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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


|           |  |                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                           
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
	2001;                                             
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
	OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
	from           to                                              

Commission file number 000-27212



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Endocare, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                    |  |                                                                    
|------------------------------------------------------------------- |  | -------------------------------------------------------------------
|Delaware                                                            |  | 33-0618093                                                         
|(State of
	incorporation)                                           |  | ----------------------------
	(I.R.S. Employer
	Identification No.)
|                                                                   
|201 Technology, Irvine, CA(Address of
	principal executive offices) |  | 92618
	----------------------------(Zip Code)                      

Registrants telephone number, including
area
code:     (949) 450-5400

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

Rights to Purchase Shares of Participating
Preferred Stock

(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.

(1) Yes þ     No o     (2) Yes þ     No o


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

The aggregate market value of the Common Stock of
the Registrant held by non-affiliates on March 15, 2002 was
approximately 332,974,312 (based on the closing price for shares
of the Registrants Common Stock as reported by the Nasdaq
National Market for that date). Shares of Common Stock held by
each officer, director and holder of 10% or more of the
outstanding Common Stock have been excluded in that such persons
may be deemed affiliates. Exclusion of shares held by any person
should not be construed to indicate that such person possesses
the power, direct or indirect, to direct or cause the direction
of management or policies of the Registrant, or that such person
is controlled by or under common control with the Registrant.

There were 22,135,835 shares of the
Registrants Common Stock issued and outstanding as of
March 15, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Companys Proxy Statement
for the Annual Meeting of Stockholders to be held on
June 13, 2002, to be filed with the Commission pursuant to
Regulation 14A, are incorporated by reference into
Part III of this Annual Report on Form 10-K.

Certain exhibits filed with the Companys
prior registration statements and Forms 10-K, 8-K and 10-Q
are incorporated herein by reference into Part IV of this
Annual Report on Form 10-K.



---






---

TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5. Market for Our Common Equity and Related Stockholder Matters                         
|              | Item 6. Selected Consolidated Financial Data                                                 
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES   
|Exhibit 10.19
|Exhibit 10.20
|Exhibit 10.21
|Exhibit 23.01



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##### Table of Contents



ENDOCARE, INC.

FORM 10-K

For the Fiscal Year Ended December 31,
2001


TABLE OF CONTENTS

|                     |  |                                                                                        |     |      |    | 
|-------------------- |  | -------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                     |  |                                                                                        |     | Page
|                     |  |                                                                                        |     |     
|PART I              
|Item 1.              |  | Business                                                                               |     |      | 2  | 
|Item 2.              |  | Properties                                                                             |     |      | 32 | 
|Item 3.              |  | Legal Proceedings                                                                      |     |      | 32 | 
|Item 4.              |  | Submission of Matters to a Vote of Security
	Holders                                   |     |      | 32 | 
|PART II             
|Item 5.              |  | Market for Our Common Equity and Related
	Stockholder Matters                          |     |      | 33 | 
|Item 6.              |  | Selected Consolidated Financial Data                                                   |     |      | 34 | 
|Item 7.              |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |     |      | 35 | 
|Item 7A.             |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |     |      | 42 | 
|Item 8.              |  | Financial Statements and Supplementary Data                                            |     |      | 42 | 
|Item 9.              |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |     |      | 42 | 
|PART III            
|Item 10.             |  | Directors and Executive Officers of the Registrant                                     |     |      | 42 | 
|Item 11.             |  | Executive Compensation                                                                 |     |      | 42 | 
|Item 12.             |  | Security Ownership of Certain Beneficial Owners
	and Management                        |     |      | 43 | 
|Item 13.             |  | Certain Relationships and Related Transactions                                         |     |      | 43 | 
|PART IV             
|Item 14.             |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |     |      | 43 | 
|Signatures           |  |                                                                                        | 46  |     
|Financial Statements |  |                                                                                        | F-1 |     

1



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PART I

This Annual Report on Form 10-K may contain
forward-looking statements that involve risks and uncertainties.
Such statements typically include, but are not limited to,
statements containing the words believes,
intends, anticipates,
expects, estimates, should,
planned and words of similar import. Our actual
results could differ materially from any such forward-looking
statements as a result of risks and uncertainties, including
those set forth below in Risks Related to Our
Business and in other documents we file from time to time
with the Securities and Exchange Commission, including our
Quarterly Reports on Form 10-Q. Any such forward-looking
statements reflect our managements opinions only as of the
date of this Annual Report on Form 10-K, and we undertake
no obligation to revise or publicly release the results of any
revisions to any such forward-looking statements. Readers should
carefully review the risk factors set forth below in Risks
Related to Our Business and in other documents we file
from time to time with the Securities and Exchange Commission,
including our Quarterly Reports on Form 10-Q.

The Argon AdvantageTM, C3®,
CryoBeamTM, CryoSeedTM, Cryocare®,
Cryocare Surgical SystemTM, CryoDiscTM,
CryoguideTM, Dura IITM,
EasyFloTM, Endocare®TM,
ErecAid®, Esteem®, FastTracTM, Horizon
Prostatic StentTM, ProDynamicTM,
RigiScan®, SmartTempTM, SnapGaugeTM,
StayErecTMStepFreeTM, Targeted
AblationTM, Targeted Ablation of the Prostate
TAP®, Targeted Ablation Therapy TAT®, Targeted
Cryoablation of the Prostate TCAP®, Targeted Cryoablation
Therapy TCAT®, TEMPprobeTM,
ThermaStentTM, and UroBreezeTM are
trademarks of Endocare, Inc. or its wholly-owned subsidiary,
Timm Medical Technologies, Inc. This Annual Report on
Form 10-K may also include trademarks and trade names owned
by other parties, and all other trademarks and trade names
mentioned in this Annual Report on Form 10-K are the
property of their respective owners.






|        |         
|------- | --------
|Item 1. | Business

Overview

We are a medical device company focused on
developing, manufacturing and selling urological healthcare
products with the potential to dramatically improve mens
health and quality of life. Our primary focus is on the
diagnosis, treatment and monitoring of the two most common
diseases of the prostate, prostate cancer and benign prostate
hyperplasia, or BPH, which is a non-cancerous enlargement of the
innermost part of the prostate. Our FDA-cleared Cryocare
Surgical System occupies a leading position in the market for
the cryosurgical treatment of prostate cancer. We are currently
developing a urologic stent, the Horizon Prostatic Stent,
designed to provide temporary and immediate relief for BPH
patients. In February 2002, we expanded our urological product
offerings by acquiring Timm Medical Technologies, Inc., or Timm
Medical. Through this acquisition, we now own or have acquired
marketing rights to an additional product used in the treatment
of BPH, five products used in the diagnosis and treatment of
erectile dysfunction, six products used in the diagnosis and
management of urinary incontinence and one product used in the
diagnosis of bladder cancer. This acquisition also increased our
sales and marketing organization from 26 to approximately 80
people, including 55 field sales representatives. Our strategy
is to increase sales of our current products through targeted
sales and marketing efforts, to continue to develop and obtain
regulatory approval for our Horizon Prostatic Stent and to
develop and acquire additional products in urology that leverage
our existing sales and marketing organization.

Prostate Cancer:Our
Cryocare Surgical System is a minimally invasive cryosurgical
system for the targeted treatment of prostate cancer. In fiscal
year 2001, we derived substantially all of our revenues from the
sale of Cryocare Surgical System units and from recurring sales
of disposable supplies used with the Cryocare Surgical System.
We intend to increase sales by generating additional physician
and patient awareness of the efficacy and advantages of our
Cryocare Surgical System. The key elements of our Cryocare
Surgical System include our patented real time temperature
monitoring system, our Cryoguide computer-controlled ultrasound
guidance and planning system and our disposable cryoprobes and
guidewires. Careful monitoring of the temperature around the
prostate and optimal positioning of the cryoprobes enables
physicians to destroy cancer with relatively minimal risk to
surrounding healthy tissue. We began selling our Cryocare
Surgical System in July 1999 following Medicares
initiation of national reimbursement coverage of cryosurgery for
the

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primary treatment of prostate cancer. Effective
July 2001, Medicare approved reimbursement of secondary
cryosurgical treatment for men who have been unsuccessfully
treated with radiation therapy.


In addition to our Cryocare Surgical System, we
have a right to market and sell to urology practices in the
United States a proprietary prostate cancer test developed by
Qualigen, Inc., the FastPack® System. The office-based
FastPack System delivers accurate test results within
15 minutes. We also are developing a unique prostate biopsy
tool, which we expect will allow physicians to more accurately
locate and stage prostate tumors.

Benign Prostate Hyperplasia:We are developing a proprietary
urologic stent, the Horizon Prostatic Stent, to provide
temporary and immediate relief for patients who undergo thermal
therapies or other procedures to treat BPH. BPH is a
non-cancerous enlargement of the innermost part of the prostate.
Patients suffering from BPH often experience a frequent urge to
urinate because of their inability to completely empty their
bladder, a burning sensation or similar discomfort during
urination and a general lack of control over initiating and
ending urination. Our Horizon Prostatic Stent employs shape
memory, a metallurgical property that causes the stent to
enlarge and harden when heated and to shrink and soften when
cooled. As a result of shape memory, our Horizon Prostatic Stent
is soft and flexible during insertion, and then expands into the
shape of a rigid tube when heated by the body. The stent can be
removed easily by a physician by flushing cool water through the
stent, which allows the stent to return to its pre-insertion
relaxed state.

We are exploring the use of our Horizon Prostatic
Stent for the long-term relief of BPH without the need for
thermal therapy or other treatment procedures in a subset of the
patient population. We also are exploring the development of a
stent, named the ThermaStent, that will deliver heat to destroy
excess prostate tissue in patients with moderate to severe cases
of BPH. We believe the potential advantage of the ThermaStent
will be to provide patients with both immediate relief and a
long-term cure for BPH in a one-step process.

Through our acquisition of Timm Medical, we
obtained rights to distribute to urologists in North America a
non-surgical, office-based thermal therapy for BPH developed by
ArgoMed, Inc., the Thermoflex® System. The Thermoflex
System utilizes a proprietary catheter and console to deliver
heated water to destroy excess prostate tissue and reopen the
urethras path through the prostate. The distribution
agreement with ArgoMed may be terminated by either party without
cause after June 30, 2002.

Erectile Dysfunction:With our acquisition of Timm Medical,
we now market five products used in the diagnosis and treatment
of erectile dysfunction. Our two diagnostic tools include the
RigiScan Monitor and the SnapGauge. The RigiScan Monitor is an
ambulatory device that measures the frequency, rigidity and
duration of both nocturnal and provocative erections. The
SnapGauge is a disposable, single-use diagnostic device used to
confirm maximum rigidity achieved during nocturnal erections.

We also offer a leading line of vacuum therapy
systems and a prosthetic device for the treatment of erectile
dysfunction. Our vacuum therapy systems include the Esteem, the
StayErec and the ErecAid Systems. The Dura II Penile
Prosthesis is a positionable, concealable penile prosthesis
which consists of two cylinders that are surgically implanted to
impart penile rigidity.

Urinary Incontinence:With the acquisition of Timm Medical,
we now offer six products used in the diagnosis and management
of urinary incontinence in both men and women. Our diagnostic
products consist of the ProDynamic Monitor, the UroBreeze
Urodynamics Monitor and the EasyFlo Uroflowmetry System. These
monitoring systems measure bladder, abdominal and urethral
pressures to help physicians determine the cause of urinary
incontinence and track the progress of treatments. We also offer
a line of disposable products, such as catheters and tubing
kits, for use with these monitors. We also have exclusive North
American distribution rights to the urodynamic products,
including the Andromeda Ellipse Monitor, developed by Andromeda
Medizinische Systeme, Gmbh of Munich, Germany.

We also offer two proprietary, non-invasive
products for the management of urinary incontinence. Our
patented C3 device is used to control mild to moderate male
incontinence through an external cuff that compresses and
occludes the urethra. Our StepFree System is a pelvic
muscle-toning program using vaginal weights to improve female
bladder control. In addition to these diagnosis and management
products, Timm

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Medical was developing, and we intend to continue
to develop, additional products for the treatment of
incontinence in men and women.


Bladder Cancer:As
part of our acquisition of Timm Medical, we obtained exclusive
distribution rights to urologists in the United States to a
bladder cancer detection test developed by Matritech, Inc., the
NMP22TM POC Test. The NMP22 POC Test will allow
urologists to test their patients for bladder cancer in their
office. The FDA is currently reviewing Matritechs 510(k)
application for the NMP22 POC Test.

Additional Cryosurgical Markets:We believe our proprietary
cryosurgical technologies have broad applications across a
number of surgical markets, including the treatment of tumors in
the kidney, lung, breast, liver and bones, as well as the
treatment of cardiac arrhythmias. In October 1999, we formed a
strategic alliance with Sanarus Medical, Inc. to commercialize
our proprietary cryosurgical technology for the treatment of
breast cancer, benign breast tumors and gynecological diseases.
We received FDA clearance in October 2001 for the use of our
cryosurgical system for the treatment of benign breast tumors.
Sanarus intends to market this product as the
VisicaTMTreatment System. In September 2001, we
formed a strategic alliance with CryoCath Technologies Inc. to
market, sell and distribute our proprietary cryosurgical
technology for the treatment of cardiac arrhythmias. In February
2002, we received FDA clearance for use of our cryosurgical
technologies for the treatment of cardiac arrhythmias. CryoCath
intends to market this product as the SurgiFrostTM
System. In addition to these two strategic alliances, we intend
to continue to enhance and leverage our cryosurgical technology
platform by partnering with third parties who can effectively
develop, distribute or otherwise commercialize our technology in
clinical areas outside of urology.

We were incorporated under the laws of the State
of Delaware in May 1994. We maintain our executive offices at
201 Technology, Irvine, California 92618, and our telephone
number at that address is (949) 450-5400. Financial
information regarding our financial condition and results of
operations can be found in a separate section of this Annual
Report on Form 10-K, beginning on page F-1.

Prostate Cancer



| |                  
| | -----------------
| | Market Background

The prostate is a walnut size gland surrounding
the male urethra, located below the bladder and adjacent to the
rectum. Prostate cancer is a malignant tumor that begins most
often in the periphery of the gland and, like other forms of
cancer, may spread beyond the prostate to other parts of the
body. If left untreated, prostate cancer can metastasize to the
lung or bone, resulting in death.

The incidence of prostate cancer has risen
steadily since 1980 to become the second most common cause of
cancer-related deaths among men. Prostate cancer is most
prominent in North America and northwestern Europe and less
common in Asia, Africa, Central America, and South America. The
American Cancer Society estimates there will be about 189,000
new cases of prostate cancer diagnosed and an estimated 30,200
deaths associated with the disease in the United States during
2002. Prostate cancer incidence and mortality increase with age.
Prostate cancer is found most often in men who are over the age
of 50. According to the American Cancer Society, more than 70%
of men diagnosed with prostate cancer are over the age of 65. In
addition to age, other risk factors are linked to prostate
cancer, such as genetics and diet.

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. The
American Cancer Society recommends that men without symptoms,
risk factors and a life expectancy of at least ten years should
begin regular annual medical exams at the age of 50, and
believes that the physicians should offer as a part of the exam,
the prostate-specific antigen, or PSA, blood test and a digital
rectal examination in which the physician places a gloved finger
into the rectum and examines the prostate for lumps. The PSA
blood test determines the amount of prostate specific antigen
present in the blood. PSA is found in a protein secreted by the
prostate, and elevated levels of PSA can be associated with
either prostatitis, a non-cancerous inflammatory condition, or a
proliferation of cancer cells in the prostate. Transrectal
ultrasound tests and biopsies are typically performed on
patients with elevated PSA readings to confirm the existence of
cancer.

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Over 85% of prostate cancer patients are eligible
for our cryosurgical treatment. The U.S. market for prostate
cancer treatment for newly diagnosed patients is estimated to be
approximately $1.3 billion in 2001 and is expected to grow
to $2 billion by 2006. We believe the market for secondary
cryosurgical treatment of patients with recurring prostate
cancer is significant.



| |                                    
| | -----------------------------------
| | Non-Cryosurgical Treatment
	Options

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

Radical prostatectomy has been used for over
30 years and is most often the therapy of choice due to the
surgeons high degree of confidence in surgically removing
the cancerous tissue, particularly for patients having more
advanced stages of the disease. The procedure is dependent on
the skill of the surgeon and is often associated with relatively
high rates of impotence and incontinence and can result in
operative mortality.

Radiation therapy for prostate cancer includes
both external radiation beam and interstitial radioactive seed
therapies. External beam radiation therapy emerged as one of the
first alternatives to radical prostatectomy; however, studies
have shown that the success rate of this procedure is not
comparable to that of radical prostatectomy. Interstitial
radioactive seed therapy, also referred to as brachytherapy, is
the permanent placement of radioactive seeds in the prostate.
Brachytherapy has been shown to be most effective for localized
tumors caught in the early stage of disease development.

Ancillary therapies, primarily consisting of
hormone therapy and chemotherapy, are used to slow the growth of
cancer and reduce tumor size, but are generally not intended to
be curative. Ancillary therapies are often used during advanced
stages of the disease to extend life and to relieve symptoms.
Side effects of hormonal drug therapy include increased
development of breasts, impotence and decreased libido. In
addition, many hormone pharmaceuticals artificially lower PSA
levels in patients, which can interfere with the staging of the
disease and monitoring its progress. Side effects of
chemotherapy include nausea, hair loss and fatigue. Drug therapy
and chemotherapy require long-term, repeated administration of
medication on an outpatient basis.

Watchful waiting is recommended by
some physicians in some circumstances based upon the severity
and growth rate of the disease, as well as the age and life
expectancy of the patient. The aim of watchful waiting is to
monitor the patient, treat some of the attendant symptoms and
determine when more active intervention is required. Watchful
waiting has gained popularity among those patients refusing
treatment due to side effects associated with radical
prostatectomy. Watchful waiting requires periodic physician
visits and PSA monitoring.



| |                           
| | --------------------------
| | The History of Cryosurgery

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 resorting
to radical surgery. Although effective in killing cancer cells,
the inability to control the amount of tissue frozen during the
procedure prevented broad use and development of cryotherapy for
prostate cancer. These initial negative experiences with
cryosurgery continue to contribute to a lack of widespread
acceptance of the procedure today.

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 more precise control during application.
Published studies suggest that cryosurgery may be able to
deliver disease free rates comparable to radical

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surgery, but with the benefit of lower rates of
incontinence and mortality, shorter recovery periods and
relatively minimal complications.




| |                                            
| | -------------------------------------------
| | Our Solution: The Cryocare Surgical
	System

We have developed our proprietary Cryocare
Surgical System, a next-generation cryosurgery system, to allow
urologists to treat prostate cancer in a minimally invasive
manner. We designed the Cryocare Surgical System to freeze
tissue much faster and with more control than previous
cryosurgical systems.

The Cryocare Surgical System incorporates
enhanced control mechanisms to minimize the risk of unintended
damage to tissue surrounding the prostate. The argon gas-based
cryoprobes stop freezing instantly. Use of six to eight
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 in real time.

The majority of our cryosurgical procedures to
date have been performed in medium to high risk patients. In
these procedures, the urologist intentionally ablates the
neurovascular bundles to prevent the recurrence of cancer,
typically resulting in impotence. We are attempting to develop a
nerve sparing procedure for lower risk patients through a
combination of early detection and improved surgical techniques.

Our Cryoguide, a software controlled ultrasound
planning and mapping system sold as an accessory to the Cryocare
Surgical System, is a significant advancement in targeted
cryoablation of the prostate. The Cryoguide control unit
consists of a computer console and display screen designed to be
compatible with standard ultrasound equipment. The Cryoguide
allows physicians to visualize the prostate in three dimensions
and uses a grid system to facilitate the precise placement of
our cryoprobes in the optimal position in the prostate. Our
Cryoguide incorporates a visualization and planning process
allowing the surgeon to simulate cryoablation of the prostate.
This simulation allows validation of the positioning of the
cryoprobes prior to initiating treatment and tailoring the
iceball formation for individual patients, improving patient
outcomes. The Cryoguide creates a standardized repeatable
procedure and decreases procedural time.

We are continually evaluating and implementing
technology that will refine and improve the Cryocare Surgical
System. Our proprietary cryoprobes are engineered to produce
consistently sculpted ice conforming to the unique anatomy of
the prostate. Our efficient argon gas-based system delivers
lethal ice in a controllable and repeatable fashion. We also
developed a percutaneous access device, named FastTrac, which
allows a simplified one-step insertion of our cryoprobes to
significantly reduce procedure time.

The Cryocare Surgical System has been cleared for
marketing by the FDA. We commercially launched the Cryocare
Surgical System in July 1999 following the initiation of
national Medicare coverage for cryosurgical procedures as a
primary treatment alternative for localized prostate cancer.
Through direct sales and our placement program, we have
installed Cryocare Surgical Systems primarily in North America,
with over 2,500 patients treated to date. Effective July 1,
2001, the Healthcare Financing Administration, now the Centers
for Medicaid and Medicare Services, or CMS, approved national
Medicare coverage for secondary cryosurgical treatment of
prostate cancer patients who have failed radiation therapy.

Cryosurgery is the first minimally invasive
procedure that urologists can perform themselves. With radiation
therapies, urologists must refer the patient for treatment to a
radiation oncologist. Cryosurgery offers the urologist both the
opportunity to maintain continuity of patient care and to
generate additional revenue.



| |                                                
| | -----------------------------------------------
| | Key Advantages of Our Cryocare Surgical
	System

Our Cryocare Surgical System provides the
following significant clinical advantages relative to other
principal treatment options for prostate cancer:



| |   |                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Effective for a broad range of low to high
	risk prostate cancer patients.In low
	risk cases, the success of cryosurgery, including our Cryocare
	Surgical System, is comparable to radiation therapy. In medium
	to high risk cases, results of cryotherapy appear to be superior
	to brachytherapy and are comparable to radiation therapy.

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| |   |                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High quality of life following
	treatment.Our minimally invasive
	procedure offers patients short recovery periods and we believe
	may result in a lower incidence of certain side effects,
	including incontinence.                                                          
|
| |  | Treatment of patients who have failed
	radiation therapy.Patients who have
	failed radiation therapy have limited options. Cryosurgery is a
	potentially curative treatment option that can be used to treat
	these patients effectively with fewer side effects than surgery.
|
| |  | Treatment can be performed more than
	once.Unlike radiation therapy,
	cryosurgery can be repeated if the cancer recurs.                                                                                                                                                       

Diagnosis and
Monitoring of Prostate Cancer

Heightened awareness of prostate cancer has led
to increased rates of testing and improved diagnostic and
monitoring methods. To this end, we acquired a right to market
and sell to urology practices in the United States the FastPack
System, a proprietary, PSA test developed by Qualigen, Inc. The
FastPack System delivers accurate results within 15 minutes in
the urologists office. The FastPack System consists of the
FastPack Analyzer and the FastPack, a disposable, single-use
test pack. The FastPack Analyzer is fully automated and features
one-button operation. The FastPack is a multi-chambered plastic
pouch that contains all of the chemical reagents needed for a
single test. To perform the test, the physician inserts a sample
of the patients blood in the FastPack and places the pack
in the FastPack Analyzer, which automatically completes the
test. Qualigen has received FDA clearance for the FastPack
System. We also are developing a unique prostate biopsy tool,
which we expect will allow physicians to more accurately locate
and stage prostate tumors.

Benign Prostate Hyperplasia

Market
Background

BPH, which affects a significant 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, the complete inability to urinate, serious
urinary tract infections and, in severe cases, permanent bladder
and kidney damage.

Most males will eventually suffer from BPH. In
the United States, 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. It is estimated that approximately 12 to
25 million men worldwide suffer from the symptoms of BPH.

Patients diagnosed with BPH generally have four
options for treatment: watchful waiting, drug
therapy, surgical intervention and new, less-invasive thermal
therapies. Treatment is generally reserved for patients with
intolerable symptoms or those with significant potential
symptoms if treatment were withheld. A large number of patients
delay discussing their symptoms or elect watchful
waiting to see if the condition remains tolerable. We
believe 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.

Drugs therapies involve drugs 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

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urethral obstruction. Current drug therapies
generally require daily administration for the duration of the
patients life.


Transurethral resection of the prostate, or TURP,
is the most common surgical procedure and 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 requires a hospital stay of approximately four days.

Other technologies developed or 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 tissue death. Thermal energy
forms being utilized include microwave, radio frequency,
ultrasound energy and heated water. The procedures are typically
performed in an outpatient setting under local anesthesia.

Our Stent
Technology for BPH

We are developing a proprietary urologic stent,
the Horizon Prostatic Stent, to provide temporary and immediate
relief for patients who undergo thermal therapy or other
procedures to treat BPH. Our Horizon Prostatic Stent is made of
nitinol, a titanium metal alloy that employs a metallurgical
property named shape memory. This shape memory property causes
the Horizon Prostatic Stent to be soft and flexible in its
relaxed state, allowing a physician to introduce and position
the device in a relatively pain-free manner using a catheter.
When the device is heated naturally by the body after insertion,
the device expands and hardens into the shape of a rigid tube,
or stent. A catheter is inserted using a local anesthetic and
positioned in the prostatic urethra under direct vision. After
approximately 30 days, a physician can remove the stent by
flushing cool water through the working channel of a cystoscope,
causing the stent to return to its pre-insertion relaxed state.
The design of the Horizon Prostatic Stent allows physicians to
insert and remove the device in an outpatient setting under
local anesthesia. We have received a CE Mark for the Horizon
Prostatic Stent, and have begun to market the Horizon Prostatic
Stent through our European distributors.

The FDA has determined that our Horizon Prostatic
Stent requires premarket approval, or PMA, prior to
commercialization in the United States. We have completed a
feasibility study for the Horizon Prostatic Stent, and received
approval from the FDA to commence a pivotal study, which is the
final study before we submit our PMA application. We divided our
PMA application into three modules. We filed the first PMA
module, manufacturing, with the FDA in December 2001, and the
second PMA module, pre-clinical testing, in February 2002.
Although the process is uncertain, we anticipate filing the last
PMA module during 2002. Nevertheless, the PMA process generally
takes between one and three years from completion of an
application or even longer. In addition, achieving a completed
application is a process that may take numerous clinical trials
and require filing of amendments over time. Therefore, our
Horizon Prostatic Stent may not be commercially available for a
number of years.

We are exploring the use of our Horizon Prostatic
Stent for the long-term relief of BPH without the need for
thermal therapies or other treatment procedures in a subset of
the patient population. We also are exploring the development of
a stent, the ThermaStent, that physicians can use to deliver
heat to destroy excess prostate tissue in patients with moderate
to severe BPH. We believe the potential advantage of the
ThermaStent will be to provide patients with both immediate
relief and a long-term cure for BPH in a one-step process.

Thermal
Therapy for BPH

Through our acquisition of Timm Medical, we
obtained rights to distribute to urologists in North America a
non-surgical, office-based thermal therapy for BPH developed by
ArgoMed, Inc., the Thermoflex System. The Thermoflex System
utilizes a proprietary disposable catheter and console to
deliver heated water to destroy excess prostate tissue and
reopen the urethras path through the prostate. Because the
Thermoflex System is based on heated water, it is less expensive
to manufacture than other thermal therapy systems. In addition,
the conductive heat used in the Thermoflex System is easier to
control than radiant heat used by other thermal therapies, which
should allow better treatment results. Most patients do not
require general

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anesthesia or sedation prior to treatment, but
receive a topical anesthetic prior to insertion of the
proprietary catheter. Once the physician positions the catheter,
heated water is circulated through the catheter, destroying
diseased areas of the prostate. The ablated tissue passes
through the urethra or is absorbed into the body. Patients
require catheterization for one to two weeks following
treatment. Published data reflects equal or superior efficacy
rates compared to other thermal therapies and low reported
incidents of incontinence or sexual dysfunction as a result of
treatment with the Thermoflex System. An initial reimbursement
rate for the Thermoflex System was established in January of
2002. Our distribution agreement with ArgoMed may be terminated
by either party without cause after June 30, 2002.


Erectile Dysfunction

Market
Background

Erectile dysfunction, or impotence, is the
inability to achieve or maintain an erection firm enough, or for
a sufficient amount of time, for sexual intercourse. Worldwide
sales for erectile dysfunction products are estimated at
$1.2 billion annually. Approximately 30 million men in
the United States suffer from erectile dysfunction, primarily
those over the age of 40. A variety of physical and
psychological conditions can cause erectile dysfunction,
including diabetes, high blood pressure, high cholesterol,
nervous system disorders, complications from surgery,
medication, alcoholism, spinal cord injuries, depression and
other psychological conditions. Erectile dysfunction is most
often caused by physical problems, rather than psychological
problems.

Men suffering from erectile dysfunction generally
have five treatment options: drug therapy, vacuum systems,
needle injection therapy, urethral suppositories and penile
implants. Historically, it is estimated that fewer than 10% of
men afflicted with erectile dysfunction sought treatment for
their condition. The introduction and advertising of Viagra by
Pfizer Inc. in 1998, however, significantly increased the
population of patients seeking treatment. This trend is expected
to continue during the next five years as patients become
increasingly comfortable in seeking treatment. Although the
success of Viagra has had a positive impact on the diagnosis and
treatment of patients suffering from erectile dysfunction, a
significant number of patients do not respond to Viagra,
experience side effects or are not proper candidates for Viagra
or other drug therapies. We believe that these patients will
turn to alternative treatments for erectile dysfunction,
including vacuum systems and penile implants.

Our Erectile
Dysfunction Offerings

Through our acquisition of Timm Medical, we now
have an erectile dysfunction product line consisting of
diagnostic and treatment products.

Diagnostic
Products

We now market a leading line of diagnostic tools
for erectile dysfunction, including the RigiScan Monitor and the
SnapGauge. The RigiScan Monitor is an ambulatory diagnostic tool
used to measure the frequency, rigidity and duration of both
nocturnal and provocative erections. The RigiScan Monitor allows
a physician to review a patients nocturnal erection
session, reaction to visual erectile stimuli and reaction to
drug therapies. The SnapGauge is a disposable diagnostic device
used to confirm maximum rigidity achieved during nocturnal
erections. Both of these products provide a non-threatening,
non-invasive, cost-effective method for a physician to measure
the severity of a patients erectile dysfunction.

Treatment
Products

We also offer a leading line of vacuum therapy
systems and a penile implant for the treatment of erectile
dysfunction. Even with the success of drug therapies, these
product lines continue to appeal to a growing patient
population. Target patient populations include individuals who
have not responded to or have conditions contraindicated for
existing drug therapies, patients who are not eligible for
third-party reimbursement under their present healthcare plans
and those patients concerned with the side-effects of drug
therapies.

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We hold a leading market position in vacuum
therapy systems. We offer a full line of products, including the
Esteem, StayErec and ErecAid Systems. Vacuum therapy involves
the use of a mechanical system that creates a vacuum around the
penis, causing the erectile bodies to fill with blood. A
constriction ring is then placed around the base of the penis to
impede blood drainage and maintain the erection. These systems
are over 90% effective and represent a low cost treatment for
erectile dysfunction. We are reviewing various revenue
opportunities in this market, including the development and
distribution of new accessories for our existing vacuum therapy
systems.

In addition to our vacuum therapy systems, we
offer a penile implant, the Dura II Penile Prosthesis,
which consists of two cylinders that are surgically implanted to
impart penile rigidity. The Dura II has a patented,
segmented design making positioning quick and easy while
providing satisfactory rigidity and excellent concealment. The
one-piece construction of the Dura II simplifies the
implantation procedure. Patients generally receive the
Dura II under local anesthesia on an outpatient basis.

Urinary Incontinence

Market
Background

Urinary incontinence is the inability to control
the release of urine from the body. Incontinence represents one
of the largest underserved urology markets. Urinary incontinence
afflicts approximately 11 million women and two million men
in the United States. A wide range of factors can cause
incontinence, including weakened pelvic muscles, tumors or other
cancers, surgery, obesity, drugs and neurological damage.
Childbirth and menopause are additional causes of incontinence
in women. Patients with mild incontinence attempt to manage
their incontinence condition through the use of diapers and
absorbent pads, behavioral therapy, pelvic muscle strengthening,
urethral inserts and clamps or, for men, a catheter and a
urinary drainage bag. Patients with moderate to severe
incontinence typically find management of their incontinence
unacceptable and attempt to treat their incontinence with
injectable bulking materials or surgical solutions, including
bladder neck slings and artificial urinary sphincters.

Our Urinary
Incontinence Offerings

Through our acquisition of Timm Medical, we now
have a urinary incontinence product line consisting of
diagnostic equipment and management products for both men and
women. In addition to these diagnostic and management products,
Timm Medical was developing, and we intend to continue to
develop, additional products for the treatment of incontinence
in men and women.

Diagnostic
Products

Our diagnostic products consist of our UroBreeze
Urodynamics Monitor, the ProDynamic Monitor and the EasyFlo
Uroflowmetry System. These monitoring systems measure bladder,
abdominal and urethral pressures to help physicians determine
the cause of urinary incontinence and track the progress of
treatments. The UroBreeze Urodynamics Monitor is a lightweight,
portable urodynamic monitor that provides up to five channels of
testing information. The ProDynamic Monitor is a larger
urodynamic monitor that provides up to seven channels of testing
information, and is typically sold to hospitals and large
physician offices. The EasyFlo Uroflowmetry System is a lower
cost ambulatory monitor used in the evaluation of urine flow. We
also offer a line of disposable products, such as catheters and
tubing kits, for use with these monitors. Our incontinence
diagnostic equipment line enjoys a strong industry reputation,
rooted in a 25-year history of reliability, advanced
functionality and innovation.

We also have exclusive North American
distribution rights to the urodynamic products, including the
Andromeda Ellipse Monitor, developed by Andromeda Medizinische
Systeme, Gmbh of Munich, Germany. The Andromeda Ellipse Monitor
is a sophisticated urodynamic monitor that provides up to eight
channels of testing information, and includes video urodynamic
capabilities.

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Management
Products

We offer two management products for urinary
incontinence that are non-invasive and represent either a bridge
towards a permanent treatment for incontinence or restore
continence utilizing natural methods. Our patented C3 device is
used to control mild to moderate male incontinence through an
external cuff that compresses and occludes the urethra. The C3
offers men a comfortable, hygienic and discrete method of
controlling their incontinence condition. Each device can be
used for up to 10 days. Our patented StepFree System is a
pelvic muscle-toning program for improving female bladder
control. The StepFree System consists of a series of vaginal
weights designed to facilitate the proper performance of a
womans pelvic muscles, which play an important role in
urinary control. The StepFree System is a home-based program
designed to be a part of a womans normal routine and
provides demonstrable progress through graduated weight goals
and benchmarks.

Bladder Cancer

Market
Background

According to the American Cancer Society, there
will be about 56,500 new cases of bladder cancer diagnosed in
the United States in 2002, and an estimated 12,600 deaths.
Bladder cancer is four times more prevalent in men than women,
and typically occurs in patients over the age of 55. With
average Medicare costs in excess of $58,000 per patient, bladder
cancer is the most expensive form of cancer to treat. Early
detection of bladder cancer is a key factor in improved
survival. For patients diagnosed with localized disease, the
five-year relative survival rate is 94%. For patients whose
cancer is regional or distant, the five-year survival rates drop
to 48% and 6%, respectively. Only 74% of bladder cancers are
currently detected in the early stage according to the American
Cancer Society.

Current standard diagnostic techniques include
cystoscopy and urine cytology. Cystoscopy is a procedure
performed in a physicians office under local anesthesia in
which a fiber optic tube is inserted into the bladder through
the urethra. Urine cytology is a laboratory test where a
microscope is used to analyze abnormal bladder cells that may be
shed into the urine. Urine cytology has a very low sensitivity
for diagnosing bladder cancer, typically about 30%, with
inconclusive results being common.

Our Bladder
Cancer Offering

As part of our recent acquisition of Timm
Medical, we obtained exclusive distribution rights to urologists
in the United States to a bladder cancer detection test
developed by Matritech, Inc., the NMP22 POC Test. The NMP22 POC
Test will allow doctors to test their patients for bladder
cancer in their office. The test is performed on a single voided
urine sample, and is twice as sensitive as urine cytology. The
FDA is currently reviewing a 510(k) application for the NMP22
POC Test. Matritech previously received FDA approval for a
lab-based version of the NMP22 POC Test.

Strategy

Our goal is to become a leading medical device
company in the area of urology, and to apply our proprietary
cryosurgical technology across horizontal markets. Key elements
of our strategy are to:



| |   |                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maximize the Market Opportunity for Our
	Cryocare Surgical System in the Treatment of Prostate
	Cancer.Since our inception we have
	focused considerable resources on establishing our Cryocare
	Surgical System as a primary treatment option for prostate
	cancer. We intend to continue to dedicate significant effort to:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | educate physicians and patients regarding the
	advantages of our Cryocare Surgical System;                                            
|
| |  | demonstrate the safety and efficacy of
	cryosurgery as a primary treatment for prostate cancer;                                       
|
| |  | demonstrate the safety and efficacy of
	cryosurgery as a secondary treatment in treating patients that
	have failed radiation therapy;

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| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | maximize reimbursement for cryosurgery;                                        
|
| |  | market the product to physicians and hospitals
	through our direct sales force;
|
| |  | provide physician training; and                                                
|
| |  | improve our Cryocare Surgical System so that it
	is easier to use.             



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leverage our Acquisition of Timm
	Medical.Through our acquisition of
	Timm Medical, we acquired or obtained marketing rights for an
	additional product used in the treatment of BPH, five products
	used in the diagnosis and treatment of erectile dysfunction, six
	products used in the diagnosis and management of urinary
	incontinence and one product used in the diagnosis of bladder
	cancer. We also increased our sales and marketing organization
	from 26 people to approximately 80 people, including 55 field
	sales representatives. The sales force we acquired from Timm
	Medical is the only urology-focused sales force that is
	accredited by the Certification Board of Urology Nurses and
	Associates, or CBUNA, a certification process that includes
	extensive ongoing training by physicians and industry
	professionals. We intend to use this targeted sales force to
	aggressively market our Cryocare Surgical System and other
	urological products to the approximately 8,000 urologists in the
	United States.
|
| |  | Develop New and Innovative Medical
	Products.We believe that our stent
	technology represents a potentially significant advance for
	treating the symptoms of BPH. We are developing this technology
	in three ways:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We plan to conduct a pivotal trial of our Horizon
	Prostatic Stent for temporary use, in combination with other
	therapies and alone.                    
|
| |  | We plan to conduct a clinical study of our
	Horizon Prostatic Stent for long-term use, without the need for
	any other therapy.                          
|
| |  | We plan to conduct preclinical studies of our
	ThermaStent device as a primary treatment that offers both a
	long-term cure and immediate relief for BPH.



| |                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are also developing our prostate biopsy
	product, our cardiac arrhythmia product and other horizontal
	applications of our proprietary cryosurgical technology. In
	addition, Timm Medical was developing, and we intend to continue
	to develop, additional products for the treatment of
	incontinence in men and women.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leverage our Cryosurgery Technology
	Platform.We intend to continue
	applying our proprietary cryosurgical technologies to surgical
	markets outside urology. We believe our cryosurgical
	technologies have broad applications across a number of surgical
	markets. We believe that these markets can be more cost
	effectively accessed through partners rather than through
	developing our own infrastructure. We formed a strategic
	alliance with Sanarus Medical, Inc. to develop our cryosurgical
	technology for the treatment of breast cancer, benign breast
	tumors and gynecological diseases. We also formed a strategic
	alliance with CryoCath Technologies Inc. to market our
	cryosurgical technology for the treatment of cardiac arrhythmia.
	We intend to continue to collaborate with well known medical
	device companies to develop and market non-urology applications.
|
| |  | Continue to Acquire Complementary Urological
	Products and Technologies.In addition
	to our acquisition of Timm Medical, we intend to continue to
	acquire or license complementary products and technologies in
	the urology market. We believe we are well suited to identify,
	evaluate and attract these opportunities because of our focus in
	this market. By acquiring complementary urological products, we
	believe we will be able to leverage our urology sales force and
	product development expertise.                                                                                                                                                                                                                                                                                                                                                                             

Strategic Alliances

We use collaborative marketing arrangements and
distribution alliances to market our Cryocare Surgical System.
We also have entered into collaborative agreements providing us
with the right to distribute products of others and to realize
value in the application of our proprietary cryosurgical
technology in non-urology applications.

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Distribution
Arrangement for Our Cryocare Surgical System

U.S. Therapies,
LLC:On June 30, 2001, we issued
213,010 shares of our common stock with a fair market value of
$2,837,293 as consideration for a membership interest in the
form of Class A Units of U.S. Therapies, LLC equal to
approximately 9% of the total issued and outstanding
Class A Units of U.S. Therapies and approximately 5%
of the Class A Units on a fully-diluted basis.
U.S. Therapies is a national urology group representing
more than 150 urologists across the nation. We
simultaneously entered into a distribution agreement with
U.S. Medical Devices, Ltd., a subsidiary of
U.S. Therapies, under which U.S. Medical Devices
received exclusive sales rights to our Cryocare Surgical System
and associated disposable products in 16 states.
U.S. Medical Devices also has the exclusive right to
distribute the Cryocare Surgical System to HealthTronics
Surgical Services, Inc. (Nasdaq: HTRN) and its affiliates, a
company that provides urologic and orthopedic services to
patients in 35 states through physician partnerships. We have
recorded net sales of $685,000 and $4,105,000 to
U.S. Medical Devices for the three months and the
12 months ended December 31, 2001, respectively. These
net sales constitute approximately 13% and approximately 26% of
our revenues for the three and 12 months ended
December 31, 2001, respectively.

Distribution
Arrangements for Additional Cryosurgical Markets

Sanarus Medical,
Inc.:In October 1999, we entered into
a strategic alliance with Sanarus Medical, Inc. to commercialize
our proprietary cryosurgical technology for the treatment of
breast cancer, benign breast tumors and gynecological diseases.
Sanarus is a private company focused on developing
minimally-invasive solutions for total breast care management.
The terms of the related agreements included a 5% equity
investment by us in Sanarus totaling $300,000. We also received
a warrant to acquire approximately 79% of Sanarus common
stock at that time in consideration for entering into a
manufacturing, supply and license agreement. In July 2001,
Sanarus completed an equity financing. This financing along with
other financings by Sanarus reduced our current ownership
interest to 2% and our potential maximum ownership percentage in
Sanarus to approximately 22% on a fully-diluted basis. We
received FDA clearance in October 2001 for the use of our
cryosurgical system for the treatment of benign breast tumors.
Sanarus intends to market this product as the Visica Treatment
System.

CryoCath Technologies,
Inc.:In September 2001, we entered
into a five-year exclusive market access and supply agreement
with CryoCath Technologies, Inc., a public company on the
Toronto Stock Exchange focused on developing minimally invasive,
catheter-based cryotherapy products to treat cardiovascular
disease. Under this agreement, CryoCath obtained an exclusive,
worldwide right to market, sell and distribute our cryosurgical
technologies for the targeted treatment of cardiac arrhythmias.
The agreement requires CryoCath to pay license fees and to make
minimum product purchases. We are obligated under the agreement
to undertake product development projects, maintain regulatory
approval for the products in the United States and Europe and
indemnify CryoCath in the event of some third party claims. We
have the right to reduce CryoCaths rights to a
non-exclusive license if CryoCath fails to meet certain minimum
purchase requirements. In February 2002, we received FDA
clearance for use of our cryosurgical technologies for the
treatment of cardiac arrhythmias. CryoCath intends to market the
system as the Surgifrost System.

Distribution
Arrangements for Third Party Products

Qualigen, Inc.:In
June 2001, we signed an original equipment manufacturer
agreement with Qualigen, Inc., a private company focused on
developing advanced blood testing systems for point-of-care use.
Under this agreement, we obtained the right to distribute
Qualigens 15-minute total prostate specific antigen test,
the FastPack System, as part of a urology diagnostic workstation
we are developing. The agreement has a term of five years and
includes one year of exclusivity with the option of four
one-year extensions of exclusivity based upon minimum purchase
commitments. In September 2001, we expanded our relationship
with Qualigen by entering into a five-year distribution
agreement. Under the distribution agreement, we obtained the
non-exclusive right to market the Fastpack System as a
stand-alone product directly to urology practices. After the
expiration of the initial five-year term, the distribution
agreement automatically renews for successive one-year terms
until terminated by one of the parties. Either party may
terminate the distribution agreement without cause on
90 days written notice to the other party. In the event
that Qualigen terminates

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the distribution agreement without cause, it must
continue to sell the FastPack System to us for a period of one
year in sufficient quantities to meet the ongoing demands of our
existing customers who have previously purchased the FastPack
System.


ArgoMed, Inc.:Through our acquisition of Timm Medical, we obtained rights to
distribute to urologists in North America a non-surgical,
office-based thermal therapy for BPH developed by ArgoMed, Inc.,
the Thermoflex System. ArgoMed is a private company focused on
developing and marketing minimally invasive thermal therapy
technologies to treat BPH and other urologic disorders. The
Thermoflex System utilizes a proprietary catheter and console to
deliver heated water to destroy excess prostate tissue and
reopen the urethras path through the prostate. The
distribution agreement establishes minimum purchase
requirements. The initial term of the distribution agreement
expires in May 2005, but automatically renews for successive
one-year terms until terminated by one of the parties. In
addition, either party may terminate the distribution agreement
without cause after June 30, 2002.

Matritech, Inc.:As
part of our recent acquisition of Timm Medical, we obtained
exclusive distribution rights to a bladder cancer detection
test, the NMP22 POC Test. The NMP22 POC Test was developed by
Matritech, Inc., a public company focused on the development of
proteomics-based diagnostic products for the early detection of
cancer. Under the distribution agreement, Matritech must use
best efforts to obtain FDA clearance for the NMP22 POC Test. The
agreement terminates six years after Matritech receives FDA
clearance for the test. After the expiration of the six-year
term, the agreement automatically renews for successive one-year
terms until terminated by one of the parties. Either party may
terminate the agreement if Matritech fails to obtain FDA
clearance for the test. As part of the agreement, Timm Medical
made, and we will be required to make future, marketing payments
to Matritech upon completion of certain milestones. In addition,
Timm Medical was required to purchase $150,000 in the common
stock of Matritech, which stock may not be sold until January
2003 without Matritechs prior consent. The distribution
agreement also establishes minimum purchase requirements.

Products

We are marketing, developing or have commercial
rights to distribute the following products:

|                                           |  |                                                                                   |  |          
|------------------------------------------ |  | --------------------------------------------------------------------------------- |  | ---------
|Product Name                               |  | Function                                                                          |  | Status   
|                                           |  |                                                                                   |  |          
|Prostate Cancer                            |  |                                                                                   |  |          
|Cryocare Surgical System
	 8 Probe System |  | Cryosurgical system with eight cryoprobe
	capability                              |  | Marketing
|CryoGuide                                  |  | Computerized cryoprobe placement, simulation and
	guidance system for cryosurgery |  | Marketing
|Cryoprobes                                 |  | Disposable probes used with the Cryocare Surgical
	System                         |  | Marketing
|Guidewires                                 |  | Disposable guidewires used with the Cryocare
	Surgical System                     |  | Marketing
|FastTrac                                   |  | Percutaneous access device that allows one-step
	insertion of cryoprobes          |  | Marketing
|FastPack System                            |  | Office-based prostate cancer test                                                 |  | Marketing
|Biopsy Tool                                |  | Precision tool that allows targeted biopsy of the
	prostate                       |  | Prototype

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|                                 |  |                                                                                            |  |                                                                         
|-------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------
|Product Name                     |  | Function                                                                                   |  | Status                                                                  
|                                 |  |                                                                                            |  |                                                                         
|Benign Prostate
	Hyperplasia     |  |                                                                                           
|Horizon Prostatic Stent          |  | Nitinol stent for relief of BPH                                                            |  | Clinical Investigation in Process in United
	States; Marketing in Europe
|Thermoflex System                |  | Office-based, thermal therapy for the treatment
	of BPH                                    |  | Marketing                                                               
|ThermaStent                      |  | Stent providing thermal therapy for the treatment
	of BPH                                  |  | Prototype                                                               
|Erectile Dysfunction             |  |                                                                                            |  |                                                                         
|RigiScan Monitor                 |  | Diagnostic tool for erectile dysfunction                                                   |  | Marketing                                                               
|SnapGauge                        |  | Diagnostic tool for erectile dysfunction                                                   |  | Marketing                                                               
|Esteem System                    |  | Vacuum therapy system                                                                      |  | Marketing                                                               
|ErecAid System                   |  | Vacuum therapy system                                                                      |  | Marketing                                                               
|StayErec System                  |  | Vacuum therapy system                                                                      |  | Marketing                                                               
|Dura II Penile Prosthesis        |  | Penile prosthesis to impart penile rigidity                                                |  | Marketing                                                               
|Urinary Incontinence             |  |                                                                                            |  |                                                                         
|UroBreeze Urodynamics Monitor    |  | Urodynamic monitor providing five channels of
	testing information                         |  | Marketing                                                               
|EasyFlo Uroflowmetry System      |  | Lower cost urodynamic monitor providing five
	channels of testing information              |  | Marketing                                                               
|ProDynamic Monitor               |  | Urodynamic monitor providing seven channels of
	testing information                        |  | Marketing                                                               
|Andromeda Ellipse Monitor        |  | Urodynamic monitor providing eight channels of
	testing information and video capabilities |  | Marketing                                                               
|C3                               |  | External cuff device for management of male
	incontinence                                  |  | Marketing                                                               
|StepFree System                  |  | Pelvic muscle-toning program for management of
	female incontinence                        |  | Marketing                                                               
|Bladder Cancer                   |  |                                                                                            |  |                                                                         
|NMP22 POC Test                   |  | Office-based bladder cancer test                                                           |  | 510(k) Application Filed                                                
|Additional Cryosurgical
	Markets |  |                                                                                           
|Cryocare  4 Probe System        |  | Cryosurgical system with 4 probe capability for
	general surgery                           |  | Marketing                                                               

Patents and Intellectual Property

We have rights to nine issued patents relating to
our cryosurgical technology, including rights to four
in-licensed patents. These patents relate to our cryoprobe
technology for creating the freeze zone and precisely
controlling the shape of the freeze zone produced by the
cryoprobes. Additionally, our patents relate to our computer
guided system for assisting surgeons in properly placing
cryoprobes in a patient, a computer controlled cryosurgery
apparatus and method, and a cryosurgical integrated control and
monitoring system. We also have several patents pending. We have
rights to 11 patents relating to our stent product line,
including

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rights to three in-licensed patents. Through our
acquisition of TimmMedical, we acquired patent rights to the
Dura II Penile Prosthesis and the C3 products.


Our policy is to secure and protect intellectual
property rights relating to our technology through patenting
inventions and licensing others when necessary. While we believe
that the protection of patents and licenses is important to our
business, we also rely on trade secrets, know-how and continuing
technological innovation to maintain our competitive position.
Given our technology and patent portfolio, we do not consider
the operation of our business to be materially dependent upon
any one patent, group of patents or single technological
innovation.

Our policy is to sell our products under
trademarks and to secure trademark protection in the United
States and worldwide where possible. We believe the protection
of our trademarks is important to our business.

No assurance can be given that our processes or
products will not infringe patents or other intellectual
property rights of others or that any license required would be
made available under any such patents or intellectual property
rights, on terms acceptable to us or at all. From time to time,
we have received correspondence alleging infringement of
intellectual property 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 we could be
prevented from practicing the subject matter claimed or would be
required to obtain licenses from the owners of any such
intellectual property rights to avoid infringement.

In December 2000, we settled a patent lawsuit
against Cryomedical Sciences, Inc. and in March 2001, we settled
two patent lawsuits against Israel-based Galil Medical, Ltd. and
its U.S. affiliate, Galil Medical (USA), Inc. The lawsuits
against Cryomedical Sciences and Galil concerned the
infringement of our patent for an integrated cryosurgical
system. The settlements resulted in cross-licensing agreements
between Galil and Endocare and Cryomedical Sciences and Endocare.

We seek to preserve the confidentiality of our
technology by entering into confidentiality agreements with our
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.

Research Strategy

Our research goal is to develop innovative
urological healthcare technologies which dramatically improve
patient outcomes. Our primary focus is on the diagnosis,
treatment and management of prostate disease. To that end, we
plan to develop innovations which improve the speed and efficacy
of our Cryocare Surgical System. We also will conduct research
and development of a number of complementary products focusing
on diagnosis and treatment of prostate disease with an emphasis
on our stents for the treatment of BPH. In addition, Timm
Medical was developing, and we intend to continue to develop,
product enhancements to existing urological product offerings
and new product offerings for the treatment of incontinence in
men and women. We also are constantly evaluating horizontal
applications that may allow us to apply our cryosurgical
technologies. Once new applications have been identified, we
will develop cryosurgical systems and cryoprobes tailored to
that application.

We spent approximately $2.6 million,
$3.2 million and $3.5 million for the years ended
1999, 2000 and 2001, respectively, on research and development
activities. In fiscal year 2001, Timm Medical spent
approximately $1.3 million on research and development
activities.

Sales and Marketing

We sell our products primarily to physicians and
hospitals and have both domestic and international customers.
Net sales to U.S. Medical Devices, Ltd. constituted 26% of our
net revenues for the year ended December 31, 2001, and the
loss of U.S. Medical Devices as a distributor would have a
material adverse effect on our net revenues. None of our other
customers account for in excess of 10% of our net revenues.

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We currently sell our products domestically
through our direct sales force which, as of December 31,
2001, consisted of 26 people, including a senior vice president
of sales and marketing, vice president of marketing, seven
regional sales managers and two clinical application
specialists. With our acquisition of Timm Medical, our sales and
marketing force has increased to 80 people, including 55 field
sales representatives. We intend to continue to expand our
direct sales force and enhance our direct sales capabilities by
hiring additional sales and marketing personnel. Our strategy is
to focus marketing and sales efforts and generating physician
access to and awareness of our Cryocare Surgical System and
other urological product offerings. We also intend to create
patient demand by providing education on the benefits of
cryosurgical therapy and our other urological product offerings
versus alternative treatment options. We also have plans to
expand our marketing initiatives to programs targeted directly
at prostate disease patients.

We also distribute our Cryocare Surgical System
through affiliates of national urological groups. These
marketing partners sell our systems directly to urology groups
and indirectly to multiple urology groups through sales to
limited liability companies or other entities in which such
groups have an equity interest. We also distribute our
cryosurgical systems through the operators of mobile lythotripsy
systems for the treatment of kidney stones.

Internationally, our products are sold primarily
through independent distributors in Germany, China, Brazil,
Australia, the United Kingdom, Turkey, Greece, Korea, Japan and
Taiwan. Our international sales represented approximately 12%,
16% and 7% of our consolidated revenue in 1999, 2000 and 2001,
respectively.

Reimbursement

We sell our Cryocare System and related
disposable guidewires and cryoprobes to hospitals and other
entities that provide services to hospitals. Most procedures
involving the Cryocare Surgical System are performed in
hospitals on an inpatient basis. While occasional patients pay
for cryosurgical procedures, virtually all patients depend upon
third party payors, including Medicare, Medicaid, Tricare and
other federal healthcare programs, as well as private insurers
to pay for their procedures. Accordingly, our revenue is
dependent upon third party reimbursement.

Reimbursement for cryosurgical procedures using
our products as a primary treatment alternative for localized
prostate cancer began July 1999. Effective July 2001, Medicare
coverage was approved for secondary cryosurgical treatment of
prostate cancer patients who have failed radiation therapy.

When Medicare reimbursed services are provided on
an inpatient basis, the hospital is reimbursed under the
Medicare prospective payment system, based on the applicable
diagnosis related group, or DRG. A single payment covers all
facility services.

Outpatient reimbursement for cryosurgical
procedures for Medicare beneficiaries is in accordance with the
newly effective Hospital Outpatient Prospective Payment System,
or HOPPS. Under HOPPS, reimbursement is made on a per procedure
basis. The physician is paid a professional fee and the hospital
receives payment for the technical portion of the fee. The
hospitals technical fee includes the per procedure share
of the cost for any depreciable equipment, such as our Cryocare
Surgical System unit, and the provision of disposable devices,
such as our guidewires and cryoprobes.

Medicare makes additional payments to hospitals
when certain qualifying new medical devices are used to perform
a procedure or service on a program beneficiary on an outpatient
basis. Generally speaking, the additional payment amount for
qualifying medical devices is the amount by which a
hospitals charges for a device used in an outpatient
service, adjusted to cost, exceed the portion of the otherwise
applicable hospital outpatient department fee schedule amount
determined by the Secretary of the U.S. Department of Health and
Human Services to be associated with the device. As a result,
these pass-through payments help to compensate
hospitals for the additional costs of utilizing new technology
in treating Medicare beneficiaries. Our guidewires and
cryoprobes are currently paid on a pass-through basis.

Two statutory expenditure control mechanisms,
however, limit overall program payments that can be made on a
pass-through basis for qualifying medical devices, and, as such,
also limit actual item-specific payments to hospitals using
qualifying devices. The more significant among these two
mechanisms caps the

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aggregate Medicare payments that may be made on a
pass-through basis for eligible items for a given year.
Specifically, if the Secretary of the U.S. Department of Health
and Human Services determines, based on a number of
considerations, before the start of a year that the total amount
of pass-through payments for all eligible items in that year
would exceed a predetermined percentage of total projected
payments to hospitals for outpatient services for that year, the
Secretary is required to reduce the amount of each of the
transitional pass-through payments made in that year to ensure
that the limit is not exceeded. For calendar years 2002 and
2003, the applicable predetermined percentage is 2.5%; for
calendar year 2004 and subsequent years, the applicable
percentage is 2.0%. The Centers for Medicare and Medicaid
Services, or CMS, did not implement these adjustments in 2000
and 2001, because it could not accurately project overall
expenditures under the pass-through provisions. CMS intends to
implement these adjustments in April 2002. Commencing
April 1, 2002, the pro rata reduction in pass-through
payments for eligible devices is 63.6 percent. As such,
payments to hospitals for calendar year 2002 will be reduced by
this percentage. It is possible that the pro rata reduction in
pass-through payments for eligible devices will increase beyond
63.6% beginning in calendar year 2004, when the applicable
percentage is reduced from 2.5% to 2.0%.


Items qualifying for pass-through payment
continue to be eligible for at least two, but not more than
three years. After a temporary payment period expires for an
item, its cost is packaged with the relative procedure code or
medical visit and assigned to the APC group that is clinically
related and comparable in resources used. At such time, the APC
groupings, weights and payments are updated to include costs
associated with former pass-through items. We have no assurance
that once pass-through status for our guidewires and cryoprobes
ends and CMS sets an all inclusive technical fee for
cryosurgery, total reimbursement will remain at current levels.
If overall Medicare reimbursement to hospitals is reduced, it is
likely that we would have to reduce our charges to hospitals for
the equipment and devices. This could have a material adverse
effect on our revenues.

We are in discussions currently with CMS to
ensure that correct data is utilized when CMS incorporates the
pass-through payments for our guidewires and cryoprobes into the
technical fee paid to the hospital for the cryosurgery
procedure. We have been asked by CMS to submit data
demonstrating the hospitals costs to perform cryosurgery
on an outpatient basis. To date, no resolution has been reached
regarding the final technical payment to the hospital.

The items we acquired through our acquisition of
Timm Medical also are reimbursed by Medicare and other federal
healthcare programs, as well as private insurers. Timm Medical
provides certain items pursuant to physicians orders
directly to patients, and bills the patient or payor.
Consequently, Timm Medicals business, unlike the other
elements of Endocares business, involves dealing directly
with Medicare and other payors, and would be directly impacted
by any changes in either coverage policies or reimbursement
amounts adopted by Medicare or other payors. An initial
reimbursement rate for the Thermoflex System was established in
January 2002.

Future devices and technology that we develop
would have to be approved by Medicare after we obtain FDA
approval or clearance. The Medicare approval process is lengthy
and there is no assurance that Medicare approval would be
granted. Each private insurer makes its own determination
whether to cover a device or procedure and sets its own
reimbursement rate. It is unlikely that a private insurer would
provide coverage if Medicare refused to do so.

Backlog

As of December 31, 2001, we maintained
minimal backlog. Our policy is to carry enough inventory to be
able to ship most orders within a few days of receipt of order.
Historically, most of our orders have been for shipment within
30 days of the placement of the order. Therefore, we rely
on orders placed during a given period for sales during that
period. Backlog information as of the end of a particular period
is not necessarily indicative of future levels of our revenue.

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Manufacturing

We manufacture our Cryocare Surgical System and
related disposables internally at our facilities in Irvine,
California. Our existing Irvine manufacturing facility was
subject to an FDA audit in September 1999, and the FDA did not
find any deviations from its QSR requirements. In addition, we
have obtained from the California Department of Health Services
a license to manufacture medical devices, subject to periodic
inspections and other regulation by that agency. We have
received ISO 9001 certification indicating compliance of our
existing Irvine manufacturing facility with European standards
for quality assurance and manufacturing process control.

We recently moved our executive offices to a new
facility in Irvine, California, and plan to transfer our
manufacturing activities to this new facility in April 2002.
This new facility has not yet been inspected by the FDA or the
California Department of Health Services.

The erectile dysfunction and urinary incontinence
products we acquired through our acquisition of Timm Medical are
manufactured in Eden Prairie, Minnesota. The Eden Prairie
facility is equipped and registered to produce FDA Class I,
II, and III medical devices and has received ISO 9001, EN 46001
and CE mark certifications. This facility also maintains
controlled environment rooms for production of implantable
products.

Government Regulation

Governmental regulation in the United States and
other countries is a significant factor affecting the research
and development, manufacture and marketing of our products. In
the United States, the FDA has broad authority under the Federal
Food, Drug and Cosmetic Act, the FDC 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 special
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.

Most Class I devices are exempt from
premarket notification or approval. Class II devices are
subject to the premarket notification requirements under
Section 510(k) of the FDC Act. For a 510(k) to be cleared
by the FDA, the manufacturer must demonstrate to the FDA that a
device is substantially equivalent to another legally marketed
device that was either cleared through the 510(k) process or on
the market prior to 1976. Our Cryocare Surgical System and our
Cryocare Cardiac Surgical System product have been cleared for
marketing through the 510(k) procedure. Class III devices
generally include the most risky devices as well as devices that
are not substantially equivalent to other legally marketed
devices. To obtain approval to market a Class III device, a
manufacturer must obtain FDA approval of a premarket approval
application, or PMA. The PMA process requires more data, takes
longer and is more expensive than the 510(k) procedure. Our
Horizon Prostatic Stent will require premarket approval.

There can be no assurance that we will be able to
obtain necessary clearances or approvals for clinical testing or
for manufacturing or marketing of our products. After a device
is placed on the market, numerous regulatory requirements apply.
These include:



| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | quality system regulation, which requires
	manufacturers to follow design, testing, control, documentation
	and other quality assurance procedures during the manufacturing
	process;                                                                                                     
|
| |  | labeling regulations, which prohibit the
	promotion of products for unapproved or off-label
	uses and impose other restrictions on labeling; and                                                                                                                                        
|
| |  | medical device reporting regulations, which
	require that manufacturers report to the FDA if their device may
	have caused or contributed to a death or serious injury or
	malfunctioned in a way that would likely cause or contribute to
	a death or serious injury if it were to recur.

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Failure to comply with applicable regulatory
requirements can result in enforcement action by the FDA, which
may include any of the following sanctions:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | fines, injunctions, and civil penalties;                                          
|
| |  | recall or seizure of our products;                                                
|
| |  | operating restrictions, partial suspension or
	total shutdown of production;      
|
| |  | refusing our request for 510(k) clearance or
	premarket approval of new products; 
|
| |  | withdrawing 510(k) clearance or premarket
	approvals that are already granted; and
|
| |  | criminal prosecution.                                                             

Medical device laws are also in effect in many of
the countries outside of the United States in which we do
business. These laws range from comprehensive device approval
and quality system requirements for some or all of our medical
device products to simple requests for product data or
certifications. The number and scope of these requirements are
increasing. In June 1998, the European Union Medical Device
Directive became effective, and all medical devices must meet
the Medical Device Directive standards and receive CE mark
certification. CE mark certification involves a comprehensive
Quality System program, and submission of data on a product to
the Notified Body in Europe.

We have obtained CE Mark for distribution of our
Cryocare Surgical System and our Horizon Prostatic Stent in
Europe and product registration for distribution of our Cryocare
Surgical System in Canada, Australia and New Zealand.

Healthcare Regulatory Issues

The healthcare industry is highly regulated and
there can be no assurance that the regulatory environment in
which we operate will not change significantly in the future. In
general, regulation of healthcare related companies is
increasing. We anticipate that Congress and state legislatures
will continue to review and assess alternative healthcare
delivery and payment systems. We cannot predict what impact the
adoption of any federal or state healthcare reform measures may
have on our business.

We regularly monitor developments in laws and
regulations relating to our business. We may be required to
modify our agreements, operations, marketing and expansion
strategies from time to time in response to changes in the
statutory and regulatory environment. We plan to structure all
of our agreements, operations, marketing and strategies in
accordance with applicable law, although there can be no
assurance that our arrangements will not be challenged
successfully or that required changes may not have a material
adverse effect on operations or profitability.

The following discussion briefly summarizes some,
but not all, of the current regulatory schemes that could be
applicable to our business. Complying with these regulatory
schemes may involve expense to us, delay in our operations,
and/or restructuring of our business relationships. Violations
could potentially result in the imposition upon us of civil
and/or criminal penalties.

Anti-Kickback
Laws

Federal law prohibits the knowing and willful
offer, payment, solicitation or receipt of any form of
remuneration in return for, or in order to induce, (i) the
referral of a person for services, (ii) the furnishing or
arranging for the furnishing of items or services or
(iii) the purchase, lease, or order or arranging or
recommending purchasing, leasing or ordering any item or
service, in each case, reimbursable under any federal healthcare
program. Because our products are reimbursable under Medicare,
Medicaid and other federal healthcare programs, the
anti-kickback law applies. Many states have similar
anti-kickback laws, and in many cases these laws apply to all
patients, not just federal health program beneficiaries.
Noncompliance with, or violation of, the federal anti-kickback
law can result in exclusion from federal healthcare programs and
civil and criminal penalties. Similar penalties are provided for
violation of state anti-kickback laws. Several federal courts
have held that the anti-kickback statute is violated if just one
purpose of the payment of

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remuneration is to induce the referral of
patients. To the extent that we are deemed to be subject to
these federal or similar state laws, we believe that our
activities and contemplated activities will comply in all
material respects with such statutes and regulations.


Regulations to the federal anti-kickback law
specify payment practices that will not be subject to
prosecution under the anti-kickback law. These are known as the
safe-harbor provisions. Failure to comply fully with
a safe-harbor does not mean the practice is per se illegal.
Rather, if a practice does not fit within a safe
harbor, no guarantee can be given that the practice will
be exempt from prosecution; it will be viewed under the totality
of the facts and circumstances.

We believe that our current structure and
business and our contemplated future operations comply and will
comply with the federal anti-kickback prohibition. It does not
appear, however, that certain of our business practices fit or
will fit within a safe harbor and there is no
assurance that if viewed under the totality of the facts and
circumstances, our structure and business would not be
challenged, perhaps even successfully, as a violation of the
anti-kickback prohibitions. Mere challenge, even if we
ultimately prevail, could have a substantial adverse effect on
us.

Patient
Referral Laws

Stark II prohibits a physician from
referring a patient for a designated health service
reimbursable by Medicare or Medicaid to an entity with which the
physician has a direct or indirect financial relationship,
whether in the nature of an ownership interest or a compensation
arrangement, subject only to limited exceptions. Stark II
also prohibits the recipient of a prohibited referral from
billing for the designated health services provided pursuant
thereto. Pursuant to the Stark II regulations, the entity
that bills Medicare for the designated health service is
considered to be the provider of designated health service.
Therefore, we are not (except with respect to certain Timm
Medical products) providers of designated health services, nor
are the physician-owned entities that purchase or lease our
equipment. Rather the hospitals where the procedures are
performed are the providers of designated health services,
because they bill Medicare for the procedures, and inpatient and
outpatient hospital services are designated health services.
Physicians who have a an ownership or compensation relationship
with the entities (such as mobile vendors) that furnish our
equipment to hospitals, and the hospitals that obtain equipment
and services directly or indirectly from such entities, are
considered to have an indirect compensation relationship, and
are thus subject to Stark II prohibitions.

We believe that the arrangements we have
established with physician-owned entities and hospitals comply
with applicable Stark II exceptions. However, if any of the
relationships between physicians and hospitals involving our
services, or, in the case of Timm Medical, any of our financial
relationships with referring physicians, do not meet a
Stark II exception, neither the hospital nor we would be
able to bill for any procedure resulting from a referral that
violated Stark II. Although, in most cases we are not the
direct provider and do not bill Medicare for the designated
health services, any Stark II problem with our business
arrangements with physicians and hospitals would adversely
affect us as well as the referring physician and the hospital
receiving the referral.

Many states also have patient referral laws, some
of which are more restrictive than Stark II and regulate
referrals by all licensed health care practitioners for any
health care service to an entity with which the licensee has a
financial relationship unless an exception applies. Such laws in
particular states may prohibit us from entering into
relationships with physicians and physician-owned entities which
may limit business development.

We believe that our structure and business comply
with Stark II and applicable state referral laws. No
assurance can be made, however, that such structure and business
would not be successfully challenged and penalties, such as
civil money penalties and exclusion from Medicare and Medicaid,
and or state penalties, imposed. And, again, mere challenge,
even if we ultimately prevail, could have a substantial adverse
effect on us.

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HIPAA and
Other Privacy Laws

Beginning April 14, 2003, the privacy
regulations developed under the Health Insurance Portability and
Accountability Act of 1996, HIPAA, will take effect. These
privacy regulations place limitations on the use and disclosure
of medical records containing identifiable patient information,
including research data. We anticipate that, either as a
covered entity or as a business
associate of other covered entities such as health care
providers, we will be required to comply with HIPAA privacy
regulations which may be costly and which may make it more
difficult and expensive to conduct our research and obtain
medical information for other purposes as well.

Other United
States Regulatory Requirements

In addition to the regulatory framework for
product approvals, we are and may be subject to regulation under
federal and state laws, including requirements regarding
occupational health and safety, laboratory practices and the
use, handling, and disposing of toxic or hazardous substances.
We may also be subject to other present and future local, state,
federal and foreign regulations.

Seasonality

We believe that holidays, major medical
conventions and vacations taken by physicians, patients and
patient families may have a seasonal impact on our sales. We are
continuing to monitor and assess the impact seasonality may have
on demand for our products.

Competition

The medical device industry is subject to intense
competition. Significant competitors in the area of prostate
cancer therapies include Cryomedical Sciences, Inc., Galil
Medical, Ltd., Theragenics Corporation and North American
Scientific, Inc. Significant competitors in the area of BPH
therapies and bladder disease include Urologix, Inc., VidaMed,
Inc., C.R. Bard, Inc., ACMI/ Circon Corporation, Johnson
& Johnson, Boston Scientific Corp., and American Medical
Systems Holdings, Inc. Significant competitors in the area of
incontinence include American Medical Systems Holdings, Inc.,
Boston Scientific Corp., Carbon Medical Technologies, Inc.,
ACMI/ Circon Corporation, C.R. Bard, Inc., Medtronics Inc.,
Johnson & Johnson, and UroPlasty, Inc. Significant
competitors in the area of erectile dysfunction include American
Medical Systems Holdings, Inc., Mentor Corporation, SOMA Blue,
Inc. and Pfizer, Inc. In addition, other companies are
developing urological products that could compete with our
Cryocare Surgical System and other urological products. Many of
these competitors have significantly greater financial and human
resources than we do.

We believe the principal competitive factors in
the urological product market include:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | the safety and efficacy of treatment alternatives;             
|
| |  | acceptance of a procedure by physicians and
	patients;         
|
| |  | technology leadership and superiority;                         
|
| |  | price;                                                         
|
| |  | availability of government or private insurance
	reimbursement;
|
| |  | speed to market; and                                           
|
| |  | ability to use the product in the
	physicians office.         

Employees

As of December 31, 2001, we had a total of
97 employees. Of these employees, 13 are engaged directly
in research and development activities, 8 in regulatory affairs/
quality assurance, 23 in manufacturing, 26 in sales and
marketing and 16 in general and administrative positions.
Through the acquisition of Timm Medical, we will employ an
additional 95 employees, including six in research and
development activities, three in

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regulatory affairs/ quality assurance, 21 in
manufacturing, 54 in sales and marketing and 11 in general and
administrative positions. We expect to increase employment in
conjunction with the continued commercialization of the Cryocare
Surgical System and our other urological product offerings and
expanded research, development and clinical activities related
to the Horizon Prostatic Stent. We have never experienced a work
stoppage, none of our employees are represented by a labor
organization, and we consider our employee relations to be good.


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

Risks Related to Our Business

The risks and uncertainties described below
are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently
deem immaterial may also impair our operations. The occurrence
of any of the following risks could harm our business. In that
case, the trading price of our common stock could decline, and
you may lose all or part of your investment.

We have a limited operating experience and a
history of net losses, and we may never achieve or maintain
profitability.

Since our inception, we have engaged primarily in
research and development activities, and have minimal experience
in manufacturing, marketing and selling our Cryocare Surgical
System in commercial quantities. In addition, we recently closed
our acquisition of Timm Medical in March 2002. As a result, we
have no history in marketing and selling the products we
acquired or have rights to commercialize through our acquisition
of Timm Medical. We have incurred annual operating losses each
year since our inception. For the fiscal years ended
December 31, 1999, 2000 and 2001, we had net operating
losses of approximately $9.3 million, $12.4 million
and $5.9 million, respectively. As of December 31,
2001, our accumulated deficit was approximately
$38.1 million. It is possible that we will never generate
sufficient revenues from product sales to achieve or maintain
profitability. Even if we do achieve significant revenues from
our product sales, we expect to incur increased operating
expenses over the next several quarters, as we, among other
things:



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expand our selling and marketing activities as we
	attempt to gain market share for our Cryocare Surgical System
	and our other urology products;             
|
| |  | incur costs related to the integration of Timm
	Medical into our business;                                                                                    
|
| |  | increase our research and development efforts to
	improve our existing products and develop new products such as
	our development Horizon Prostatic Stent; and
|
| |  | perform clinical research and trials in an effort
	to obtain governmental clearance and approval for the commercial
	sale of our Horizon Prostatic Stent.     

We will need to significantly increase the
revenues we receive from sales of our products as a result of
these increased operating expenses. We may be unable to do so,
and therefore, may never achieve profitability. Even if we do
achieve profitability, we cannot be certain that we will be able
to sustain or increase profitability on a quarterly or annual
basis.

We recently acquired Timm Medical, and face
risks associated with integrating this business into our
existing business operations.

We closed the acquisition of Timm Medical in
March 2002, and we are in the process of integrating the
operations, personnel and products of Timm Medical into our
business. The integration of Timm Medicals business
involves numerous risks and expenses, including, among others,
difficulties and expenses incurred in assimilating Timm
Medicals operations, personnel and products, difficulties
in operating a new business and

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marketing new products, difficulties in training
sales personnel to effectively sell new products, the diversion
of managements attention from other business concerns and
the potential loss of key employees from both Timm Medical and
Endocare. In addition, Timm Medicals business may suffer
as the attention of both its management and employees are
diverted during the integration process. If we do not
successfully integrate and grow the business we acquired from
Timm Medical, our business will suffer.


We expect to derive a significant portion of
our future revenues from our Cryocare Surgical System, which
could fail to achieve market acceptance or generate significant
revenue.

We introduced our Cryocare Surgical System to the
market in July 1999. We derived substantially all of our
revenues in the fiscal year ended December 31, 2001 from
sales of Cryocare Surgical Systems and related disposable
supplies. We expect that sales of Cryocare Surgical Systems and
related disposable supplies will constitute a significant
portion of our sales for the foreseeable future. Accordingly,
our success is reliant on the acceptance by doctors and patients
of the Cryocare Surgical System as a preferred treatment for
prostate cancer. Cryosurgery has existed for many years, but has
not been widely accepted primarily due to concerns regarding
safety and efficacy and widespread use of alternative therapies.
Because of a lack of precise monitoring, cryosurgical procedures
performed in the 1970s resulted in high cancer recurrence and
negative side effects, such as rectal fistula and incontinence,
and attached a stigma to cryosurgical treatment. Now that
ultrasound guidance and temperature sensing are available for
more precise monitoring in our Cryocare Surgical System, we will
need to overcome this stigma to obtain market acceptance for our
product. In addition, use of our Cryocare Surgical System
requires significant physician education and training. As a
result, we may have difficulty obtaining recommendations and
endorsements of physicians and patients for our Cryocare
Surgical System. We may also have difficulty raising the brand
awareness necessary to generate interest in our Cryocare
Surgical System. Any adverse side effects, including impotence
or incontinence, recurrence of cancer or future reported adverse
events or other unfavorable publicity involving patient outcomes
from the use of cryosurgery, whether from our products or the
products of our competitors, could adversely affect acceptance
of cryosurgery. In addition, emerging new technologies and
procedures to treat cancer, prostate enlargement and other
prostate disorders may negatively affect the market acceptance
of cryosurgery. If our Cryocare Surgical System does not achieve
market acceptance, we will likely remain unprofitable.

If we are unable to continue to develop
innovative products in the prostate and other urological
markets, our business will suffer.

Our growth depends in large part on continued
ability to successfully develop and commercialize our current
products under development and any new products in the prostate
and other urological markets. Several of our products are in
varying stages of development. Our Horizon Prostatic Stent is in
clinical trials and has not been approved for marketing in the
United States. We also are developing enhancements to our
Cryocare Surgical System. We may experience difficulties that
could delay or prevent the successful development and
commercialization of our current products under development or
any new products. Our products in development may not prove safe
and effective in clinical trials. Clinical trials may identify
significant technical or other obstacles that must be overcome
prior to obtaining necessary regulatory or reimbursement
approvals. In addition, our competitors may succeed in
developing commercially viable products that render our products
obsolete or less attractive. Our failure to successfully develop
and commercialize new products will likely have a significant
negative effect on our financial prospects.

There is uncertainty relating to third party
reimbursement, which is critical to market acceptance of our
products.

In the United States, healthcare providers, such
as hospitals and physicians, that purchase our products and use
our mobile services 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 our products and services and on
reimbursement for our products and procedures. While some
private health insurance companies pay for the procedures in
which our products are used in some areas of the United States,

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private insurance reimbursement may not be
adopted nationally or by additional insurers and may be
terminated by those private insurance companies currently paying
for procedures in which our products are used. If reimbursement
levels from Medicare, Medicaid, other governmental healthcare
programs or private insurers are not sufficient, physicians may
choose not to recommend, and patients may not choose, procedures
utilizing our products.


Currently, reimbursement under Medicare for our
disposable products used in outpatient procedures is provided
under a pass-through system in which Medicare pays
the cost we charge the hospital for our products. Pass-through
reimbursement status only remains for a period of two to three
years, dependent upon the time period in which the Centers for
Medicare and Medicaid Services, or CMS, formerly the Healthcare
Financing Administration, or HCFA, obtains sufficient data to
establish a cost. We obtained pass-through status for disposable
products related to the Cryocare Surgical System on
April 1, 2001. Thus, pass-through status for those products
will terminate no later than April 1, 2004. After
pass-through status terminates, the cost of our disposable
products will be incorporated into the hospital outpatient
prospective payment system and there will be no separate
reimbursement for our disposable products. For calendar years
2002 and 2003, federal law caps the total cost of pass-through
payments to 2.5% of expenditures for hospital outpatient
services for the year. The cap is set at 2.0% for calendar year
2004 and each year thereafter.

This statutory limit on pass-through payments,
first implemented by CMS for calendar year 2002, will result in
a pro rata reduction in pass-through payments for calendar year
2002 of 63.6%. This means that payments to hospitals for our
disposable products used in outpatient procedures in calendar
year 2002 will be reduced by this percentage. It is possible
that this pro rata reduction in pass-through payments for
eligible devices will increase beyond 63.6% beginning in
calendar year 2004, when the applicable percentage is reduced
from 2.5% to 2.0%. These reductions in Medicare payment will
likely affect our charges to hospitals and resulting revenues.

We have no assurance that once pass-through
status for our guidewires and cryoprobes ends and CMS sets an
all inclusive technical fee for cryoablation, total
reimbursement will not be further reduced. Private healthcare
payors are also expected to incorporate the costs of our
products into the overall cost of the procedures in which they
are used, meaning that there will no longer be separate,
additional reimbursement for our disposable products. This too
may affect our charges to hospitals and resulting revenues.

International market acceptance of our products
may depend, in part, upon the availability of reimbursement
within prevailing healthcare payment systems. Reimbursement and
healthcare payment systems in international markets vary
significantly by country, and include both government sponsored
healthcare and private insurance. We may not obtain
international reimbursement approvals in a timely manner, if at
all. Our failure to receive international reimbursement
approvals may negatively impact market acceptance of our
products in the international markets in which those approvals
are sought.

Furthermore, significant attention is focused on
reforming the healthcare system in the United States and other
countries. Any changes in Medicare, Medicaid or third party
medical expense reimbursement, which may arise from healthcare
reform, may have a material adverse effect on reimbursement for
our products or procedures in which our products are used and
may reduce the price we are able to charge for our products. In
addition, changes to the healthcare system may also affect the
commercial acceptance of products we are currently developing
and products we may develop in the future. Potential approaches
that have been considered include controls on healthcare
spending through limitations on the growth of private purchasing
groups and price controls. Several proposals have been made in
the United States Congress and various state legislatures
recently that, if adopted, would potentially reduce healthcare
spending which may result in a material adverse effect on our
business.

We may have difficulty managing our
growth.

We expect to continue to experience significant
growth in the scope of our operations and the number of our
employees. We recently experienced significant growth in our
operations and number of employees as a result of an acquisition
of Timm Medical. This growth has and will likely continue to
place a significant strain on our management and operations. Our
ability to manage this growth will depend upon our ability to
attract,

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hire and retain skilled employees. Our success
will also depend on the ability of our officers and key
employees to continue to implement and improve our operational
and other systems, to manage multiple, concurrent development
projects and to hire, train and manage our employees. Our future
success is heavily dependent upon growth and acceptance of new
products. If we cannot scale our business appropriately or
otherwise adapt to anticipated growth and new product
introduction, our business, financial condition and results of
operations will be adversely affected.


We have limited sales and marketing experience
with our Cryocare Surgical System and any failure to
significantly expand sales of this product will negatively
impact future revenue.

We currently handle a majority of the marketing,
distribution and sales of our Cryocare Surgical Systems. We have
limited experience marketing and selling our Cryocare Surgical
System in commercial quantities or on a nationwide basis. We
will face significant challenges and risks in training, managing
and retaining our sales and marketing teams, including managing
geographically dispersed efforts and adequately training our
people in the use and benefits of our Cryocare Surgical System.
We may not be able to hire significant additional personnel to
create increased demand for our Cryocare Surgical System. In
addition, we have distribution arrangements, some of which are
exclusive, for the sale of our Cryocare Surgical System both
domestically and internationally and are dependent upon the
sales and marketing efforts of our third-party distributors.
These distributors may not commit the necessary resources to
effectively market and sell our Cryocare Surgical System. If we
are unable to expand our sales and marketing capabilities, we
may not be able to effectively commercialize our Cryocare
Surgical System.

Negative economic conditions in the United
States may negatively impact our ability to achieve
profitability.

During 2001, the United States and other
international markets experienced a significant economic
downturn. In addition, the United States and other countries
suffered significant acts of hostility and terror. Such acts may
increase or prolong such negative economic conditions. The
economic downturn may impact our ability to achieve
profitability by negatively affecting growth in demand for our
products. There can be no certainty as to the degree or severity
of the duration of this downturn. We also cannot predict the
extent and timing of the impact of the economic downturn in the
United States and in other countries in which we conduct our
business.

If our relationship with U.S. Medical Devices
is disrupted, our revenues could be significantly
reduced.

We have an exclusive distribution agreement with
U.S. Medical Devices Ltd. For the fiscal year ended
December 31, 2001, 26% of our revenues were derived from
sales made to U.S. Medical Devices. As a result, our revenues
are dependent in large part on continued sales to this
distributor.

Our success will depend on our ability to
attract and retain key personnel.

In order to execute our business plan, we need to
attract, retain and motivate a significant number of highly
qualified managerial, technical and sales personnel. If we fail
to attract and retain skilled scientific and marketing
personnel, our research and development and sales and marketing
efforts will be hindered. Our future success depends to a
significant degree upon the continued services of key management
personnel, including Paul W. Mikus, our Chief Executive Officer.
None of these individuals is bound by an employment agreement or
covered by an insurance policy of which we are the beneficiary.
Competition for such personnel is intense, particularly in
southern California where we are located. If we do not attract
and retain qualified personnel we will not be able to achieve
our growth objectives.

If we fail to protect our intellectual
property rights, our competitors may take advantage of our ideas
and compete directly against us.

Our success will depend to a significant degree
on our ability to secure and protect intellectual proprietary
rights and enforce patent and trademark protections relating to
our technology. While we believe that the

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protection of patents and trademarks is important
to our business, we also rely on a combination of copyright,
trade secret, nondisclosure and confidentiality agreements,
know-how and continuing technological innovation to maintain our
competitive position. From time to time, litigation may be
advisable to protect our intellectual property position.
However, these legal means afford only limited protection and
may not adequately protect our rights or permit us to gain or
keep any competitive advantage. Any litigation in this regard
could be costly, and it is possible that we will not have
sufficient resources to fully pursue this litigation or to
protect our other intellectual property rights. It could result
in the rejection or invalidation of our existing and future
patents. Any adverse outcome in litigation relating to the
validity of our patents, or any failure to pursue litigation or
otherwise to protect our patent position, could materially harm
our business and financial condition. In addition,
confidentiality agreements with our employees, consultants,
customers, and key vendors may not prevent the unauthorized
disclosure or use of our technology. It is possible that these
agreements will be breached or that they will not be enforceable
in every instance, and that we will not have adequate remedies
for any such breach. Enforcement of these agreements may be
costly and time consuming. Furthermore, the laws of foreign
countries may not protect our intellectual property rights to
the same extent as the laws of the United States.


Because the medical device industry is
litigious, we may be sued for allegedly violating the
intellectual property rights of others.

The medical technology industry has in the past
been characterized by a substantial amount of litigation and
related administrative proceedings regarding patents and
intellectual property rights. In addition, major medical device
companies have used litigation against emerging growth companies
as a means of gaining a competitive advantage.

Should third parties file patent applications or
be issued patents claiming technology also claimed by us in
pending applications, we may be required to participate in
interference proceedings in the U.S. Patent and Trademark
Office to determine the relative priorities of our inventions
and the third parties inventions. We could also be
required to participate in interference proceedings involving
our issued patents and pending applications of another entity.
An adverse outcome in an interference proceeding could require
us to cease using the technology or to license rights from
prevailing third parties.

Third parties may claim we are using their
patented inventions and may go to court to stop us from engaging
in our normal operations and activities. These lawsuits are
expensive to defend and conduct and would also consume and
divert the time and attention of our management. A court may
decide that we are infringing a third partys patents and
may order us to cease the infringing activity. The court could
also order us to pay damages for the infringement. These damages
could be substantial and could harm our business, financial
condition and operating results.

If we are unable to obtain any necessary license
following an adverse determination in litigation or in
interference or other administrative proceedings, we would have
to redesign our products to avoid infringing a third
partys patent and could temporarily or permanently have to
discontinue manufacturing and selling some of our products. If
this were to occur, it would negatively impact future sales.

If we require future capital, we may not be
able to secure additional funding in order to expand our
operations and develop new products.

If we fail to reach profitability, undertake or
accelerate significant research and development projects for new
products or pursue corporate acquisitions, we may need
additional outside financing. We may raise these additional
funds by selling our equity securities, incurring additional
debt or entering into collaborative arrangements. Any additional
equity financing may be dilutive to stockholders, and debt
financing, if available, may involve interest expense and
restrictive covenants. Collaborative arrangements, if necessary
to raise additional funds, may require us to relinquish rights
to some of our technologies, products or marketing territories.
Our failure to raise capital when needed could harm our business.

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We have limited experience manufacturing our
products and if we are unable to meet customer demand, we may
not become profitable.

We use solely internal manufacturing capacity to
manufacture our products. We have limited experience in
producing our products in commercial quantities. We may
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. Our failure to overcome these manufacturing problems
could negatively impact our business and financial condition.

Our success will depend in part upon our ability
to manufacture our products in compliance with the FDAs
Quality System regulations and other regulatory requirements in
sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. We recently
moved our executive offices to a new facility in Irvine,
California, and plan to transfer our manufacturing activities to
this new facility in April 2002. This new facility has not been
inspected by the FDA or the California Department of Health
Services. We must obtain FDA approval prior to manufacturing
products in our new facility. Any failure or delay in obtaining
the necessary approvals may cause us to be unable to meet
customer demand for our products. If we fail to increase
production volumes in a timely or cost-effective manner or to
maintain compliance with the FDAs Quality System
regulations or other regulatory requirements, once obtained, our
business will suffer.

We are dependent upon a limited number of
third party suppliers to manufacture our products and the loss
of any of these suppliers could harm our business.

We depend upon a limited number of unaffiliated
third-party suppliers for components and materials used in the
manufacture of our products and, as such, our business would be
seriously harmed if we were unable to develop and maintain
relationships with suppliers that allow us to obtain sufficient
quantities and quality materials and components on acceptable
terms. If our principal suppliers cease to supply the materials
and components we need to manufacture our products, the
qualification of additional or replacement supplies could be a
lengthy process and there may not be adequate alternatives to
meet our needs, which will have a material adverse effect on our
business. We may not be able to obtain the necessary components
and materials used in our products in the future on a timely
basis, if at all.

If we fail to obtain or maintain necessary
regulatory clearances or approvals for products, or if approvals
are delayed or withdrawn, we will be unable to commercially
distribute and market our products or any product
modifications.

Government regulation has a significant impact on
our business. Government regulation in the United States and
other countries is a significant factor affecting the research
and development, manufacture and marketing of our products. In
the United States, the FDA has broad authority under the Federal
Food, Drug and Cosmetic 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
clearances and approvals is lengthy and expensive. We may not be
able to obtain or maintain necessary approvals for clinical
testing or for the manufacturing or marketing of our products.
Failure to comply with applicable regulatory approvals can,
among other things, result in fines, suspension or withdrawal of
regulatory approvals, product recalls, operating restrictions,
and criminal prosecution. In addition, governmental regulations
may be established which could prevent, delay, modify or rescind
regulatory approval of our products. Any of these actions by the
FDA, or change in FDA regulations, may adversely impact our
business and financial condition.

Regulatory approvals, if granted, may include
significant limitations on the indicated uses for which our
products may be marketed. In addition, to obtain such approvals,
the FDA and foreign regulatory authorities may impose numerous
other requirements on us. FDA enforcement policy 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 unforeseen problems
following initial marketing. We may not be able to obtain or
maintain regulatory approvals for our products on a timely
basis, or at all, and delays in receipt of or

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failure to receive such approvals, the loss of
previously obtained approvals, or failure to comply with
existing or future regulatory requirements would have a
significant negative effect on our financial condition.


Our products may be subject to product recalls
even after receiving FDA clearance or approval, which would harm
our reputation and our business.

The FDA and similar governmental authorities in
other countries have the authority to request and, in some
cases, require the recall of our products in the event of
material deficiencies or defects in design or manufacture. A
governmental mandated or voluntary recall by us could occur as a
result of component failures, manufacturing errors or design
defects. Any recall of product would divert managerial and
financial resources and harm our reputation with customers and
our business.

We could be negatively impacted by future
interpretation or implementation of federal and state fraud and
abuse laws, including anti-kickback laws.

Federal anti-kickback laws and regulations
prohibit the knowing and willful offer, payment, solicitation
and receipt of any form of remuneration in exchange for the
referral of an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which
payment may be made by Medicare, Medicaid and other federal
healthcare programs. Violations of federal anti-kickback laws
are punishable by monetary fines, civil and criminal penalties
and exclusion from participation in Medicare, Medicaid and other
federal healthcare programs. Several states have similar laws.
While we believe our operations are in material compliance with
the applicable Medicare and Medicaid fraud and abuse laws,
including the anti-kickback laws, there is a risk that the
federal government might investigate our arrangements with
physicians and other third parties. Such investigations,
regardless of their outcome, could damage our reputation and
adversely affect important business relationships that we have
with third parties, including physicians, hospitals and others.
If our arrangements with physicians and other third parties were
found to be illegal, we could be subject to civil and criminal
penalties, including fines and possible exclusion from
participation in governmental payor programs. Significant fines
could cause liquidity problems and adversely affect our results
of operations. Exclusion from participation from government
payor programs would eliminate a major source of revenue and
adversely affect our business.

We could be negatively impacted by future
interpretation or implementation of the federal Stark law and
other federal and state anti-referral laws.

We are also subject to federal and state statutes
and regulations banning payments for referrals of patients and
referrals by physicians to healthcare providers with whom the
physicians have a financial relationship. The federal Stark law
applies to Medicare and Medicaid and prohibits a physician from
referring patients for services to an entity with which the
physician has a financial relationship. A financial relationship
includes both investment interests in an entity and compensation
arrangements with an entity. Many states have similar laws,
often broader laws prohibiting referrals by any licensed
healthcare provider. These state laws generally apply to
services reimbursed by both governmental and private payors.
Violation of these federal and state laws may result in
prohibition of payment for services rendered, loss of licenses,
fines, criminal penalties and exclusion from governmental and
private payor programs, among other things. We have financial
relationships with physicians and physician-owned entities,
which in turn have financial relationships with hospitals and
other providers of designated health services. Although we
believe that our financial relationships with physicians and
physician-owned entities, as well as the relationships between
physician-owned entities that purchase or lease our products and
hospitals, are not in violation of applicable laws and
regulations, governmental authorities might take a contrary
position. If our financial relationships with physicians or
physician-owned entities or the relationships between those
entities and hospitals were found to be illegal, we and/or the
affected physicians and hospitals could be subject to civil and
criminal penalties, including fines, exclusion from
participation in government and private payor programs and
requirements to refund amounts previously received from
government and private payors. In addition, expansion of our
operations to new jurisdictions, or new interpretations of laws
in our existing jurisdictions, could require structural and
organizational modifications of our relationships with
physicians, physician-owned entities and others to

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comply with that jurisdictions laws. Such
structural and organizational modifications could result in
lower profitability and failure to achieve our growth objectives.


If we become subject to product liability
claims, we may be required to pay damages that exceed our
insurance coverage.

Our business exposes us to potential product
liability claims that are inherent in the testing, production,
marketing and sale of medical devices. While we believe that we
are reasonably insured against these risks, we may not be able
to obtain insurance in amounts or scope sufficient to provide us
with adequate coverage against all potential liabilities.
Currently, we maintain product liability insurance in amounts we
deem to be reasonable. A product liability claim in excess of
our insurance coverage would have to be paid out of cash
reserves and would harm our reputation in the industry and our
business.

We are faced with intense competition and
rapid technological and industry change, which may make it more
difficult for us to achieve significant market
penetration.

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. If our
competitors existing products or new products are more
effective than or considered superior to our products, the
commercial opportunity for our products will be reduced or
eliminated. We face intense competition from companies in the
cryosurgical marketplace as well as companies offering other
treatment options, including radical surgery, radiation therapy
and hormone therapy. If we are successful in penetrating the
market for treatment of prostate cancer with our cryosurgical
treatment, other medical device companies may be attracted to
the marketplace. Many of our potential competitors are
significantly larger than us and have greater financial,
technical, research, marketing, sales, distribution and other
resources than us. We believe there will be intense price
competition for products developed in our markets. Our
competitors may develop or market technologies and products,
including drug-based treatments, that are more effective or
commercially attractive than any that we are developing or
marketing. Our competitors may obtain regulatory approval, and
introduce and commercialize products before we do. These
developments could have a significant negative effect on our
financial condition. Even if we are able to compete
successfully, we may not be able to do so in a profitable manner.

Fluctuations in our future operating results
may negatively impact the market price of our Common
Stock.

Our operating results have fluctuated in the past
and can be expected to fluctuate from time to time in the
future. Some of the factors that may cause these fluctuations
include:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | the impact of acquisitions,                                                                                                                
|
| |  | market acceptance of our existing products, as
	well as products in development,                                                           
|
| |  | the timing of regulatory approvals,                                                                                                        
|
| |  | the timing of payments received and the
	recognition of such payments as revenue under collaborative
	arrangements and strategic alliances,
|
| |  | our ability to manufacture products efficiently,                                                                                           
|
| |  | the timing of our research and development
	expenditures, and                                                                              
|
| |  | the timing of customer orders.                                                                                                             

If our operating results are below the
expectations of securities analysts or investors, the market
price of our common stock may fall abruptly and significantly.

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If we acquire new and complementary
businesses, products or technologies instead of developing them
ourselves, we may be unable to complete these acquisitions or to
successfully integrate an acquired business or technology in a
cost-effective and non-disruptive manner.

As part of our strategy to expand our urology
product offerings and technologies, we may acquire one or more
businesses or lines of business. In June 1999, we consummated a
business combination with Advanced Medical Procedures, LLC, a
regional mobile cryosurgery service company, and in March 2002,
we closed the acquisition of Timm Medical Technologies, Inc. We
cannot assure you that we will be able to identify suitable
acquisition opportunities in the future. In addition, even if we
do identify acquisition opportunities, we may not be able to
effectively integrate our business with any other business we
may acquire or merge with or effectively utilize the business
acquired to develop and market our products. We are not
experienced in acquiring businesses or managing facilities or
operations in geographically distant areas. The failure to
successfully integrate an acquired company or acquired assets
into our operations may cause a drain on our financial and
managerial resources, and have a significant negative effect on
our business and financial results. In addition, our
profitability may suffer because of acquisition-related costs,
amortization costs, restructuring or impairment of acquired
goodwill and other intangible assets. There is also a risk of
loss of key employees, customers and vendors of recently
acquired businesses. Finally, in connection with any future
acquisitions, we may incur debt or issue equity securities as
part or all of the consideration for the acquired companys
assets or capital stock. We may be unable to obtain sufficient
additional acquisition financing on favorable terms or at all.
In addition, any equity issuances will be dilutive to our
existing stockholders.

Our stock price may be volatile and your
investment could decline in value.

Our stock price has in the past fluctuated and is
likely to continue to fluctuate significantly, making it
difficult to resell shares when an investor wants to at prices
they find attractive. The market prices for securities of
emerging companies have historically been highly volatile.
Future events concerning us or our competitors could cause such
volatility including:



| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in our operating
	results,                                                                                                                             
|
| |  | developments regarding government and third party
	reimbursement,                                                                                                                       
|
| |  | changes in government regulation,                                                                                                                                                       
|
| |  | government investigation of us or our products,                                                                                                                                         
|
| |  | changes in reimbursement rates or methods
	affecting our products,                                                                                                                      
|
| |  | developments concerning proprietary rights,                                                                                                                                             
|
| |  | litigation or public concern as to the safety of
	our products or our competitors products,                                                                                            
|
| |  | technological innovations or new commercial
	products by us or our competitors,                                                                                                         
|
| |  | investor perception of us and our industry, and                                                                                                                                         
|
| |  | general economic and market conditions including
	market uncertainty related to the September 11, 2001
	terrorist attacks and any potential military action resulting
	from the attacks.

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, which are often unrelated to the
operating performance of these companies. Any failure by us to
meet or exceed estimates of financial analysts is likely to
cause a decline in our common stock price.

Our common stock has a limited market and
trading history and there may not be an active, liquid trading
market for our common stock.

If we fail to satisfy the continued listing
requirements of the Nasdaq National Market or Nasdaq SmallCap
Market, our stock could become subject to the SECs penny
stock rules, making the stock difficult to sell. Our common
stock began trading on the Nasdaq SmallCap Market in February
1997 and in May 2000

31



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was listed and is currently traded on the Nasdaq
National Market. If we are unable to maintain the standards for
quotation on the Nasdaq National Market or the Nasdaq SmallCap
Market, the ability of our investors to resell their shares may
be limited. In addition, our securities may be subjected to
penny stock rules that impose additional sales practice and
market making requirements on broker-dealers who sell or make a
market in such securities. This could affect the ability or
willingness of broker-dealers to sell or make a market in our
securities and the ability of holders of our securities to sell
their securities in the secondary market.


Future sales of shares of our common stock may
negatively affect our stock price.

Future sales of our common stock, including
shares issued upon the exercise of outstanding options and
warrants or hedging or other derivative transactions with
respect to our stock, could have a significant negative effect
on the market price of our common stock. These sales also might
make it more difficult for us to sell equity securities or
equity-related securities in the future at a time and price that
we would deem appropriate.

We could be difficult to acquire due to
anti-takeover provisions in our charter, our stockholders rights
plan and Delaware law.

Provisions of our Certificate of Incorporation
and 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 us. In addition, in April
1999, our board of directors adopted a stockholder rights plan
in which preferred stock purchase rights were distributed as a
dividend. These provisions may make it more difficult for
stockholders to take corporate actions and may have the effect
of delaying or preventing a change in control. We are subject to
the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law. Subject to specified exceptions, this
section provides that a corporation may not engage in any
business combination with any interested stockholder during the
three-year period following the time that such stockholder
becomes an interested stockholder. This provision could have the
effect of delaying or preventing a change of control of us. The
foregoing factors could limit the price that investors or an
acquiror might be willing to pay in the future for shares of our
common stock.




Item 2.     Properties

In February 2002, we moved our executive offices
to a 28,000 square foot facility in Irvine, California. The
lease for this facility expires in 2007, with an option to
extend the lease for an additional five years. To facilitate the
relocation of our manufacturing activities, we extended the
lease for our prior 16,000 foot facility through May 2002. We
plan to transfer our manufacturing activities to the new
facility in April 2002.

Through our acquisition of Timm Medical, we
maintain offices and manufacturing and research facilities for
our erectile dysfunction and urinary incontinence products, in a
29,000 square foot facility in Eden Prairie, Minnesota. The
lease for this facility expires in April 2004.

We believe that our property and equipment are
generally well maintained, in good operating condition and are
sufficient to meet our current needs.




Item 3.     Legal
Proceedings

From time to time, we may be involved in
litigation that arises through the normal course of business. As
of the date of this Annual Report on Form 10-K, we are not
a party to any litigation we believe could reasonably be
expected to have a material adverse effect on our business or
results of operations.




Item 4.     Submission
of Matters to a Vote of Security Holders

We did not submit any matters to a vote of
security holders during the quarter ended December 31, 2001.

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##### Table of Contents






PART II




Item 5.     Market
for Our Common Equity and Related Stockholder
Matters

Market Information

Our common stock is listed on the Nasdaq National
Market under the symbol ENDO. The following table
sets forth for the periods indicated, the high and low sales
prices for our common stock as quoted on the Nasdaq SmallCap
Market from January 1, 1999 to May 22, 2000 and the
Nasdaq National Market from May 23, 2000 to
December 31, 2001. Such quotations represent inter-dealer
prices without retail mark up, mark down or commission and may
not necessarily represent actual transactions.

|                              |                |      |   |       |  |  |   |       | 
|----------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                              |                | High |   | Low  
|                              |                |      |   |      
|Year Ended December 31, 2001: |                |      |   |       |  |  |   |      
|                              | First Quarter  |      | $ | 14.44 |  |  | $ | 6.75  | 
|                              | Second Quarter |      |   | 16.26 |  |  |   | 5.00  | 
|                              | Third Quarter  |      |   | 18.46 |  |  |   | 13.41 | 
|                              | Fourth Quarter |      |   | 23.94 |  |  |   | 15.39 | 
|Year Ended December 31, 2000: |                |      |   |       |  |  |   |      
|                              | First Quarter  |      | $ | 22.56 |  |  | $ | 8.38  | 
|                              | Second Quarter |      |   | 20.63 |  |  |   | 11.75 | 
|                              | Third Quarter  |      |   | 23.00 |  |  |   | 15.75 | 
|                              | Fourth Quarter |      |   | 19.88 |  |  |   | 11.50 | 

Holders

As of March 15, 2002, there were 307 holders
of record of our common stock.

Dividends

We have never paid any cash dividends on our
capital stock. We anticipate that we will retain any future
earnings to support operations and to finance the growth and
development of our business. Therefore, we do not expect to pay
cash dividends in the foreseeable future. Any determination to
pay dividends in the future will be at the discretion of the
board of directors and will depend on their existing conditions,
including our financial condition, contractual restrictions,
capital requirements and business prospects.

Recent Sales of Unregistered
Securities

On June 30, 2001, we issued 213,010 shares
of our common stock with a fair market value of $2,837,293 as
consideration for a membership interest in the form of
Class A Units of U.S. Therapies, LLC equal to approximately
9% of the total issued and outstanding Class A Units of
U.S. Therapies and approximately 5% of the Class A Units on
a fully-diluted basis. This transaction was a private offering
exempt from registration with the Securities and Exchange
Commission under Section 4(2) of, and Regulation D,
promulgated under the Securities Act of 1933, as amended.

33



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##### Table of Contents






Item 6.     Selected
Consolidated Financial Data

The selected financial data set forth below are
derived from our consolidated financial statements. The
statement of operations data for the years ended
December 31, 1997, 1998, 1999, 2000 and 2001, and the
balance sheet data as of December 31, 1997, 1998, 1999,
2000 and 2001 are derived from our audited consolidated
financial statements. The selected financial data set forth
below should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operation and our consolidated financial statements and
related notes included elsewhere in this Annual Report on
Form 10-K. Our historical results are not necessarily
indicative of operating results to be expected in the future.

|                                     |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |        |        | 
|------------------------------------ | ----------------------------------- | ------------------------------------- | --------- | ----- | ----- | ---- | ---------- | ----- | ----- | ---- | ---------- | ----- | ------ | - | ---------- | ------ | ------ | - | ---------- | ------ | ------ | 
|                                     |                                     |                                      
|                                     |                                     | Years Ended December 31,             
|                                     |                                     |                                      
|                                     |                                     | 1997                                  |           | 1998  |       | 1999 |            | 2000  |       | 2001
|                                     |                                     |                                       |           |       |       |      |            |       |       |     
|                                     |                                     |                                      
|                                     |                                     | (In thousands, except per share data)
|Statement of Operations Data:        |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |       
|Revenues                             |                                     | $                                     | 2,348     |       |       | $    | 2,495      |       |       | $    | 3,462      |       |        | $ | 6,671      |        |        | $ | 15,721     |       
|                                     |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |       
|Costs and expenses:                  |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |       
|                                     | Cost of revenues                    |                                       |           | 1,422 |       |      |            | 1,183 |       |      |            | 1,684 |        |   |            | 3,012  |        |   |            | 5,423  |       
|                                     | Research and development            |                                       |           | 1,596 |       |      |            | 1,920 |       |      |            | 2,574 |        |   |            | 3,204  |        |   |            | 3,538  |       
|                                     | Selling, general and administrative |                                       |           | 3,553 |       |      |            | 4,653 |       |      |            | 7,992 |        |   |            | 12,230 |        |   |            | 13,171 |       
|                                     |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |       
|                                     |                                     | Total costs and expenses              |           |       | 6,571 |      |            |       | 7,756 |      |            |       | 12,250 |   |            |        | 18,446 |   |            |        | 22,132 | 
|                                     |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |       
|Loss from operations                 |                                     |                                       | (4,223    | )     |       |      | (5,261     | )     |       |      | (8,788     | )     |        |   | (11,775    | )      |        |   | (6,411     | )     
|Interest income (expense), net       |                                     |                                       | 201       |       |       |      | 336        |       |       |      | (476       | )     |        |   | (624       | )      |        |   | 488        |       
|                                     |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |       
|Net loss                             |                                     | $                                     | (4,022    | )     |       | $    | (4,925     | )     |       | $    | (9,264     | )     |        | $ | (12,399    | )      |        | $ | (5,923     | )     
|                                     |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |       
|Net loss per share                   |                                     | $                                     | (.48      | )     |       | $    | (.49       | )     |       | $    | (.86       | )     |        | $ | (.97       | )      |        | $ | (.35       | )     
|                                     |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |       
|Weighted average shares outstanding  |                                     |                                       | 8,307,000 |       |       |      | 10,062,000 |       |       |      | 10,838,000 |       |        |   | 12,757,000 |        |        |   | 16,741,000 |       
|                                     |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |       
|Balance Sheet Data:                  |                                     |                                       |           |       |       |      |            |       |       |      |            |       |        |   |            |        |        |   |            |       
|Cash and cash equivalents            |                                     | $                                     | 3,896     |       |       | $    | 6,286      |       |       | $    | 7,365      |       |        | $ | 22,016     |        |        | $ | 83,239     |       
|Working capital                      |                                     |                                       | 3,718     |       |       |      | 5,544      |       |       |      | 6,445      |       |        |   | 19,452     |        |        |   | 88,761     |       
|Total assets                         |                                     |                                       | 5,691     |       |       |      | 7,992      |       |       |      | 12,996     |       |        |   | 28,845     |        |        |   | 98,034     |       
|Long-term obligations(1)             |                                     |                                       | 44        |       |       |      | 201        |       |       |      | 10,153     |       |        |   | 7,574      |        |        |   |           |       
|Total stockholders equity (deficit) |                                     |                                       | 3,960     |       |       |      | 6,011      |       |       |      | (480       | )     |        |   | 14,869     |        |        |   | 94,613     |       



---



|    |                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------
|(1) | Long-term obligations include convertible
	debentures, a note payable and other liabilities, net of current
	balances.

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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
	of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with our consolidated financial statements and
related notes contained elsewhere in this Annual Report on
Form 10-K. This discussion may contain forward-looking
statements based upon current expectations that involve risks
and uncertainties. Our actual results and the timing of selected
events could differ materially from those anticipated in these
forward-looking statements as a result of selected factors,
including those set forth under Risk Related to Our
Business set forth in Item 1 of this Annual Report on
Form 10-K. All forward-looking statements included in this
Annual Report on Form 10-K are based on information
available to us as of the date hereof, and we assume no
obligation to update any such forward-looking
statements.

Overview

We are a medical device company focused on
developing, manufacturing and selling urological healthcare
products with the potential to dramatically improve mens
health and quality of life. Our primary focus is on the
diagnosis, management and treatment of the two most common
diseases of the prostate, prostate cancer and benign prostate
hyperplasia, or BPH. Our FDA-cleared Cryocare Surgical System
occupies a leading position in the market for the cryosurgical
treatment of prostate cancer. We are currently developing a
urologic stent, the Horizon Prostatic Stent, for the treatment
of BPH. In February 2002, we significantly expanded our
urological product offerings by acquiring Timm Medical
Technologies, Inc., or Timm Medical. Through this acquisition,
we now own or have marketing rights for an additional product
used in the treatment of BPH, five products used in the
diagnosis and treatment of erectile dysfunction, six products
used in the diagnosis and management of urinary incontinence and
one product used in the diagnosis of bladder cancer. This
acquisition also increased our sales and marketing organization
from 26 to approximately 80 people, including 55 field sales
representatives. Our strategy is to increase sales of our
current products through targeted sales and marketing efforts,
to continue to develop and obtain regulatory approval for our
Horizon Prostatic Stent, and to develop and acquire additional
products in urology that leverage our existing sales and
marketing organization.

Our Cryocare Surgical System is a minimally
invasive cryosurgical system for the targeted treatment of
prostate cancer. We commenced commercial sales of our FDA
cleared Cryocare Surgical System in the United States in July
1999. We obtained the CE Mark for the Cryocare Surgical System,
and have registered the Cryocare Surgical System for
distribution in Canada, Australia and New Zealand. We sell the
Cryocare Surgical System to urology groups and urologists
through our direct sales force and through distribution
arrangements.

We were formed in 1990 as a research and
development division of Medstone International, Inc. (Nasdaq:
MEDS), a manufacturer of shockwave lythotripsy equipment for the
treatment of kidney stones. On January 1, 1996, we became
an independent, publicly-owned corporation upon Medstones
distribution of our stock to their existing stockholders. We
have incurred significant operating losses and negative cash
flows from operations in each full fiscal year since
January 1, 1996. We incurred net losses of approximately
$9.3 million in 1999, $12.4 million in 2000 and
$5.9 million in 2001. As of December 31, 2001, we had
an accumulated deficit of $38.1 million. We expect to incur
additional losses as we expand our sales and marketing efforts
and continue to develop new products.

Critical Accounting Policies

We believe the following critical accounting
policies affect our more significant judgment and estimates used
in the preparation of our consolidated financial statements.

Revenue Recognition.During the fiscal year ended December 31, 2001, we
generated revenues primarily from sales of our Cryocare Surgical
System units and from the recurring sales of our disposable
cryoprobes. We recognize revenues, including revenues from sales
to distributors, upon shipment for sales of system units and
disposable cryoprobes, provided acceptance is assured and
collectibility is probable. In the past, we placed our Cryocare
Surgical System units with urology groups on a per-use basis to
expand our installed base, and thus increase the market for our
disposable cryoprobes. Under this placement program, we receive
a fee relating to each use of the Cryocare Surgical System unit,
which we recognize as revenue upon

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##### Table of Contents



completion of the procedure. The cost of the
Cryocare Surgical System unit is depreciated into cost of
revenues over an estimated useful life of three years. Prior to
Medicares initiation of national reimbursement coverage
for our Cryocare Surgical System in July 1999, we focused on
generating revenues from a mobile cryosurgery business in which
we provided cryosurgical equipment for the treatment of prostate
and liver cancer on a procedural basis. Revenues from mobile
cryosurgical procedures, as a percentage of total revenues, have
declined over the fiscal year ended December 31, 2001 and
are expected to continue to decline due to our increased
strategic focus on system, probe and procedural sales. The
initial product mix of Cryocare Surgical System units when
compared to disposable cryoprobes will negatively impact our
gross margins until we have established a sufficiently large
installed base of users. In the event we establish an installed
base of Cryocare Surgical System units, we expect to generate an
increasing portion of our revenues through recurring sales of
our disposable cryoprobes.


Investments.We have
both marketable and non-marketable equity investments. We
classify our marketable equity investments as available-for-sale
securities with net unrealized gains or loss recorded as a
component of accumulated other comprehensive loss. The
non-marketable equity investments represent investments in other
medical technologies or strategic alliances and are recorded at
cost and are evaluated periodically for impairment. Marketable
equity investments are evaluated for impairment based on their
market price, while non-marketable equity investments are
evaluated for impairment through a review of the financial
position and operating results of the investee. If it is
determined that a decline of any investment is other than
temporary, then the investment basis would be written down to
fair value and the write-down would be included in operations as
a loss.

Sales Returns and Warranty
Accruals.We generally do not permit
returns except for defective products identified within one
year. Accordingly, we establish a liability for warranty repairs
based on historical analysis of the cost for the repairs.
However, our future returns on defective products and related
warranty liability could differ significantly from historical
patterns, which would adversely affect our operating results.

Allowance for Doubtful
Accounts.Accounts receivable are
presented net of our allowance for doubtful accounts. The
allowance for doubtful accounts is determined through a specific
identification process whereby management assesses the
collectibility of receivables based in part on the financial
condition of the client.

Use of Estimates.The preparation of our financial
statements in conformity with accounting principles generally
accepted in the United States of America requires our management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Our actual results could differ
materially from those estimates as a result of selected factors,
including those set forth under Risk Related to Our
Business set forth in Item 1 of this Annual Report on
Form 10-K.

Inventories:Inventories are stated at the lower of
cost or market, cost being determined on the first-in, first-out
method. Reserves for slow moving and obsolete inventories are
provided based on historical experience and product demand. We
have only recently begun the commercialization of our products
and have limited experience in assessing obsolescence. We
evaluate the adequacy of these reserves periodically based on
forecasted sales and market trend.

Costs and Expenses

Cost of revenues consists primarily of:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | costs relating to the manufacture of our products;                         
|
| |  | depreciation of Cryocare Surgical System units
	placed with urology groups;
|
| |  | costs relating to our internal operations; and                             
|
| |  | royalties on product sales.                                                

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##### Table of Contents



Research and development expenses include
expenses associated with the design, development, testing and
enhancement of our products. These expenses consist primarily of:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | salaries and related personnel expenses;                                                             
|
| |  | fees paid to outside service providers;                                                              
|
| |  | expenditures for clinical trials and obtaining
	and maintaining regulatory approval for our products;
|
| |  | expenditures for purchases of laboratory
	supplies; and                                              
|
| |  | utilities and other facility expenses related to
	product development.                               

We expense research and development expenses when
incurred. Our research and development efforts are periodically
subject to significant non-recurring expenses and fees that can
cause significant variability in our quarterly research and
development expenses.

Selling, general and administrative expenses
primarily consist of:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | salaries, commissions and related expenses for
	personnel engaged in sales, marketing, customer service and
	administrative functions;
|
| |  | expenses associated with advertising, trade
	shows, promotional and other marketing activities;                                       
|
| |  | legal and regulatory expenses; and                                                                                                    
|
| |  | general corporate expenses.                                                                                                           

Results of Operations

The following table sets forth, for the periods
indicated, financial data as a percentage of revenues:

|                                    |  |                          |      |      |  |      |      |    |  |  |     |   
|----------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | -- |  |  | --- | --
|                                    |  |                         
|                                    |  | Years Ended December 31,
|                                    |  |                         
|                                    |  | 1999                     |      | 2000 |  | 2001
|                                    |  |                          |      |      |  |     
|Revenues                            |  |                          | 100  | %    |  |      | 100  | %  |  |  | 100 | % 
|Cost of revenues                    |  |                          | 49   |      |  |      | 45   |    |  |  | 34  |   
|                                    |  |                          |      |      |  |      |      |    |  |  |     |   
|Gross margin                        |  |                          | 51   |      |  |      | 55   |    |  |  | 66  |   
|                                    |  |                          |      |      |  |      |      |    |  |  |     |   
|Operating expenses:                 |  |                          |      |      |  |      |      |    |  |  |     |   
|Research and development            |  |                          | 74   |      |  |      | 48   |    |  |  | 22  |   
|Selling, general and administrative |  |                          | 231  |      |  |      | 183  |    |  |  | 84  |   
|                                    |  |                          |      |      |  |      |      |    |  |  |     |   
|Total operating expenses            |  |                          | 305  |      |  |      | 231  |    |  |  | 106 |   
|                                    |  |                          |      |      |  |      |      |    |  |  |     |   
|Loss from operations                |  |                          | (254 | )    |  |      | (177 | )  |  |  | (41 | ) 
|Interest income (expense), net      |  |                          | (14  | )    |  |      | (9   | )  |  |  | 3   |   
|                                    |  |                          |      |      |  |      |      |    |  |  |     |   
|Net loss                            |  |                          | (268 | )%   |  |      | (186 | )% |  |  | (38 | )%
|                                    |  |                          |      |      |  |      |      |    |  |  |     |   

Year Ended
December 31, 2001 Compared to Year Ended December 31,
2000

Revenues.Revenues
for the year ended December 31, 2001 increased 136% to
$15,721,000 compared to $6,671,000 in 2000. The increase in
revenues for the year ended December 31, 2001 was
attributable to an increase in sales of our Cryocare Surgical
System units and disposable cryoprobes. For the year ended
December 31, 2001, Cryocare Surgical System sales were
$8,948,000 and sales of disposable cryoprobes, procedures, and
other equipment were $6,773,000. For the year ended
December 31, 2000 Cryocare Surgical System sales were
$5,830,000 and sales of disposable cryoprobes, procedures, and
other equipment were $841,000.

37



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##### Table of Contents



Cost of Revenues.Cost of revenues for the year ended December 31, 2001
increased 80% to $5,423,000 from $3,012,000 in 2000. The
increase in cost of revenues for the year ended
December 31, 2001 resulted primarily from an increase in
the cost of manufacturing an increased number of Cryocare
Surgical System units and disposable cryoprobes sold in 2001,
partially offset by a reduction in the per unit production costs
of our products due to increased manufacturing efficiencies.

Gross Margins.Gross
margins on revenues increased to 66% for the year ended
December 31, 2001 compared to 55% in 2000. The increase in
gross margins on revenues during the year ended
December 31, 2001 is due primarily to our shift to sales of
our Cryocare Surgical System units from our prior placement
program and reduction in product costs due primarily to
increased manufacturing efficiencies.

Research and Development
Expenses.Research and development
expenses for the year ended December 31, 2001 increased 10%
to $3,538,000 compared to $3,204,000 in 2000. The increase was
primarily attributable to hiring additional personnel, increased
spending on product development efforts and clinical costs
associated with our Horizon Prostatic Stent. As a percentage of
sales, research and development expenses decreased from 43% in
the year 2000 to 23% in 2001 primarily due to the increase in
sales in 2001 primarily due to the increase in sales in 2001.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses for the year ended December 31,
2001 increased 8% to $13,171,000 compared to $12,230,000 in
2000. This increase reflects increased sales and marketing costs
associated with the commercialization of our Cryocare Surgical
System and an increase in our direct sales and marketing
personnel. As a percentage of sales, selling, general and
administrative expenses decreased from 183% in the year 2000 to
84% in 2001 primarily related to the increase in sales in 2001
primarily related to the increase in sales in 2001.

Interest Income (Expense),
Net.Interest income (expense), net
for the year ended December 31, 2001 was $488,000 compared
to ($624,000) in 2000. The change was due to the reduction of
interest expense associated with the reduction of debt in 2001
and increased cash balances following our secondary public
offering.

Net Loss.Net loss
for the year ended December 31, 2001 was $5,923,000 or
$0.35 per share on 16,741,000 weighted average shares
outstanding, compared to a net loss of $12,399,000, or $0.97 per
share on 12,757,000 weighted average shares outstanding for the
same period in 2000. The decrease in net loss resulted from
higher revenues, improved margins and increased interest income
partially offset by higher selling, general and administrative
expenses and increased research and development expenses.

Year Ended
December 31, 2000 Compared to Year Ended December 31,
1999

Revenues.Revenues
for the year ended December 31, 2000 increased 93% to
$6,671,000 compared to $3,462,000 in 1999. Revenues for the year
ended December 31, 2000 consisted of $5,968,000 in revenues
from product sales and $703,000 in revenues from mobile
cryosurgical procedures. Revenues for the year ended
December 31, 1999 consisted of $2,329,000 in revenues from
product sales and $1,133,000 in revenues from mobile
cryosurgical procedures. The increase in revenues for the year
ended December 31, 2000 was attributable primarily to a
$3,639,000 increase in sales of our products during 2000
partially offset by a $430,000 decrease in revenue from mobile
cryosurgical procedures during 2000.

Cost of Revenues.Cost of revenues for the year ended December 31, 2000
increased 79% to $3,012,000 compared to $1,684,000 in 1999. Cost
of revenues for the year ended December 31, 2000 consisted
of $2,607,000 in expenses related to product sales and $405,000
in expenses related to mobile cryosurgical procedures. Cost of
revenues for the year ended December 31, 1999 consisted of
$1,255,000 in expenses related to product sales and $429,000 in
expenses related to mobile cryosurgical procedures. The increase
in costs of revenues for the year ended December 31, 2000
resulted primarily from an increase in the cost of manufacturing
an increased number of Cryocare Surgical Systems units and
disposable cryoprobes sold during 2000 partially offset by a
decrease in costs related to fewer mobile cryosurgical
procedures performed.

Gross Margins.Gross
margins on revenues increased to 55% for the year ended
December 31, 2000 compared to 51% in 1999. Gross margins on
product sales increased to 56% for the year ended
December 31, 2000 compared to 46% in 1999. Gross margin on
our mobile cryosurgical procedures decreased to 42% for the

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year ended December 31, 2000 compared to 62%
in 1999. The increase in gross margins on revenues during the
year ended December 31, 2000 is due primarily to an
increase in sales of our higher margin disposable cryoprobes,
our shift to sales of our Cryocare Surgical System units from
our prior placement program, a reduction in product costs due
primarily to increased manufacturing efficiencies, partially
offset by a decrease in gross margins on mobile cryosurgical
procedures.


Research and Development
Expenses.Research and development
expenses for the year ended December 31, 2000 increased 24%
to $3,204,000 compared to $2,574,000 in 1999. The increase was
primarily attributable to hiring additional personnel, improving
our infrastructure, increased spending on product development
efforts and clinical costs associated with our Horizon Prostatic
Stent.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses for the year ended December 31,
2000 increased 53% to $12,230,000 compared to $7,992,000 in
1999. This increase reflects increased sales and marketing
costs, including increased sales commissions, associated with
the commercialization of our Cryocare Surgical System and an
increase in our direct sales and marketing personnel between
periods.

Interest Income (Expense),
Net.Interest income (expense), net
for the year ended December 31, 2000 was ($624,000)
compared to ($476,000) in 1999. The change was due to interest
expense associated with the issuance of debt in the middle of
1999 and 2000, including corresponding amortization of deferred
financing costs partially offset by interest income.

Net Loss.Net loss
for the year ended December 31, 2000 was $12,399,000 or
$0.97 per share on 12,757,000 weighted average shares
outstanding, compared to a net loss of $9,264,000, or $0.86 per
share on 10,838,000 weighted average shares outstanding for the
same period in 1999. The increase in net loss resulted from
higher research and development costs, higher selling, general
and administrative expenses and increased interest expense,
partially offset by increased revenues and lower cost of
revenues as a percentage of revenues.

Liquidity and Capital Resources

Since our inception we have funded our operations
primarily through private placements of equity securities,
private placements of convertible debentures that were
subsequently converted into equity securities, loans that were
subsequently converted into equity securities, the use of
short-term and long-term debt, a public offering of equity
securities and sales to customers. At December 31, 2001, we
had cash and cash equivalents of $83,239,000 compared to
$22,016,000 at December 31, 2000.

In June and July 1999, we received a total of
$8 million from the sale to institutional investors of 7%
convertible debentures due in three years from the date of
issuance. During the second quarter of 2000, these debentures
were converted into 1,475,610 shares of common stock pursuant to
the terms of the debentures. On May 5, 2000, we received a
total of $8 million from the sale of additional 7%
convertible debentures, of which $0.5 million of these
debentures were converted into 74,074 shares of common stock
during the fourth quarter of 2000, $1 million of these
debentures were converted into 148,148 shares of common stock
during the first quarter of 2001, $4.2 million of these
debentures were converted into 622,222 shares of common stock
during the second quarter of 2001, and the final
$2.3 million of these debentures were converted into
340,741 shares of common stock in July 2001. Of the debentures
converted in 2000 and 2001, an additional 38,861 and 17,622
shares, respectively, were issued as interest representing a
rate of 7%.

On November 21, 2001, we closed a public
offering of 4,000,000 shares of our common stock at a price of
$17.00 per share. On December 4, 2001, we sold an
additional 600,000 shares of our common stock at the public
offering price of $17.00 per share upon exercise of the
over-allotment granted to the underwriters in the public
offering. We raised $78.2 million in proceeds through the
public offering before deducting commissions and offering
expenses of $5.6 million.

Cash Used in
Operations.Net cash used in operating
activities was approximately $8.4 million,
$10.7 million and $11.3 million for the years ended
December 31, 1999, 2000 and 2001, respectively. For these
periods, net cash used in operating activities resulted
primarily from net losses and increases in accounts receivable
and inventory and a decrease in trade payables. In conjunction
with the increased sales of our

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Cryocare Surgical System and related disposable
cryoprobes, inventory increased to $2,416,000 at
December 31, 2001 compared to $1,544,000 at
December 31, 2000 and net accounts receivable increased to
$5,734,000 at December 31, 2001 compared to $2,114,000 at
December 31, 2000. Our current liabilities decreased to
$3,421,000 at December 31, 2001 compared to $6,401,025 at
December 31, 2000.


Investing
Activities.Net cash used in investing
activities was approximately $0.64 million,
$0.48 million and $1.11 million for the years ended
December 31, 1999, 2000 and 2001, respectively. The net
cash used in investing activities primarily included additions
to property and equipment as well as cost method investments in
certain investees.

Cash Provided by Financing
Activities.Net cash provided by
financing activities was approximately $10.1 million,
$25.9 million and $73.6 million for the years ended
December 31, 1999, 2000 and 2001, respectively. The net
cash provided by financing activities was primarily attributable
to the net proceeds from private placements of equity
securities, a public offering, exercise of options and warrants
and repayments on our credit facility and other debt.

Working Capital.Our
working capital increased to $88.8 million at
December 31, 2001 from $19.5 million at
December 31, 2000. The increase in working capital was due
to our secondary offering offset by our use of cash in
operations, including higher accounts receivable and increased
inventory, partially offset by a decrease in current liabilities.

In October 1999, we entered into a strategic
alliance with Sanarus Medical, Inc., a privately held medical
device company. The terms of the related agreements included a
5% equity investment by our company in Sanarus totaling
$300,000. We also received a warrant to acquire at that time
approximately 79% of Sanarus common stock at that time in
consideration for entering into a manufacturing, supply and
license agreement. In June 2001, we provided a bridge loan to
Sanarus in the amount of $250,000. This amount was subsequently
repaid in July 2001 upon Sanarus receipt of additional
equity financing, which financing along with other financings by
Sanarus reduced our current ownership percentage to 2% and our
potential maximum ownership percentage to approximately 22% on a
fully-diluted basis. The investment is included in
Investments, intangible and other assets, net in our
consolidated balance sheets as of December 31, 2000 and
2001, and is reflected at cost as we do not have significant
influence over the operations of Sanarus.

In June 2001, we entered into a five year
distribution agreement with Qualigen, Inc. pursuant to which we
will distribute Qualigens 15-minute prostate cancer
screening test as an integral part of our developmental
diagnostic workstation. We have an exclusive distribution right
in the United States for one-year, which exclusivity period may
be extended for additional one-year periods over the term of the
agreement if we satisfy minimum purchase commitments.

On June 30, 2001, we issued 213,010 shares
of our common stock valued at its fair market value of
$2,837,293 in consideration for a membership interest, in the
form of Class A units of U.S. Therapies, LLC, equal to
approximately 5% of the total issued and outstanding
Class A units of U.S. Therapies on a fully-diluted basis.
We simultaneously entered into a distribution agreement with
U.S. Medical Devices Ltd., a subsidiary of U.S. Therapies, under
which U.S. Medical Devices received exclusive sales rights to
our Cryocare Surgical System and related disposable products in
16 states and the exclusive right to sell to HealthTronics
Surgical Services, Inc. (Nasdaq: HTRN) and its affiliates. The
investment in U.S. Therapies is included in Investments,
intangible and other assets, net in our balance sheet as
of December 31, 2001 using the cost method of accounting as
we do not have significant influence over the operations of U.S.
Therapies. Sales to U.S. Medical Devices accounted for
approximately 26% and 13% of our revenues for the 12-month and
three-month periods ended December 31, 2001, respectively.

In February 2002, we completed the acquisition of
Timm Medical Technologies, Inc. for a purchase price of
approximately $11 million in cash and 1,620,530 shares of
our common stock. Pursuant to the acquisition agreement, we will
register the shares of Common Stock issued in the acquisition.

In September 2000, we invested $250,000,
representing approximately 833,000 shares of common stock, in
Medical Resources Management, Inc., or MRM. In July 2001, these
shares were converted into approximately 308,000 shares of
common stock of Emergent Group, Inc., upon its acquisition of
MRM as a

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wholly owned subsidiary. We monitor our
investments for other than temporary declines in value which
would be written down and included in earnings as a loss. As of
December 31, 2001, the fair value of the MRM investment is
below cost and we will continue to monitor this investment and
should the investment show no signs of market recovery, we will
record an impairment charge in a future period. The investment
in MRM is included in Investments, intangible and other
assets, net in our balance sheet as of December 31,
2001 using the cost method of accounting as we own less than 1%
of the outstanding shares of Emergent Group, Inc. and we do not
have significant influence over the operations of Emergent
Group, Inc..


We expect to have positive cash flows from
operations in the year 2002. However, we also expect increased
sales and marketing expenses related to the promotion of our
Cryocare Surgical System and the urological products we acquired
or obtained a right to market through our acquisition of Timm
Medical, increased expenses related to developing and obtaining
regulatory approval for our Horizon Prostatic Stent, increased
research and development expenses, as well as expenses for
additional personnel and product enhancement efforts. Our future
capital requirements will depend on a number of factors,
including market acceptance of our Cryocare Surgical System, our
ability to successfully integrate the operations of Timm Medical
into our business, including its sales and marketing personnel,
market acceptance of the products we acquired from Timm Medical,
the resources we devote to developing and supporting our
products, continued progress of our research and development of
potential products, the need to acquire licenses to technology
and potential future merger and acquisition activity. We believe
that our current cash balances, together with the revenue to be
derived from sales of our products, will be sufficient to fund
our operations for at least the next 12 months. If we elect
to undertake or accelerate significant research and development
projects for new products or pursue corporate acquisitions, we
may require additional outside financing sooner than
anticipated. We expect that to meet our long-term needs we may
need to raise substantial additional funds through the sale of
our equity securities, the incurrence of indebtedness or through
funds derived through entering into collaborative agreements
with third parties. We also expect to replace our credit line
which matured in July 2001 with no outstanding balance.
Additional equity or debt financing may not be available on
acceptable terms, or at all. If we are unable to obtain
additional capital, we may be required to reduce our selling and
marketing activities, reduce the scope of or eliminate our
research and development programs, or relinquish rights to
technologies or products that we might otherwise seek to develop
or commercialize. In the event that we do raise additional
equity financing, our stockholders will be further diluted. In
the event that we incur additional indebtedness to fund our
operations, we may have to grant the lender a security interest
in our assets.

Inflation

The impact of inflation on our business has not
been material to date.

Accounting Pronouncements Not Yet
Adopted

In July 2001, the FASB issued
SFAS No. 141, Business Combinations and
No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after
June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001.
SFAS No. 141 also specifies criteria for intangible
assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 will
require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions
of SFAS No. 142. SFAS No. 142 will also
require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of.

We are required to adopt the provisions of
SFAS No. 141 immediately, except with regard to
business combinations initiated prior to July 1, 2001, and
SFAS No. 142 effective January 1, 2002.
Furthermore, any goodwill and any intangible asset determined to
have an indefinite useful life that are acquired in a purchase

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business combination completed after
June 30, 2001 will not be amortized, but will continue to
be evaluated for impairment in accordance with the appropriate
pre-SFAS No. 142 accounting literature. Goodwill and
intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to
the adoption of SFAS No. 142. The adaptation of
SFAS Nos. 141 and 142 is not expected to have a
material effect on our financial position or results of
operations. The acquisition of Timm Medical in February 2002
will be accounted for in accordance with SFAS Nos. 141
and 142.


In June 2001, the FASB issued
SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement requires an enterprise to
record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets.
Since the requirement is to recognize the obligation when
incurred, approaches that have been used in the past to accrue
the asset retirement obligation over the life of the asset are
no longer acceptable. SFAS No. 143 also requires the
enterprise to record the contra to the initial obligation as an
increase to the carrying amount of the related long-lived asset,
i.e., the associated asset retirement costs, and to depreciate
that cost over the life of the asset. The liability is increased
at the end of each period to reflect the passage of time, i.e.,
accretion expense, and changes in the estimated future cash
flows underlying the initial fair value measurement. We will
adopt SFAS No. 143 beginning January 1, 2003.
This Statement is not expected to have a material impact on our
financial reporting and related disclosures.

In August 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144
supersedes Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of
Operations  Reporting the effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. SFAS No. 144
retains the requirement in Opinion No. 30 to report
separately discontinued operations and extends that reporting to
a component of an entity that either has been disposed of or is
classified as held for sale. We are required and plan to adopt
the provisions of SFAS No. 144 in the quarter ending
March 31, 2002. The implementation of
SFAS No. 144 is not expected to have a material effect
on our financial statements.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

The primary objective of our investment
activities is to preserve principal while at the same time
maximizing the income we receive from our invested cash without
significantly increasing risk of loss. Our financial instruments
include cash, cash equivalents, notes receivable, investments,
accounts payable and accrued liabilities. At December 31,
2001, the carrying values of our cash, cash equivalents,
accounts receivable, accounts payable and accrued liabilities
approximated their fair values. Although there is not a readily
available market value for our cost method investments, in
general we do not believe the fair value of these investments
would significantly differ from cost. However, at
December 31, 2001, the fair value of the Companys
investment in Medical Resources Management, Inc. is below its
cost basis of $250,000 and the Company will continue to monitor
this investment. Should the investment show no signs of market
recovery, the Company would record an impairment charge in a
future period.

Our policy is not to enter into derivative
financial instruments. In addition, we do not enter into any
futures or forward contracts and therefore, we do not have
significant market risk exposure with respect to commodity
prices.

Although we transact our business in
U.S. dollars, future fluctuations in the value of the
U.S. dollar may affect the price competitiveness of our
products. However, we do not believe that we currently have any
significant direct foreign currency exchange rate risk and have
not hedged exposures denominated in foreign currencies or any
other derivative financial instruments.




Item 8.     Financial
Statements and Supplementary Data

Our financial statements and schedules, as listed
under Item 14, appear in a separate section of this Annual
Report on Form 10-K beginning on page F-1.

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|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
	Accountants on Accounting and Financial Disclosure

None.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

The sections titled Directors and
Nominees, Board Meetings and Committees,
Executive Officers and Section 16(a)
Beneficial Ownership Reporting Compliance appearing in our
Proxy Statement for the 2002 Annual Meeting of Stockholders are
incorporated herein by reference.




Item 11.     Executive
Compensation

The section titled Executive
Compensation appearing in our Proxy Statement for the 2002
Annual Meeting of Stockholders is incorporated herein by
reference.






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
	Owners and Management

The section titled Principal
Stockholders appearing in our Proxy Statement for the 2002
Annual Meeting of Stockholders is incorporated herein by
reference.




Item 13.     Certain
Relationships and Related Transactions

The section titled Related Party
Transactions appearing in our Proxy Statement for the 2002
Annual Meeting of Stockholders is incorporated herein by
reference.




PART IV






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

(a)(1) Financial Statements:

The consolidated financial statements of
Endocare, Inc. are included in a separate section of this Annual
Report on Form 10-K commencing on the pages referenced
below:

|                                                                                                                  |  |      |             | 
|----------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | 
|                                                                                                                  |  | Page
|                                                                                                                  |  |     
|Consolidated Financial Statements of Endocare,
	Inc.:                                                             |  |      |             | 
|Report of Independent Auditors                                                                                    |  |      | F-1         | 
|Consolidated Statements of Operations for the
	Years Ended December 31, 1999, 2000 and 2001.                      |  |      | F-2         | 
|Consolidated Balance Sheets as of
	December 31, 2000 and 2001                                                     |  |      | F-3         | 
|Consolidated Statements of Stockholders
	Equity (Deficit) for the Years Ended December 31, 1999,
	2000 and 2001. |  |      | F-4         | 
|Consolidated Statements of Cash Flows for the
	Years Ended December 31, 1999, 2000 and 2001.                      |  |      | F-5         | 
|Notes to the Consolidated Financial Statements                                                                    |  |      | F-6 to F-18 | 

(2)     Financial
Statement Schedules:

Schedule II  Valuation and
Qualifying Accounts for the years ended December 31, 1999,
2000 and 2001 is included in the consolidated financial
statements at page F-18. All other schedules have been
omitted because they are not applicable, not required or the
information is included in the consolidated financial statements
or the notes thereto.

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(3) Exhibits:

|            |          |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | -------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |          | Description
|            |          |            
|            | 2.1(1)   |             |  | Agreement and Plan of Reorganization, dated
	February 21, 2002, by and among the Company, Timm Medical
	Technologies, Inc., TMT Acquisition Corporation and certain
	stockholders of Timm Medical Technologies, Inc. Certain
	schedules and other attachments to this exhibit were omitted. We
	agree to furnish supplementally a copy of any omitted schedules
	or attachments to the Commission upon request.
|            | 2.2(2)   |             |  | Agreement and Plan of Merger, dated June 30,
	1999, by and among the Company, Advanced Medical Procedures,
	Inc., Advanced Medical Procedures, LLC, Gary M.
	Onik, M.D., Robert F. Byrnes and Jerry Anderson.
	Schedules and other attachments to this exhibit were omitted. We
	agree to furnish supplementally a copy of any omitted schedules
	or attachments to the Commission upon request.               
|            | 3.1(2)   |             |  | Certificate of Amendment of Restated Certificate
	of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                             
|            | 3.2(2)   |             |  | Certificate of Designation of Series A
	Junior Participating Preferred Stock of the Company.                                                                                                                                                                                                                                                                                                                   
|            | 3.3(2)   |             |  | Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                         
|            | 3.4(2)   |             |  | Amended and Restated Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.1(2)  |             |  | Promissory Notes, dated August 8, 2001 and
	July 24, 2001, as subsequently amended, by Paul Mikus in
	favor of the Company.                                                                                                                                                                                                                                                                                    
|            | 10.2(2)  |             |  | Change in Employment Status and Settlement
	Agreement and Release, effective June 25, 2001, by and
	between the Company and William Hughes.                                                                                                                                                                                                                                                                    
|            | 10.3(2)  |             |  | Consulting and Confidentiality Agreement, dated
	June 1, 2001, by and between the Company and Michael
	Strauss, M.D.                                                                                                                                                                                                                                                                                           
|            | 10.4(2)  |             |  | Note and Warrant Purchase Agreement, dated
	April 1, 2001, by and among the Company, Sanarus Medical,
	Inc. and specified purchasers and related Convertible Promissory
	Note and Warrant to Purchase Series B Preferred Stock,
	dated April 1, 2001.                                                                                                                                                          
|            | 10.5(2)  |             |  | Offer of Employment, effective February 16,
	2001, by and between the Company and Kevin Quilty.                                                                                                                                                                                                                                                                                                                
|            | 10.6(2)  |             |  | Offer of Employment, effective September 22,
	2000, by and between the Company and David Battles.                                                                                                                                                                                                                                                                                                              
|            | 10.7(2)  |             |  | Offer of Employment, effective August 14,
	2000, by and between the Company and Holly Williams.                                                                                                                                                                                                                                                                                                                
|            | 10.8(2)  |             |  | Promissory Note, dated November 2, 1999, by
	Jerry Anderson in favor of the Company.                                                                                                                                                                                                                                                                                                                           
|            | 10.9(2)  |             |  | Promissory Note cancellations between the Company
	and each of Paul Mikus, Vincent Cutarelli, Jay Eum and William
	Hughes.                                                                                                                                                                                                                                                                                     
|            | 10.10(2) |             |  | Consulting Agreement, dated January 6, 1999,
	by and between the Company and Robert Byrnes.                                                                                                                                                                                                                                                                                                                    
|            | 10.11(2) |             |  | Consulting Agreement, dated January 6, 1999,
	by and between the Company and Alan Kaganov.                                                                                                                                                                                                                                                                                                                     
|            | 10.12(2) |             |  | Loan and Security Agreement, dated
	October 1, 1998, by and between the Company and Advanced
	Medical Procedures, LLC and related Revolving Promissory Note,
	dated October 1, 1998.                                                                                                                                                                                                                           
|            | 10.13(2) |             |  | Guarantor Security Agreement, dated
	October 1, 1998, by and between the Company and Robert
	Byrnes.                                                                                                                                                                                                                                                                                                           
|            | 10.14(2) |             |  | Scientific Advisory Board Agreement, dated
	December 2, 1997, by and between the Company and Foundation
	Research, Inc.                                                                                                                                                                                                                                                                                        
|            | 10.15(2) |             |  | Consulting Agreement, dated May 27, 1997, by
	and between the Company and Bob Byrnes.                                                                                                                                                                                                                                                                                                                          
|            | 10.16(3) |             |  | Offer of Employment, dated June 11,2001, by
	and between the Company and John V. Cracchiolo.                                                                                                                                                                                                                                                                                                                   
|            | 10.17(3) |             |  | Compensation Agreement, dated June 25, 2001,
	by and between the Company and John V. Cracchiolo.                                                                                                                                                                                                                                                                                                               

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|            |          |             |  |                                                                                                                                   
|----------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |          | Description
|            |          |            
|            | 10.17(4) |             |  | Global Supply and Market Access Agreement, dated
	September 21, 2001, by and between the Company and CryoCath
	Technologies, Inc.*
|            | 10.18(4) |             |  | Distribution Agreement, dated September 25,
	2001, by and between the Company and Qualigen, Inc.*                                 
|            | 10.19    |             |  | Lease Agreement, dated November 26, 2001 by
	and between the Company and the Irvine Company.                                      
|            | 10.20    |             |  | Form of Indemnification Agreement by and between
	the Company and its directors.                                                  
|            | 10.21    |             |  | Form of Indemnification Agreement by and between
	the Company and its executive officers.                                         
|            | 23.1     |             |  | Consent of KPMG LLP.                                                                                                              
|            | 24.1     |             |  | Power of Attorney, included on signature pages.                                                                                   



---



|  |                                                                                               
|- | ----------------------------------------------------------------------------------------------
|* | We have requested confidential treatment with
	respect to certain portions of these documents.



|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Previously filed on Form 8-K on
	March 5, 2002.                                                                 
|   
|(2) | Previously filed with our Registration Statement
	on Form S-3 filed on September 20, 2001 and
	October 31, 2001.
|   
|(3) | Previously filed on Form 10-Q for the
	quarter ended June 30, 2001.                                             
|   
|(4) | Previously filed on Form 10-Q for the
	quarter ended September 30, 2001.                                        

(b) Reports on Form 8-K

We filed a Form 8-K on October 8, 2001
attaching a press release regarding the expansion of our
distribution agreement with Qualigen, Inc. Under the expanded
agreement, we have exclusive rights to distribute
Qualigens proprietary, office-based prostate cancer test,
the FastPack System.

We filed a Form 8-K on October 17, 2001
attaching a press release regarding the receipt of 510(k)
clearance from the FDA for the Visica Treatment System, a
minimally invasive cryosurgical system for the targeted
treatment of benign breast tumors.

Supplemental Information

We have not sent an annual report or proxy
materials to our stockholders as of the date of this Annual
Report on Form 10-K. We intend to provide our stockholders
with an annual report and proxy materials after the filing of
this Annual Report on Form 10-K, and we will furnish such
materials to the SEC at that time.

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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                         
| | Chairman of the Board,                
| | President and Chief Executive
	Officer

Date:     March 28,
2002

POWER OF ATTORNEY

Know all men by these present, that each person
whose signature appears below constitutes and appoints Paul W.
Mikus and John V. Cracchiolo, and each or any one of them, his
true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agent, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.

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

|                                               |  |                                                                                                               |  |               
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                      |  | Title                                                                                                         |  | Date          
|                                               |  |                                                                                                               |  |               
|/s/ PAUL W. MIKUSPaul W. Mikus                 |  | Chairman of the Board, President and Chief
	Executive Officer
	(principal executive officer)                  |  | March 28, 2002
|                                              
|/s/ JOHN V. CRACCHIOLOJohn V. Cracchiolo       |  | Chief Operating Officer, Chief Financial Officer
	and Secretary (principal financial and
	accounting officer) |  | March 28, 2002
|                                              
|/s/ PETER F. BERNARDONIPeter F. Bernardoni     |  | Director                                                                                                      |  | March 28, 2002
|                                              
|/s/ ROBERT F. BYRNESRobert F. Byrnes           |  | Director                                                                                                      |  | March 28, 2002
|                                              
|/s/ BENJAMIN GERSONBenjamin Gerson, M.D.       |  | Director                                                                                                      |  | March 28, 2002
|                                              
|/s/ MICHAEL J. STRAUSSMichael J. Strauss, M.D. |  | Director                                                                                                      |  | March 28, 2002

46



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

Endocare, Inc.:


We have audited the consolidated financial
statements of Endocare, Inc. (the Company) and subsidiary as
listed in the index under Item 14(a)(1). In connection with
our audits of the financial statements, we also have audited the
financial statement schedule as listed in the index under
Item 14(a)(2). These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Endocare, Inc. and
subsidiary as of December 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the
years in the three year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the
United States of America. 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 LLP

Costa Mesa, California

February 19, 2002, except as to


notes 1 and 15, which are as of


March 25, 2002


F-1



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                        |                                     |                                  |            |           |            |      |             |            |            |   |            |            |            | 
|------------------------------------------------------- | ----------------------------------- | -------------------------------- | ---------- | --------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                        |                                     |                                 
|                                                        |                                     | For The Years Ended December 31,
|                                                        |                                     |                                 
|                                                        |                                     | 1999                             |            | 2000      |            | 2001
|                                                        |                                     |                                  |            |           |            |     
|Revenues                                                |                                     | $                                | 3,461,874  |           |            | $    | 6,670,948   |            |            | $ | 15,721,089 |           
|                                                        |                                     |                                  |            |           |            |      |             |            |            |   |            |           
|Costs and expenses:                                     |                                     |                                  |            |           |            |      |             |            |            |   |            |           
|                                                        | Cost of revenues                    |                                  |            | 1,684,668 |            |      |             | 3,012,449  |            |   |            | 5,423,240  |           
|                                                        | Research and development            |                                  |            | 2,573,518 |            |      |             | 3,203,717  |            |   |            | 3,538,499  |           
|                                                        | Selling, general and administrative |                                  |            | 7,991,885 |            |      |             | 12,230,294 |            |   |            | 13,171,112 |           
|                                                        |                                     |                                  |            |           |            |      |             |            |            |   |            |           
|                                                        |                                     | Total costs and expenses         |            |           | 12,250,071 |      |             |            | 18,446,460 |   |            |            | 22,132,851 | 
|                                                        |                                     |                                  |            |           |            |      |             |            |            |   |            |           
|Loss from operations                                    |                                     |                                  | (8,788,197 | )         |            |      | (11,775,512 | )          |            |   | (6,411,762 | )         
|Interest income                                         |                                     |                                  | 315,864    |           |            |      | 652,331     |            |            |   | 883,360    |           
|Interest expense                                        |                                     |                                  | (791,842   | )         |            |      | (1,276,445  | )          |            |   | (394,944   | )         
|                                                        |                                     |                                  |            |           |            |      |             |            |            |   |            |           
|Net loss                                                |                                     | $                                | (9,264,175 | )         |            | $    | (12,399,626 | )          |            | $ | (5,923,346 | )         
|                                                        |                                     |                                  |            |           |            |      |             |            |            |   |            |           
|Net loss per share of common stock 
	basic and diluted |                                     | $                                | (.86       | )         |            | $    | (.97        | )          |            | $ | (.35       | )         
|                                                        |                                     |                                  |            |           |            |      |             |            |            |   |            |           
|Weighted average shares of
	common stock outstanding    |                                     |                                  | 10,838,000 |           |            |      | 12,757,000  |            |            |   | 16,741,000 |           
|                                                        |                                     |                                  |            |           |            |      |             |            |            |   |            |           

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

F-2



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

|                                              |                                                                                                                                                             |                                            |           |             |            |  |           |             |            | 
|--------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ----------- | ---------- |  | --------- | ----------- | ---------- | 
|                                              |                                                                                                                                                             |                                           
|                                              |                                                                                                                                                             | December 31                               
|                                              |                                                                                                                                                             |                                           
|                                              |                                                                                                                                                             | 2000                                       |           | 2001       
|                                              |                                                                                                                                                             |                                            |           |            
|ASSETS                                       
|Current assets:                               |                                                                                                                                                             |                                            |           |             |            |  |           |            
|                                              | Cash and cash equivalents                                                                                                                                   |                                            | $         | 22,016,448  |            |  | $         | 83,238,915  |           
|                                              | Accounts receivable, less allowances for doubtful
	accounts and sales returns of $406,639 and $825,000 for 2000 and
	2001, respectively                     |                                            |           | 2,113,766   |            |  |           | 5,733,563   |           
|                                              | Inventories                                                                                                                                                 |                                            |           | 1,543,733   |            |  |           | 2,415,744   |           
|                                              | Prepaid expenses and other current assets                                                                                                                   |                                            |           | 178,972     |            |  |           | 793,025     |           
|                                              |                                                                                                                                                             |                                            |           |             |            |  |           |            
|                                              |                                                                                                                                                             | Total current assets                       |           |             | 25,852,919 |  |           |             | 92,181,247 | 
|Property and equipment, net                   |                                                                                                                                                             |                                            | 1,496,153 |             |            |  | 1,814,714 |            
|Investments, intangible and other assets, net |                                                                                                                                                             |                                            | 1,495,718 |             |            |  | 4,037,981 |            
|                                              |                                                                                                                                                             |                                            |           |             |            |  |           |            
|                                              |                                                                                                                                                             | Total assets                               |           | $           | 28,844,790 |  |           | $           | 98,033,942 | 
|                                              |                                                                                                                                                             |                                            |           |             |            |  |           |            
|LIABILITIES AND STOCKHOLDERS
	EQUITY        
|Current liabilities:                          |                                                                                                                                                             |                                            |           |             |            |  |           |            
|                                              | Accounts payable                                                                                                                                            |                                            | $         | 2,231,344   |            |  | $         | 1,260,214   |           
|                                              | Accrued compensation                                                                                                                                        |                                            |           | 1,646,079   |            |  |           | 1,334,168   |           
|                                              | Other accrued liabilities                                                                                                                                   |                                            |           | 1,523,602   |            |  |           | 826,119     |           
|                                              | Credit facility                                                                                                                                             |                                            |           | 1,000,000   |            |  |           |            |           
|                                              |                                                                                                                                                             |                                            |           |             |            |  |           |            
|                                              |                                                                                                                                                             | Total current liabilities                  |           |             | 6,401,025  |  |           |             | 3,420,501  | 
|Convertible debentures                        |                                                                                                                                                             |                                            | 7,500,000 |             |            |  |          |            
|Note payable and other liabilities            |                                                                                                                                                             |                                            | 74,268    |             |            |  |          |            
|                                              |                                                                                                                                                             |                                            |           |             |            |  |           |            
|                                              |                                                                                                                                                             | Total liabilities                          |           |             | 13,975,293 |  |           |             | 3,420,501  | 
|                                              |                                                                                                                                                             |                                            |           |             |            |  |           |            
|Commitments and Contingencies                 |                                                                                                                                                             |                                            |           |             |            |  |           |            
|Stockholders equity:                         |                                                                                                                                                             |                                            |           |             |            |  |           |            
|                                              | Preferred stock, $.001 par value; 1,000,000
	shares authorized; none issued and outstanding at December 31,
	2000 and 2001, respectively                    |                                            |           |            |            |  |           |            |           
|                                              | Common stock, $.001 par value; 50,000,000 shares
	authorized; 15,018,649 and 22,057,905 issued and outstanding at
	December 31, 2000 and 2001, respectively |                                            |           | 15,019      |            |  |           | 22,058      |           
|                                              | Additional paid-in capital                                                                                                                                  |                                            |           | 48,163,186  |            |  |           | 133,716,105 |           
|                                              | Receivables from stockholders                                                                                                                               |                                            |           | (1,135,457  | )          |  |           | (1,028,125  | )         
|                                              | Accumulated deficit                                                                                                                                         |                                            |           | (32,173,251 | )          |  |           | (38,096,597 | )         
|                                              |                                                                                                                                                             |                                            |           |             |            |  |           |            
|                                              |                                                                                                                                                             | Total stockholders equity                 |           |             | 14,869,497 |  |           |             | 94,613,441 | 
|                                              |                                                                                                                                                             |                                            |           |             |            |  |           |            
|                                              |                                                                                                                                                             | Total liabilities and stockholders equity |           | $           | 28,844,790 |  |           | $           | 98,033,942 | 
|                                              |                                                                                                                                                             |                                            |           |             |            |  |           |            

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

F-3



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                                                                |  |              |            |            |  |            |        |              |  |                |             |              |  |   |            |   |  |   |             |   |  |   |             |  
|--------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | ---------- | ------ | ------------ |  | -------------- | ----------- | ------------ |  | - | ---------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                |  |              |            |            |  |            |        |              |  | Total         
|                                                                |  | Common Stock |            | Additional |  | Receivable |        |              |  | Stockholders/
|                                                                |  |              |            | Paid-In    |  | From       |        | Accumulated  |  | Equity        
|                                                                |  | Shares       |            | Capital    |  | Amount     |        | Stockholders |  | Deficit        |             | (Deficiency)
|                                                                |  |              |            |            |  |            |        |              |  |                |             |             
|Balance at December 31, 1998                                    |  |              | 10,698,354 |            |  |            | 10,698 |              |  |                | 16,509,952  |              |  |   |           |   |  | $ | (10,509,450 | ) |  | $ | 6,011,200   |  
|Common stock issued, other                                      |  |              | 210,988    |            |  |            | 211    |              |  |                | 1,450,035   |              |  |   | (1,028,125 | ) |  |   |            |   |  |   | 288,621     |  
|Stock options and warrants exercised                            |  |              | 338,981    |            |  |            | 339    |              |  |                | 750,023     |              |  |   |           |   |  |   |            |   |  |   | 750,362     |  
|Fair value of convertible debenture purchase
	options           |  |              |           |            |  |            |       |              |  |                | 1,600,000   |              |  |   |           |   |  |   |            |   |  |   | 1,600,000   |  
|Net loss                                                        |  |              |           |            |  |            |       |              |  |                |            |              |  |   |           |   |  |   | (9,264,175  | ) |  |   | (9,264,175  | )
|                                                                |  |              |            |            |  |            |        |              |  |                |             |              |  |   |            |   |  |   |             |   |  |   |             |  
|Balance at December 31, 1999                                    |  |              | 11,248,323 |            |  |            | 11,248 |              |  |                | 20,310,010  |              |  |   | (1,028,125 | ) |  |   | (19,773,625 | ) |  |   | (480,492    | )
|Private placement of common stock, net                          |  |              | 1,509,440  |            |  |            | 1,509  |              |  |                | 18,350,059  |              |  |   |           |   |  |   |            |   |  |   | 18,351,568  |  
|Conversion of convertible debentures and accrued
	interest, net |  |              | 1,588,545  |            |  |            | 1,589  |              |  |                | 7,473,928   |              |  |   |           |   |  |   |            |   |  |   | 7,475,517   |  
|Common stock issued for trademark and domain name               |  |              | 20,000     |            |  |            | 20     |              |  |                | 434,980     |              |  |   |           |   |  |   |            |   |  |   | 435,000     |  
|Common stock issued, other                                      |  |              | 7,216      |            |  |            | 8      |              |  |                | 394,823     |              |  |   |           |   |  |   |            |   |  |   | 100,683     |  
|Stock options and warrants exercised                            |  |              | 645,125    |            |  |            | 645    |              |  |                | 1,199,386   |              |  |   | (107,332   | ) |  |   |            |   |  |   | 1,092,699   |  
|Net loss                                                        |  |              |           |            |  |            |       |              |  |                |            |              |  |   |           |   |  |   | (12,399,626 | ) |  |   | (12,399,626 | )
|                                                                |  |              |            |            |  |            |        |              |  |                |             |              |  |   |            |   |  |   |             |   |  |   |             |  
|Balance at December 31, 2000                                    |  |              | 15,018,649 |            |  | $          | 15,019 |              |  | $              | 48,163,186  |              |  | $ | (1,135,457 | ) |  | $ | (32,173,251 | ) |  | $ | 14,869,497  |  
|Common stock issued, net                                        |  |              | 4,600,000  |            |  |            | 4,600  |              |  |                | 72,602,575  |              |  |   |           |   |  |   |            |   |  |   | 72,607,175  |  
|Conversion of convertible debentures and accrued
	interest, net |  |              | 1,128,733  |            |  |            | 1,129  |              |  |                | 7,294,730   |              |  |   |           |   |  |   |            |   |  |   | 7,295,859   |  
|Common stock issued in exchange for investment                  |  |              | 213,010    |            |  |            | 213    |              |  |                | 2,837,080   |              |  |   |           |   |  |   |            |   |  |   | 2,837,293   |  
|Common stock issued, other                                      |  |              | 20,883     |            |  |            | 21     |              |  |                | 78,422      |              |  |   |           |   |  |   |            |   |  |   | 78,443      |  
|Stock options and warrants exercised                            |  |              | 1,076,630  |            |  |            | 1,076  |              |  |                | 2,740,112   |              |  |   |           |   |  |   |            |   |  |   | 2,741,188   |  
|Cash received on stockholder note receivable                    |  |              |           |            |  |            |       |              |  |                |            |              |  |   | 107,332    |   |  |   |            |   |  |   | 107,332     |  
|Net loss                                                        |  |              |           |            |  |            |       |              |  |                |            |              |  |   |           |   |  |   | (5,923,346  | ) |  |   | (5,923,346  | )
|                                                                |  |              |            |            |  |            |        |              |  |                |             |              |  |   |            |   |  |   |             |   |  |   |             |  
|Balance at December 31, 2001                                    |  |              | 22,057,905 |            |  | $          | 22,058 |              |  | $              | 133,716,105 |              |  | $ | (1,028,125 | ) |  | $ | (38,096,597 | ) |  | $ | 94,613,441  |  
|                                                                |  |              |            |            |  |            |        |              |  |                |             |              |  |   |            |   |  |   |             |   |  |   |             |  

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

F-4



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |            |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ---------------------------------------------------------------------------- | ---------- | ---------- | ---------- | ---- | ----------- | ----------- | ---------- | - | ----------- | ---------- | ---------- | -
|                                                                                                                                                |                                     |                                                                             
|                                                                                                                                                |                                     | For The Years Ended December 31                                             
|                                                                                                                                                |                                     |                                                                             
|                                                                                                                                                |                                     | 1999                                                                         |            | 2000       |            | 2001
|                                                                                                                                                |                                     |                                                                              |            |            |            |     
|Cash flows from operating activities:                                                                                                           |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|                                                                                                                                                | Net loss                            |                                                                              | $          | (9,264,175 | )          |      | $           | (12,399,626 | )          |   | $           | (5,923,346 | )         
|                                                                                                                                                |                                     | Adjustments to reconcile net loss to net cash
	used in operating activities: |            |            |            |      |             |             |            |   |             |            |            |  
|                                                                                                                                                |                                     | Depreciation and amortization                                                |            |            | 365,925    |      |             |             | 575,057    |   |             |            | 428,169    |  
|                                                                                                                                                |                                     | Amortization of warrant value                                                |            |            | 133,500    |      |             |             | 294,148    |   |             |            | 78,443     |  
|                                                                                                                                                |                                     | Amortization of deferred financing costs                                     |            |            | 378,695    |      |             |             | 395,614    |   |             |            | 93,974     |  
|                                                                                                                                                |                                     | Common stock issued for interest payable                                     |            |            | 288,621    |      |             |             | 549,098    |   |             |            | 200,335    |  
|                                                                                                                                                |                                     | Common stock received as investment                                          |            |            |           |      |             |             |           |   |             |            | (35,928    | )
|Changes in operating assets and liabilities:                                                                                                    |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|                                                                                                                                                |                                     | Accounts receivable                                                          |            |            | (550,543   | )    |             |             | (1,155,621 | ) |             |            | (3,619,797 | )
|                                                                                                                                                |                                     | Inventories                                                                  |            |            | (1,226,412 | )    |             |             | (1,046,242 | ) |             |            | (418,858   | )
|                                                                                                                                                |                                     | Prepaid expenses and other current assets                                    |            |            | (79,572    | )    |             |             | (25,410    | ) |             |            | (626,803   | )
|                                                                                                                                                |                                     | Other assets                                                                 |            |            | 26,778     |      |             |             | 30,044     |   |             |            | (58,488    | )
|                                                                                                                                                |                                     | Accounts payable                                                             |            |            | 863,922    |      |             |             | 713,874    |   |             |            | (984,997   | )
|                                                                                                                                                |                                     | Accrued compensation                                                         |            |            | 305,475    |      |             |             | 735,976    |   |             |            | (311,911   | )
|                                                                                                                                                |                                     | Other accrued liabilities                                                    |            |            | 373,656    |      |             |             | 627,257    |   |             |            | (139,472   | )
|                                                                                                                                                |                                     | Deferred revenue                                                             |            |            |           |      |             |             | (38,000    | ) |             |            |           |  
|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|Net cash used in operating activities                                                                                                           |                                     |                                                                              | (8,384,130 | )          |            |      | (10,743,831 | )           |            |   | (11,318,679 | )         
|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|Cash flows from investing activities:                                                                                                           |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|                                                                                                                                                | Purchases of property and equipment |                                                                              |            | (338,818   | )          |      |             | (229,812    | )          |   |             | (1,058,400 | )         
|                                                                                                                                                | Loan made to investee               |                                                                              |            |           |            |      |             |            |            |   |             | (250,000   | )         
|                                                                                                                                                | Repayment of loan made to investee  |                                                                              |            |           |            |      |             |            |            |   |             | 250,000    |           
|                                                                                                                                                | Investments                         |                                                                              |            | (300,061   | )          |      |             | (250,000    | )          |   |             | (50,000    | )         
|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|Net cash used in investing activities                                                                                                           |                                     |                                                                              | (638,879   | )          |            |      | (479,812    | )           |            |   | (1,108,400  | )         
|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|Cash flows from financing activities:                                                                                                           |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|                                                                                                                                                |                                     | Proceeds from credit facility                                                |            |            | 2,000,000  |      |             |             | 2,000,000  |   |             |            |           |  
|                                                                                                                                                |                                     | Payments made on credit facility and other debt                              |            |            |           |      |             |             | (3,040,814 | ) |             |            | (1,632,279 | )
|                                                                                                                                                |                                     | Proceeds from private placement                                              |            |            |           |      |             |             | 18,351,568 |   |             |            |           |  
|                                                                                                                                                |                                     | Proceeds from secondary offering                                             |            |            |           |      |             |             |           |   |             |            | 72,607,175 |  
|                                                                                                                                                |                                     | Stock options and warrants exercised                                         |            |            | 750,362    |      |             |             | 1,199,386  |   |             |            | 2,577,318  |  
|                                                                                                                                                |                                     | Proceeds from stockholder note receivable                                    |            |            |           |      |             |             |           |   |             |            | 107,332    |  
|                                                                                                                                                |                                     | Proceeds from issuance of debentures                                         |            |            | 8,000,000  |      |             |             | 8,000,000  |   |             |            |           |  
|                                                                                                                                                |                                     | Debt issuance costs and other                                                |            |            | (648,201   | )    |             |             | (635,000   | ) |             |            | (10,000    | )
|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|Net cash provided by financing activities                                                                                                       |                                     |                                                                              | 10,102,161 |            |            |      | 25,875,140  |             |            |   | 73,649,546  |           
|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|Net increase in cash and cash equivalents                                                                                                       |                                     |                                                                              | 1,079,152  |            |            |      | 14,651,497  |             |            |   | 61,222,467  |           
|Cash and cash equivalents, beginning of year                                                                                                    |                                     |                                                                              | 6,285,799  |            |            |      | 7,364,951   |             |            |   | 22,016,448  |           
|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|Cash and cash equivalents, end of year                                                                                                          |                                     | $                                                                            | 7,364,951  |            |            | $    | 22,016,448  |             |            | $ | 83,238,915  |           
|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|Non-cash activities:                                                                                                                            |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|Note receivable from stock sale                                                                                                                 |                                     | $                                                                            | 1,028,125  |            |            | $    |            |             |            | $ |            |           
|Convertible debentures and accrued interest
	converted to common stock, net of unamortized deferred financing
	costs of $1,573,585 and $390,609 |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|                                                                                                                                                | in 2000 and 2001, respectively      |                                                                              |            |           |            |      |             | 7,475,517   |            |   |             | 7,295,859  |           
|Acquisition of trademark and domain name through
	issuance of 20,000 shares of common stock                                                     |                                     |                                                                              |           |            |            |      | 435,000     |             |            |   |            |           
|Transfer of inventory to property and equipment
	for placement at customer sites                                                                |                                     |                                                                              | 490,237    |            |            |      | 781,294     |             |            |   | 10,251      |           
|Fair value of convertible debenture purchase
	options credited to additional paid-in-capital                                                    |                                     |                                                                              | 1,600,000  |            |            |      |            |             |            |   |            |           
|Common stock exchanged for investment                                                                                                           |                                     |                                                                              |           |            |            |      |            |             |            |   | 2,837,293   |           
|Issuance of common stock for stockholder note
	receivable                                                                                       |                                     |                                                                              |           |            |            |      | 107,332     |             |            |   | 168,370     |           
|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           
|Total non-cash activities                                                                                                                       |                                     | $                                                                            | 3,118,362  |            |            | $    | 8,799,143   |             |            | $ | 10,307,273  |           
|                                                                                                                                                |                                     |                                                                              |            |            |            |      |             |             |            |   |             |           

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

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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization
and Operations of the Company

Endocare, Inc. (the Company) is a
medical device company focused on developing, manufacturing and
selling urological healthcare products with the potential to
dramatically improve mens health and quality of life. The
Company has concentrated on developing devices for the treatment
of the two most common diseases of the prostate, prostate cancer
and benign prostate hyperplasia (BPH). The
Companys Cryocare Surgical System is a minimally invasive
cryosurgical system for the targeted treatment of prostate
cancer. The Company has received FDA clearance for the Cryocare
Surgical System, and commenced sales in the United States in
July 1999. The Company is developing a urologic stent, the
Horizon Prostatic Stent, for the treatment of BPH. The Company
is also developing or out-licensing its cryosurgical
technologies for treating tumors in other organs, including the
kidney, lung, breast, liver and bones, as well as for treating
cardiac arrhythmia.

The Company significantly expanded its urological
product offerings in February 2002 through the acquisition of
Timm Medical Technologies, Inc. (see Note 15). Through this
acquisition, the Company now owns or has marketing rights to an
additional product used in the treatment of BPH, five products
used in the diagnosis and treatment of erectile dysfunction, six
products used in the diagnosis and management of urinary
incontinence and one product used in the diagnosis of bladder
cancer. This acquisition also increased the Companys sales
and marketing organization.

The Company was formed in 1990 as a research and
development division of Medstone International, Inc. (Nasdaq:
MEDS), a manufacturer of shockwave lythotripsy equipment for the
treatment of kidney stones. On January 1, 1996, the Company
became an independent, publicly-owned corporation upon
Medstones distribution of the Companys stock to
their existing stockholders.

2.     Summary of
Significant Accounting Policies

Principles of Consolidation:The consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiary Advanced Medical Procedures, Inc. All intercompany
balances and transactions have been eliminated in consolidation.

Use of Estimates:The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.

Cash and Cash Equivalents:All highly liquid investments
purchased with an original maturity of three months or less are
considered to be cash equivalents. Cash and cash equivalents
include money market funds and various deposit accounts.

Inventories:Inventories are stated at the lower of
cost or net realizable value. Cost is determined by the
first-in, first-out method.

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 seven years. Leasehold improvements are amortized
over the shorter of the estimated useful lives of the assets or
the related lease term. Cryosurgical equipment placed at
customer sites for use with the Companys disposable
Cryoprobes is depreciated into cost of sales over estimated
useful lives of three years.

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

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ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

impairment loss is recognized as the excess of
the carrying value of the asset over its fair value. The amount
represents the net book value of the product, as the fair value
of these assets was determined to be nominal.

Deferred Financing Costs:Deferred financing costs are amortized
to interest expense over the lives of the respective debt.

Revenue Recognition:The Company recognizes revenues,
including revenues from sales to distributors, upon shipment for
sales of Cryocare Surgical System units and disposable
cryoprobes, provided acceptance is assured and collectibility is
probable. In the past, the Company placed its Cryocare Surgical
System units with urology groups on a per-use basis to expand
its installed base, and thus increase the market for its
disposable cryoprobes. Under this placement program, the Company
receives revenue from each use of the Cryocare Surgical System
unit, which it recognizes upon completion of the procedure. The
cost of the Cryocare Surgical System unit is depreciated into
cost of revenues over an estimated useful life of three years.

Revenues from mobile cryosurgical procedures as a
percentage of total revenues, have declined over the fiscal year
ended December 31, 2001 and are expected to continue to
decline due to the Companys increased strategic focus on
system, probe and procedural sales. Revenues and related cost of
revenues relating to mobile cryosurgical procedures for fiscal
years 1999 and 2000 are as follows:

|                                                            |  |      |           |      |  |   |         | 
|----------------------------------------------------------- |  | ---- | --------- | ---- |  | - | ------- | 
|                                                            |  | 1999 |           | 2000
|                                                            |  |      |           |     
|Revenues related to mobile cryosurgical procedures          |  |      | 1,132,901 |      |  |   | 703,240 | 
|                                                            |  |      |           |      |  |   |         | 
|Cost of revenues related to mobile cryosurgical
	procedures |  | $    | 429,751   |      |  | $ | 405,321 | 
|                                                            |  |      |           |      |  |   |         | 

Mobile cryosurgical procedure revenues and
related cost of revenues for 2001 were immaterial.

Collectibility of accounts receivable is
determined based upon an understanding of the financial
condition of, and prior history with, the buyer and overall
historical experience. In December 1999, the SEC issued Staff
Accounting Bulletin No. 101 (SAB 101).
SAB 101, as amended, provides the SECs views in
applying Generally Accepted Accounting Principles to selected
revenue recognition issues. The adoption of SAB 101 did not
cause a material change to the Companys existing revenue
recognition policies.

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 as incurred.

Net Loss Per Share:Earnings per share (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 dilutive securities,
options, convertible debentures, 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. The consolidated loss (numerator), shares
(denominator) and per-share amount for fiscal 1999 are
$(9,264,175), 10,838,000 and $(0.86), respectively, the
consolidated loss (numerator), shares (denominator) and
per-share amount for fiscal 2000 are $(12,399,626), 12,757,000
and $(0.97), respectively, and the consolidated loss
(numerator), shares (denominator) and per-share amount for
fiscal 2001 are $(5,923,346), 16,741,000 and $(0.35),
respectively. As the Company has been in a net loss position for
the fiscal years 1999, 2000, and 2001, the potential dilution
from the conversion of options, warrants and convertible
debentures to common stock of 3,953,000, 4,332,027 and 2,827,022
as of December 31, 1999, 2000 and 2001, respectively, were
not used to compute diluted loss per share as the effect was
antidilutive.

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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Fair Value of Financial Instruments:The primary objective of the
Companys investment activities is to preserve principal
while at the same time maximizing the income the Company
receives from its invested cash without significantly increasing
risk of loss. The Companys financial instruments include
cash, cash equivalents, notes receivable, investments, accounts
payable and accrued liabilities. At December 31, 2001, the
carrying values of the Companys cash, cash equivalents,
accounts receivable, accounts payable and accrued liabilities
approximated their fair values. Although there is not a readily
available market value for the Companys cost method
investments, in general the Company does not believe the fair
value of these investments would significantly differ from cost.

Comprehensive Income:The Company does not have any
components of other comprehensive income. Therefore,
comprehensive loss equaled net loss for all periods presented.

Segment Disclosures:The Company operates in one industry
segment  the design, manufacture and marketing of
surgical devices and related procedures to treat prostate
diseases.

Investments:The
Company has both marketable and non-marketable equity
investments. The Company classifies its marketable equity
investments as available-for-sale securities with net unrealized
gains or loss recorded as a component of accumulated other
comprehensive loss. The non-marketable equity investments
represent investments in other medical technology companies or
strategic alliances and are recorded at cost and are evaluated
periodically for impairment. Marketable equity investments are
evaluated for impairment based on their market price, while
non-marketable equity investments are evaluated for impairment
through a review of the financial position and operating results
of the investee. If it is determined that a decline of any
investment is other than temporary, then the investment basis
would be written down to fair value and the write-down would be
included in operations as a loss.

Stock-Based Compensation:The Company measures stock-based
compensation for option grants to employees and members of the
board of directors using a method which assumes that options
granted at market price at the date of grant have no intrinsic
value. Pro forma net earnings and earnings per share are
presented in Note 8 as if the fair value had been applied. The
Company issues stock options to consultants for services
performed and to employees for achievement of specific
performance goals. The Company records compensation expense for
the fair value of these stock options as determined by the
Black-Scholes option pricing model. The fair value of these
options is charged to operations over the service period or as
the performance goal has been achieved.

Income Taxes:The
Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and
the tax basis of the Companys assets and liabilities along
with net operating loss and credit carryforwards, if it is more
likely than not that the tax benefits will be realized. To the
extent a deferred tax asset cannot be recognized under the
preceding criteria, allowances must be established. The impact
on deferred taxes of changes in tax rates and laws, if any, are
applied to the years during which temporary differences are
expected to be settled and reflected in the financial statements
in the period of enactment.

Accounting Pronouncements Not Yet
Adopted

In July 2001, the FASB issued SFAS No. 141,
Business Combinations and No. 142,
Goodwill and Other Intangible Assets. SFAS
No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30,
2001 as well as all business combinations completed after
June 30, 2001. SFAS No. 141 also specifies criteria
for intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an
assembled workforce may not be accounted for separately. SFAS
No. 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead
tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 will also

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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

require that intangible assets with definite
useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.

The Company is required to adopt the provisions
of SFAS No. 141 immediately, except with regard to business
combinations initiated prior to July 1, 2001, and SFAS
No. 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business
combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-SFAS No. 142 accounting
literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to
be amortized prior to the adoption of SFAS No. 142. The
adoption of SFAS 141 and 142 is not expected to have a
material effect on the companys financial position or
results of operations.

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations. This
statement requires an enterprise to record the fair value of an
asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the
retirement of tangible long-lived assets. Since the requirement
is to recognize the obligation when incurred, approaches that
have been used in the past to accrue the asset retirement
obligation over the life of the asset are no longer acceptable.
SFAS No. 143 also requires the enterprise to record the
contra to the initial obligation as an increase to the carrying
amount of the related long-lived asset, i.e., the associated
asset retirement costs, and to depreciate that cost over the
life of the asset. The liability is increased at the end of each
period to reflect the passage of time, i.e., accretion expense,
and changes in the estimated future cash flows underlying the
initial fair value measurement. The Company will adopt SFAS
No. 143 for fiscal years beginning after June 15,
2002. This Statement is not expected to have a material impact
on the Companys financial reporting and related
disclosures.

In August 2001, Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144) was
issued. SFAS No. 144 supersedes Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting
and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations  Reporting
the effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business.
SFAS No. 144 retains the requirement in Opinion No. 30
to report separately discontinued operations and extends that
reporting to a component of an entity that either has been
disposed of or is classified as held for sale. The Company is
required and plans to adopt the provisions of SFAS No. 144
in the quarter ending March 31, 2002. The implementation of
SFAS No. 144 is not expected to have a material effect on
the Companys financial statements.

3.     Merger

On June 30, 1999, the Company acquired all
the outstanding units of Advanced Medical Procedures, LLC, a
Florida limited liability company (AMP). AMP
operates a mobile cryosurgery business which provides
cryosurgical equipment for the treatment of prostate and liver
cancer on a procedural basis. The AMP unitholders received an
aggregate of 260,000 shares of the Companys Common Stock
in exchange for all of their AMP units. The acquisition was
accounted for as a pooling-of-interests for financial reporting
purposes. The pooling-of-interests method of accounting is
intended to present as a single interest two or more common
stockholders interests which were previously independent;
accordingly, the historical financial statements for the periods
prior to the merger have been restated as though the companies
had been combined. Fees and expenses related to the merger were
expensed as incurred and amounted to approximately $50,000.

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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Supplemental
Financial Statement Data

Cash paid for interest for the years 1999, 2000
and 2001 was $17,580, $8,993 and $560,689, respectively.

|                                           |                                                            |                                                 |   |           |            |   |   |            |            |  
|------------------------------------------ | ---------------------------------------------------------- | ----------------------------------------------- | - | --------- | ---------- | - | - | ---------- | ---------- | -
|                                           |                                                            |                                                
|                                           |                                                            | December 31,                                   
|                                           |                                                            |                                                
|                                           |                                                            | 2000                                            |   | 2001     
|                                           |                                                            |                                                 |   |          
|Inventories:                               |                                                            |                                                 |   |           |            |   |   |           
|                                           | Raw materials                                              |                                                 | $ | 763,389   |            |   | $ | 1,456,482  |           
|                                           | Work in process                                            |                                                 |   | 288,480   |            |   |   | 501,687    |           
|                                           | Finished goods                                             |                                                 |   | 491,864   |            |   |   | 457,575    |           
|                                           |                                                            |                                                 |   |           |            |   |   |           
|                                           |                                                            | Total inventories                               |   | $         | 1,543,733  |   |   | $          | 2,415,744  |  
|                                           |                                                            |                                                 |   |           |            |   |   |           
|Property and equipment:                    |                                                            |                                                 |   |           |            |   |   |           
|                                           | Equipment                                                  |                                                 | $ | 616,360   |            |   | $ | 1,153,299  |           
|                                           | Equipment  cryosurgical systems placed
	at customer sites |                                                 |   | 1,271,532 |            |   |   | 1,231,783  |           
|                                           | Furniture and fixtures                                     |                                                 |   | 530,388   |            |   |   | 835,220    |           
|                                           | Leasehold improvements                                     |                                                 |   | 100,034   |            |   |   | 100,034    |           
|                                           |                                                            |                                                 |   |           |            |   |   |           
|                                           |                                                            | Total property and equipment, at cost           |   |           | 2,518,314  |   |   |            | 3,320,336  |  
|                                           |                                                            |                                                 |   |           |            |   |   |           
|Accumulated depreciation and amortization: |                                                            |                                                 |   |           |            |   |   |           
|                                           | Cryosurgical systems placed at customer sites              |                                                 |   | (348,427  | )          |   |   | (463,404   | )         
|                                           | All other property and equipment                           |                                                 |   | (673,734  | )          |   |   | (1,042,218 | )         
|                                           |                                                            |                                                 |   |           |            |   |   |           
|                                           |                                                            | Total accumulated depreciation and amortization |   |           | (1,022,161 | ) |   |            | (1,505,622 | )
|                                           |                                                            |                                                 |   |           |            |   |   |           
|                                           |                                                            | Net property and equipment                      |   | $         | 1,496,153  |   |   | $          | 1,814,714  |  
|                                           |                                                            |                                                 |   |           |            |   |   |           

5.     Debt

Convertible Debentures

In June and July 1999, the Company received a
total of $8 million from the sale to institutional
investors of 7% convertible debentures due in three years from
the date of issuance. During the second quarter of 2000, these
debentures were converted into 1,475,610 shares of the
Companys Common Stock pursuant to the terms of the
debentures. On May 5, 2000, the Company received a total of
$8 million from the sale of additional 7% convertible
debentures, of which $0.5 million of these debentures were
converted into 74,074 shares of the Companys Common Stock
during the fourth quarter of 2000, $1 million of these
debentures were converted into 148,148 shares of the
Companys Common Stock during the first quarter of 2001,
$4.2 million of these debentures were converted into
622,222 shares of the Companys Common Stock during the
second quarter of 2001, and the final $2.3 million of these
debentures were converted into 340,741 shares of the
Companys Common Stock in July 2001. Of the debentures
converted in 2000 and 2001, an additional $549,098 or 38,861
shares and $200,335, or 17,622 shares, respectively, were issued
as interest representing a rate of 7%.

Credit Facility

The Company had a Loan and Security Agreement
with a lender which originally provided for a revolving credit
line plus up to an additional amount based on eligible accounts
receivable of the Company (the Loan). The balance
available under the revolving portion of the credit facility was
$4,000,000 with an additional $1,000,000 available based on
eligible accounts receivable of the Company. The Loan accrued
interest at the highest prime or equivalent rate announced by
certain designated banks, plus 2% for the portion of the loan

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ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

based on eligible accounts receivable or 3.5%.
The Loan was secured by a first priority lien on all of the
assets of the Company, except for intellectual property, was
fully guaranteed by Advanced Medical Procedures, LLC, a Florida
limited liability company, or AMP, a wholly-owned subsidiary of
the Company, and contained certain restrictive covenants. The
loan matured on July 31, 2001 and was paid in full on that
date.

6.     Secondary
Offering

On November 21, 2001, the Company closed a
public offering of 4,000,000 shares of its Common Stock at a
price of $17.00 per share. On December 4, 2001, the Company
sold an additional 600,000 shares of its Common Stock at the
public offering price of $17.00 per share upon exercise of the
over-allotment granted to the underwriters in the public
offering. The Company raised $78.2 million in proceeds
through the public offering before deducting commissions and
offering expenses of $5.6 million.

7.     Private
Placements

In November 2000, the Company sold 1,509,440
shares of its common stock at a price of $13.25 per share in a
private placement. In addition, warrants to purchase up to an
aggregate of 188,680 shares of the Companys common stock
were issued to the investors at an exercise price of $13.9125
per share. The warrants are exercisable for a term of five years
from the date of issuance. After transaction fees, legal,
accounting, filing fees and other associated expenses of
approximately $1,648,000, the net contribution to the
Companys capital was approximately $18,352,000.

8.     Stock Options
and Warrants

At December 31, 2001, Endocare had two
stock-based compensation plans. 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 grant.
Options generally 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
4,100,008 shares of common stock have been reserved for issuance
under the 1995 Stock Plan, subject to an automatic annual share
increase to which the number of shares available for issuance
under the plan will automatically increase on the first trading
day of each calendar year by 3% of the total number of shares of
the Companys common stock outstanding at the end of the
preceding calendar year, to a maximum of 500,000 shares each
year. As of December 31, 2001, options to purchase a total
of 4,035,063 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 granted an
option to purchase 20,000 shares of Endocare common stock vested
over a two-year period 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, or the first trading day
thereafter, 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 become fully exercisable on the first anniversary of
the date of grant. A total of 300,000 shares of common stock
have been reserved for issuance under the Director

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ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Plan. As of December 31, 2001, options to
purchase a total of 140,000 shares of the Companys common
stock have been granted under the Director Plan.

The following tables summarize Endocares
option activity under both plans:

|                               |  |           |           |                |  |           |      |                |  |           |           |                |  |   |       |  |  |  |            |   |  |   |       | 
|------------------------------ |  | --------- | --------- | -------------- |  | --------- | ---- | -------------- |  | --------- | --------- | -------------- |  | - | ----- |  |  |  | ---------- | - |  | - | ----- | 
|                               |  |           |           |                |  |          
|                               |  | 1999      |           | 2000           |  | 2001     
|                               |  |           |           |                |  |          
|                               |  |           |           | Weighted Avg.  |  |           |      | Weighted Avg.  |  |           |           | Weighted Avg. 
|                               |  | Number Of |           | Exercise Price |  | Number Of |      | Exercise Price |  | Number Of |           | Exercise Price
|                               |  | Options   |           | Per Option     |  | Options   |      | Per Option     |  | Options   |           | Per Option    
|                               |  |           |           |                |  |           |      |                |  |           |           |               
|Outstanding, beginning of year |  |           | 2,657,553 |                |  | $         | 1.96 |                |  |           | 2,959,184 |                |  | $ | 2.24  |  |  |  | 2,736,590  |   |  | $ | 3.37  | 
|Granted during year            |  |           | 749,500   |                |  | $         | 3.31 |                |  |           | 428,500   |                |  | $ | 11.09 |  |  |  | 704,000    |   |  | $ | 10.19 | 
|Cancelled during year          |  |           | (245,138  | )              |  | $         | 3.04 |                |  |           | (192,669  | )              |  | $ | 5.61  |  |  |  | (113,060   | ) |  | $ | 6.47  | 
|Exercised                      |  |           | (202,731  | )              |  | $         | 1.60 |                |  |           | (458,425  | )              |  | $ | 2.38  |  |  |  | (1,005,695 | ) |  | $ | 2.90  | 
|                               |  |           |           |                |  |           |      |                |  |           |           |                |  |   |       |  |  |  |            |   |  |   |       | 
|Outstanding, end of year       |  |           | 2,959,184 |                |  | $         | 2.24 |                |  |           | 2,736,590 |                |  | $ | 3.37  |  |  |  | 2,321,835  |   |  | $ | 5.42  | 
|                               |  |           |           |                |  |           |      |                |  |           |           |                |  |   |       |  |  |  |            |   |  |   |       | 

|               |              |                     |         |                     |  |                |           |                   |  |                |       |      |  |  |        |           |  |   |       |      | 
|-------------- | ------------ | ------------------- | ------- | ------------------- |  | -------------- | --------- | ----------------- |  | -------------- | ----- | ---- |  |  | ------ | --------- |  | - | ----- | ---- | 
|               |              |                     |         |                    
|               |              | Options Outstanding |         | Options Exercisable
|               |              |                     |         |                    
|               |              | Number              |         |                     |  | Number         |           |                  
|               |              | Outstanding         |         | Weighted-Avg.       |  | Weighted-      |           | Exercisable       |  | Weighted-     
|Range Of       |              | At                  |         | Remaining           |  | Avg.           |           | At                |  | Avg.          
|Exercise Price |              | December 31, 2001   |         | Contractual Life    |  | Exercise Price |           | December 31, 2001 |  | Exercise Price
|               |              |                     |         |                     |  |                |           |                   |  |               
|               | 0.18 -  2.00 |                     |         | 513,961             |  |                |           | 4.5 years         |  |                | $     | 0.52 |  |  |        | 478,940   |  |   | $     | 0.46 | 
|               | 2.03 -  4.00 |                     |         | 728,669             |  |                |           | 6.5 years         |  |                | $     | 2.63 |  |  |        | 549,909   |  |   | $     | 2.70 | 
|               | 4.50 -  6.19 |                     |         | 498,918             |  |                |           | 8.7 years         |  |                | $     | 5.11 |  |  |        | 69,647    |  |   | $     | 5.03 | 
|               | 6.93 -  9.00 |                     |         | 129,789             |  |                |           | 8.1 years         |  |                | $     | 8.05 |  |  |        | 56,112    |  |   | $     | 8.89 | 
|11.75 - 13.88  |              |                     | 224,810 |                     |  |                | 9.1 years |                   |  | $              | 12.52 |      |  |  | 25,041 |           |  | $ | 11.69 |     
|14.00 - 21.30  |              |                     | 225,689 |                     |  |                | 9.5 years |                   |  | $              | 17.20 |      |  |  | 17,458 |           |  | $ | 16.40 |     
|               |              |                     |         |                     |  |                |           |                   |  |                |       |      |  |  |        |           |  |   |       |     
|               | 0.18 - 21.30 |                     |         | 2,321,835           |  |                |           | 7.2 years         |  |                | $     | 5.42 |  |  |        | 1,197,107 |  |   | $     | 2.56 | 
|               |              |                     |         |                     |  |                |           |                   |  |                |       |      |  |  |        |           |  |   |       |     

The following table presents consolidated pro
forma information as if the Company recorded compensation cost
using the fair value of the issued stock options using the
Black-Scholes valuation model consistent with SFAS 123:

|                                         |                                 |      |   |             |   |      |   |             |   |  |   |            |  
|---------------------------------------- | ------------------------------- | ---- | - | ----------- | - | ---- | - | ----------- | - |  | - | ---------- | -
|                                         |                                 | 1999 |   | 2000        |   | 2001
|                                         |                                 |      |   |             |   |     
|Net loss:                                |                                 |      |   |             |   |      |   |             |   |  |   |           
|                                         | As reported                     |      | $ | (9,264,175  | ) |      | $ | (12,399,626 | ) |  | $ | (5,923,346 | )
|                                         | Assumed stock compensation cost |      |   | (896,000    | ) |      |   | (1,830,000  | ) |  |   | (1,702,000 | )
|                                         |                                 |      |   |             |   |      |   |             |   |  |   |           
|                                         | Pro forma, adjusted             |      | $ | (10,160,175 | ) |      | $ | (14,229,626 | ) |  | $ | (7,625,346 | )
|                                         |                                 |      |   |             |   |      |   |             |   |  |   |           
|Net loss per share  basic and
	diluted: |                                 |      |   |             |   |      |   |             |   |  |   |           
|                                         | As reported                     |      | $ | (0.86       | ) |      | $ | (0.97       | ) |  | $ | (0.35      | )
|                                         | Pro forma, adjusted             |      | $ | (0.94       | ) |      | $ | (1.12       | ) |  | $ | (0.46      | )

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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The weighted average fair value of the
Companys options at the grant date was approximately $1.90
in 1999, $3.22 in 2000 and $4.06 in 2001. 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:

|                        |  |      |          |      |  |      |          |   |  |  |         |  
|----------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  |  | ------- | -
|                        |  | 1999 |          | 2000 |  | 2001
|                        |  |      |          |      |  |     
|Stock volatility        |  |      | .5       |      |  |      | .9       |   |  |  | .8      |  
|Risk-free interest rate |  |      | 6.00     | %    |  |      | 4.7      | % |  |  | 4.6     | %
|Option term in years    |  |      | 10 years |      |  |      | 10 years |   |  |  | 5 years |  
|Stock dividend yield    |  |      |         |      |  |      |         |   |  |  |        |  

The Company issued warrants to purchase 176,506
and 239,070 shares of the Companys common stock in 1999
and 2000, respectively (see note 7). Warrants generally vest
over a one to five year period and have been provided in
conjunction with financing transactions, patent licenses and
service contracts. As of December 31, 2001, the Company had
401,673 warrants outstanding, of which 335,423 are exercisable.
Warrant exercise prices range from $2.31 to $15.40 per share.
During 1999, 2000 and 2001, warrants to purchase 136,250,
186,400 and 70,935 shares of common stock, respectively, were
exercised. The Company amortizes the fair values of warrants
associated with non-equity transactions, as determined using the
Black-Scholes option pricing method, to expense over the service
period of the related warrants. From time to time, the Company
issues stock options in return for consulting services. Under
variable accounting treatment, the compensation expense recorded
in 2001 for consulting related options was $78,000. The Company
also issues options with vesting dates based on performance
goals. Under variable accounting treatment, the total
compensation expense recorded in 2001 for performance based
options was $90,000.

9.     Stockholder
Rights Plan

In April 1999, the Company adopted a stockholder
rights plan (the Plan) in which preferred stock
purchase rights were distributed as a dividend at the rate of
one right for each share of common stock held as of the close of
business on April 15, 1999. The rights are designed to
guard against partial tender offers and other abusive and
coercive tactics that might be used in an attempt to gain
control of the Company or to deprive the Companys
stockholders of their interest in the long-term value of the
Company. The rights will be exercisable only if a person or
group acquires 15% or more of the Companys common stock
(subject to certain exceptions stated in the Plan) or announces
a tender offer the consummation of which would result in
ownership by a person or group of 15% or more of the
Companys common stock. At any time on or prior to the
close of business on the first date of a public announcement
that a person or group has acquired beneficial ownership of 15%
or more of the Companys common stock (subject to certain
exceptions stated in the Plan), the rights are redeemable for
one cent per right at the option of the Board of Directors.

F-13



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10.     Income
Taxes

Income tax expense, which is included as an
operating expense in the Companys consolidated statements
of operations, consisted of:

|          |                 |                          |   |       |  |      |   |       |  |  |   |       | 
|--------- | --------------- | ------------------------ | - | ----- |  | ---- | - | ----- |  |  | - | ----- | 
|          |                 |                         
|          |                 | Years Ended December 31,
|          |                 |                         
|          |                 | 1999                     |   | 2000  |  | 2001
|          |                 |                          |   |       |  |     
|Current:  |                 |                          |   |       |  |      |   |       |  |  |   |      
|          | Federal         |                          | $ |      |  |      | $ |      |  |  | $ |      | 
|          | State and local |                          |   | 3,600 |  |      |   | 1,600 |  |  |   | 3,600 | 
|Deferred: |                 |                          |   |       |  |      |   |       |  |  |   |      
|          | Federal         |                          |   |      |  |      |   |      |  |  |   |      | 
|          | State and local |                          |   |      |  |      |   |      |  |  |   |      | 
|          |                 |                          |   |       |  |      |   |       |  |  |   |      
|          | Total           |                          | $ | 3,600 |  |      | $ | 1,600 |  |  | $ | 3,600 | 
|          |                 |                          |   |       |  |      |   |       |  |  |   |      

The following table summarizes the tax effects of
temporary differences which give rise to significant portions of
the deferred tax assets at December 31:

|                     |                                                             |                           |   |             |            |  |   |             |            | 
|-------------------- | ----------------------------------------------------------- | ------------------------- | - | ----------- | ---------- |  | - | ----------- | ---------- | 
|                     |                                                             | 2000                      |   | 2001       
|                     |                                                             |                           |   |            
|Deferred tax assets: |                                                             |                           |   |             |            |  |   |            
|                     | Product and other allowances established for book
	purposes |                           | $ | 440,000     |            |  | $ | 393,000     |           
|                     | Property and equipment allowances                           |                           |   | 112,000     |            |  |   | 112,000     |           
|                     | Inventory obsolescence allowances                           |                           |   | 119,000     |            |  |   | 102,000     |           
|                     | Accounts receivable allowances                              |                           |   | 172,000     |            |  |   | 349,000     |           
|                     | Net operating loss carryforwards                            |                           |   | 11,172,000  |            |  |   | 14,066,000  |           
|                     | Other                                                       |                           |   | 716,000     |            |  |   | 525,000     |           
|                     |                                                             |                           |   |             |            |  |   |            
|                     |                                                             | Gross deferred tax assets |   |             | 12,731,000 |  |   |             | 15,547,000 | 
|                     | Valuation allowance                                         |                           |   | (12,731,000 | )          |  |   | (15,547,000 | )         
|                     |                                                             |                           |   |             |            |  |   |            
|                     |                                                             | Net deferred tax assets   |   | $           |           |  |   | $           |           | 
|                     |                                                             |                           |   |             |            |  |   |            

The valuation allowance increased by $4,779,000
and $2,816,000 during the years ended December 31, 2000 and
2001, respectively. Due to the Companys history of
operating losses, management has determined that it is more
likely than not that future tax benefits of the deferred tax
assets will be realized as a result of future and current
income. Accordingly, the valuation allowance has been increased
to fully reserve the deferred tax assets.

Subsequently recognized tax benefits relating to
the valuation allowance for deferred tax assets as of
December 31, 2001 will be allocated as follows:

|                                                                                        |  |   |            | 
|--------------------------------------------------------------------------------------- |  | - | ---------- | 
|Income tax benefit that would be reported in the
	consolidated statements of operations |  | $ | 15,227,000 | 
|Additional paid-in capital                                                              |  |   | 320,000    | 
|                                                                                        |  |   |            | 
|                                                                                        |  | $ | 15,547,000 | 
|                                                                                        |  |   |            | 

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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                           |                    |                          |            |       |  |      |            |       |  |   |            |       | 
|-------------------------------------------------------------------------- | ------------------ | ------------------------ | ---------- | ----- |  | ---- | ---------- | ----- |  | - | ---------- | ----- | 
|                                                                           |                    |                         
|                                                                           |                    | Years Ended December 31,
|                                                                           |                    |                         
|                                                                           |                    | 1999                     |            | 2000  |  | 2001
|                                                                           |                    |                          |            |       |  |     
|Computed expected tax benefit                                              |                    | $                        | (3,150,000 | )     |  | $    | (4,216,000 | )     |  | $ | (2,014,000 | )    
|State income taxes net of federal benefit                                  |                    |                          | (541,000   | )     |  |      | (506,000   | )     |  |   | (329,000   | )    
|Nondeductible expenses                                                     |                    |                          | 19,400     |       |  |      | 38,000     |       |  |   | 40,000     |      
|Net operating losses and temporary differences,
	no tax benefit recognized |                    |                          | 3,812,000  |       |  |      | 4,779,000  |       |  |   | 2,816,000  |      
|Provision to return adjustment                                             |                    |                          | (114,000   | )     |  |      | 3,000      |       |  |   | (512,000   | )    
|Other                                                                      |                    |                          | (22,800    | )     |  |      | (96,400    | )     |  |   | 2,600      |      
|                                                                           |                    |                          |            |       |  |      |            |       |  |   |            |      
|                                                                           | Actual tax expense |                          | $          | 3,600 |  |      | $          | 1,600 |  |   | $          | 3,600 | 
|                                                                           |                    |                          |            |       |  |      |            |       |  |   |            |      

As of December 31, 2001, the Company has net
operating loss carryforwards for federal income tax purposes of
approximately $36,240,000 which are available to offset future
federal taxable income, if any, through the years to 2021. For
state income tax purposes, the Company has net operating losses
of approximately $21,132,000 which are available to offset
future state taxable income, if any, through the years to 2011.

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.

11.     Collaborative
Agreements

In October 1999, the Company entered into a
strategic alliance with Sanarus Medical, Inc., a privately held
medical device company. The terms of the related agreements
included a 5% equity investment by the Company in Sanarus
totaling $300,000. The Company also received a warrant to
acquire at that time approximately 79% of Sanarus common
stock at that time in consideration for entering into a
manufacturing, supply and license agreement. In June 2001, the
Company provided a bridge loan to Sanarus in the amount of
$250,000. This amount was subsequently repaid in July 2001 upon
Sanarus receipt of additional equity financing, which
financing along with other financings by Sanarus reduced the
Companys current ownership percentage to 2% and its
potential ownership percentage to approximately 22% on a
fully-diluted basis. The investment is included in
Investments, intangible and other assets, net in the
Companys consolidated balance sheets as of
December 31, 2000 and December 31, 2001 and is
reflected at cost as the Company does not have significant
influence over the operations of Sanarus.

In June 2001, the Company signed an exclusive
original equipment manufacturer agreement with Qualigen, Inc.,
pursuant to which the Company will distribute Qualigens
15 minute PSA test known as the FastPackTM
System as part of the Companys diagnostic workstation for
urology which is currently under development. The agreement has
a term of five years and includes one year of exclusivity with
the option of four one-year extensions of exclusivity based upon
minimum purchase commitments. In September 2001, the Company
entered into a new expanded distribution agreement with
Qualigen, Inc. Under this new agreement, the Company will sell
Qualigens FDA-cleared 15-minute total prostate-specific
antigen test as a stand alone product, non-exclusively directly
to urology practices.

On June 30, 2001, the Company issued 213,010
shares of its Common Stock with a fair value of $2,837,293 as
consideration for a membership interest in the form of
Class A Units of U.S. Therapies, LLC, equal to
approximately 9% of the total issued and outstanding
Class A Units of U.S. Therapies and approximately 5% of the
Class A Units on a fully-diluted basis. U.S. Therapies is a
national urology group

F-15



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

representing more than 150 urologists across the
nation. In a related Distributor Agreement, U.S. Medical
Devices, Ltd., a subsidiary of U.S. Therapies, was appointed a
distributor and given exclusive distribution rights to the
Companys Cryocare Surgical System and associated
disposable products in 16 states. U.S. Medical
Devices (USMD) also has the exclusive right to distribute
the Cryocare Surgical System to HealthTronics Surgical Services,
Inc. (Nasdaq: HTRN) and its affiliates, a company that provides
urologic and orthopedic services to patients in 35 states
through physician partnerships. The investment in UST is
included in Investments, intangible and other assets,
net in the accompanying consolidated balance sheet at
December 31, 2001 and is carried using the cost method of
accounting as the Company does not have significant influence
over the operations of U.S. Therapies. The Company has
recognized sales of $4,105,000 to USMD for the year ended
December 31, 2001. As of December 31, 2001, USMD
accounted for approximately $905,000 of net accounts receivable.

In September 2001, the Company entered into a
strategic alliance with CryoCath Technologies, Inc. pursuant to
an exclusive global market access and supply agreement, whereby
CryoCath Technologies, Inc. and the Company will co-develop a
new, advanced line of surgical probe systems to surgically treat
cardiac arrhythmias. CryoCath will purchase the newly developed
systems from Endocare and market them on a global basis under
the CryoCath trademark, SurgifrostTM. The
Company recognized $125,000 in license revenue from CryoCath
Technologies, Inc. during 2001.

In September 2000, the Company invested $250,000,
representing approximately 833,000 shares of common stock, in
Medical Resources Management, Inc., or MRM. In July 2001, these
shares were converted into approximately 308,000 shares of
common stock of Emergent Group, Inc., upon its acquisition of
MRM as a wholly owned subsidiary. The investment in MRM is
included in Investments, intangible and other assets,
net in our balance sheet as of December 31, 2001
using the cost method of accounting as the Company owns less
than 1% of the outstanding shares of Emergent Group, Inc. and
the Company does not have significant influence over the
operations of Emergent Group, Inc.

12.     Commitments
and Contingencies

Commitments

In February 1997, the Company signed a five-year
lease for a 16,100 square foot facility in Irvine, California.
Rent expense on the lease was $157,727 in 1999, $161,754 in 2000
and $174,991 in 2001. The future minimum commitment on this
operating lease is $37,700 in 2002.

In November 2001, the Company entered into a
lease agreement for approximately 28,000 square foot facility in
Irvine, California. The Company moved its executive offices to
this new facility in February 2002. The term of the lease
agreement expires in February 2007. At the expiration of the
lease term, the Company has the option to extend the lease for
an additional five years. Future minimum facility lease payments
are as follows $351,440, $435,908, $452,780, $469,652, $486,524
and $81,556 for the fiscal years ended December 31, 2002,
2003, 2004, 2005, 2006 and 2007, respectively.

In 2001, the Company leases space for Advanced
Medical Procedures, Inc., with total lease expense totaling
$26,786 in 2001 and future minimum lease payments totaling
$16,995 in 2002. The Company also leases other space and various
office equipment under operating leases, with lease commitments
through 2005 totaling $18,283 in 2002, $18,492 in 2003, $12,820
in 2004 and $5,528 in 2005.

As of December 31, 2001, the Company has no
other facility leases, capital leases, or other long-term
commitments.

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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Contingencies

The Company, in the normal course of business, is
subject to various other legal matters. While the results of
litigation and claims cannot be predicted with certainty, the
Company believes that the final outcome of these matters will
not have a material adverse effect on the Companys
consolidated results of operations or financial condition.

In connection with the market access and supply
agreement with CryoCath Technologies, Inc., the Company is
obligated to undertake product development projects, maintain
regulatory approval for the products in the United States and
Europe and indemnify CryoCath in the event of some third party
claims.

From time to time, the Company has received other
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 the consolidated financial condition
or the results of operations because of such actions.

13.     Major
Customers and Concentration of Credit Risk

The Company currently operates in one industry
segment  the design, manufacture and marketing of
surgical devices and related procedures to treat prostate
diseases. The Company markets and sells its devices worldwide to
distributors of medical devices and directly to hospitals and
other medical professional organizations.

Customer credit may be extended based upon
evaluation of the customers financial condition. The
Company maintains reserves for credit losses, and Company
management considers such reserves to be adequate based upon
historical experience. International shipments are billed and
collected by the Company in U.S. dollars.

During the year ended December 31, 2001, one
customer accounted for 26% of the Companys total revenues.
As of December 31, 2001, one customer accounted for
approximately 16% of net accounts receivable. By significant
geographic area, approximately 7% and 93% of revenues were from
foreign countries and the United States, respectively, in 2001.

During the year ended December 31, 2000, no
customer accounted for more that 10% of the Companys total
revenues. As of December 31, 2000, two customers accounted
for approximately 29% of net accounts receivable. By significant
geographic area, approximately 10%, 6% and 84% of revenues were
from Asia, other foreign countries and the United States,
respectively, in 2000.

During the year ended December 31, 1999, no
customer accounted for more than 10% of the Companys total
revenues. As of December 31, 1999, one customer accounted
for approximately 11% of net accounts receivable. By significant
geographic area, approximately 9%, 3% and 88% of revenues were
from Asia, other foreign countries and the United States,
respectively, in 1999.

14.     Related Party
Transactions

Relationship with AMP

The Company originally had a $135,000 note
payable from AMP (see Note 3). The loan bore interest at prime
plus 1% and was originally repayable beginning
September 30, 2000 in equal monthly installments of
principal and interest over a twelve month period. The loan was
secured by the assets of AMP and Robert F. Byrnes, a former
member of AMP and a member of Endocares Board of
Directors. In June 1999, Endocare

F-17



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

acquired all of the outstanding units of interest
in AMP in exchange for 260,000 shares of common stock.
Mr. Byrnes received 102,413 shares of Company common stock
for his ownership interest in AMP.

Sanarus Medical, Inc.

In June 2001, the Company provided a bridge loan
to Sanarus in the amount of $250,000. This amount was
subsequently repaid in July 2001 upon Sanarus receipt of
additional equity financing.

Loan to Officers

In November 1999, the Company received a full
recourse promissory note for $1,028,125 in connection with the
sale of 175,000 shares of its common stock to Jerry W. Anderson,
the Companys Senior Vice President, Sales and Marketing.
The note bears interest at 5.99% per annum, payable annually,
and the principal is payable in September 2003. The stock was
sold at the fair market value of the common stock on the date of
sale. During 1999, the Company made loans to certain officers
with accrued interest at 5.41% annually. These loans, and the
related interest, were forgiven in 2000, were recorded as
compensation to officers at that time and are included in the
Statement of Operations for the year ended December 31,
2000. In March 2001, the Company received full recourse
promissory notes from other officers totaling $149,800 due March
2003. These notes bear interest at 12.00% per annum, payable in
one lump sum in March 2003.

15.     Subsequent
Event

In February 2002, the Company completed the
acquisition of Timm Medical Technologies, Inc., a privately held
medical device manufacturer and distributor located in Eden
Prairie Minnesota, for a purchase price of approximately
$11 million in cash and 1,620,530 shares of the
Companys common stock. The acquisition will be accounted
for as a purchase.

16.     Quarterly
Results of Operations (Unaudited)

|               |                    |         |   |           |  |           |   |            |   |  |   |       |  
|-------------- | ------------------ | ------- | - | --------- |  | --------- | - | ---------- | - |  | - | ----- | -
|               |                    | Total   |   |           |  | Net Loss 
|               |                    | Revenue |   | Net Loss  |  | Per Share
|               |                    |         |   |           |  |          
|Quarter Ended: |                    |         |   |           |  |           |   |            |   |  |   |      
|               | December 31, 2001  |         | $ | 5,212,887 |  |           | $ | (259,226   | ) |  | $ | (0.01 | )
|               | September 30, 2001 |         |   | 4,214,766 |  |           |   | (1,258,046 | ) |  |   | (0.07 | )
|               | June 30, 2001      |         |   | 3,537,849 |  |           |   | (2,063,906 | ) |  |   | (0.13 | )
|               | March 31, 2001     |         |   | 2,755,587 |  |           |   | (2,342,168 | ) |  |   | (0.15 | )
|               | December 31, 2000  |         | $ | 2,034,828 |  |           | $ | (3,181,412 | ) |  | $ | (0.23 | )
|               | September 30, 2000 |         |   | 1,759,878 |  |           |   | (2,852,654 | ) |  |   | (0.22 | )
|               | June 30, 2000      |         |   | 1,565,213 |  |           |   | (3,351,393 | ) |  |   | (0.27 | )
|               | March 31, 2000     |         |   | 1,311,030 |  |           |   | (3,013,668 | ) |  |   | (0.27 | )
|               | December 31, 1999  |         | $ | 1,169,023 |  |           | $ | (2,332,833 | ) |  | $ | (0.21 | )
|               | September 30, 1999 |         |   | 1,029,220 |  |           |   | (2,510,629 | ) |  |   | (0.23 | )
|               | June 30, 1999      |         |   | 606,510   |  |           |   | (2,577,036 | ) |  |   | (0.24 | )
|               | March 31, 1999     |         |   | 657,121   |  |           |   | (1,843,677 | ) |  |   | (0.17 | )

F-18



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARY

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

|                                                   |  |            |         |            |  |       |           |            |  |            |   |  |  |   |          |   |  |   |         | 
|-------------------------------------------------- |  | ---------- | ------- | ---------- |  | ----- | --------- | ---------- |  | ---------- | - |  |  | - | -------- | - |  | - | ------- | 
|                                                   |  | Balance at |         |            |  |       |           |           
|                                                   |  | the        |         | Additions  |  |       |           |           
|                                                   |  | Beginning  |         |            |  |       |           | Balance at
|                                                   |  | of the     |         | Charges to |  |       |           |            |  | the End of
|                                                   |  | Period     |         | Operations |  | Other |           | Deductions |  | the Period
|                                                   |  |            |         |            |  |       |           |            |  |           
|1998                                               |  |            |         |            |  |       |           |            |  |            |   |  |  |   |          |   |  |   |         | 
|Allowance for doubtful accounts and sales
	returns |  | $          | 86,000  |            |  | $     | 254,238   |            |  |            |  |  |  | $ | (70,238  | ) |  | $ | 270,000 | 
|1999                                               |  |            |         |            |  |       |           |            |  |            |   |  |  |   |          |   |  |   |         | 
|Allowance for doubtful accounts and sales
	returns |  | $          | 270,000 |            |  | $     | 379,885   |            |  |            |  |  |  | $ | (243,246 | ) |  | $ | 406,639 | 
|2000                                               |  |            |         |            |  |       |           |            |  |            |   |  |  |   |          |   |  |   |         | 
|Allowance for doubtful accounts and sales
	returns |  | $          | 406,639 |            |  | $     | 1,157,898 |            |  |            |  |  |  | $ | (739,537 | ) |  | $ | 825,000 | 

F-19



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##### Table of Contents



EXHIBIT INDEX

|            |          |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | -------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |          | Description
|            |          |            
|            | 2.1(1)   |             |  | Agreement and Plan of Reorganization, dated
	February 21, 2002, by and among the Company, Timm Medical
	Technologies, Inc., TMT Acquisition Corporation and certain
	stockholders of Timm Medical Technologies, Inc. Certain
	schedules and other attachments to this exhibit were omitted. We
	agree to furnish supplementally a copy of any omitted schedules
	or attachments to the Commission upon request.
|            | 2.2(2)   |             |  | Agreement and Plan of Merger, dated June 30,
	1999, by and among the Company, Advanced Medical Procedures,
	Inc., Advanced Medical Procedures, LLC, Gary M.
	Onik, M.D., Robert F. Byrnes and Jerry Anderson.
	Schedules and other attachments to this exhibit were omitted. We
	agree to furnish supplementally a copy of any omitted schedules
	or attachments to the Commission upon request.               
|            | 3.1(2)   |             |  | Certificate of Amendment of Restated Certificate
	of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                             
|            | 3.2(2)   |             |  | Certificate of Designation of Series A
	Junior Participating Preferred Stock of the Company.                                                                                                                                                                                                                                                                                                                   
|            | 3.3(2)   |             |  | Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                         
|            | 3.4(2)   |             |  | Amended and Restated Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                                    
|            | 10.1(2)  |             |  | Promissory Notes, dated August 8, 2001 and
	July 24, 2001, as subsequently amended, by Paul Mikus in
	favor of the Company.                                                                                                                                                                                                                                                                                    
|            | 10.2(2)  |             |  | Change in Employment Status and Settlement
	Agreement and Release, effective June 25, 2001, by and
	between the Company and William Hughes.                                                                                                                                                                                                                                                                    
|            | 10.3(2)  |             |  | Consulting and Confidentiality Agreement, dated
	June 1, 2001, by and between the Company and Michael
	Strauss, M.D.                                                                                                                                                                                                                                                                                           
|            | 10.4(2)  |             |  | Note and Warrant Purchase Agreement, dated
	April 1, 2001, by and among the Company, Sanarus Medical,
	Inc. and specified purchasers and related Convertible Promissory
	Note and Warrant to Purchase Series B Preferred Stock,
	dated April 1, 2001.                                                                                                                                                          
|            | 10.5(2)  |             |  | Offer of Employment, effective February 16,
	2001, by and between the Company and Kevin Quilty.                                                                                                                                                                                                                                                                                                                
|            | 10.6(2)  |             |  | Offer of Employment, effective September 22,
	2000, by and between the Company and David Battles.                                                                                                                                                                                                                                                                                                              
|            | 10.7(2)  |             |  | Offer of Employment, effective August 14,
	2000, by and between the Company and Holly Williams.                                                                                                                                                                                                                                                                                                                
|            | 10.8(2)  |             |  | Promissory Note, dated November 2, 1999, by
	Jerry Anderson in favor of the Company.                                                                                                                                                                                                                                                                                                                           
|            | 10.9(2)  |             |  | Promissory Note cancellations between the Company
	and each of Paul Mikus, Vincent Cutarelli, Jay Eum and William
	Hughes.                                                                                                                                                                                                                                                                                     
|            | 10.10(2) |             |  | Consulting Agreement, dated January 6, 1999,
	by and between the Company and Robert Byrnes.                                                                                                                                                                                                                                                                                                                    
|            | 10.11(2) |             |  | Consulting Agreement, dated January 6, 1999,
	by and between the Company and Alan Kaganov.                                                                                                                                                                                                                                                                                                                     
|            | 10.12(2) |             |  | Loan and Security Agreement, dated
	October 1, 1998, by and between the Company and Advanced
	Medical Procedures, LLC and related Revolving Promissory Note,
	dated October 1, 1998.                                                                                                                                                                                                                           
|            | 10.13(2) |             |  | Guarantor Security Agreement, dated
	October 1, 1998, by and between the Company and Robert
	Byrnes.                                                                                                                                                                                                                                                                                                           
|            | 10.14(2) |             |  | Scientific Advisory Board Agreement, dated
	December 2, 1997, by and between the Company and Foundation
	Research, Inc.                                                                                                                                                                                                                                                                                        
|            | 10.15(2) |             |  | Consulting Agreement, dated May 27, 1997, by
	and between the Company and Bob Byrnes.                                                                                                                                                                                                                                                                                                                          
|            | 10.16(3) |             |  | Offer of Employment, dated June 11,2001, by
	and between the Company and John V. Cracchiolo.                                                                                                                                                                                                                                                                                                                   
|            | 10.17(3) |             |  | Compensation Agreement, dated June 25, 2001,
	by and between the Company and John V. Cracchiolo.                                                                                                                                                                                                                                                                                                               



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##### Table of Contents



|            |          |             |  |                                                                                                                                   
|----------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |          | Description
|            |          |            
|            | 10.17(4) |             |  | Global Supply and Market Access Agreement, dated
	September 21, 2001, by and between the Company and CryoCath
	Technologies, Inc.*
|            | 10.18(4) |             |  | Distribution Agreement, dated September 25,
	2001, by and between the Company and Qualigen, Inc.*                                 
|            | 10.19    |             |  | Lease Agreement, dated November 26, 2001 by
	and between the Company and the Irvine Company.                                      
|            | 10.20    |             |  | Form of Indemnification Agreement by and between
	the Company and its directors.                                                  
|            | 10.21    |             |  | Form of Indemnification Agreement by and between
	the Company and its executive officers.                                         
|            | 23.1     |             |  | Consent of KPMG LLP.                                                                                                              
|            | 24.1     |             |  | Power of Attorney, included on signature pages.                                                                                   



---



|  |                                                                                               
|- | ----------------------------------------------------------------------------------------------
|* | We have requested confidential treatment with
	respect to certain portions of these documents.



|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Previously filed on Form 8-K on
	March 5, 2002.                                                                 
|   
|(2) | Previously filed with our Registration Statement
	on Form S-3 filed on September 20, 2001 and
	October 31, 2001.
|   
|(3) | Previously filed on Form 10-Q for the
	quarter ended June 30, 2001.                                             
|   
|(4) | Previously filed on Form 10-Q for the
	quarter ended September 30, 2001.                                        

(b) Reports on Form 8-K

We filed a Form 8-K on October 8, 2001
attaching a press release regarding the expansion of our
distribution agreement with Qualigen, Inc. Under the expanded
agreement, we have exclusive rights to distribute
Qualigens proprietary, office-based prostate cancer test,
the FastPack System.