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UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-KFOR
    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 1934For the fiscal year ended
    December 31, 2006; oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the Transition period
    from          to          .   Commission File Number
    001-15063
  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 Series A Junior
    Participating Preferred Stock
 (Title of Class)
  o þ
  o þ
  þ o þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.
  Forms 10-K, 8-K 10-Q Form 10-K.




---



##### 



Endocare,
    Inc.
  Form 10-K
  For the
    Fiscal Year Ended December 31, 2006
  TABLE OF
    CONTENTS
  PagePart IItem 1.


Business


1Item 1A.


Risk
    Factors


14Item 1B.


Unresolved Staff
    Comments


22Item 2.


Properties


22Item 3.


Legal
    Proceedings


22Item 4.


Submission of
    Matters to a Vote of Security Holders


23Part IIItem 5.


Market For
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


24Item 6.


Selected
    Consolidated Financial Data


24Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


25Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


36Item 8.


Financial
    Statements and Supplementary Data


36Item 9.


Changes in and
    Disagreements With Accountants on Accounting and Financial
    Disclosure


36Item 9A.


Controls and
    Procedures


37Item 9B.


Other
    Information


39Part IIIItem 10.


Directors,
    Executive Officers and Corporate Governace


39Item 11.


Executive
    Compensation


39Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


39Item 13.


Certain
    Relationships and Related Transactions and Director
    Independence


39Item 14.


Principal
    Accountant Fees and Services


39Part IVItem 15.


Exhibits and
    Financial Statement Schedules


40Signatures


41Financial Statements


F-1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   i




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PART I  Form 10-K Form 10-Q. Form 10-K, Form 10-Q.
  tm tm ® tm ® ® tm ® tm ® ® tm tm ® ® tm tm tm 2 tm tm ® sm sm sm sm Form 10-K Form 10-K
  Item 1.
    Business  Overview
    fee-for-service
  (949) 450-5400. Form 10-K, page F-1.
 1




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##### Table of Contents



Prostate
    Cancer and Urology Market Background
          Non-Cryosurgical
    Treatment Options
    five-day
     2




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##### Table of Contents



The
    History of Cryosurgery
        Endocare
    Cryosurgery Technology Development
  V-Prove
 3




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##### Table of Contents



Our
    System Solution: Cryocare CS
        Key
    Clinical Advantages of Our Cryocare CS System
    
    High quality of life following treatment.  Our
    minimally invasive procedure typically offers patients a short
    recovery period for prostate cancer therapy and 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 an option that can
    be used to treat these patients effectively with potentially
    fewer side effects than radical surgery.
    Treatment can be performed more than
    once.  Regardless of what therapy is chosen there
    is always a chance that the cancer will recur. Unlike radiation
    therapy or surgery, cryosurgery can be repeated without
    increased morbidity.
    Focal or partial gland treatment.  Focal
    cryoablation is a prostate cancer treatment in which the
    ablation is confined to the known tumor location, thereby
    sparing surrounding tissue.  Marketing
    and Strategy
  Cryosurgical
    Products
       4




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##### Table of Contents




    Increasing awareness in the urological community regarding the
    clinical benefits of cryosurgery through our presence at major
    technical meetings and trade shows, publication of numerous
    scientific papers and articles on cryosurgery and formation of a
    scientific advisory board to provide guidance and counsel to us
    regarding clinical matters and physician education;
    Conducting clinical studies to further demonstrate the safety
    and efficacy of cryosurgery as a primary treatment of prostate
    cancer;
    Conducting clinical studies to further demonstrate the safety
    and efficacy of cryosurgery as a salvage treatment for prostate
    cancer patients who have failed radiation treatments;
    Conducting clinical studies to further demonstrate the safety
    and efficacy of cryosurgery as a treatment for renal tumors
    which is another important component of the urology market for
    cryosurgery;
    Creating a significant number of new practicing cryosurgeons
    each year through our physician education program;
    Endeavoring to ensure that reimbursement for cryosurgery by
    Medicare and other payers is appropriate given the costs and
    benefits of the treatment; 5




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##### Table of Contents




    Driving patient awareness through our
    direct-to-consumer
    advertising programs; and
    Marketing our products to physicians and hospitals through our
    direct sales force.      
    Conducting key clinical studies to demonstrate the safety and
    efficacy of cryosurgery as a primary treatment for lung and
    liver tumors as well as for palliative intervention (treatment
    of pain associated with metastases), and
    Formation of a dedicated sales group focused on the
    opportunities for cryosurgical treatment approaches in these new
    markets.  Products
    Prostate
    and Renal Cancer:
  
    Cryocare Surgical System  A cryosurgical system with
    eight cryoprobe capability.
    Cryocare CS System  A Cryocare Surgical System with
    onboard ultrasound.
    CryoGuide  A computerized cryoprobe placement,
    simulation and guidance system for cryosurgery.
    Cryoprobes  Disposable probes used with the Cryocare
    Surgical System.
    FasTrac  Percutaneous access device that allows
    one-step insertion of cryoprobes.  Additional
    Cryosurgical Markets:
  
    Cryocare Surgical System  A cryosurgical system with
    eight cryoprobe capability specially configured for
    interventional radiology and oncology.  Raw
    Materials
    Patents
    and Intellectual Property
   6




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Research
    Strategy
      Sales
    2004


2005


2006Cryoablation and urological
    products:Cryocare Surgical Systems


*



*



*Cryoprobes, disposables and
    procedures


91
%


94
%


94
%Cardiac products (CryoCath)


*



*



*     *
    
    These products account for less than 15 percent of total
    revenues. 7




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2004


2005


2006(In thousands)United States

$
22,234


$
26,322


$
26,379International:China


556



567



451Canada


760



1,015



796Other


631



370



364Total international


1,947



1,952



1,611Total revenues

$
24,181


$
28,274


$
27,990   Reimbursement
             8




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Backlog
    Manufacturing
      Government
    Regulation
           9




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
    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.    
    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.      Health
    Care Regulatory Issues
      and/or and/or
 10




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Anti-Kickback
    Laws
          
    Physician-owned subcontractors are not compensated or otherwise
    treated differently than non-physician-owned entities;
    The per procedure payments under the subcontracts are intended
    to reflect fair market value for the products and services
    provided by the subcontractors; 11




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
    Subcontracts are in writing and include a number of
    representations regarding health care regulatory compliance
    issues, including requiring the subcontractor to represent that
    distributions to physician owners of the subcontractor are not
    based on referrals; and
    Physicians must make significant investments in order to
    purchase our equipment. The fact that the physicians have
    assumed bona fide business risk is an important factor in
    demonstrating that the arrangement is not simply a way for
    physicians to profit from their referrals.  Patient
    Referral Laws
      Fair Market Value Compensation.
  Written Contract.
  Anti-Kickback Law Compliance.
      HIPAA and
    Other Privacy Laws
   12




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Other
    United States Regulatory Requirements
    Seasonality
    Competition
        
    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; and
    speed to market.  Employees
    Available
    Information
  Form 10-K, Form 10-Q, Form 8-K,
 13




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Item 1A.
    Risk
    Factors  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.
  Risks
    Associated With our Business
  We have a
    limited operating history with significant losses and expect
    losses to continue for the foreseeable future.
    We may
    require additional financing to sustain our operations and
    without it we may not be able to continue operations.
        and/or
   14




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Our
    independent auditor has issued an unqualified opinion with an
    explanatory paragraph, to the effect that there is substantial
    doubt about our ability to continue as a going
    concern.
  Liquidity and Capital Resources
  The sale
    of our common stock to Fusion Capital may cause dilution and the
    sale of the shares of common stock acquired by Fusion Capital
    could cause the price of our common stock to decline.
    Our
    business may be materially and adversely impacted by the loss of
    our largest customer or the reduction, delay or cancellation of
    orders from this customer; in addition, our business may be
    materially and adversely impacted if this customer delays
    payment or fails to pay for products sold to this
    customer.
   15




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We may be
    required to make tax payments that exceed our settlement
    estimates.
    We may
    incur significant expenses in the future as a result of our
    obligation to pay legal fees for and otherwise indemnify former
    officers and former directors.
    Our
    success will depend on our ability to attract and retain key
    personnel.
    Our
    success is reliant on the acceptance by doctors and patients of
    the Cryocare Surgical System as a preferred treatment for tumor
    ablation.
   16




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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.
    If we are
    unable to continue to enhance our Cryocare Surgical System, our
    business will suffer.
    There is
    uncertainty relating to third-party reimbursement, which is
    critical to market acceptance of our products.
       17




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If we
    fail to protect our intellectual property rights, our
    competitors may take advantage of our ideas and compete directly
    against us.
    Because
    the medical device industry is litigious, we may be sued for
    allegedly violating the intellectual property rights of
    others.
         18




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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.
      Our
    products may be subject to product recalls even after receiving
    FDA clearance or approval, which would harm our reputation and
    our business.
    We could
    be negatively impacted by future interpretation or
    implementation of the federal anti-kickback and Stark laws and
    other federal and state anti-self-referral and anti-kickback
    laws.
  and/or
 19




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Health Care Regulatory Issues.
      and/or
  If we
    become subject to product liability claims, we may be required
    to pay damages that exceed our insurance coverage.
    Our
    intangible assets could become impaired.
    Our
    facilities and systems are vulnerable to natural disasters or
    other catastrophic events.
   20




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Risks
    Associated with an Investment in Our Common Stock
  The
    market price of our common stock is highly volatile.
    Future
    sales of shares of our common stock may negatively affect our
    stock price.
    Form 8-K
    Our
    common stock was delisted from the Nasdaq Stock Market and, as a
    result, trading of our common stock has become more
    difficult.
  over-the-counter
 21




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In order
    to qualify our stock for relisting, we may effectuate a reverse
    stock split, which could adversely affect our
    stockholders.
    i.e.
  We could
    be difficult to acquire due to anti-takeover provisions in our
    charter, our stockholders rights plan and Delaware
    law.
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings   22




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Governmental
    Investigations
  Form 8-K
      Lawsuit
    with KPMG LLP
    Item 4.
    Submission
    of Matters to a Vote of Security Holders   23




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Market
    Information
      High


LowYear Ended December 31,
    2006:

$
3.50


$
2.68First Quarter


3.55



2.35Second Quarter


2.80



1.50Third Quarter


2.05



1.57Fourth QuarterYear Ended December 31,
    2005:First Quarter

$
3.70


$
2.25Second Quarter


4.40



2.98Third Quarter


5.15



2.89Fourth Quarter


3.29



2.35   Holders
    Dividends
    Recent
    Sales of Unregistered Securities
  Form 10-Q Form 8-K.
  Issuer
    Purchases of Equity Securities
    Item 6.
    Selected
    Consolidated Financial Data  Form 10-K.
 24




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Form 10-K Form 10-K Managements Discussion and Analysis of Financial
    Condition and Results of Operations Share Based
    Payment, stock-based
  2002


2003


2004


2005


2006Revenues from continuing operations

$
17,901


$
19,604


$
24,181


$
28,274


$
27,990Loss from continuing operations

$
(26,492
)

$
(24,963
)

$
(31,901
)

$
(14,838
)

$
(11,076
)Net loss per share of common
    stock  basic and diluted (continuing operations)

$
(1.11
)

$
(1.03
)

$
(1.31
)

$
(0.51
)

$
(0.37
)Weighted-average shares of common
    stock outstanding


23,822



24,162



24,263



28,978



30,253Balance Sheet Data:Total assets

$
92,628


$
71,997


$
34,374


$
32,237


$
16,246Common stock warrants

$



$



$



$
5,023


$
1,307   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion should be read in conjunction with
    Item 1  Business,
    Item 1A  Risk Factors,
    Item 6  Selected Consolidated Financial
    Data and Item 8  Financial
    Statements and Supplementary Data, as well as our
    consolidated financial statements and related notes contained
    elsewhere in this Annual Report on
    Form 10-K.
    This discussion contains forward-looking statements based on our
    current expectations. There are various factors  many
    beyond our control  that could cause our actual
    results or the occurrence or timing of expected events to differ
    materially from those anticipated in these forward-looking
    statements. Some of these factors are described below and other
    factors are described elsewhere in this Annual Report on
    Form 10-K,
    including above under Risks Factors in Item 1A
    of this Annual Report on
    Form 10-K.
    In addition, there are factors not described in this Annual
    Report on
    Form 10-K
    that could cause our actual results or the occurrence or timing
    of expected events to differ materially from those anticipated
    in these forward-looking statements. 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
    fee-for-service
   25




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Strategy
    and Key Metrics
    year-over-year
    10-year
 26




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Results
    of Operations
    Year Ended December 31,2004


2005


2006(In thousands)Revenues:Product sales:Cryoablation disposable products

$
4,584


$
6,790


$
13,948Cryocare Surgical Systems


1,403



743



1,096Other (Urohealth)


49



72



446,036



7,605



15,088Cryoablation procedure fees


17,516



19,780



12,298Cardiac royalties (CryoCath)


629



889



604$
24,181


$
28,274



27,990Cost of revenues:Cryoablation disposable products
    and procedure fees

$
13,330


$
15,278



11,541Cryocare Surgical Systems


255



460



802$
13,585


$
15,738


$
12,343              27




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Share Based Payment Accounting for Stock-Based
    Compensation grant-date Accounting
    for Stock Issued to Employees,
    Year Ended December 31,2004


2005


2006(In thousands)Cost of revenues

$
13,585


$
15,738


$
12,343Research and development


1,856



2,283



2,781Selling and marketing


13,354



13,001



15,195General and administrative


16,379



13,858



13,107Goodwill impairment and other
    charges


9,900



26



Loss on divestitures, net


711







Total costs and expenses

$
55,785


$
44,906


$
43,426Interest income

$
293


$
308


$
452Interest expense

$
(7
)

$
657


$
3,716Minority interests

$
(583
)

$



$
   Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Revenues.
   28




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Costs of Revenues.
  Gross Margins.
  Research and Development Expenses.
  Selling and Marketing Expenses.
  General and Administrative Expenses.
   29




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Interest Income.
  Interest Expense.
  Loss from Continuing Operations.
  Income from Discontinued Operations.
  Net Loss.
  Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
  Revenues.
      Cost of Revenues.
 30




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Gross Margins.
  Research and Development Expenses.
  Selling and Marketing Expenses.
  General and Administrative Expenses. Form S-2
  Goodwill Impairment and Other Charges.
  Interest Income.
  Interest Expense.
  Loss from Continuing Operations.
  Income (Loss) from Discontinued Operations. 24-month
 31




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Off
    Balance Sheet Financing
    Liquidity
    and Capital Resources
         32




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Form 10-K
  Contractual
    Obligations
    Payments Due by Period [Update]Total


2007


2008-2009


2010-2011(In thousands)Non-cancelable operating leases(1)

$
1,785


$
587


$
1,075


$
123Purchase commitments(2)


620



620







$
2,405


$
1,207


$
1,075


$
123     (1)
    
    We enter into operating leases in the normal course of business.
    We lease office space as well as other property and equipment
    under operating leases. Some lease agreements provide us with
    the option to renew the lease at the end of the original term.
    Our future operating lease obligations would change if we
    exercise these renewal options and if we enter into additional
    operating lease agreements. For more information, see
    Note 13 Commitments and Contingencies to
    our Consolidated Financial Statements.(2)
    
    These purchase commitments relate to agreements to purchase
    goods or services. These obligations are not recorded in our
    consolidated financial statements until contract payment terms
    take effect. We expect to fund these commitments with cash flows
    from operations and from cash balances on hand. The obligations
    shown in the above table are subject to change based on, among
    other things, our manufacturing operations not operating in the
    normal course of business, the demand for our products, and the
    ability of our suppliers to deliver the products or services as
    promised.     33




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Critical
    Accounting Policies
  Form 10-K.
  Revenue Recognition. No. 00-21,
           34




---



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Impairment of Long-Lived Assets. Accounting for the
    Impairment or Disposal of Long Lived Assets,
  Legal and Other Loss Contingencies. Accounting for Contingencies,
  Other Investments. The Equity Method of Accounting of
    Investments in Common Stock, 00-31, The Meaning of
    Other-Than-Temporary
    Impairment and Its Application to Certain Investments, Consolidation of Variable Interest Entities, an
    interpretation of ARB No. 51.
  Income Taxes. ,
    Accounting for Uncertainty in Income Taxes, an interpretation of
    SFAS No. 109
  Stock based compensation. stock-based
 35




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Share-Based
    Payments. Accounting for Stock Issued to
    Employees stock-based Share-Based Payment.
  Inflation
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk        Item 8.
    Financial
    Statements and Supplementary Data  Form 10-K page F-1.
  Item 9.
    Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosure   36




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Item 9A.
    Controls
    and Procedures  Evaluation of Disclosure Controls and
    Procedures.
  Rule 13a-15(b)
  Managements Annual Report on Internal Control
    Over Financial Reporting. Rules 13a-15(f) 15d-15(f)
                Changes in Internal Controls.
 37




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    ON INTERNAL CONTROL OVER FINANCIAL REPORTING
     Internal Control  Integrated Framework
            Ernst &
    Young llp
    38




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##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and director
    independence    Item 14.
    Principal
    Accountant Fees and Services   39




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statements:
  Form 10-K
  PageConsolidated Financial
    Statements of the Company:Report of
    Independent Registered Public Accounting Firm

F-1Consolidated
    Statements of Operations for the Years Ended December 31,
    2004, 2005 and 2006

F-2Consolidated
    Balance Sheets as of December 31, 2005 and 2006

F-3Consolidated
    Statements of Stockholders Equity for the Years Ended
    December 31, 2004, 2005 and 2006

F-4Consolidated
    Statements of Cash Flows for the Years Ended December 31,
    2004, 2005 and 2006

F-5Notes to the
    Consolidated Financial Statements

F-6 to F-37   Financial Statement Schedules:
  page F-38.
  Exhibits:
  Form 10-K Form 10-K,
  Supplemental
    Information
  Form 10-K. Form 10-K,
 40




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SIGNATURES    Endocare, Inc.
   By:
    /s/  Craig
    T. Davenport   Chairman, Chief Executive Officer and President
  POWER OF
    ATTORNEY
  attorney-in-fact Form 10-K, attorneys-in-fact attorneys-in-fact
    Signature

Title

Date/s/  Craig
    T.
    DavenportCraig
    T. Davenport

Chairman, Chief Executive Officer
    and President (principal executive officer)

March 16, 2007/s/  Michael
    R.
    RodriguezMichael
    R. Rodriguez

Senior Vice President, Finance and
    Chief Financial Officer (principal financial and accounting
    officer)

March 16, 2007/s/  John
    R. Daniels,
    M.D.John
    R. Daniels, M.D.

Director

March 16, 2007/s/  David
    L.
    GoldsmithDavid
    L. Goldsmith

Director

March 16, 2007/s/  Eric
    S. KentorEric
    S. Kentor

Director

March 16, 2007/s/  Terrence
    A. NoonanTerrence
    A. Noonan

Director

March 16, 2007/s/  Thomas
    R. TestmanThomas
    R. Testman

Director

March 16, 2007  41




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                 /s/  Ernst &
    Young llp
    F-1




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Years Ended December 312004


2005


2006(In thousands, except per share data)Product sales

$
6,036


$
7,605


$
15,088Service revenues


17,516



19,780



12,298Other


629



889



60424,181



28,274



27,990Costs and expenses:Cost of revenues


13,585



15,738



12,343Research and development


1,856



2,283



2,781Selling and marketing


13,354



13,001



15,195General and administrative


16,379



13,858



13,107Goodwill impairment and other
    charges


9,900



26



Loss on divestitures, net


711







Total costs and expenses


55,785



44,906



43,426Loss from operations


(31,604
)


(16,632
)


(15,436
)Interest income


293



308



452Interest expense


(7
)


657



3,716Loss from continuing operations
    before minority interests


(31,318
)


(15,667
)


(11,268
)Minority interests


(583
)






Loss from continuing operations
    before taxes


(31,901
)


(15,667
)


(11,268
)Tax benefit on continuing
    operations






829



192Loss from continuing operations


(31,901
)


(14,838
)


(11,076
)Income (loss) from discontinued
    operations, net of taxes


(5,718
)


1,159



311Net loss

$
(37,619
)

$
(13,679
)

$
(10,765
)Net income (loss) per share of
    common stock  basic and diluted Continuing operations

$
(1.31
)

$
(0.51
)

$
(0.37
)Discontinued operations

$
(0.24
)

$
0.04


$
0.01Weighted-average shares of common
    stock outstanding


24,263



28,978



30,253    F-2




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
  December 312005


2006(In thousands, except share and per share data)ASSETSCurrent assets:Cash and cash equivalents

$
8,108


$
1,811Accounts receivable less
    allowances for doubtful accounts and sales returns of $70 and
    $84 at December 31, 2005 and 2006, respectively


3,549



4,161Inventories


2,462



2,260Prepaid expenses and other current
    assets


1,213



1,284Assets of discontinued operations


9,624



Total current assets


24,956



9,516Property and equipment, net


1,794



1,040Intangibles, net


4,167



3,613Investments and other assets


1,320



2,077Total assets

$
32,237


$
16,246LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
4,384


$
3,393Accrued compensation


3,614



3,000Other accrued liabilities


4,925



3,594Liabilities of discontinued
    operations


1,461



Total current liabilities


14,384



9,987Common stock warrants


5,023



1,307Deferred compensation






74Stockholders equity:Preferred stock, $0.001 par
    value; 1,000,000 shares authorized; none issued and
    outstanding






Common stock, $0.001 par
    value; 50,000,000 shares authorized; 30,089,144 and
    30,679,176 shares issued and outstanding at
    December 31, 2005 and 2006, respectively


30



31Additional paid-in capital


178,477



181,289Accumulated deficit


(165,677
)


(176,442
)Total stockholders equity


12,830



4,878Total liabilities and
    stockholders equity

$
32,237


$
16,246    F-3




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
 (In
    thousands)
  TotalCommon Stock


Additional


Accumulated


Deferred





StockholdersShares


Amount


Paid-In Capital


Deficit


Compensation


Treasury Stock


EquityBalance at December 31,
    2003


24,183


$
24


$
171,875


$
(114,379
)

$
(107
)

$
(2,092
)

$
55,321Net loss and comprehensive loss














(37,619
)










(37,619
)Stock options exercised


350







92















92Compensation related to issuance
    of options and warrants










123







13







136Treasury stock retired










(2,596
)










2,596



Purchase of treasury stock


(191
)


















(504
)


(504
)Deferred compensation on options
    forfeited










(94
)






94







Balance at December 31,
    2004


24,342


$
24


$
169,400


$
(151,998
)

$



$



$
17,426Net loss and comprehensive loss














(13,679
)










(13,679
)Stock options exercised


112







116















116Compensation expense










51















51Sale of common stock


5,635



6



8,910















8,916Balance at December 31,
    2005


30,089


$
30


$
178,477


$
(165,677
)

$



$



$
12,830Net loss and comprehensive loss














(10,765
)










(10,765
)Stock options exercised


86







108















108Compensation expense










2,797















2,797Sale of common stock


504



1



(93
)














(92
)Balance at December 31,
    2006


30,679


$
31


$
181,289


$
(176,442
)

$



$



$
4,878     F-4




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  For the Years Ended December 31,2004


2005


2006(In thousands)Cash flows from operating
    activities:Net loss

$
(37,619
)

$
(13,679
)

$
(10,765
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation and amortization


3,481



3,054



1,576Reserve for uncollectible notes










695(Gain) loss on divestitures, net


711



(609
)


(524
)Compensation expense related to
    issuance of options, warrants and restricted stock


136



51



2,845Goodwill impairment and other
    charges


15,810



26



Loss on sale of placement units and
    other fixed assets


139



107



47Minority interests


584



(214
)


Extinguishment of payroll tax
    liabilities


(117
)


(182
)


(891
)Interest expense on common stock
    warrants






(657
)


(3,716
)Changes in operating assets and
    liabilities, net of effects from purchases and divestitures:Accounts receivable


(248
)


(354
)


(407
)Inventories


(1,516
)


(318
)


112Prepaid expenses and other current
    assets


1,132



(454
)


(83
)Accounts payable


(675
)


(337
)


(1,409
)Accrued compensation


(33
)


429



281Other accrued liabilities


1,127



(1,581
)


(1,364
)Net cash used in operating
    activities


(17,088
)


(14,718
)


(13,603
)Cash flows from investing
    activities:Purchases of property and equipment


(456
)


(423
)


(158
)Purchases of intangibles






(330
)


Partnership distributions to
    minority interests


(739
)






Proceeds from divestitures


2,388



850



7,480Other assets


315







Net cash provided by investing
    activities


1,508



97



7,322Cash flows from financing
    activities:Stock options and warrants exercised


92



116



108Borrowings on line of credit










250Payments on line of credit










(250
)Proceeds from sale of stock and
    warrants, net






14,596



(92
)Repurchase of treasury stock


(504
)






Net cash provided by (used in)
    financing activities


(412
)


14,712



16Net increase/(decrease) in cash and
    cash equivalents


(15,992
)


91



(6,265
)Cash and cash equivalents,
    beginning of year


23,977



7,985



8,108Less: Cash of discontinued
    operations


(155
)


32



(32
)Cash and cash equivalents, end of
    year

$
7,830


$
8,108


$
1,811Non cash activities:Transfer of inventory to property
    and equipment for placement at customer sites

$
951


$
532


$
587Transfer from property and
    equipment to inventory for sale of Cryocare Surgical Systems










470Other supplemental information:Interest paid

$
8


$
36


$
19Income taxes paid

$
2


$
22


$
55    F-5




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
  1.
    Organization
    and Operations of the Company      2.
    Recent
    Operating Results and Liquidity    Government Investigations
     F-6




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Private Placement of Common Stock and
    Warrants
  Line of Credit
    re-engineering
 F-7




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Form 10-K
  3.
    Summary
    of Significant Accounting Policies  Principles
    of Consolidation
    Comprehensive
    Income
   F-8




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Use of
    Estimates
    Revenue
    Recognition
  set-up,
   F-9




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended December 31,2004


2005


2006Revenues:Product sales:Cryoablation disposable products

$
4,584


$
6,790


$
13,948Cryocare Surgical Systems


1,403



743



1,096Other (Urohealth)


49



72



446,036



7,605



15,088Cryoablation procedure fees


17,516



19,780



12,298Cardiac royalties (CryoCath)


629



889



604$
24,181


$
28,274


$
27,990Cost of revenues:Cryoablation disposable products
    and procedure fees

$
13,330


$
15,278


$
11,541Cryocare Surgical Systems


255



460



802$
13,585


$
15,738


$
12,343     rent-to-own No. 00-21, Revenue Arrangements with Multiple Deliverables,
     F-10




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Inventories
  work-in-process first-in,
    December 31,2005


2006(In thousands)Raw materials

$
1,646


$
1,750Work in process


275



300Finished goods


911



778Total inventories


2,832



2,828Less inventory reserve


(370
)


(568
)Inventories, net

$
2,462


$
2,260   Property
    and Equipment
      December 31,2005


2006(In thousands)Equipment and computers

$
1,697


$
1,825Cryosurgical systems placed at
    customer sites


5,746



5,019Furniture and fixtures


905



908Leasehold improvements


321



321Total property and equipment, at
    cost


8,669



8,073Accumulated depreciation and
    amortization


(6,875
)


(7,033
)Property and equipment, net

$
1,794


$
1,040  F-11




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Long-Lived
    Assets, Goodwill and Intangible Assets Subject to
    Amortization
  Goodwill and other Intangible Assets Impairment of Goodwill and
    Other Intangible Assets.
    Trade names (discontinued
    operations)

15 yearsDomain names

5 yearsCovenants not to compete

3 to 5 yearsDeveloped technology (discontinued
    operations)

15 yearsPatents

3 to 15 years   Accounting for the
    Impairment or Disposal of Long-Lived Assets, Impairment of Goodwill
    and other Intangible Assets Dispositions and Discontinued
    Operations
    2007

$
4892008


4832009


4832010


4832011


483Thereafter


1,192$
3,613    F-12




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     December 31,2005


2006(In thousands)Domain name

$
435


$
435Covenant not to compete


352



352Patents


6,205



6,205Total intangibles


6,992



6,992Accumulated amortization


(2,825
)


(3,379
)Intangibles, net

$
4,167


$
3,613   Investments
  start-up other-than-temporary.
  Product
    Warranties
    Research
    and Development
    Advertising
    Shipping
    and Handling Costs
   F-13




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Cash and
    Cash Equivalents
      Concentrations
    of Credit Risk
    Dispositions and Discontinued Operations Related Party
    Transactions
  Fair
    Value of Financial Instruments
    Risks and
    Uncertainties
   F-14




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Reclassification
    Off-Balance
    Sheet Financings and Liabilities
    Other
    Accrued Liabilities
    Capital
    Stock and Earnings Per Share
      Taxes
    Stock-Based
    Compensation
  Accounting for Stock Issued to
    Employees Accounting for Stock Based
 F-15




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Compensation.
  Share Based Payment
  Share-Based
    Payment.
    Form 10-Q,
       F-16




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      December 31,


December 31,2004


2005Net loss, as reported(a)

$
(37,619
)

$
(13,679
)Add: Stock-based employee
    compensation expense included in reported net loss for all
    awards(b)


136



43Less: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards


(3,875
)


(3,696
)Net loss, as adjusted

$
(41,358
)

$
(17,332
)Basic and diluted loss per share:As reported

$
(1.55
)

$
(0.47
)As adjusted

$
(1.70
)

$
(0.60
)     2004


2005


2006Stock volatility


0.89



0.90



0.70Risk-free interest rate


3.6
%


4.0
%


4.6
%Expected life in years


5 years



5 years



6.25 yearsStock dividend yield










     (a)
    
    In the past, we had issued stock options and warrants to
    consultants for services performed. Compensation expense for the
    fair value of these options was determined by the Black-Scholes
    option-pricing model and was charged to operations over the
    service period or as performance goals were achieved. Such
    expense was included in net loss as reported.(b)
    
    Since we issue options with exercise prices equal to or
    exceeding the fair values of the underlying common stock, no
    compensation expense was recorded for options issued to
    employees. The recorded expense generally related to
    compensation charges upon modification of vesting terms,
    cashless exercises, and other non-routine transactions.   F-17




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   4.
    Recent
    Accounting Pronouncements  Accounting for Uncertainty
    in Income Taxes Accounting for Income Taxes
  No. 00-19-2, Accounting for Registration Payment Arrangements, Accounting for Contingencies. Private Placement of Common
    Stock and Warrants No. 00-19, Accounting for Derivative Financial Instruments Indexed to,
    and Potentially Settled in, a Companys Own Stock.
    5.
    Impairment
    of Goodwill and Other Intangible Assets  Goodwill and Other Intangible
    Assets,
 F-18




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Dispositions and Discontinued Operations
  Dispositions and Discontinued Operations
    6.
    Private
    Placement of Common Stock and Warrants  Fusion
    Capital Equity Purchase Agreement
   F-19




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Form S-1 365-day
  pre-existing
  March
    2005 Private Placement
      30-day
    Form S-2
 F-20




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  S-2 Form S-3,
  S-2
  00-19, Accounting for Derivative Financial Instruments Indexed To,
    and Potentially Settled In, a Companys Own Stock, 00-19
  
    First, the Black-Scholes option-pricing model was used with the
    following assumptions: an expected life equal to the remaining
    contractual term of the warrants (3.25 years); no
    dividends; a risk free rate of 4.73 percent, which equals
    the yield on Treasury bonds at constant (or fixed) maturity
    equal to the remaining contractual term of the warrants; and
    volatility of 53.53 percent. Under these assumptions, the
    Black-Scholes option-pricing model yielded a value of $0.38 for
    each of the Series A warrants and $0.32 for each of the
    Series B warrants, for an aggregate value of
    $1.4 million;
    Second, since the warrants are limited in the amount of
    realizable profit to the holders as a result of the call
    provision described above, we reduced the value of the warrants
    to account for the probability that the stock price will reach
    or exceed $6.50 and $7.50, respectively ( i.e.,the
    prices above which we have the right to call the Series A
    and Series B warrants, effectively compelling the holders
    to exercise their warrants). We used a statistical formula to
    calculate the probability that our stock price will reach or
    exceed $6.50 and $7.50, respectively. Based on this formula, we
    calculated that, for the Series A warrants, the probability
    that the stock price of $6.50 will be reached or exceeded is
    approximately 0.28 percent. Similarly, we calculated that,
    for the Series B warrants, the probability that the stock
    price of $7.50 will be reached or exceeded is approximately
    0.04 percent. Based on these probabilities, the valuation
    of each of the Series A warrants is calculated at $0.38
    (which equals one minus 0.28 percent, multiplied by $0.38)
    and the valuation of each of the Series B warrants is
    calculated at $0.32 (which equals one minus 0.04 percent,
    multiplied by $0.32). This yields an aggregate value of the
    warrants equal to $1.4 million; and
    Third, we further reduced the value of the warrants on the
    assumption that our stock price on the day that the warrants are
    exercised will be affected by dilution as a result of the
    additional stock introduced into the market. Given that there
    are approximately 30.7 million shares outstanding, we
    calculated that the exercise of the warrants will result in
    dilution of approximately 6.2 percent. Using the dilution
    figure of 6.2 percent, we reduced the value of each of the
    Series A warrants to $0.36 and the Series B warrants
    to $0.31. This yields an aggregate value of the warrants equal
    to $1.3 million. F-21




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Share Based Payment Summary of Significant
    Accounting Policies  Stock-Based
    Compensation
  00-19, No. 00-19-2, Accounting for Registration Payment Arrangements,
    7.
    Dispositions
    and Discontinued Operations  Timm
    Medical  2005
  Private Placement of Common
    Stock and Warrants
  Accounting for the
    Impairment or Disposal of Long-Lived Assets,
 F-22




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Feb 10,


Dec 31,2006


2005Assets:Cash, inventories and other
    current assets

$
1,041


$
1,216Property and equipment, net


71



75Goodwill, net


4,552



4,552Intangibles, net


3,680



3,716Other assets


65



65Total assets

$
9,409


$
9,624Liabilities:Accounts payable and other current
    liabilities


502


$
942Other accrued liabilities


486



519Total liabilities


988



1,461Net assets

$
8,421


$
8,163     Cryosurgical
    Products for Cardiac Applications
  tm 12-year
 F-23




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Urinary
    Incontinence and Urodynamics
        Mobile
    Prostate Treatment Businesses (Partnerships)
    8.
    Stock-Based
    Compensation Plans   F-24




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended December 31,2004


2005


2006Weighted-Average





Weighted-Average





Weighted-AverageNumber of


Exercise Price


Number of


Exercise Price


Number of


Exercise PriceOptions


Per Option


Options


Per Option


Options


Per OptionOutstanding, beginning of year


5,118,752


$
5.06



5,361,682


$
4.72



5,621,240


$
4.27Granted


1,397,500



2.94



1,549,250



3.19



1,116,250



2.84Cancelled/forfeited


(804,570
)


5.32



(1,094,463
)


5.34



(742,459
)


3.69Exercised


(350,000
)


0.26



(195,229
)


2.10



(85,833
)


1.26Outstanding, end of year


5,361,682



4.72



5,621,240



4.27



5,909,198



4.13   Options OutstandingWeighted-Average





Options ExercisableNumber


Remaining





Number


Weighted-Range Of

Outstanding at


Contractual Life


Weighted-Average


Exercisable at


AverageExercise Price

December 31, 2006


(Number of Years)


Exercise Price


December 31, 2006


Exercise Price$ 1.80 -  2.22


760,500



8.21


$
2.15



232,917


$
2.112.25 -  2.25


625,000



6.17



2.25



585,938



2.252.36 -  2.75


604,833



7.35



2.67



390,709



2.652.80 -  3.00


700,995



8.52



2.88



244,921



2.913.04 -  3.31


646,750



8.82



3.24



58,707



3.203.35 -  4.15


704,521



7.70



3.79



396,051



3.914.16 -  4.20


40,917



6.81



4.18



34,958



4.184.27 -  4.27


1,000,000



6.96



4.27



675,000



4.274.69 - 13.42


614,632



4.72



8.04



588,799



8.1913.42 - 21.23


211,050



4.84



16.18



211,050



16.185,909,198



7.25


$
4.10



3,419,050


$
4.84        F-25




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   9.
    Equity
    Incentive Plans  Share-based
    payments
    004 Stock Incentive Plan.
  995 Stock Plan.
  995 Director Option Plan. 10-year
  2002 Supplemental Stock Plan. non-statutory
 F-26




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##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Employee Deferred Stock Unit Program. paid-in-capital.
  Non-employee Directors Deferred Stock Unit
    Program.
    Option Arrangements Outside of Plans.
 F-27




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Stockholder
    Rights Plan
    10.
    Income
    Taxes    Years Ended December 31,2004


2005


2006(In thousands)Federal

$



$
(705
)

$
(163
)State






(124
)


(29
)Total

$



$
(829
)

$
(192
)    F-28




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2005


2006(In thousands)Deferred tax assets (liabilities):Depreciation and amortization

$
468


$
448Nondeductible reserves and accruals


2,280



2,399Investment in stock of
    discontinued operation


10,468



Research and experimentation tax
    credit carryforwards


1,000



1,153Net operating loss carryforwards


42,578



45,430Capital loss carryforwards


5,279



16,064Stock-based compensation






724Other


1,417



16063,490



66,378Valuation allowance


(63,490
)


(66,378
)Net deferred tax assets

$



$
       Years Ended December 31,2004


2005


2006(In thousands)Computed expected tax benefit

$
(10,846
)

$
(5,327
)

$
(3,831
)Nondeductible expenses


78



89



342Increase in valuation allowance


12,950



4,490



4,296State taxes


(1,861
)


(81
)


(19
)Other


(321
)






(980
)Actual tax expense (benefit)

$



$
(829
)

$
(192
)    F-29




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     11.
    Collaborative
    and Other Agreements  Sanarus
    Medical Inc.
  paid-up paid-up
      CryoFluor
    Therapeutics
   F-30




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         CryoDynamics,
    LLC  Research & Development
    Agreement
          Patent,
    Licensing, Royalty and Distribution Agreements
   F-31




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     12.
    Commitments
    and Contingencies  Leases
    Year ending December 31, 2007

$
5872008


5292009


5462010


1232011


Thereafter


$
1,785   Employment
    and Severance Agreements
    Former
    Officers
  Legal
    Matters
   F-32




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Employee
    Benefit Plans
    Legal
    Matters
    Governmental
    Investigations
  Form 8-K
 F-33




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Historical
    option granting practices
  Materiality Considering the Effects of Prior Year Misstatements When
    Quantifying Misstatements in Current Year Financial
    Statements.
    Shareholder
    Class Action and Derivate Lawsuits
  class-action class-action
     F-34




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Lawsuit
    With KPMG LLP
    Other
    Litigation
        13.
    Line of
    Credit   F-35




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            14.
    Related
    Party Transactions     F-36




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  15.
    Quarterly
    Results of Operations (Unaudited)    Quarter Ended


Quarter Ended


Quarter Ended


Quarter EndedMarch 31,


June 30,


September 30,


December 31,2006


2006


2006


2006Revenues from continuing operations

$
7,262


$
6,908


$
6,700


$
7,120Cost of revenues from continuing
    operations

$
3,766


$
3,256


$
2,677


$
2,644Loss from continuing operations

$
(5,174
)

$
(708
)

$
(2,149
)

$
(3,045
)Net loss

$
(4,929
)

$
(708
)

$
(2,149
)

$
(2,979
)Loss from continuing operations
    per share of common stock  basic and diluted

$
(0.17
)

$
(0.02
)

$
(0.07
)

$
(0.10
)Net loss per share of common
    stock  basic and diluted

$
(0.16
)

$
(0.02
)

$
(0.07
)

$
(0.10
)Weighted average shares of common
    stock outstanding  basic and diluted


30,143



30,166



30,175



30,532   Quarter Ended


Quarter Ended


Quarter Ended


Quarter EndedMarch 31,


June 30,


September 30,


December 31,2005


2005


2005


2005Revenues from continuing operations

$
6,867


$
6,919


$
7,008


$
7,480Cost of revenues from continuing
    operations

$
4,186


$
3,924


$
3,809


$
3,818Loss from continuing operations

$
(5,219
)

$
(4,522
)

$
(2,997
)

$
(2,100
)Net loss

$
(4,506
)

$
(4,196
)

$
(2,460
)

$
(2,517
)Loss from continuing operations
    per share of common stock  basic and diluted

$
(0.17
)

$
(0.15
)

$
(0.10
)

$
(0.07
)Net loss per share of common
    stock  basic and diluted

$
(0.15
)

$
(0.14
)

$
(0.08
)

$
(0.08
)Weighted average shares of common
    stock outstanding  basic and diluted


29,988



30,044



30,069



30,081  F-37




---



##### Table of Contents



ENDOCARE,
    INC. AND SUBSIDIARIES
  SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS
  Balance at the


Additions





Balance atBeginning of


Charges to








the End ofthe Period


Operations


Other


Deductions


the Period(In thousands)2004Allowance for Doubtful Accounts
    and Sales Returns

$
1,986


$
(726
)

$



$
(1,186
)

$
742005Allowance for Doubtful Accounts
    and Sales Returns

$
74


$
10


$



$
(14
)

$
702006Allowance for Doubtful Accounts
    and Sales Returns

$
70


$
36


$



$
(22
)

$
84      F-38




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##### Table of Contents



EXHIBIT INDEX
  Exhibit No.

Description2
.1(1)

Stock Purchase Agreement, dated as
    of January 13, 2006, by and among Plethora Solutions
    Holdings plc, Endocare, Inc. and Timm Medical Technologies, Inc.
    The schedules and other attachments to this exhibit were
    omitted. The Company agrees to furnish a copy of any omitted
    schedules or attachments to the Securities and Exchange
    Commission upon request.2
.2(2)

$1,425,000 Secured Convertible
    Promissory Note, dated as of February 10, 2006, from
    Plethora Solutions Holdings plc to Endocare, Inc.3
.1(3)

Certificate of Amendment of
    Restated Certificate of Incorporation of the Company.3
.2(3)

Certificate of Designation of
    Series A Junior Participating Preferred Stock of the
    Company.3
.3(3)

Restated Certificate of
    Incorporation.3
.4(4)

Amended and Restated Bylaws of the
    Company.4
.1(5)

Form of Stock Certificate.4
.2(6)

Form of Series A Warrant.4
.3(6)

Form of Series B Warrant.4
.4(7)

Rights Agreement, dated as of
    March 31, 1999, between the Company and U.S. Stock
    Transfer Corporation, which includes the form of Certificate of
    Designation for the Series A Junior Participating Preferred
    Stock as Exhibit A, the form of Rights Certificate as
    Exhibit B and the Summary of Rights to Purchase
    Series A Preferred Shares as Exhibit C.4
.5(8)

Amendment No. 1 to Rights
    Agreement, dated as of September 24, 2005, between the
    Company and U.S. Stock Transfer Corporation.10
.1(9)

Lease Agreement, dated as of
    November 26, 2001, by and between the Company and The
    Irvine Company.10
.2(9)

Form of Indemnification Agreement
    by and between the Company and its directors.10
.3(9)

Form of Indemnification Agreement
    by and between the Company and its executive officers.10
.4(10)

1995 Director Option Plan (as
    amended and restated through March 2, 1999).10
.5(11)

1995 Stock Plan (as amended and
    restated through December 30, 2003).10
.6(13)

Employment Agreement, dated as of
    December 15, 2003, by and between the Company and Craig T.
    Davenport.10
.7(14)

Employment Agreement, dated as of
    August 11, 2004, by and between the Company and Michael R.
    Rodriguez.10
.8(15)

2004 Stock Incentive Plan.10
.9(16)

2004 Non-Employee Director Option
    Program under 2004 Stock Incentive Plan.10
.10(16)

Form of Award Agreement Under 2004
    Stock Incentive Plan.10
.11(17)

Confidential Settlement Agreement
    and Release, dated as of February 18, 2005, by and between
    the Company and Great American E&S Insurance Company.10
.12(6)

Purchase Agreement, dated as of
    March 10, 2005, by and between the Company and the
    Investors (as defined therein).10
.13(6)

Registration Rights Agreement,
    dated as of March 10, 2005, by and between the Company and
    the Investors (as defined therein).10
.14(18)

First Amendment to Employment
    Agreement with Craig T. Davenport, dated as of April 28,
    2005.10
.15(2)

Loan and Security Agreement, dated
    as of October 26, 2005, by and among the Company, Timm
    Medical Technologies, Inc. and Silicon Valley Bank.10
.16(2)

Commercialization Agreement, dated
    as of November 8, 2005, by and between the Company and
    CryoDynamics, LLC.10
.17(19)

Employment Agreement, dated as of
    January 17, 2006, by and between the Company and Clint B.
    Davis.10
.18(20)

Description of director
    compensation, as amended on February 23, 2006. F-39




---



##### Table of Contents



Exhibit No.

Description10
.19(21)

Description of 2006 Management
    Incentive Compensation Program.10
.20(22)

Amendment to Loan Documents, dated
    as of April 24, 2006, by and between the Company and
    Silicon Valley Bank.10
.21(23)

Amendment to Loan Documents, dated
    as of February 10, 2006, between the Company, Timm Medical
    Technologies, Inc. and Silicon Valley Bank.10
.22(24)

Employee Deferred Stock Unit
    Program, effective as of May 18, 2006.10
.23(24)

Non-Employee Director Deferred
    Stock Unit Program, effective as of May 18, 2006.10
.24(25)

First Amendment to Lease, dated as
    of May 19, 2006, between the Company and The Irvine Company.10
.25(25)*

Customer Quote, dated as of
    January 9, 2006, to Advanced Medical Partners, Inc..10
.26(25)*

Amended and Restated Endocare
    Service Agreement, dated as of January 9, 2006, between the
    Company and Advanced Medical Partners, Inc..10
.27(26)

Common Stock Purchase Agreement,
    dated as of October 25, 2006, by and between the Company
    and Fusion Capital Fund II, LLC.10
.28(26)

Registration Rights Agreement,
    dated as of October 25, 2006, by and between the Company
    and Fusion Capital Fund II, LLC.10
.29(27)

Non-Prosecution Agreement, dated
    as of July 18, 2006, by and between the Company and the
    Department of Justice.10
.30(27)

Consent to Entry of Judgment,
    dated as of July 14, 2006, in favor of the Securities and
    Exchange Commission.10
.31(28)

Form of Retention Agreement.10
.32(29)

Amendment to Loan Documents, dated
    as of December 22, 2006, by and between Endocare, Inc. and
    Silicon Valley Bank.21
.1(30)

Subsidiaries of the Company.23
.1

Consent of Independent Registered
    Public Accounting Firm.24
.1(31)

Power of Attorney.31
.1

Certification under
    Section 302 of the Sarbanes-Oxley Act of 2002 for Craig T.
    Davenport.31
.2

Certification under
    Section 302 of the Sarbanes-Oxley Act of 2002 for Michael
    R. Rodriguez.32
.1

Certification under
    Section 906 of the Sarbanes-Oxley Act of 2002 for Craig T.
    Davenport.32
.2

Certification under
    Section 906 of the Sarbanes-Oxley Act of 2002 for Michael
    R. Rodriguez.     
    
    Management contract or compensatory plan or arrangement.*
    
    Certain confidential portions of this exhibit were omitted and
    provided separately to the SEC pursuant to a request for
    confidential treatment.(1)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on January 18, 2006.(2)
    
    Previously filed as an exhibit to our
    Form 10-K
    filed on March 16, 2006.(3)
    
    Previously filed as an exhibit to our Registration Statement on
    Form S-3
    filed on September 20, 2001.(4)
    
    Previously filed as an exhibit to our
    Form 10-K
    filed on March 16, 2004.(5)
    
    Previously filed as an exhibit to our
    Form 10-K
    for the year ended December 31, 1995.(6)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on March 16, 2005.(7)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on June 3, 1999.(8)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on June 28, 2005.(9)
    
    Previously filed as an exhibit to our
    Form 10-K
    filed on March 29, 2002.  (10)
    
    Previously filed as an exhibit to our Registration Statement on
    Form S-8
    filed on June 2, 1999.(11)
    
    Previously filed as an appendix to our Definitive Proxy
    Statement filed on December 3, 2003.(12)
    
    Previously filed as an exhibit to our
    Form 10-K
    filed on December 3, 2003. F-40




---



##### Table of Contents



(13)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on December 16, 2003.(14)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on August 12, 2004.(15)
    
    Previously filed as an appendix to our Definitive Proxy
    Statement filed on August 6, 2004.(16)
    
    Previously filed as an exhibit to our
    Form 10-K
    filed on March 16, 2005.(17)
    
    Previously filed as an exhibit to our
    Form 10-Q
    filed on May 10, 2005.(18)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on May 3, 2005.(19)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on January 12, 2006.(20)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on March 1, 2006.(21)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on March 14, 2006.(22)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on April 25, 2006.(23)
    
    Previously filed as an exhibit to our
    Form 10-Q
    filed on May 10, 2006.(24)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on May 22, 2006.(25)
    
    Previously filed as an exhibit to our
    Form 10-Q
    filed on August 8, 2006.(26)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on October 30, 2006.(27)
    
    Previously filed as an exhibit to our
    Form 10-Q
    filed on November 9, 2006.(28)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on December 13, 2006.(29)
    
    Previously filed as an exhibit to our
    Form 8-K
    filed on December 22, 2006.(30)
    
    Not applicable because the Company does not have any
    subsidiaries that constitute significant
    subsidiaries under
    Rule 1-02(w)
    of
    Regulation S-X.(31)
    
    Included on the signature page of this
    Form 10-K. F-41