders at its 1997
annual meeting of stockholders to approve an amendment to the 1995 Stock Plan to
increase the number of shares reserved for issuance thereunder by 1,000,000
shares. Exercise of these options or warrants may result in substantial dilution
to investors. In addition, the Company has granted certain shareholders and
warrantholders piggyback registration rights with respect to 357,497 shares of
Common Stock.

   Anti-Takeover Effect of Certain Provision; Possible Negative Effect on Stock
Price: Certain provisions of the Company's Certificate of Incorporation and the
Bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock. For
example, certain of these provisions allow the Company to issue Preferred Stock
without any vote or further action by the shareholders, eliminate the ability of
shareholders to act by written consent without a meeting and eliminate
cumulative voting in the election of directors. These provisions may make it
more difficult for shareholders to take certain corporate actions and may have
the effect of delaying or preventing a change in control of the Company.

                                       13
<PAGE>   14

ITEM 2.     PROPERTIES

   The Company currently occupies approximately 16,000 square feet of office,
manufacturing, engineering, warehouse, and research and development laboratories
in Irvine, California. The property is leased for a term of 60 months, expiring
in February, 2002. The Company has subleased its previously occupied facility
and the lease and sublease expire in August, 1998.

ITEM 3.     LEGAL PROCEEDINGS

   On November 27, 1996, Cryomedical Sciences, Inc. ("CMS") filed a complaint in
the Circuit Court for Montgomery County, Maryland against the Company and Dr.
Chang, the Company's then Vice President of Research and Development and former
employee of CMS. The suit alleges that Dr. Chang breached his employment
contract with CMS, that the Company tortiously interfered with the employment
contract and the prospective business relations of CMS, misappropriated trade
secrets and confidential information, and competed unfairly with and conspired
against CMS. CMS is seeking injunctive relief and damages of at least
$10,000,000 and punitive damages of $20,000,000. On September 23, 1997, the
court granted Dr. Chang's motion (which the Company joined) to modify an earlier
injunction prohibiting Dr Chang from performing services for the Company, based
on the language contained in an employment agreement between Dr. Chang and CMS
that ostensibly prohibits Dr. Chang from working for a CMS competitor. Under the
modification obtained by Dr. Chang and the Company, Dr. Chang is entitled to
provide consulting services to the Company in the area of stent technology,
subject to certain restrictions and to periodic review of Dr. Chang's activities
by a neutral third party. The Company is subject to the terms of this modified
injunction, insofar as necessary to enforce the restrictions on Dr. Chang's
activities. No other injunctive or other relief has been granted to CMS. On
October 17, 1997, the Company filed a comprehensive motion for summary judgment
seeking dismissal of all claims against it brought by CMS, on a variety of legal
and undisputed factual grounds. Shortly thereafter, on November 4, 1997, the
parties filed a request that the court stay all proceedings pending efforts to
resolve the case through mediation. The parties are currently negotiating the
terms of a settlement of the litigation. The Company continues to deny all
allegations of wrongdoing in the complaint and intends to defend the litigation
vigorously in the event that the settlement negotiations do not result in a
negotiated solution of the case. However, the costs of defending the lawsuit
could be material, and there can be no assurance that damages, which could have
a material adverse effect on the Company, will not be assessed. The Company is
not a party to any other legal proceedings.

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

    None.

                                       14
<PAGE>   15

                                    PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

   ENDOcare's common stock began trading on the NASDAQ SmallCap Market on
February 28, 1997 and between February 20, 1996 and February 27, 1997, trading
was conducted in the over-the-counter market on the NASDAQ Electronic Bulletin
Board under the symbol "ENDO." The following table sets forth the high and low
bid prices for ENDOcare's common stock during the periods indicated as quoted on
the NASDAQ SmallCap Market or NASDAQ Electronic Bulletin Board:

<TABLE>
<CAPTION>
                                      FISCAL YEAR ENDED DECEMBER 31,
                                      ------------------------------
                                          1996            1997
                                          ----            ----
                                      HIGH     LOW     HIGH     LOW
                                      ----     ---     ----     ---
<S>                                   <C>     <C>      <C>     <C>
            Fourth quarter            $6.38   $3.38    $3.63   $3.50

            Third quarter
                                       5.00    2.25     3.88    3.69

            Second quarter
                                       5.88    1.88     3.88    3.69

            First quarter
            (from February 20, 1996)   3.00    0.38     4.63    3.94
</TABLE>


   ENDOcare's common stock first traded publicly on February 20, 1996, at a
price of $0.375 per share. As of March 24, 1998, ENDOcare had approximately 360
shareholders of record. On March 24, 1998, there were 8,386,167 shares of
ENDOcare common stock issued and outstanding.

   ENDOcare has not paid any cash dividends on its common stock and does not
intend to pay any cash dividends in the foreseeable future.


RECENT SALES OF UNREGISTERED SECURITIES

Common Stock
   On January 27, 1997, ENDOcare sold 2,218,714 shares of common stock at a
price of $3.50 per share in a private placement, with Oppenheimer & Co., Inc.
acting as placement agent.

   On January 27, 1997, an aggregate of 332,000 shares of common stock were
issued upon conversion of $750,000 in promissory note payables plus accrued
interest on such promissory notes.

   The sales and issuances of the common stock described above were deemed to be
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act") in reliance upon Section 4(2) thereof, as transactions not
involving a public offering. The purchasers in such private offerings of stock
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof.

Stock Options
   During the period from January 1, 1996 through December 31, 1996, the Company
granted stock options to 14 individuals covering an aggregate of 626,000 shares
of its common stock. During the period from January 1, 1997 through December 31,
1997, the Company granted stock options to 28 individuals covering an aggregate
of 363,500 shares of its common stock. All such options were granted at fair
market value, vest over a four year period, and are exercisable over a ten year
period. No consideration was paid for such options. Such grants were exempt from
the registration requirement of the Securities Act as not involving the sale of
a security.

                                       15
<PAGE>   16

Warrants
    As of March 24, 1998, ENDOcare had issued warrants for the purchase of
382,497 shares of common stock.

   On April 17, 1996, ENDOcare issued a warrant to purchase up to 10,000 shares
of common stock to Brigham and Women's Hospital, Inc. in connection with that
unaffiliated entity's license of patent rights and other technology to the
Company.

   On August 26, 1996, ENDOcare issued warrants to purchase up to 150,000 shares
of common stock to four partnerships managed by Technology Funding Inc., one
officer of which, Peter F. Bernardoni, has served on ENDOcare's Board of
Directors since November 1995. These warrants were issued in connection with
Technology Funding Inc.'s purchase of $1,500,000 of convertible promissory notes
from ENDOcare.

   On January 27, 1997, ENDOcare issued a warrant to purchase up to 177,497
shares of common stock to Oppenheimer & Co., Inc. in connection with their
services as placement agent for the Company's private placement of common stock.

   On February 14, 1997, ENDOcare issued a warrant to purchase up to 25,000
shares of common stock in connection with a license of technology.

   On February 17, 1997, ENDOcare issued a warrant to purchase up to 20,000
shares of common stock to a consultant of the Company.

   Such issuances of warrants described above were exempt from the registration
under the Securities Act in reliance upon Section 4(2) thereof.


ITEM 6.  SELECTED FINANCIAL DATA

   The following table presents selected financial data of ENDOcare for
the years ended December 31, 1996 and 1997 and for its predecessor, ENDOcare
Division of Medstone, for previous years. Prior to 1996, ENDOcare was not an
independent company with publicly traded shares. Hence, no earnings per share
data is presented for those years.

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                          -----------------------------------------------------------------------
                                             1993            1994           1995          1996           1997
                                          -----------    -----------    -----------    -----------    -----------
                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>            <C>            <C>            <C>            <C>
Statement of Operations Data:
Revenues:
  Net product sales ...................   $     2,697    $     2,283    $       951    $     1,878    $     1,918
  Revenue from collaborative agreements            --             --             --            250             83
  Research revenue from related party .           480            379            377              1             --
                                          -----------    -----------    -----------    -----------    -----------
    Total revenues ....................         3,177          2,662          1,328          2,129          2,001
Costs and expenses:
  Cost of product sales ...............           630            638            380            994          1,271
  Research and development ............         1,061            911            852          1,023          1,596
  Selling, general and administrative .         2,000          1,376            673          1,313          3,029
Impairment loss on long-lived assets ..            --             --             --            325             --
                                          -----------    -----------    -----------    -----------    -----------
    Total costs and expenses ..........         3,691          2,925          1,905          3,655          5,896
                                          -----------    -----------    -----------    -----------    -----------
Loss from operations ..................          (514)          (263)          (577)        (1,526)        (3,895)
Provision for income taxes ............            --             --             --              5              5
                                          -----------    -----------    -----------    -----------    -----------
Net loss ..............................   $      (514)   $      (263)   $      (577)   $    (1,531)   $    (3,900)
                                          ===========    ===========    ===========    ===========    ===========
Net loss per share ....................                                                $      (.27)   $      (.48)
                                                                                       ===========    ===========
Weighted average shares outstanding ...                                                  5,634,561      8,047,000
                                                                                       ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                  BALANCES AT DECEMBER 31,
                                           -----------------------------------------------------------------------
                                            1993             1994           1995           1996             1997
                                           -------         -------         -------        -------        ---------
                                                                       (IN THOUSANDS)
<S>                                                  <C>       <C>       <C>       <C>        <C>
     Balance Sheet Data:
     -------------------
     Working capital ............          $   236        $   295          $   328        $   519        $ 3,735
     Total assets ...............            1,041            972              806          1,751          5,543
     Long-term debt .............               --             --               --            750             --
     Total shareholders'/division
       equity (deficiency) ......              867            864              803           (149)         3,933
</TABLE>

                                       16
<PAGE>   17

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


GENERAL
   ENDOcare, designs, manufactures, and markets an array of innovative,
terperature-based surgical devices and technologies to treat prostate diseases,
including prostate cancer and prostate enlargement. ENDOcare began marketing
disposable surgical devices in 1993 with the introduction of the Prolase laser
catheter. In late 1995, ENDOcare began marketing two new disposable product
families, the Uroloop and Vaporbar electrosurgical cutting elements. In May
1996, the Company introduced its new CRYOcare cryosurgical system for the
treatment of prostate cancer. In November 1996, ENDOcare signed a distribution
agreement with Boston Scientific Corporation granting that company exclusive
world-wide marketing rights for CRYOcare systems for urological applications.

   ENDOcare currently is developing additional, innovative therapies for
prostate enlargement. The Company does not expect to be profitable in the near
future because of increased operating expenses from expanded research and
development efforts and support of clinical trials for products currently under
development.

   Since its formation in 1990, ENDOcare operated first as a research and
development department, then later as a division of Medstone International, Inc.
In this form, ENDOcare shared facilities and certain personnel with its parent.
Effective January 1, 1996, ENDOcare began operating as an independent
corporation. Comparisons of financial results for 1996 and 1997 with those of
1995 may be impacted significantly by these two different organizational
structures. In 1995 ENDOcare received direction, services, funding, and
accounting allocations from Medstone. Beginning in 1996, charges were directly
incurred by ENDOcare as it replaced services previously provided by Medstone
with its own resources.

RESULTS OF OPERATIONS
    The following table sets forth, for the periods indicated, certain financial
    data as a percentage of total revenues.

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                                       ------------------------
                                                        1995     1996     1997
                                                        ----     ----     ----
<S>                                                     <C>      <C>      <C>
           Revenues:
             Net product sales ....................       72%      88%      96%
             Revenue from collaborative agreements        --       12        4
             Research revenue from related party ..       28       --       --
                                                        ----     ----     ----
               Total revenues .....................      100%     100%     100%

           Costs and expenses:
             Cost of product sales ................       29       47       64
             Research and development .............       63       48       80
             Selling, general and administrative ..       51       62      151
             Impairment loss on long-lived assets .       --       15       --
                                                        ----     ----     ----
               Total costs and expenses ...........      143      172      295
                                                        ----     ----     ----
            Net loss before income taxes ..........      (43)     (72)    (195)
            Provision for income taxes ............       --       --       --
                                                        ----     ----     ----
            Net loss ..............................      (43)%    (72)%   (195)%
                                                        ====     ====     ====
</TABLE>

      Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

   Revenue from product sales for the year ended December 31, 1997 increased
slightly to $1,918,000 compared to $1,878,000 for the year ended December 31,
1996. In 1997 product sales consisted almost entirely of CRYOcare surgical
systems while the volumes of surgical disposables declined considerably during
the year.

   Revenue from collaborative agreements was $83,000 for the year ended December
31, 1997 compared to $250,000 for the year ended December 31, 1996. The 1997
amount represents one year's amortization of a lump-sum milestone payment from
Boston Scientific Corporation ("BSC") to ENDOcare associated with the
distribution agreement entered into in 1996 . The $250,000 in 1996 was a
non-refundable, lump-sum payment from Boston Scientific Corporation to ENDOcare
upon signing of a distribution agreement giving Boston Scientific exclusive
world-wide marketing rights for CRYOcare systems in urological applications.

   Gross margins on product sales were 34% in 1997 compared to 47% in 1996. This
difference was caused by a change in ENDOcare's product revenue mix along with
additional infrastructure and personnel costs associated with the Company's new


                                       17
<PAGE>   18

manufacturing facility. In 1996 ENDOcare's revenue product mix consisted of more
higher margin surgical disposables along with the mid-year introduction of
CRYOcare systems, including early units shipped with lower, introductory prices.
The majority of the CRYOcare systems revenue in 1997 consisted of units also
shipped with lower introductory prices primarily to Boston Scientific.

   Research and development expense increased 56% to $1,596,000 in 1997 from
$1,023,000 in 1996. The increase resulted primarily from additional personnel
and costs to support the further development of the CRYOcare systems, including
one and four probe platforms, and development of other new products.

   Selling, general and administrative expense increased 131% to $3,028,000 in
1997 from $1,313,000 in 1996. This increase reflects the increased sales and
marketing effort associated with the Company's CRYOcare products and
relationship with BSC, in addition to the increases in personnel and operating
costs as the Company continues to build its infrastructure to support its
product lines.

   ENDOcare's net loss increased to $3,900,000 in 1997 from $1,531,000 in 1996.
This increase was primarily due to lower gross margins and the increase in
research and development costs and selling, general and administrative expenses
described above.


      Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

   Revenue from product sales for the year ended December 31, 1996 increased 97%
to $1,878,000 compared to $951,000 for the year ended December 31, 1995. This
increase resulted from the introduction of new products. In 1995 product sales
consisted almost entirely of Prolase laser catheters, the volumes of which had
dropped considerably by the end of 1995. At the beginning of 1996, ENDOcare's
newly introduced Uroloops and Vaporbars began contributing significant revenue.
In May 1996, ENDOcare introduced its new CRYOcare surgical system, which
generated $880,000 of revenue in 1996.

   Revenue from collaborative agreements increased from zero in 1995 to $250,000
for the year ended December 31, 1996. This $250,000 in 1996 was a
non-refundable, lump-sum payment from Boston Scientific Corporation to ENDOcare
upon signing of a distribution agreement giving Boston Scientific exclusive
world-wide marketing rights for CRYOcare systems in urological applications.

   Research revenue from related party decreased from $377,000 in 1995 to $1,600
in 1996. In 1996 ENDOcare focused its research efforts on its own internal
product development, rather than performing research services for its former
parent, Medstone.

   Gross margins on product sales were 47% in 1996 compared to 60% in 1995. This
difference was caused by changes in ENDOcare's product revenue mix as new
products were introduced and older products exhibited margin declines. In 1995
ENDOcare's revenue was almost entirely from high margin Prolase sales. In early
1996, Prolase margins were declining, and the dominant source of revenue for the
Company was Uroloops and Vaporbars, whose margins were lower than those of
Prolase. With the mid-year introduction of CRYOcare systems, some early units
were shipped with lower, introductory prices. Also, 1996 margins were impacted
by the sale of several low margin Diolase units.

   Research and development expense increased 20% to $1,023,000 in 1996 from
$852,000 in 1995. These increases primarily reflect increased development
efforts completing development of the new CRYOcare system in the beginning of
1996 and the initiation of other new product development later in the year.

   Selling, general and administrative expense increased 95% to $1,313,000 in
1996 from $673,000 in 1995. This increase reflects the higher administrative
expense of operating as an independent, publicly-traded company, as well as
general investment in sales and marketing resources to establish a foundation
for future revenue growth. Also, during the second quarter of 1996, sales and
marketing expenses increased for the introduction of the new CRYOcare system.

   ENDOcare's net loss increased to $1,531,000 in 1996 from $577,000 in 1995.
This increase was primarily due to the increase in selling, general and
administrative expense described above. In addition, a major factor contributing
to the loss was the effect of adopting the new accounting pronouncement
requiring review of long-lived assets for possible impairment. As described in
Note 4 to the financial statements, review of the assets contributed to ENDOcare
by Medstone resulted in a write-down of $325,000 effective January 1, 1996.

                                       18
<PAGE>   19

LIQUIDITY AND CAPITAL RESOURCES
   At December 31, 1997, ENDOcare's cash balance was $3,896,000, compared to
$477,000 at December 31, 1996. This cash increase was provided primarily by the
1997 financing transaction discussed below offset by cash used in operating
activities.

   Working capital has been used as ENDOcare's operations have increased in
1997. Although revenue levels remained relatively consistent, net accounts
receivable decreased to $376,000 at December 31, 1997, compared to $588,000 at
December 31, 1996. The decrease resulted primarily from timely payments from
sales to BSC as specified in the distribution agreement. To support higher
production levels, inventory increased to $926,000 at December 31, 1997,
compared to $397,000 at the beginning of the year. Fixed asset additions during
1997 were approximately $200,000. Working capital was provided as accounts
payable and other current liabilities grew to an operating level of
approximately $1,527,000, compared to $984,000 at December 31, 1996.

   At December 31, 1997, ENDOcare's net working capital was $3,735,000 and the
ratio of current assets to current liabilities was 3.4 to 1.

   In connection with the January 1996 spin-out, Medstone contributed $500,000
cash to ENDOcare. In addition, ENDOcare took possession of $102,000 of its
accounts receivable and $219,000 of inventory. Medstone retained responsibility
for all financial liabilities incurred before January 1, 1996.

   In August 1996, ENDOcare obtained a two-year $1,500,000 secured borrowing
facility from four partnerships managed by Technology Funding Inc., a venture
capital firm. At December 31, 1996, $750,000 was outstanding under this loan.

   On January 27, 1997, ENDOcare sold 2,218,714 shares of common stock at a
price of $3.50 per share in a private placement, with Oppenheimer & Co., Inc.
acting as placement agent. After deducting commissions and other expenses of the
sale, this offering added approximately $7,050,000 to ENDOcare's capital base.

   Also on January 27, 1997, the four partnerships managed by Technology Funding
Inc. converted the outstanding principal amount of their $750,000 promissory
notes and $50,000 of accrued interest into common stock at the conversion rate
of $2.50 per share. To induce conversion at that time, ENDOcare issued to the
partnerships an additional 12,000 shares of stock, with a fair market value on
that date of approximately $50,000. These transactions converted the outstanding
debt into equity so that ENDOcare will not be required to re-pay principal or to
continue to incur interest expense.

   In February 1997, ENDOcare signed a new five-year lease for a larger facility
in Irvine, California, with contractual rentals of $153,860 in 1998, $157,727 in
1999, $161,593 in 2000, $165,460 in 2001 and $34,639 in 2002, The Company's
previous lease expires on August 31, 1998 and has future minimum commitment of
$30,654 in 1998. The Company has subleased its previous facility to another
tenant for the remaining lease term.

   As described in Note 14 to the financial statements, subsequent to year-end
ENDOcare entered into a $1,000,000 one-year bank line of credit which is
available for working capital purposes. The line of credit is secured by the
Company's assets, excluding intellectual property, and is subject to certain
financial and other covenants.

   The Company believes that its existing cash resources, anticipated cash flow
from future operations, and the $1,000,000 bank line of credit, will provide
sufficient resources to meet present and reasonably foreseeable working capital
requirements and other cash needs through the end of 1998. The Company is
considering other means to raise capital to fund operations, including through a
private placement of common stock to institutional investors. Insofar as the
Company elects to undertake or accelerate significant research and development
projects for new products or pursue corporate acquisitions, it may require
additional outside financing prior to such time.

   The preceding forward-looking statements are subject to uncertainties in
economic conditions, regulatory issues, and other risk factors. Such factors may
cause actual future results to differ significantly from management's current
expectations.


OTHER MATTERS
   The Company intends to adopt Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131), in 1998. Both standards may require financial
statement disclosure, but will not have a material effect on the Company's
financial position or results of operations. SFAS 130 establishes standards for
the reporting and display of comprehensive income and is expected to first be
reflected in the Company's first quarter of 1998 interim financial statements.
Components of comprehensive income include items such as net earnings, foreign
currency translation adjustments and changes in value of available-for-sale
securities. SFAS 131 changes the way companies report segment information and
requires segments to be determined and reported based on how management measures
performance and makes decisions about allocating resources. SFAS 131 will first
be reflected in the Company's 1998 Annual Report.

                                       19
<PAGE>   20
   The Company is not aware of any issues related to environmental concerns that
have or are expected to materially effect its business.

   Many existing software programs use only two digits to identify the year in
the date field. If such programs are not corrected, date data concerning the
Year 2000 could cause many computer applications to fail, lock-up or generate
erroneous results. The Company is currently assessing the cost to remediate its
Year 2000 issues. Although the actual cost to remediate its Year 2000 issues is
not yet fully known, based upon information to date, it is not expected that the
remediation will have a material impact on the Company's financial condition or
operating results.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   See Item 14, "Exhibits, Financial Statement Schedules, and Reports on Form
8-K."

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

   Not applicable.

                                       20
<PAGE>   21

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


EXECUTIVE OFFICERS AND DIRECTORS
   The executive officers and directors of the Company and their ages as of
March 24, 1998 are as follows:


<TABLE>
<CAPTION>
      NAME              AGE                               POSITION
      ----              ---                               --------
<S>                     <C>   <C>
Paul W. Mikus            32   President, Chief Executive Officer, Chairman of the Board
                              and Director

William R. Hughes        41   Senior Vice President and Chief Financial Officer

Vincent C. Cutarelli     48   Vice President, Regulatory Affairs/Quality Assurance

Ralph L. Quigley         54   Vice President, Operations

Joseph V. Standish       52   Vice President, Marketing & Sales

Peter F. Bernardoni      38   Director

Robert F. Byrnes         53   Director

Benjamin Gerson, M.D.    50   Director
</TABLE>

   Paul W. Mikus has served as Chief Executive Officer, Chairman and Director
since November 1995. Prior to that time, he was President of ENDOcare as a
division of Medstone from June 1995. Prior to becoming President of ENDOcare, he
managed worldwide sales and marketing for Prosurg, Inc. From July 1989 to
September 1994 he worked for Medstone as manager of engineering where he was a
co-founder of ENDOcare. Mr. Mikus holds a BS degree in Electrical Engineering.

   William R. Hughes joined Endocare in July, 1997 as Senior Vice President and
Chief Financial Officer. With 18 years experience in public accounting and
industry, Mr. Hughes previously served as Controller and Chief Accounting
Officer for File Net Corporation and was a Partner in the accounting firm of
KPMG Peat Marwick. He obtained a BS degree in Economics from California State
University, San Luis Obispo and has been a Certified Public Accountant since
1981.

   Vincent C. Cutarelli, RAC, has served as Vice President, Regulatory
Affairs/Quality Assurance since September, 1996. He has over 24 years experience
in regulatory affairs, quality assurance, GMP/ISO compliance and documentation
control in the medical device industry. Most recently, he has served as the
Director, Regulatory Affairs at both Allergan Optical and Baxter Healthcare.
After obtaining his Bachelors degree in Chemistry and Biology from Clark
University, he went on to become an ASQC Certified Quality Engineer and
Regulatory Affairs Certified (RAC).

   Ralph L. Quigley has served as Vice President, Operations since May 1996.
Prior to joining ENDOcare, Mr. Quigley served as Director and Division General
Manager at Everett-Charles Test Equipment Company from 1982 to 1988. From 1991
to 1993, Mr. Quigley was Vice President, Operations at L.H. Research, Inc., a
power supply manufacturer, where he was responsible for both domestic and
international operations. From 1993 to 1996, Mr. Quigley served as Director of
Operations for Workstation Technologies, a digital video equipment manufacturer.


   Joseph V. Standish joined Endocare in December, 1997 with over 20 years
experience in the sales and marketing arena. Prior to joining Endocare, Mr.
Standish was most recently President and Chief Operating Officer of Visijet,
Inc., and served as Vice President, Marketing and Sales for Iovision, Inc. He
holds an MBA in Finance from California State University, Fullerton, and
obtained his BA in languages from Fairfield University.

   Peter F. Bernardoni has served as a Director since November 1995. Mr.
Bernardoni has been a vice president of Technology Funding Inc. since 1991 and a
partner in Technology Funding Ltd. since 1994. He serves on the board of
directors of Urogen, Corp. He has an MS in Mechanical Engineering from Stanford
University.

                                       21
<PAGE>   22

   Robert F. Byrnes joined Endocare's Board of Directors in August, 1997.
Previously Mr. Byrnes served in a number of top-level management positions in
the health care industry including Chairman and Chief Executive Officer of Tokos
Medical and President and Chief Executive Officer of Matria Healthcare, Inc.

   Benjamin Gerson, M.D. joined Endocare's Board of Directors in August, 1997.
Dr. Gerson is a Professor of Pathology and Laboratory Medicine and Professor of
Pharmacology and Experimental Therapeutics at Boston University School of
Medicine. Dr. Gerson was previously a panel member of the U.S. Food and Drug
Administration (FDA) and had served as Chairman of the Clinical Chemistry and
Clinical Toxicology Devices Panel, Center for Devices and Radiological Health.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
   Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
directors and certain of its officers, and persons who own more than 10% of a
registered class of the Company's equity securities (collectively, "Insiders"),
to file reports of ownership and changes in ownership with the Commission.
Insiders are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file.

   Based solely on its review of the copies of Forms 3 and 4 and amendments to
them received by it with respect to fiscal year 1997, or written representations
from certain reporting persons that no Form 5's were required for those persons,
the Company believes that Mr. Byrnes and Mr. Gerson both filed Form 3 late.


ITEM 11.    EXECUTIVE COMPENSATION


EXECUTIVE COMPENSATION

   The following table sets forth information regarding compensation earned
by the Chief Executive Officer and the three (3) other most highly compensated
executive officers whose salaries and bonus for the year ended December 31,
1997 was in excess of $100,000 (the "Named Executive Officers") for their
services to the Company for the years ended December 31, 1996 and 1997.

<TABLE>
<CAPTION>
                                                                            LONG-TERM
                                                                           COMPENSATION
                                    ANNUAL COMPENSATION                       AWARDS
                            -------------------------------------------    ------------
                                                                            SECURITIES
                                                           OTHER ANNUAL     UNDERLYING     ALL OTHER
NAME AND                                                     COMPEN-         OPTIONS/       COMPEN-
PRINCIPAL POSITION          YEAR    SALARY ($)    BONUS($)   SATION($)      SAR'S(#)(1)    SATION($)
------------------          ----    ----------    --------   ---------      -----------    ---------
<S>                         <C>      <C>           <C>        <C>            <C>            <C>
Paul W. Mikus               1997     132,500       25,000       --                 --          464(2)
Chairman, President,        1996      97,500           --       --                 --        4,818(3)
Chief Executive Officer

Vincent Cutarelli(4)(5)     1997     100,000        1,250       --                 --          324(2)
Vice President,             1996          --           --       --                 --           --
Regulatory Affairs/
Quality Assurance
</TABLE>

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

(1)   The Company does not grant Stock Appreciation Rights.

(2)   Represents group term life insurance payments.

(3)   Represents $130 of group term life insurance payments and $4,688 of
      commissions on the sale of CRYOcare Systems.

(4)   Mr. Cutarelli was hired in September 1996.

(5)   Mr. Cutarelli became an executive officer of the Company in 1997.


                                       22
<PAGE>   23

STOCK OPTIONS
   The following table sets forth information concerning each grant of stock
options made during 1997 to each of the Named Executive Officers.

OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                             INDIVIDUAL GRANTS
                              -------------------------------------------------  POTENTIAL REALIZABLE VALUE
                              NUMBER OF    PERCENT OF                              AT ASSUMED ANNUAL RATES
                                SHARES    TOTAL OPTIONS                          OF STOCK PRICE APPRECIATION
                              UNDERLYING   GRANTED TO    EXERCISE                     FOR OPTION TERM(1)
                               OPTIONS      EMPLOYEES      PRICE      EXPIRATION  ---------------------------
           NAME               GRANTED(2)    IN PERIOD   PER SHARE(4)    DATE           5%          10%
      -------------           ----------    ---------   ------------  ----------    --------     --------
<S>                           <C>              <C>         <C>        <C>           <C>          <C>
      Paul W. Mikus                --            --           --            --            --           --

      William R. Hughes       140,000(3)       38.5%       $2.81      08/18/07      $247,407     $626,978

      Ralph L. Quigley             --            --           --            --            --           --

      Vincent C. Cutarelli         --            --           --            --            --           --
</TABLE>
------------
(1)   The potential realizable value is calculated based on the term of the
      option at its time of grant (ten years). It is calculated by assuming that
      the stock price on the date of grant appreciates at the indicated annual
      rate, compounded annually for the entire term of the option.

(2)   All options become exercisable upon the merger of the Company with or into
      another corporation or the sale of substantially all of the Company's
      assets.

(3)   The options vest over a four-year period with 25% on August 19, 1998 and
      the remaining 75% exercisable in equal monthly installments thereafter
      over the next three years.

(4)   No options were exercised by the Named Executive Officers during the 1997
      fiscal year.

   The following table sets forth the number and value as of December 31, 1997
of shares underlying unexercised options held by each of the Named Executive
Officers.


FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
                        NUMBER OF SHARES UNDERLYING       VALUE OF UNEXERCISED
                         UNEXERCISED OPTIONS AS OF    IN THE MONEY OPTIONS AS OF
                             DECEMBER 31, 1997           DECEMBER 31, 1997(1)
                       ----------------------------   ---------------------------
     NAME              EXERCISABLE    UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
     ----              -----------    -------------   -----------   -------------
<S>                      <C>            <C>            <C>            <C>
Paul W. Mikus(2)         250,000        250,000        $845,000       $845,000

William R. Hughes            --         140,000        $     --       $105,000

Ralph L. Quigley(4)      31,250          43,750        $     --       $     --

Vincent Cutarelli(4)     21,875          48,125        $     --       $     --
</TABLE>
------------
(1)   Based on the fair market value (computed using the average bid and ask
      prices quoted on the NASDAQ SmallCap Market as of December 31, 1997,
      ($3.56 per share)) less the exercise price payable upon exercise of such
      options.

(2)   The options vest over a four-year period with 25% on December 1, 1996 and
      the remaining 75% exercisable in equal monthly installments thereafter
      over the next three years.

(3)   The options vest over a four-year period with 25% on August 19, 1997 and
      the remaining 75% exercisable in equal monthly installments thereafter
      over the next three years.

(4)   All of Mr. Quigley's and Mr. Cutarelli's options were out of the money at
      December 31, 1997. The exercise price of their options were greater
      than the fair market value of the Company's common stock (as calculated in
      footnote (1) above) at December 31, 1997.


1995 STOCK PLAN
   The ENDOcare 1995 Stock Plan (the "1995 Stock Plan") is a stock incentive
plan covering 2,000,000 shares of common stock of ENDOcare which may be awarded
in order to attract and retain qualified personnel. The Compensation Committee
of the Board of Directors administers the 1995 Stock Plan. Any employee or other
person providing services to the Company is eligible to receive awards under the
1995 Stock Plan. Awards available under the 1995 Stock Plan include common stock
purchase options and restricted common stock.

                                       23
<PAGE>   24

BOARD COMMITTEES
   Audit Committee: The Board of Directors established the Audit Committee to:
(i) make recommendations concerning the engagement of independent public
accountants; (ii) review with the independent public accountants the plans for,
and scope of, the audit procedures to be utilized and results of the audit;
(iii) approve the professional services provided by the independent public
accountants; (iv) review the independence of the independent public accountants;
and (v) review the adequacy and effectiveness of the Company's internal
accounting controls. Mr. Peter F. Bernardoni, Mr. Robert F. Byrnes, and Mr.
Benjamin Gerson, M.D.are the members of the Audit Committee.

   Compensation Committee: The Board of Directors established the Compensation
Committee which consists of Mr. Peter F. Bernardoni, Mr. Robert F. Byrnes and
Mr. Benjamin Gerson, M.D., none of whom are employees of the Company. The
Compensation Committee determines the compensation of the Company's executive
officers and administers the 1995 Stock Plan and the 1995 Director Option Plan.


COMPENSATION OF DIRECTORS
   Directors are elected annually. The Company does not compensate its directors
for their services as such. However, directors are reimbursed for their out of
pocket expenses in attending Board meetings, and each of the Company's
non-employee directors participates in the 1995 Director Option Plan.

   The Company's 1995 Director Option Plan (the "Director Plan") as amended
covers 150,000 shares of ENDOcare common stock. The Director Plan provides that
each non-employee director (each, an "Outside Director") is automatically
granted an option to purchase 10,000 fully vested shares of ENDOcare common
stock upon his or her initial election or appointment as an Outside Director.
Subsequently, each Outside Director who has served for at least six months
will be granted an additional option to purchase 5,000 shares of ENDOcare
common stock on January 1 of each year so long as he or she remains an Outside
Director.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
   The Company's Compensation Committee, consists of Messrs. Byrnes, Bernardoni
and Gerson. No member of the Compensation Committee was at any time during
fiscal 1997 or at any other time an officer or employee of the Company. There
are no compensation committee interlocks between the Company and other entities
involving the Company's executive officers and Board members who serve as
executive officers or Board members of such other entities.


INDEMNIFICATION AND EXCULPATION ARRANGEMENTS
   The Restated Certificate of Incorporation of ENDOcare limits the liability of
directors to ENDOcare or its stockholders to the fullest extent permitted by the
Delaware General Corporation Law (the "DGCL"). Accordingly, pursuant to the
provisions of the DGCL presently in effect, directors of ENDOcare will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability: (i) for any breach of the director's duty
of loyalty to the Company or its shareholders; (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the DGCL; or (iv) for any transaction from which
the director derived an improper personal benefit. In addition, the bylaws of
ENDOcare require ENDOcare to indemnify its directors and officers to the fullest
extent permitted by the laws of the State of Delaware.

                                       24
<PAGE>   25

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The following table sets forth information with respect to the beneficial
ownership of ENDOcare common stock owned as of March 24, 1998 by (i) the holders
of more than 5% of the ENDOcare common stock, (ii) each director of the Company,
(iii) each of ENDOcare's Named Executive Officers, and (iv) all directors and
executive officers of the Company as a group.

<TABLE>
<CAPTION>
                                                            AMOUNT AND NATURE
                                   NAME AND ADDRESS           OF BENEFICIAL
              TITLE OF CLASS     OF BENEFICIAL OWNER(1)        OWNERSHIP(2)    PERCENT OF CLASS
              --------------     ----------------------        ------------    ----------------
<S>                           <C>                               <C>                 <C>
               Common Stock   The Kaufmann Fund                 1,000,000            11.9%
                                 140 E. 45th Street
                                 New York, NY  10017
                              Peter F. Bernardoni (3)             647,000             7.7%
                                 Technology Funding
                                 2000 Alameda de las Pulgas
                                 San Mateo, CA  94402
                              Paul W. Mikus(5)                    312,500(4)          3.7%
                              Ralph L. Quigley(5)                  39,062(4)           *
                              Vincent C. Cutarelli(5)              29,167(4)           *
                              William R. Hughes(5)                     --              *
                              Robert F. Byrnes                     10,000(4)
                                    3753 Howard Hughes Dr.
                                    Suite 200
                                    Las Vegas, NV  89109
                              Benjamin Gerson, M.D.                10,000(4)
                                    70 Walnut Street
                                    Wellesley, MA  02181
                              All executive officers and        1,047,729            12.5%
                                directors as a group
                                (7 persons)
</TABLE>
----------
 *    Less than 1%.
(1)   All such shares were held of record with sole voting and investment power,
      subject to applicable community property laws, by the named individual
      and/or by his wife, except as indicated in the following footnotes.
(2)   Beneficial ownership is determined in accordance with the rules of the
      Commission and generally includes voting or investment power with respect
      to securities. Shares of common stock relating to options currently
      exercisable or exercisable within 60 days of March 24, 1998, are deemed
      outstanding for computing the percentage of the person holding such
      securities but are not deemed outstanding for computing the percentage of
      any other person. Except as indicated by footnote, and subject to
      community property laws where applicable, the persons named in the table
      above have sole voting and investment power with respect to all shares
      shown as beneficially owned by them.
(3)   Includes 632,000 shares held by Technology Funding Partners III, L.P.,
      Technology Funding Venture Partners IV, an Aggressive Growth Fund, L.P.,
      Technology Funding Venture Partners V, an Aggressive Growth Fund, L.P.,
      and Technology Funding Medical Partners I, L.P. (collectively, the
      "Funds"). Mr. Bernardoni is an officer of Technology Funding Inc., and a
      partner of Technology Funding Ltd., each a general partner of the Funds.
      Mr. Bernardoni has sole voting and shared investment power with respect to
      all shares owned by the Funds, and therefore may be deemed to be
      beneficial owner of such shares. Also includes 15,000 shares issuable with
      respect to exercise of options.
(4)   Represents shares issuable with respect to the exercise of options.
(5)   The address of such persons is 7 Studebaker, Irvine, California 92618.


                                       25
<PAGE>   26


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


Relationship Between ENDOcare and Medstone After the Distribution
   Prior to 1996, ENDOcare had operated as a division of Medstone International.
ENDOcare, Inc. was incorporated as a wholly-owned subsidiary in 1994. Through
1995, the Company relied upon Medstone for financial support and administrative
assistance. Since completion of the Distribution at the beginning of 1996,
ENDOcare has operated independently from Medstone.

   Prior to the Distribution, ENDOcare and Medstone entered into a Distribution
Agreement, a Research and Development Services Agreement, an Administrative
Services Agreement and a Contribution Agreement. The full text of these
agreements has been filed as exhibits to the Registration Statement at the time
of the Distribution.

   During 1996 ENDOcare and Medstone exchanged few services. During the first
quarter 1996, Medstone billed ENDOcare approximately $3,000 for administrative
services, and ENDOcare billed Medstone approximately $3,000 for engineering and
administrative services. Throughout 1996, ENDOcare provided health insurance to
its employees through continuation of Medstone's policy. No related party
transactions occurred between ENDOcare and Medstone in 1997.


Relationship Between ENDOcare and Technology Funding
   Peter F. Bernardoni has served on ENDOcare's Board of Directors since
November 1995. He also is a partner of Technology Funding Ltd. and an officer of
Technology Funding Inc., a venture capital group. In August 1996 ENDOcare
obtained a two-year $1,500,000 borrowing facility from four partnerships managed
by Technology Funding Inc. The outstanding principal balance of $750,000 was
convertible and, at the option of the holders, was converted on January 27, 1997
into 300,000 shares of ENDOcare common stock at a conversion price of $2.50 per
share. Interest on the loan had accrued at a rate of 16% per year, and all
$50,000 was converted into 20,000 shares on that same date at the same $2.50 per
share. Also on January 27, 1997, the four partnerships managed by Technology
Funding Inc. received an additional 12,000 shares ($50,250 total market value)
to induce conversion at that time. On August 26, 1996, the partnerships also
received warrants for the purchase of up to 150,000 shares of ENDOcare common
stock at any time on or before August 26, 2001, at a price of $3.00 per share.
The partnerships received an origination fee of 10,000 shares of common stock on
that same date.


                                    PART IV

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

(a) DOCUMENTS FILED AS A PART OF THIS REPORT

(1) Index to Financial Statements
        Independent Auditors' Reports                                 29
        Statements of Operations for the years ended                  31
           December 31,  1995, 1996 and 1997
        Balance Sheets at December 31, 1996 and 1997                  32
        Statements of Shareholders'/Division Equity (Deficiency)
           for the years ended December 31, 1995, 1996 and 1997       33
        Statements of Cash Flows for the years ended
           December 31, 1995, 1996 and 1997                           34
        Notes to Financial Statements                                 35

(2) Financial Statement Schedules
        Schedule II--Valuation and Qualifying Accounts

        (All other schedules are omitted because they are not applicable or the
        required information is included in the consolidated financial
        statements or notes thereto.)


                                       26
<PAGE>   27

(3) Exhibits

 2.1  Distribution Agreement between the Registrant and Medstone International,
      Inc., dated October 31, 1995(1)

 3.1  Certificate of Incorporation of the Company(2)

 3.2  Amended and Restated Bylaws of the Company(9)

 4.1  Specimen Certificate of the Company's Common Stock(3)

10.1  Facility Lease on 18 Technology Drive(2)

10.2  Contribution Agreement between Medstone International, Inc. and the
      Company, dated October 31, 1995(1)

10.3  Research and Development Services Agreement between Medstone
      International, Inc. and the Company, dated October 31, 1995(1)

10.4  Form of Indemnification Agreement(2)*

10.5  1995 Stock Plan(1)*

10.6  1995 Director Option Plan(1)*

10.7  Patent License Agreement between the Company and Brigham and Women's
      Hospital, Inc., dated April 17, 1996(4)

10.8  Form of Convertible Secured Promissory Note due August 26, 1998, issued by
      ENDOcare, Inc. in an aggregate principal amount of $1,500,000, dated
      August 26, 1996(5)

10.9  Form of Warrant to purchase an aggregate of 150,000 shares of common
      stock, dated August 26, 1996(5)

10.10 Distributorship Agreement between the Company and Boston Scientific
      Corporation, dated November 18, 1996(6)

10.11 Common Stock Purchase Agreement by and among the Company and the persons
      listed on the Schedule of Investors attached thereto as Exhibit A, dated
      January 21, 1997(7)

10.12 Facility Lease dated January 31, 1997 for 7 Studebaker(9)

10.13 Sublease dated May 19, 1997 for 18 Technology Drive(9)

23.1  Consent of KPMG Peat Marwick LLP**

23.2  Consent of Ernst & Young LLP**

27.1  Financial Data Schedule**

29.1  ENDOcare, Inc. Information Statement distributed to shareholders of
      Medstone International, Inc., dated February 6, 1996(8)

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

(1)   Previously filed with the Company's Application for Registration on Form
      10-SB under the Securities Exchange Act of 1934, filed on November 14,
      1995, and incorporated herein by reference. Each such exhibit had the same
      exhibit number in that filing, except that the 1995 Stock Plan was exhibit
      number 10.6 and the 1995 Director Option Plan was exhibit 10.7.

(2)   Previously filed with Amendment number 1 to Company's Application for
      Registration on Form 10-SB, filed on December 21, 1995, and incorporated
      herein by reference.

(3)   Previously filed with the Company's Annual Report on Form 10-K for the
      year ended December 31, 1995, and incorporated herein by reference.

(4)   Previously filed with the Company's Current Report on Form 8-K, as
      amended, dated April 25, 1996 as filed with the Securities and Exchange
      Commission on April 26, 1996, and incorporated herein by reference.

(5)   Previously filed with the Company's Current Report on Form 8-K dated
      August 26, 1996 as filed with the Securities and Exchange Commission on
      September 10, 1996, and incorporated herein by reference.

(6)   Previously filed with the Company's Current Report on Form 8-K dated
      November 18, 1996 as filed with the Securities and Exchange Commission on
      December 3, 1996, and incorporated herein by reference.

(7)   Previously filed with the Company's Current Report on Form 8-K dated
      January 27, 1997 as filed with the Securities and Exchange Commission on
      January 31, 1997, and incorporated herein by reference.

(8)   Previously filed on February 9, 1996 by Medstone International, Inc. under
      Section 14(c) of the Securities Exchange Act of 1934, and incorporated
      herein by reference.

(9)   Previously filed with the Company's Annual Report on Form 10-K/A
      (Amendment No. 3) for the year ended December 31, 1996, and incorporated
      herein by reference.

 *    Management contract or compensatory plan or arrangement required to be
      filed as an exhibit pursuant to applicable rules of the Securities and
      Exchange Commission.

**    Filed herewith.


                                       27
<PAGE>   28

(b)   REPORTS ON FORM 8-K

      On January 31, 1997, the Company filed a Form 8-K with the Securities and
      Exchange Commission dated January 27, 1997 reporting the sale of 2,218,714
      shares of common stock in a private placement which closed January 27,
      1997 for aggregate gross proceeds of $7,765,499 to the Company and that on
      January 27, 1997, at the request of the holders, the Company converted an
      aggregate principal amount of $750,000 of the Company's Convertible
      Secured Promissory Notes due August 26, 1998, plus accrued interest
      thereon, into 332,000 shares of common stock.

                                       28
<PAGE>   29

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
ENDOcare, Inc.:

We have audited the accompanying balance sheets of ENDOcare, Inc. (the Company)
as of December 31, 1996 and 1997, and the related statements of operations,
shareholders'/division equity (deficiency), and cash flows for the years then
ended. In connection with our audit of the financial statements, we also have
audited the financial statement schedule as listed in the Index at Item 14(a).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ENDOcare, Inc. as of December
31, 1996 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

                                                          KPMG PEAT MARWICK LLP

Orange County, California
February 6, 1998, except
as to note 14, which
is as of March 24, 1998

                                       29
<PAGE>   30

To the Board of Directors and Shareholders
Endocare, Inc.

We have audited the accompanying statements of operations, division deficiency
and cash flows of ENDOcare (a division of Medstone International, Inc.) for the
year ended December 31, 1995. Our audit also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations, division deficiency and cash
flows of ENDOcare (a division of Medstone International, Inc.) for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                                      ERNST & YOUNG LLP
Orange County, California
February 14, 1996

                                       30
<PAGE>   31

                                 ENDOCARE, INC.
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                             FOR THE YEARS ENDED DECEMBER 31,
                                           -------------------------------------
                                             1995         1996          1997
                                           ---------   -----------   -----------
<S>                                       <C>          <C>           <C>
Revenues:
  Net product sales                       $  951,311   $ 1,877,678   $ 1,917,707
  Revenue from collaborative agreements           --       250,000        83,328
  Research revenue from related party        376,533         1,600            --
                                           ---------   -----------   -----------
    Total revenues                         1,327,844     2,129,278     2,001,035
                                           ---------   -----------   -----------
Costs and expenses:
  Cost of product sales                      379,478       994,374     1,270,838
  Research and development                   852,025     1,023,172     1,596,242
  Selling, general and administrative        673,258     1,313,302     3,028,815
  Impairment loss on long-lived assets            --       324,878            --
                                           ---------   -----------   -----------
    Total costs and expenses               1,904,761     3,655,726     5,895,895
                                           ---------   -----------   -----------
Loss before income taxes                    (576,917)   (1,526,448)   (3,894,860)
Provision for income taxes                        --         5,000         5,000
                                           ---------   -----------   -----------
Net loss                                   $(576,917)  $(1,531,448)  $(3,899,860)
                                           =========   ===========   ===========
Net loss per share of common stock -
  basic and diluted                                    $      (.27)  $      (.48)
                                                       ===========   ===========
Weighted average shares of
  common stock outstanding                               5,634,561     8,047,000
                                                       ===========   ===========
</TABLE>

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

                                       31
<PAGE>   32

                                 ENDOCARE, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                        DECEMBER 31
                                                                ----------------------------
                                                                    1996            1997
                                                                -----------      -----------
<S>                                                             <C>              <C>
                                     ASSETS
                                     ------
      Current assets:
         Cash and cash equivalents                              $   476,854      $ 3,896,316
         Accounts receivable, less allowances of $58,139
             and $192,000 at December 31, 1996 and 1997,
             respectively                                           587,945          376,141
         Inventories                                                396,725          925,592

         Prepaid expenses and other current assets                   41,398           64,237
                                                                -----------      -----------
             Total current assets                                 1,502,922        5,262,286

      Property and equipment, net                                   178,788          238,192
      Other assets                                                   69,191           42,566
                                                                -----------      -----------
                Total assets                                    $ 1,750,901      $ 5,543,044
                                                                ===========      ===========

                LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
                -------------------------------------------------

      Current liabilities:
         Accounts payable                                       $   668,761      $   745,771
         Accrued compensation                                        53,190          266,756
         Other accrued liabilities                                  143,399          430,918
         Deferred revenue                                           118,333           83,333
                                                                -----------      -----------
             Total current liabilities                              983,683        1,526,778

      Deferred revenue                                              166,667           83,339
      Convertible note payable                                      750,000               --

      Shareholders' equity (deficiency):
         Preferred stock, $.001 par value; 1,000,000 shares
             authorized; none issued and outstanding                     --               --
         Common stock, $.001 par value; 20,000,000 shares                --               --
             authorized; 5,645,139 and 8,378,354 issued and
             outstanding at December 31, 1996 and 1997                5,645            8,378
         Additional paid-in capital                               1,376,354        9,355,857
         Accumulated deficit                                     (1,531,448)      (5,431,308)
                                                                -----------      -----------
             Total shareholders' equity (deficiency)               (149,449)       3,932,927
                                                                -----------      -----------
      Commitments and contingencies
      Subsequent event
             Total liabilities and shareholders' equity         $ 1,750,901      $ 5,543,044
                                                                ===========      ===========
</TABLE>


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

                                       32
<PAGE>   33

                                 ENDOCARE, INC.
             STATEMENT OF SHAREHOLDERS'/DIVISION EQUITY (DEFICIENCY)


<TABLE>
<CAPTION>
                                                                                                         TOTAL
                                                                                                     SHAREHOLDERS'/
                                    COMMON STOCK         ADDITIONAL      ADVANCES                      DIVISION
                                 -------------------      PAID-IN          FROM       ACCUMULATED        EQUITY
                                 SHARES       AMOUNT      CAPITAL        MEDSTONE       DEFICIT       (DEFICIENCY)
                                 ------       ------      -------        --------       -------       ------------
<S>                             <C>           <C>       <C>            <C>            <C>             <C>
BALANCE AT DECEMBER 31, 1995           --     $   --    $        --    $ 2,831,364    $(2,028,231)    $   803,133

Common stock issued in
   Medstone Distribution        5,616,528      5,617      1,297,516     (2,831,364)     2,028,231         500,000
Other common stock issued          28,611         28         59,868             --             --          59,896
Equity provided by
   warrant amortization                --         --         18,970             --             --          18,970
Net loss                               --         --             --             --     (1,531,448)     (1,531,448)
                                ---------     ------    -----------    -----------    -----------     -----------
BALANCE AT DECEMBER 31, 1996    5,645,139      5,645      1,376,354             --     (1,531,448)       (149,449)

Common stock issued in
   private placement and
   and note conversion, net     2,550,714      2,551      7,868,600             --             --       7,871,151
Stock options exercised           182,501        182         32,668             --             --          32,850
Equity provided by
    warrant amortization               --         --         78,235             --             --          78,235
Net loss                               --         --             --             --     (3,899,860)     (3,899,860)
                                ---------     ------    -----------    -----------    -----------     -----------
BALANCE AT DECEMBER 31, 1997    8,378,354     $8,378    $ 9,355,857    $        --    $(5,431,308)    $ 3,932,927
                                =========     ======    ===========    ===========    ===========     ===========
</TABLE>


No data is presented for periods prior to December 31, 1995, because at that
time ENDOcare was operating as a division of Medstone, not as an independent
public corporation. (See note 12).

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

                                       33

<PAGE>   34


                                 ENDOCARE, INC.
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED DECEMBER 31,
                                                   -------------------------------------------
                                                       1995            1996           1997
                                                   -----------     -----------     -----------
<S>                                                <C>             <C>             <C>
Cash flows from operating activities:
-------------------------------------
   Net loss                                        $  (576,917)    $(1,531,448)    $(3,899,860)
   Adjustments to reconcile net loss to net
     cash used in operating activities:
       Depreciation and amortization                   163,193          38,325         142,286
       Amortization of warrant value                        --          18,970          78,235
       Common stock issued for services                     --          59,896              --
   Impairment loss on long-lived assets                     --         324,878              --
   Changes in operating assets and liabilities:
       Accounts receivable                              87,365        (485,529)        211,804
       Inventories                                     (21,605)       (177,427)       (528,867)
       Prepaid expenses and other current
          assets                                         8,565         (34,063)        (22,839)
       Other assets                                    (66,738)        (53,284)         26,625
       Accounts payable                                 (4,968)        668,761          77,010
       Accrued compensation                           (101,775)         53,190         213,566
       Other accrued liabilities                          (122)        143,399         287,519
       Deferred revenue                                     --         283,372        (118,328)
       Customer deposits                                   932            (932)             --
                                                   -----------     -----------     -----------
Net cash used in operating activities                 (512,070)       (691,892)     (3,532,849)
                                                   -----------     -----------     -----------
Cash flows from investing activities:
-------------------------------------
   Purchases of property and equipment                 (28,697)       (110,569)       (201,690)
   Proceeds from sale of property and
     equipment                                          26,594          27,374              --
                                                   -----------     -----------     -----------
Net cash used in investing activities                   (2,103)        (83,195)       (201,690)
                                                   -----------     -----------     -----------
Cash flows from financing activities:
-------------------------------------
   Advances from Medstone                              516,114              --              --
   Issuance of common stock, Medstone
     Distribution                                           --         500,000              --
   Issuance of common stock, other                          --              --       7,154,001
   Borrowing on convertible note payable                    --         750,000              --
                                                   -----------     -----------     -----------
Net cash provided by financing activities              516,114       1,250,000       7,154,001
                                                   -----------     -----------     -----------
Net increase in cash and cash equivalents                1,941         474,913       3,419,462
Cash and cash equivalents, beginning of year                --           1,941         476,854
                                                   -----------     -----------     -----------
Cash and cash equivalents, end of year             $     1,941     $   476,854     $ 3,896,316
                                                   -----------     -----------     -----------
Non-cash activities:
--------------------
   Book value of net assets contributed by
      Medstone at time of spin-out and
      initial capitalization of ENDOcare,
      Inc                                          $        --     $   803,133     $        --
   Conversion of note payable and accrued
     interest to common stock, net of
     origination fees paid by issuance
     of common stock                                       --              --         820,250
                                                   -----------     -----------     -----------
          Total non-cash activities                $        --     $   803,133     $   820,250
                                                   ===========     ===========     ===========
</TABLE>

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

<PAGE>   35

                                 ENDOCARE, INC.
                          NOTES TO FINANCIAL STATEMENTS


1.  ORGANIZATION AND OPERATIONS OF THE COMPANY

    ENDOcare, Inc. (the "Company") designs, manufactures, and markets an array
    of innovative, temperature-based surgical devices and technologies primarily
    to treat prostate diseases, including prostate cancer and prostate
    enlargement.

    Since its formation in 1990, ENDOcare operated first as a research and
    development department, then later as a division of Medstone International,
    Inc. ("Medstone"). Effective January 1, 1996, ENDOcare became a totally
    independent, publicly-owned corporation. At the beginning of 1996, ENDOcare,
    Inc. issued 5,616,528 shares of ENDOcare common stock to Medstone in
    exchange for $500,000 cash and the accounts receivable, inventory, and other
    net assets of the ENDOcare Division. On February 6, 1996, Medstone
    distributed to existing Medstone shareholders a stock dividend of one share
    of ENDOcare common stock for each share of Medstone common stock outstanding
    on December 29, 1995.

    All 1995 comparative amounts shown in the accompanying financial statements
    reflect operations while ENDOcare was a division of Medstone. In particular,
    the December 31, 1995 Division Equity is before Medstone's conversion of its
    net advance to equity and before Medstone's contribution of $500,000 cash.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Cash and Cash Equivalents: All highly liquid investments purchased with an
    original maturity of three months or less are considered to be cash
    equivalents.

    Inventories: Inventories are stated at the lower of actual cost (first-in,
    first-out) or net realizable value.

    Property and Equipment: Property and equipment are stated at cost and are
    depreciated on a straight-line basis over the estimated useful lives of the
    respective assets, which range from two to five years. Leasehold
    improvements are amortized over the shorter of the estimated useful lives of
    the assets or the related lease term.

    Long-Lived Assets: The Company reviews property, equipment, and intangible
    assets for possible impairment whenever events or circumstances indicate
    that the carrying amounts may not be recoverable. If the sum of the expected
    future undiscounted cash flows is less than the carrying amount of an asset,
    an impairment loss is recognized. See Note 4 for impairment adjustments in
    1996.

    Revenue Recognition: ENDOcare recognizes product revenue upon the shipment
    of its products and records reserves for estimated returns. Research revenue
    and revenue from collaborative agreements are recognized as the related
    activities are performed or milestones are met. Realizability of accounts
    receivable is determined based upon an understanding of the financial
    condition of, and prior history with, the buyer and overall historical
    experience.

    Warranty Costs: Certain of the Company's products are covered by warranties
    against defects in material and workmanship for periods of up to twelve
    months. The estimated warranty cost is recorded at the time of sale and is
    adjusted periodically to reflect actual experience.

    Research and Development: Research and development costs relate to both
    present and future products and are expensed immediately as incurred.

    Stock-Based Compensation: In October 1995, the Financial Accounting
    Standards Board issued Statement of Financial Accounting Standards No. 123,
    "Accounting for Stock-Based Compensation." Effective January 1, 1996,
    ENDOcare adopted this pronouncement to account for stock options and
    warrants. Under this standard's "fair value" method, compensation cost is
    measured based on the fair value of the award computed as of the grant date
    and is recognized over the service period of the award, which usually is the
    vesting period. In accordance with this standard, the Company has elected to
    follow the guidance of

                                       35
<PAGE>   36
    Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
    Employees," disclosing the effect of fair value in Note 10.

    Earnings (Loss) Per Share: The Company adopted Statement of Financial
    Accounting Standards No. 128, "Earnings Per Share" (SFAS 128) in the fourth
    quarter of 1997. SFAS 128 simplifies the computation of earnings per share
    ("EPS") previously required in Accounting Principles Board (APB) Opinion No.
    15, "Earnings Per Share," by replacing primary and fully diluted EPS with
    basic and diluted EPS. Under SFAS 128, basic EPS is calculated by dividing
    net earnings (loss) by the weighted-average common shares outstanding during
    the period. Diluted EPS reflects the potential dilution to basic EPS that
    could occur upon conversion or exercise of securities, options, or other
    such items, to common shares using the treasury stock method based upon the
    weighted-average fair value of the Company's common shares during the
    period. SFAS 128 was required to be adopted by the Company in its year-end
    1997 Annual Report, and the adoption of SFAS 128 did not result in a
    restatement of the Company's loss per share as previously reported for
    fiscal 1996 or the earlier quarters of 1997. In accordance with SFAS 128,
    the income (numerator), shares (denominator) and per-share amount for fiscal
    1996 are $(1,531,448), 5,634,561 and $(0.27), respectively. The income
    (numerator), shares (denominator) and per-share amount for fiscal 1997 are
    $(3,899,860), $8,047,000 and $(0.48), respectively. As the Company has been
    in a net loss position for the fiscal years 1996 and 1997, common share
    equivalents of 1,036,000 and 1,087,000 in fiscal years 1996 and 1997,
    respectively, were not used to compute diluted loss per share as the effect
    was antidilutive. Consequently, diluted EPS are not presented as they equal
    basic EPS. Earnings (loss) per share data is not presented for 1995 or
    earlier, because at that time ENDOcare was operating as a division of
    Medstone. ENDOcare, Inc. shares were not outstanding at any time during
    1995.

    Fair Value of Financial Instruments: The carrying amount of cash and cash
    equivalents approximates fair value for all periods presented because of the
    short-term maturity of these financial instruments. The carrying amounts of
    all other financial instruments on the balance sheet approximate their fair
    values.

    Use of Estimates: Company management has made a number of estimates and
    assumptions relating to the reporting of assets and liabilities, revenues
    and expenses, and contingent assets and liabilities in conformity with
    generally accepted accounting principles. Actual results could differ from
    these estimates.

3.  SUPPLEMENTAL FINANCIAL STATEMENT DATA

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                          -----------------------
                                                            1996           1997
                                                          --------       --------
<S>                                                       <C>           <C>
          Inventories:
               Raw materials                              $213,154       $628,466
               Work in process                              86,130         56,306
               Finished goods                               97,441        240,820
                                                          --------       --------
                    Total inventories                     $396,725       $925,592
                                                          ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                          -----------------------
                                                            1996           1997
                                                          ---------     ---------
<S>                                                       <C>           <C>
          Property and Equipment:
            Production equipment                          $ 201,106     $ 219,154
            Furniture and fixtures                           49,037       148,810
            Leasehold improvements                            7,076        79,771
            Assets held for disposal (net of reserves)
             (see note 4)                                   190,573       167,947
                                                          ---------     ---------
                Total property and equipment, at cost       447,792       615,682
            Accumulated depreciation and amortization      (269,004)     (377,490)
                                                          ---------     ---------
                Net property and equipment                $ 178,788     $ 238,192
                                                          =========     =========
</TABLE>

4.  LONG-LIVED ASSETS

    Effective January 1, 1996, ENDOcare adopted Statement of Financial
    Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
    Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). In
    accordance with this standard, the Company reviewed the cash flows being
    generated by certain assets which were not expected to be utilized fully in
    the Company's operations after its spin-out from Medstone International,
    Inc. Based upon this review, effective January 1, 1996, ENDOcare reduced the
    value of certain property and equipment by $264,047 and intangible
    organizational costs by $60,831 to their estimated fair market values. These
    adjustments were charged to operations in the quarter ended March 31, 1996.
    The identification and measurement of these impaired assets was primarily a
    result of the post spin-out business operations of the Company, not solely
    the adoption of SFAS 121. However, the provisions of SFAS 121 were utilized
    in determining the amount of the impairment charge. Prior to the adoption of
    SFAS 121, the Company periodically analyzed and reviewed its long-term
    assets for impairment based on economic factors and continuing benefits of
    the specific assets as determined by current and expected operations at that
    time.

                                       36
<PAGE>   37

    Assets held for disposal:

    The majority of the property and equipment adjustment pertained to laser
    machines which were no longer generating sales of the Company's ProLase
    laser catheters. At the December 31, 1995 spin-out date, these lasers had a
    net book value of $207,210. Effective January 1, 1996, ENDOcare reduced the
    machines' carrying values to their estimated disposal value of $50,000, of
    which $27,374 was realized during 1996. These assets are included in assets
    held for disposal. Included in the impairment loss in the statement of
    operations for the year ended December 31, 1996 is $157,210 related to these
    assets. In 1997, the machines' aggregate carrying value was reduced to zero.

    The $60,831 adjustment to intangible organizational costs is described in
    Note 5 below.


5.  INTANGIBLE ASSETS

    At the end of 1995, Medstone International, Inc. incurred significant legal,
    accounting, and other professional expenses in connection with the
    distribution of its subsidiaries, ENDOcare and Urogen, to its existing
    Medstone shareholders. Medstone elected to capitalize these expenses as
    deferred organizational costs on its balance sheet. At the time of the
    actual distribution, $60,831 was allocated by Medstone to ENDOcare,
    appearing as Intangible Assets on ENDOcare's initial December 31, 1995
    Balance Sheet. Effective January 1, 1996, in accordance with the new
    accounting standard described in Note 4 above, ENDOcare wrote off these
    amounts entirely.


6.  CONVERTIBLE LOAN PAYABLE

    On August 26, 1996, ENDOcare obtained a two-year $1,500,000 borrowing
    facility from four partnerships (the "Partnerships") managed by Technology
    Funding Inc., a venture capital firm. Peter F. Bernardoni is an officer of
    Technology Funding Inc. and has served as a member of ENDOcare's Board of
    Directors since November 1995. At December 31, 1996, $750,000 was
    outstanding under this loan.

    In connection with entering into this loan, ENDOcare issued to the four
    partnerships 10,000 shares of common stock as an origination fee and
    warrants to purchase an aggregate of up to 150,000 shares of ENDOcare common
    stock. The warrants are exercisable at any time between August 26, 1996 and
    August 26, 2001, at an exercise price of $3.00 per share, subject to
    adjustment.

    The loan accrued interest at the rate of 16% per year, which was due and
    payable in arrears on the maturity date. The outstanding principal and
    interest under the loan was convertible into common stock of ENDOcare at a
    conversion price of $2.50 per share, subject to certain conditions. All of
    the obligations under the loan were secured by a security interest in all
    present and after acquired personal property of ENDOcare.

    On January 27, 1997, the partnerships converted their $750,000 principal
    amount and accrued interest of $50,000 into 320,000 shares of common stock.
    Also, 12,000 additional shares of common stock were issued to the
    partnerships as an inducement to convert at that time which were valued at
    fair value of $50,250. The Convertible Loan, which provided an additional
    $750,000 in borrowing capacity, was cancelled as of the conversion. In
    conjunction with the conversion, approximately $30,000 in unamortized note
    origination fees were reclassified against additional paid-in capital.


7.  COLLABORATIVE AGREEMENTS

    Brigham: On April 17, 1996, ENDOcare entered into a patent license agreement
    with Brigham and Women's Hospital, Inc., ("Brigham") an affiliate of Harvard
    University. This agreement gives ENDOcare the worldwide exclusive right to
    use Brigham's patented thermal radiation technology in the Company's planned
    ThermaStent(TM) product. In return, Brigham received a warrant to purchase
    up to 10,000 shares of ENDOcare common stock at a price of $2.875 per share.
    The warrants are exercisable at any time between April 17, 1996 and April
    17, 2001. In addition, if ENDOcare successfully brings the product to
    market, Brigham may receive royalties on ThermaStent(TM) product sales. No
    royalties were earned or paid in 1996 and 1997.

    Boston Scientific: On November 18, 1996, ENDOcare signed a distribution
    agreement with Boston Scientific Corporation ("Boston Scientific"). This
    agreement grants Boston Scientific exclusive worldwide marketing rights for
    ENDOcare's CRYOcare system for urology. ENDOcare retains marketing rights
    for other applications. In return Boston Scientific has guaranteed ENDOcare
    certain minimum purchases of CRYOcare systems over the next five years
    subject to certain conditions and renegotiation. In addition, Boston
    Scientific has committed to pay ENDOcare four payments of $250,000 each,
    based upon meeting certain specified milestones. The first milestone, based
    upon contract signing, was received in November 1996, and revenue was
    recognized in the fourth quarter of 1996. Due to continuing obligations of
    the Company to Boston Scientific, cash related to the second milestone
    received in December 1996 is being recognized as earned over three years.

                                       37
<PAGE>   38

    Although the distributorship agreement requires Boston Scientific to
    purchase a minimum number of products, if and when there were a lack of
    sales as a result of unforeseen regulatory or clinical circumstances
    relating to a product or failure of the Company to deliver products in a
    timely manner, the minimum purchase requirements can be renegotiated.
    Currently, Medicare does not provide reimbursement for cryosurgical ablation
    of the prostate, one of the approved uses of the Company's eight probe
    CRYOcare System.

    In addition, under the distribution agreement, Boston Scientific has a right
    of first refusal to match any offer received by the Company from a third
    party to purchase the assets related to the CRYOcare System for urology, and
    a right to buy the assets and technology related to the CRYOcare System for
    urology at purchase dates of twenty-four, thirty-six and forty-eight months
    after the date that Medicare provides reimbursement for cryosurgical
    ablation of the prostate, for a purchase price of 1.7, 1.5 and 1.3 times net
    sales for the product for the preceding twelve months, but not less than $40
    million, $50 million, and $60 million, respectively.

8.  COMMITMENTS AND CONTINGENCIES

    Commitments

    Prior to September 1995, ENDOcare incurred no outside rental expense, since
    it shared facilities with its parent, Medstone. In September 1995, ENDOcare
    moved to its own facility in Irvine, California. Gross rent expense was
    $9,184, $51,391, and $40,872 in 1995, 1996 and 1997, respectively. This
    facility lease expires on August 31, 1998. Future minimum commitments on
    this lease are $30,654 in 1998, and the Company has subleased its previous
    facility for its remaining term. In February 1997, ENDOcare signed a new
    five-year lease for a larger 16,100 square foot facility in Irvine,
    California. Rent expense on this lease was $119,383 in 1997. Future minimum
    commitments on this lease are $153,860 in 1998, $157,727 in 1999, $161,953
    in 2000, $165,460 in 2001, and $34,983 in 2002.

    ENDOcare also leases various office equipment, with lease commitments
    totaling $20,568 in 1998, $20,237 in 1999, $17,658 in 2000, and $3,075 in
    2002.

    As of December 31, 1997, ENDOcare has no other facility leases, capital
    leases, or other long-term commitments.

    Contingencies

    On November 27, 1996, Cryomedical Sciences, Inc. ("CMS") filed a complaint
    in the Circuit Court for Montgomery County, Maryland against the Company and
    Dr. Chang, the Company's then Vice President of Research and Development and
    former employee of CMS. The suit alleges that Dr. Chang breached his
    employment contract with CMS, that the Company tortiously interfered with
    the employment contract and the prospective business relations of CMS,
    misappropriated trade secrets and confidential information, and competed
    unfairly with and conspired against CMS. CMS is seeking injunctive relief
    and damages of at least $10,000,000 and punitive damages of $20,000,000. On
    September 23, 1997, the court granted Dr. Chang's motion (which the Company
    joined) to modify an earlier injunction prohibiting Dr. Chang from
    performing services for the Company, based on the language contained in an
    employment agreement between Dr. Chang and CMS that ostensibly prohibits Dr.
    Chang from working for a CMS competitor. Under the modification obtained by
    Dr. Chang and the Company, Dr. Chang is entitled to provide consulting
    services to the Company in the area of stent technology, subject to certain
    restrictions and to periodic review of Dr. Chang's activities by a neutral
    third party. The Company is subject to the terms of this modified
    injunction, insofar as necessary to enforce the restrictions on Dr. Chang's
    activities. No other injunctive or other relief has been granted to CMS. On
    October 17, 1997, the Company filed a comprehensive motion for summary
    judgment seeking dismissal of all claims against it brought by CMS, on a
    variety of legal and undisputed factual grounds. Shortly thereafter, on
    November 4, 1997, the parties filed a request that the court stay all
    proceedings pending efforts to resolve the case through mediation. The
    parties are currently negotiating the terms of a settlement of the
    litigation. The Company continues to deny all allegations of wrongdoing in
    the complaint and intends to defend the litigation vigorously in the event
    that the settlement negotiations do not result in a negotiated resolution of
    the case. However, the costs of defending the lawsuit could be material, and
    there can be no assurance that damages, which could have a material adverse
    effect on the Company, will not be assessed. Management does not expect any
    material adverse effect on financial condition or the results of operations
    because of this action. The Company is not a party to any other legal
    proceedings.

    From time to time, the Company has received correspondence alleging
    infringement of proprietary rights of third parties. No assurance can be
    given that any relevant claims of third parties would not be upheld as valid
    and enforceable, and therefore that the Company could be prevented from
    practicing the subject matter claimed or would be required to obtain
    licenses from the owners of any such proprietary rights to avoid
    infringement. Management does not expect any material adverse effect on
    financial condition or the results of operations because of such actions.

                                       38
<PAGE>   39

9.  INCOME TAXES

    Income tax expense consisted of:

<TABLE>
<CAPTION>
                                       Years ended December 31,
                                           1996       1997
                                          ------     ------
<S>                                       <C>        <C>
    Current:     Federal                  $   --     $   --
                 State and local           5,000      5,000
    Deferred:    Federal                      --         --
                 State and local              --         --
                                          ------     ------
                       Total              $5,000     $5,000
                                          ======     ======
</TABLE>

    The following table summarizes the tax effects of temporary differences
    which give rise to significant portions of the deferred tax assets:

<TABLE>
<CAPTION>
                                               December 31,
                                          -----------------------
                                             1996         1997
<S>                                       <C>          <C>
    Deferred tax assets:
      Product and other reserves
         established for book purposes    $  20,000    $   12,000
      Property and equipment reserve        123,000        81,000
      Inventory obsolescence reserve         44,000        69,000
      Accounts receivable reserve            26,000        76,000
      Recognition of deferred revenue            --        66,000
      Net operating loss carryforwards      131,000     1,778,000
      Other                                   7,000        66,000
                                          ---------    ----------
          Gross deferred tax assets         351,000     2,148,000
      Valuation allowance                  (351,000)   (2,148,000)
                                          ---------    ----------
          Net deferred tax assets         $      --    $       --
                                          =========    ==========
</TABLE>

    The valuation allowance increased by $351,000 and $1,797,000 for the years
    ended December 31, 1996 and 1997, respectively.

    Actual income tax expense differs from amounts computed by applying the U.S.
    federal income tax rate of 34% to pretax income as a result of the
    following:

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                                 ---------------------------
                                                     1996           1997
                                                 -----------     -----------
<S>                                              <C>             <C>
    Computed expected tax benefit                $  (519,000)    $(1,326,000)
    State income taxes net of federal benefit          2,000        (214,000)
    Nondeductible expenses                             3,000           6,000
    Change in valuation allowance                    351,000       1,797,000
    Change in tax rate with respect to
       net operating loss                            165,000        (259,000)
    Other                                              3,000           1,000
                                                 -----------     -----------
                Actual tax expense               $     5,000     $     5,000
                                                 ===========     ===========
</TABLE>

    As of December 31, 1997, the Company has net operating loss carryforwards
    for federal income tax purposes of approximately $4,466,000 which are
    available to offset future federal taxable income, if any, through the year
    2012. For state income tax purposes, the Company has net operating loss
    carryforwards of approximately $4,466,000 which are available to offset
    future state taxable income, if any, through the year 2004.

    In accordance with Internal Revenue Code Section 382, the annual utilization
    of net operating loss carryforwards and credits existing prior to a change
    in control may be limited.

    Prior to 1996, ENDOcare's net operating losses and research and development
    credits have been included in the consolidated tax returns of Medstone and
    have been fully utilized. As a result, ENDOcare had no net operating losses
    or research and development credits to offset against future taxable income
    at the time of the spin-out from Medstone.


10. STOCK OPTIONS AND WARRANTS

    At December 31, 1997, ENDOcare had two stock-based compensation plans, as
    described below. Per FASB Statement No. 123, the Company has elected to
    apply APB Opinion No. 25 and related Interpretations in accounting for its
    plans. Accordingly, no compensation expense has been recognized for these
    plans in the Statements of Operations.

    The 1995 Stock Plan authorizes the Board or one or more committees which the
    Board may appoint from among its members (the "Committee") to grant options
    and rights to purchase common stock to employees and certain consultants and
    distributors. Options granted under the 1995 Stock Plan may be either
    "incentive stock options" as defined in Section 422 of the Internal Revenue
    Code of 1986, as amended, or nonstatutory stock options, as determined by
    the Board or the Committee. The exercise price of options granted under the
    1995 Stock Plan is equal to the fair market value of ENDOcare common stock
    on the date of


                                       39
<PAGE>   40

    grant. Options vest 25% on the one year anniversary date, with the remaining
    75% vesting monthly over the following three years. Options are exercisable
    for ten years. A total of 2,000,000 shares of common stock has been reserved
    for issuance under the 1995 Stock Plan. As of December 31, 1997, options to
    purchase a total of 1,919,500 shares of the Company's common stock have been
    granted under the 1995 Stock Plan.

    The 1995 Director Option Plan (the "Director Plan") was adopted by the Board
    of Directors (the "Board") in October 1995 and approved by the shareholders
    in November 1995. It provides automatic, nondiscretionary grants of options
    to ENDOcare's non-employee directors ("Outside Directors"). The Director
    Plan provides that each Outside Director is automatically granted an option
    to purchase 10,000 shares of ENDOcare common stock upon his or her initial
    election or appointment as an Outside Director. Subsequently, each Outside
    Director who has served for at least six months will be granted an
    additional option to purchase 5,000 shares of ENDOcare common stock on
    January 1 of each year so long as he or she remains an Outside Director. The
    exercise price of options granted to Outside Directors must be the fair
    market value of ENDOcare common stock on the date of grant. Options granted
    to Outside Directors have ten-year terms, subject to an Outside Director's
    continued service as a director. The Subsequent Options granted to the
    Outside Directors becomes fully exercisable on the first anniversary of the
    date of grant. A total of 150,000 shares of common stock has been reserved
    for issuance under the Director Plan. As of December 31, 1997, options to
    purchase a total of 50,000 shares of the Company's common stock have been
    granted under the Director Plan.

    The following two tables summarize ENDOcare's option activity:

<TABLE>
<CAPTION>
                                              1995                      1996                     1997
                                   -------------------------  ------------------------  -------------------------
                                                                         WEIGHTED AVG.              WEIGHTED AVG.
                                               WEIGHTED AVG.               EXERCISE                  EXERCISE
                                   NUMBER OF  EXERCISE PRICE   NUMBER OF     PRICE       NUMBER OF     PRICE
                                    OPTIONS     PER OPTION      OPTIONS    PER OPTION     OPTIONS    PER OPTION
                                   ---------  --------------   ---------   ----------    ---------   ----------
<S>                                 <C>        <C>              <C>           <C>       <C>             <C>
    Outstanding, beginning of year       --                       980,000     $0.18      1,506,000      $0.84
    Granted during year             980,000    $      0.18        626,000     $2.07        363,500      $3.25
    Cancelled during year                --             --       (100,000)    $2.09       (187,083)     $2.05
    Exercised                            --             --             --        --       (182,501)     $0.18
                                    -------    -----------    -----------     -----      ---------      -----
    Outstanding, end of year        980,000    $      0.18      1,506,000     $0.84      1,499,916      $1.36
                                    =======    ===========    ===========     =====      =========      =====
    </TABLE>


<TABLE>
<CAPTION>
                           OPTIONS OUTSTANDING          OPTIONS EXERCISABLE
                      -----------------------------  ---------------------------
                        NUMBER       WEIGHTED-AVG.     NUMBER
     WEIGHTED-AVG     OUTSTANDING      REMAINING     EXERCISABLE  WEIGHTED-AVG.
    EXERCISE PRICES   AT 12/31/97  CONTRACTUAL LIFE  AT 12/31/97  EXERCISE PRICE
    ---------------   -----------  ----------------  -----------  --------------
<S>                     <C>            <C>           <C>           <C>
     $         0.18     945,416        7.9 years       406,042       $0.18
     $         1.88       6,000        8.2 years         2,500       $1.88
     $         2.75      10,000        9.6 years            --       $2.75
     $         2.81     172,500        9.6 years        20,000       $2.81
     $         3.25      15,000        9.3 years           --        $3.25
     $         3.38      50,000        8.6 years        16,667       $3.38
     $         3.50      18,000        9.0 years         2,979       $3.50
     $         3.56       2,500       10.0 years            --       $3.56
     $         3.63      75,000        8.3 years        31,250       $3.63
     $         3.69      10,000        9.8 years            --       $3.69
     $         3.75     167,500        9.1 years        21,875       $3.75
     $         3.88      15,000        8.4 years         5,938       $3.88
     $         4.00      10,000        9.7 years            --       $4.00
     $         4.50       3,000        9.8 years            --       $4.50
                      ---------                        -------       -----
     $0.18 to $4.50   1,499,916                        507,251       $0.82
                      =========                        =======       =====
</TABLE>

                                       40
<PAGE>   41


    The following table presents pro forma information as if ENDOcare recorded
    compensation cost using the fair value of the issued stock options using the
    Black-Scholes valuation model:

<TABLE>
<CAPTION>
                                                    1996          1997
                                                -----------    -----------
<S>                                             <C>            <C>
    Net loss:
    ---------
      As reported                               $(1,531,448)   $(3,899,860)
      Assumed stock compensation cost              (107,000)      (157,000)
                                                -----------    -----------
      Pro forma, adjusted                       $(1,638,448)   $(4,056,860)
                                                ===========    ===========
    Net loss per share - basic and diluted:
    ---------------------------------------
      As reported                               $     (0.27)    $    (0.48)
      Pro forma, adjusted                       $     (0.29)    $    (0.50)
</TABLE>

    The weighted average fair value of the Company's options at the grant date
    was approximately $.50 in 1996 and $1.01 in 1997. The fair value of each
    option grant is estimated on the date of grant using the Black-Scholes
    option pricing model, with the following assumptions:

<TABLE>
<CAPTION>
                               1996           1997
                               ----           ----
<S>                           <C>            <C>
    Stock volatility                .3             .1
    Risk-free interest rate       8.00%          6.00%
    Option term in years      10 years       10 years
    Stock dividend yield            --             --
</TABLE>


    ENDOcare issued warrants to purchase 160,000 and 222,497 shares of the
    Company's common stock in 1996 and 1997, respectively. The Company amortizes
    the fair values of these warrants to expense over the service period of the
    related warrants. No warrants were issued in 1995 or earlier.


11. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

    ENDOcare sells its devices worldwide to distributors of medical devices and
    directly to hospitals and other medical professional organizations. With its
    November 18, 1996 signing of a distribution agreement with Boston Scientific
    (see Note 7), ENDOcare's CRYOcare systems will be distributed exclusively by
    Boston Scientific for that product's original market, urological
    applications.

    Customer credit may be extended based upon evaluation of the customer's
    financial condition. In general, on sales of major surgical systems,
    ENDOcare attempts to secure an up-front deposit and payment at time of
    delivery, often through a secured letter of credit. The Company maintains
    reserves for credit losses, and Company management considers such reserves
    to be adequate based upon historical experience.

    During the year ended December 31, 1997, Boston Scientific accounted for 59%
    of total revenues. As of December 31, 1997, one customer and Boston
    Scientific accounted for approximately 44% and 48%, respectively, of net
    accounts receivable. The Company derived approximately 5% of its total
    revenues from foreign customers during the year ended December 31, 1997.

    During the year ended December 31, 1996, two customers accounted for over
    10% of the Company's revenues. A Canadian distributor accounted for 14% of
    total revenues, and Boston Scientific accounted for 12%. At December 31,
    1996, four customers accounted for over 10% of gross accounts receivable. An
    Australian distributor accounted for 19%, a Michigan medical group accounted
    for 16%, a Texas distributor accounted for 17% and a San Diego distributor
    accounted for 11%. The Company derived 50% of its total revenues from
    foreign customers during the year ended December 31, 1996.

    During the year ended December 31, 1995, two customers accounted for over
    10% of the Company's revenues. A domestic distributor accounted for 17% of
    total revenues, and a Korean distributor accounted for 10%. The Company
    derived 38% of its total revenues from foreign customers during the year
    ended December 31, 1995. During the year ended December 31, 1994, no single
    customer accounted for 10% or more of the total revenue, and the Company
    derived 16% of its total revenues from foreign customers.


12. RELATED PARTY TRANSACTIONS

    Relationship with Medstone

    Since its inception, ENDOcare operated as a division of Medstone
    International. Prior to becoming an independent corporation in January 1996,
    ENDOcare received funding and certain administrative services from Medstone.
    In return, ENDOcare provided

                                       41
<PAGE>   42

    certain research and development services to Medstone, and Medstone received
    the cash collected from ENDOcare's outside sales. With the Distribution of
    ENDOcare as an independent company, no Advances were outstanding effective
    January 1, 1996.

    Until October 1995, ENDOcare's operations were located within Medstone's
    facilities. Medstone allocated to ENDOcare a charge for rent and other
    facilities-related expenses based upon square footage occupied. ENDOcare and
    Medstone shared the services of certain employees, whose costs, including
    salary, payroll taxes, and group benefits were allocated to ENDOcare based
    upon the percentage of time spent on ENDOcare projects. Expenses other than
    those related to facilities and employees were allocated to ENDOcare based
    upon actual usage, headcount, or other bases. Medstone management believed
    the allocations discussed above were made on a reasonable basis and were
    representative of the expenses ENDOcare would have incurred on a stand-alone
    basis.

    During 1996 ENDOcare and Medstone exchanged very little services. During the
    first quarter, Medstone billed ENDOcare approximately $3,000 for
    administrative services, and ENDOcare billed Medstone approximately $3,000
    for engineering and administrative services. Throughout 1996, ENDOcare
    provided health insurance to its employees through continuation of
    Medstone's policy.

    The following table summarizes the transactions reflected in the Advances
    from Medstone:

<TABLE>
<CAPTION>
                                                           ADVANCES FROM
                                                             MEDSTONE
                                                            -----------
<S>                                                         <C>
    Balance at December 31, 1994.........................   $ 2,315,250
    Cash expended by Medstone on behalf of ENDOcare......     1,624,399
    Expenses allocated to ENDOcare by Medstone...........       306,775
    Cash collected from ENDOcare net product sales.......    (1,038,527)
    Research revenues recorded by ENDOcare for
       services performed on behalf of Medstone..........      (376,533)
                                                            -----------
          Balance at December 31, 1995...................     2,831,364
    Conversion of Advance to equity in Distribution......    (2,831,364)
                                                            -----------
          Balance at December 31, 1996...................   $        --
                                                            ===========
</TABLE>

    Relationship with Technology Funding

    Peter F. Bernardoni has served on ENDOcare's Board of Directors since
    November 1995. He also is a partner of Technology Funding Ltd. and an
    officer of Technology Funding Inc., a venture capital group. In August 1996
    ENDOcare obtained a two-year $1,500,000 borrowing facility from four
    partnerships managed by Technology Funding Inc. The outstanding principal
    balance of $750,000 was convertible and, at the option of the holders, was
    converted on January 27, 1997 into 300,000 shares of ENDOcare common stock
    at a conversion price of $2.50 per share. Interest on the loan had accrued
    at a rate of 16% per year, and all $50,000 was converted into 20,000 shares
    on that same date at the same $2.50 per share. Also on January 27, 1997, the
    four partnerships managed by Technology Funding Inc. received an additional
    12,000 shares ($50,250 total market value) to induce conversion at that
    time. On August 26, 1996, the partnerships also received warrants for the
    purchase of up to 150,000 shares of ENDOcare common stock at any time on or
    before August 26, 2001, at a price of $3.00 per share. The partnerships
    received an origination fee of 10,000 shares of common stock on that same
    date at a fair value of $30,000.


13. PRIVATE PLACEMENT

    On January 27, 1997, ENDOcare sold 2,218,714 common stock at a price of
    $3.50 per share in a private placement, with Oppenheimer & Co., Inc.
    ("Oppenheimer") acting as placement agent. After expenses, the net
    contribution to the Company's capital was approximately $7,050,000. Expenses
    deducted from the proceeds include a commission to Oppenheimer of
    approximately $540,000 and legal, accounting, and other professional
    expenses of approximately $172,000. In addition, Oppenheimer received a
    warrant to purchase 177,497 shares of ENDOcare common stock for a period of
    five years at a price of $4.20 per share. The warrants are exercisable at
    any time between January 27, 1998 and January 27, 2002.


14. SUBSEQUENT EVENT - BANK LINE OF CREDIT

    On March 24, 1998, ENDOcare entered into a one-year $1,000,000 line of
    credit with a bank which bears interest at prime plus 1%. The line of credit
    is secured by the Company's assets, excluding intellectual property, and is
    subject to certain financial and other covenants.

                                       42
<PAGE>   43

15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                 TOTAL                      NET LOSS
                                REVENUE        TOTAL        PER SHARE
                                -------        -----        ---------
<S>                          <C>            <C>             <C>
    Quarter Ended:
       December 31,1997      $   515,429    $(1,010,404)    $  (0.12)
       September 30, 1997        555,941     (1,090,176)       (0.13)
       June 30, 1997             249,997     (1,059,826)       (0.13)
       March 31, 1997            679,668       (739,454)       (0.10)

       December 31, 1996         839,764       (192,245)       (0.03)
       September 30, 1996        499,073       (367,062)       (0.07)
       June 30, 1996             419,785       (394,557)       (0.07)
       March 31, 1996            370,656       (577,584)       (0.10)
</TABLE>

                                       43
<PAGE>   44

                                 ENDOCARE, INC.

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                ALLOWANCE FOR              RESERVE FOR
                                             DOUBTFUL RECEIVABLES    INVENTORY OBSOLESCENCE
                                              AND SALES RETURNS     AND NET REALIZABLE VALUE
                                              -----------------     ------------------------
<S>                                               <C>                      <C>
    Balance at December 31, 1994........          $  97,106                $     --
       Changes to operations............                 --                      --
       Deductions.......................            (50,158)                     --
       Other............................                 --                      --
                                                  ---------                --------
    Balance at December 31, 1995........             46,948                      --
       Changes to operations............             22,687                      --
       Deductions.......................            (11,496)                     --
       Other............................                 --                      --
                                                  ---------                --------
    Balance at December 31, 1996........             58,139                  77,236
       Changes to operations............            249,983                  62,764
       Deductions.......................           (116,122)                     --
       Other............................                 --                      --
                                                  ---------                --------
    Balance at December 31, 1997........          $ 192,000                $140,000
                                                  =========                ========
</TABLE>



                                       44
<PAGE>   45

                                   SIGNATURES

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

                                         ENDOCARE, INC.

                                         By: /s/ PAUL W. MIKUS
                                             -----------------------------------
                                                 Paul W. Mikus
                                                 Chief Executive Officer and
                                                 President


Dated:  March 30, 1998

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 1998.


<TABLE>
<CAPTION>
               SIGNATURE                                         TITLE
               ---------                                         -----
<S>                                                <C>


          /s/ PAUL W. MIKUS                        Chief Executive Officer, President,
--------------------------------------                  and Chairman of the Board
              Paul W. Mikus



         /s/ WILLIAM R. HUGHES                          Senior Vice President and
--------------------------------------                   Chief Financial Officer
             William R. Hughes                          (Principal Financial and
                                                           Accounting Officer)

         /s/ PETER F. BERNARDONI
--------------------------------------
         /s/ Peter F. Bernardoni                                Director


         /s/ ROBERT F. BYRNES
--------------------------------------
         /s/ Robert F. Byrnes                                   Director


         /s/ BENJAMIN GERSON, M.D.
--------------------------------------
         /s/ Benjamin Gerson, M.D.                              Director
</TABLE>

                                       45
<PAGE>   46

                                 ENDOCARE, INC.
                                INDEX TO EXHIBITS

     2.1  Distribution Agreement between the Registrant and Medstone
          International, Inc., dated October 31, 1995 (1)

     3.1  Certificate of Incorporation of the Company (2)

     3.2  Amended and Restated Bylaws of the Company (9)

     4.1  Specimen Certificate of the Company's Common Stock (3)

    10.1  Facility Lease on 18 Technology Drive (2)

    10.2  Contribution Agreement between Medstone International, Inc. and the
          Company, dated October 31, 1995 (1)

    10.3  Research and Development Services Agreement between Medstone
          International, Inc. and the Company, dated October 31, 1995 (1)

    10.4  Form of Indemnification Agreement (2) *

    10.5  1995 Stock Plan (1) *

    10.6  1995 Director Option Plan (1) *

    10.7  Patent License Agreement between the Company and Brigham and Women's
          Hospital, Inc., dated April 17, 1996 (4)

    10.8  Form of Convertible Secured Promissory Note due August 26, 1998,
          issued by ENDOcare, Inc. in an aggregate principal amount of
          $1,500,000, dated August 26, 1996 (5)

    10.9  Form of Warrant to purchase an aggregate of 150,000 shares of common
          stock, dated August 26, 1996 (5)

    10.10 Distributorship Agreement between the Company and Boston Scientific
          Corporation, dated November 18, 1996 (6)

    10.11 Common Stock Purchase Agreement by and among the Company and the
          persons listed on the Schedule of Investors attached thereto as
          Exhibit A, dated January 21, 1997 (7)

    10.12 Facility Lease dated January 31, 1997 for 7 Studebaker (9)

    10.13 Sublease dated May 19, 1997 for 18 Technology Drive (9)

    23.1  Consent of KPMG Peat Marwick LLP **

    23.2  Consent of Ernst & Young LLP **

    27.1  Financial Data Schedule **

    29.1  ENDOcare, Inc. Information Statement distributed to shareholders of
          Medstone International, Inc., dated February 6, 1996 (8)
------------
(1) Previously filed with the Company's Application for Registration on Form
    10-SB under the Securities Exchange Act of 1934, filed on November 14, 1995,
    and incorporated herein by reference. Each such exhibit had the same exhibit
    number in that filing, except that the 1995 Stock Plan was exhibit number
    10.6 and the 1995 Director Option Plan was exhibit 10.7.

(2) Previously filed with Amendment number 1 to Company's Application for
    Registration on Form 10-SB, filed on December 21, 1995, and incorporated
    herein by reference.

(3) Previously filed with the Company's Annual Report on Form 10-K for the year
    ended December 31, 1995, and incorporated herein by reference.

(4) Previously filed with the Company's Current Report on Form 8-K, as amended,
    dated April 25, 1996 as filed with the Securities and Exchange Commission on
    April 26, 1996, and incorporated herein by reference.

(5) Previously filed with the Company's Current Report on Form 8-K dated August
    26, 1996 as filed with the Securities and Exchange Commission on September
    10, 1996, and incorporated herein by reference.

(6) Previously filed with the Company's Current Report on Form 8-K dated
    November 18, 1996 as filed with the Securities and Exchange Commission on
    December 3, 1996, and incorporated herein by reference.

(7) Previously filed with the Company's Current Report on Form 8-K dated January
    27, 1997 as filed with the Securities and Exchange Commission on January 31,
    1997, and incorporated herein by reference.

(8) Previously filed on February 9, 1996 by Medstone International, Inc. under
    Section 14(c) of the Securities Exchange Act of 1934, and incorporated
    herein by reference.

(9) Previously filed with the Company's Annual Report on Form 10-K/A (Amendment
    No. 3) for the year ended December 31, 1996, as incorporated herein by
    reference.

 *  Management contract or compensatory plan or arrangement required to be filed
    as an exhibit pursuant to applicable rules of the Securities and Exchange
    Commission.

**  Filed herewith.


                                       46