##### Table of Contents









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, 2005; 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 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               |  | 92618                               
|                                         |  |                                     
|(Address of principal executive offices) |  | (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







o þ


o þ


þ o þ o


S-K 10-K 10-K. þ


12b-2


o þ o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE


10-K.


10-K, 8-K 10-Q 10-K.










---



##### 










Endocare, Inc.


Form 10-K


For the Fiscal Year Ended December 31, 2005


TABLE OF CONTENTS


|              |  |                                                                                                                      |  |            
|------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | -----------
|              |  |                                                                                                                      |  | Page       
|              |  |                                                                                                                      |  |            
|Part I       
|Item 1.       |  | Business                                                                                                             |  | 1          
|Item 1A.      |  | Risk Factors                                                                                                         |  | 14         
|Item 1B.      |  | Unresolved Staff Comments                                                                                            |  | 23         
|Item 2.       |  | Properties                                                                                                           |  | 23         
|Item 3.       |  | Legal Proceedings                                                                                                    |  | 23         
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                              |  | 24         
|Part II      
|Item 5.       |  | Market For Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  | 25         
|Item 6.       |  | Selected Consolidated Financial Data                                                                                 |  | 26         
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  | 26         
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  | 36         
|Item 8.       |  | Financial Statements and Supplementary
    Data                                                                      |  | 36         
|Item 9.       |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |  | 36         
|Item 9A.      |  | Controls and Procedures                                                                                              |  | 36         
|Item 9B.      |  | Other Information                                                                                                    |  | 39         
|Part III     
|Item 10.      |  | Directors and Executive Officers of the
    Registrant                                                               |  | 39         
|Item 11.      |  | Executive Compensation                                                                                               |  | 39         
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  | 39         
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                   |  | 39         
|Item 14.      |  | Principal Accountant Fees and Services                                                                               |  | 39         
|Part IV      
|Item 15.      |  | Exhibits and Financial Statement
    Schedules                                                                       |  | 40         
|              |  | Signatures                                                                                                           |  | 43         
|              |  | Financial Statements                                                                                                 |  | F-1 to F-34
|EXHIBIT 2.3  
|EXHIBIT 10.28
|EXHIBIT 10.29
|EXHIBIT 10.30
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



i



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PART I


10-K 10-Q. 10-K, 10-Q.


® ® ® ® ® ® ® ® ® ® ® 10-K 10-K







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

Overview






450-5400. 10-K, F-1.


1



---



##### Table of Contents



Prostate Cancer/ Urology Market Background












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







2



---



##### Table of Contents











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









| |                                            
| | -------------------------------------------
| | Endocare Cryosurgery Technology Development





| |                                 
| | --------------------------------
| | Our System Solution: Cryocare CS



3



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| |                                                  
| | -------------------------------------------------
| | Key Clinical Advantages of Our Cryocare CS System





| |   |                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High quality of life following treatment. Our minimally
    invasive procedure 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 significantly 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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| |   |                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 ongoing clinical studies to further demonstrate the
    safety and efficacy of cryosurgery as a primary treatment of
    cancer of the prostate, as well as its value in treating
    prostate cancer patients who have failed radiation;                                                                                                                                              
|
| |  | 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;                                                                                                                                                                                                                                                                               
|
| |  | Ensuring that reimbursement for cryosurgery by Medicare and
    other payors is appropriate given the costs and benefits of the
    treatment;                                                                                                                                                                                                                                                    
|
| |  | Driving patient awareness through our
    direct-to-consumer
    advertising programs; and                                                                                                                                                                                                                                                                                                        
|
| |  | Marketing our products to physicians and hospitals through our
    direct sales force.                                                                                                                                                                                                                                                                                                            

5



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| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Conducting numerous clinical studies to demonstrate the safety
    and efficacy of cryosurgery as a primary treatment for lung and
    liver tumors as well as for pain management of bone metastases;
|
| |  | Formation of a dedicated sales group focused on the
    opportunities for cryosurgical treatment approaches in these new
    markets; and                                                             
|
| |  | Continuing to enhance our Cryocare Surgical System to improve
    its ease of use across a broad range of tissue ablation
    applications.                                                           



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




6



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Patents and Intellectual Property












Research Strategy






7



---



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Sales




|                                      |                                        |      |  |    |      |  |  |      |   |  |  |    |  
|------------------------------------- | -------------------------------------- | ---- |  | -- | ---- |  |  | ---- | - |  |  | -- | -
|                                      |                                        | 2003 |  |    | 2004 |  |  | 2005 |  
|                                      |                                        |      |  |    |      |  |  |      |  
|Cryoablation and urological products: |                                        |      |  |    |      |  |  |      |   |  |  |   
|                                      | Cryocare Surgical Systems              |      |  | *  |      |  |  | *    |   |  |  | *  |  
|                                      | Cryoprobes, disposables and procedures |      |  | 91 | %    |  |  | 91   | % |  |  | 94 | %
|                                      | Cardiac products (CryoCath)            |      |  | *  |      |  |  | *    |   |  |  | *  |  






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







|                    |        |                |        |     |      |   |        |      |  |   |        |       | 
|------------------- | ------ | -------------- | ------ | --- | ---- | - | ------ | ---- |  | - | ------ | ----- | 
|                    |        | 2003           |        |     | 2004 |   |        | 2005 | 
|                    |        |                |        |     |      |   |        |      | 
|                    |        | (In thousands) |       
|United States       |        | $              | 18,184 |     |      | $ | 22,234 |      |  | $ | 26,322 |      
|International:      |        |                |        |     |      |   |        |      |  |   |        |      
|                    | China  |                |        | 511 |      |   |        | 556  |  |   |        | 567   | 
|                    | Canada |                |        | 30  |      |   |        | 760  |  |   |        | 1,015 | 
|                    | Other  |                |        | 879 |      |   |        | 631  |  |   |        | 370   | 
|                    |        |                |        |     |      |   |        |      | 
|Total international |        |                | 1,420  |     |      |   | 1,947  |      |  |   | 1,952  |      
|                    |        |                |        |     |      |   |        |      | 
|Total revenues      |        | $              | 19,604 |     |      | $ | 24,181 |      |  | $ | 28,274 |      
|                    |        |                |        |     |      |   |        |      | 

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




10



---



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| |                   
| | ------------------
| | Anti-Kickback Laws









11



---



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| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                                                                                                                 
|
| |  | 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







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Fair Market Value Compensation. The compensation
    to the physician under the arrangement (or, if the first link in
    the chain of arrangements between the parties is an ownership or
    investment interest by the referring physician, the first entity
    up the chain that has a direct compensation arrangement with
    next link in the chain) represents fair market value, and is not
    determined in a manner that takes into account the volume or
    value of referrals or other business generated by the physician
    for the DHS entity;
|
| | (2) Written Contract. The arrangement is set out in
    writing, signed by the parties, and specifies the services
    covered by the arrangement; and                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (3) Anti-Kickback Law Compliance. The arrangement
    does not violate the anti-kickback law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

12



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| |                             
| | ----------------------------
| | HIPAA and Other Privacy Laws







| |                                            
| | -------------------------------------------
| | 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;                                               

13



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| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | availability of government or private insurance
    reimbursement; and
|
| |  | speed to market.                                                      

Employees






Available Information


10-K, 10-Q, 8-K,







|         |             
|-------- | ------------
|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.


We face risks related to investigations by the SEC and
DOJ.




Our management members have spent considerable time and
effort dealing with external investigations.




14



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We face risks relating to our liquidity and we may never
reach or maintain profitability.






| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | incur costs related to legal proceedings, including ongoing
    government investigations;                                                                                  
|
| |  | attempt to get our stock relisted on a national exchange;                                                                                                                   
|
| |  | comply with changes in generally accepted accounting principles
    and include employee based stock option charges in our
    consolidated statement of operations in 2006;
|
| |  | comply with the increasing complexities and costs of being a
    public company, such as Sarbanes-Oxley compliance;                                                         
|
| |  | expand our sales and marketing activities as we attempt to gain
    market share for our Cryocare Surgical System; and                                                      
|
| |  | continue our research and development efforts to improve our
    existing products and develop newer products.                                                              









We may be required to make state and local tax payments that
exceed our settlement estimates.




15



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




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


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


15g-9


16



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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.




Our success is reliant on the acceptance by doctors and
patients of the Cryocare Surgical System as a preferred
treatment for tumor ablation.




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.




17



---



##### Table of Contents





If we are unable to continue to develop and 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.








18



---



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




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.






19



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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.




20



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##### Table of Contents



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










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




21



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Fluctuations in our future operating results may negatively
impact the market price of our common stock.






| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | market acceptance of our existing products, as well as products
    in development;                                                          
|
| |  | timing of payments received and the recognition of such payments
    as revenue under collaborative arrangements and strategic
    alliances;
|
| |  | ability to manufacture products efficiently;                                                                                                 
|
| |  | timing of our research and development expenditures;                                                                                         
|
| |  | timing of customer orders;                                                                                                                   
|
| |  | changes in reimbursement rates for our products and procedures
    by Medicare and other third-party payors;                                 
|
| |  | timing of regulatory approvals for new products;                                                                                             
|
| |  | outcomes of clinical studies by us or our competitors;                                                                                       
|
| |  | competition from other treatment modalities;                                                                                                 
|
| |  | physician and patient acceptance of cryosurgery; and                                                                                         
|
| |  | ability to obtain reimbursement for procedures in lung and liver
    cancer, and pain related to bone metastases.                            



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






| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in our operating results and
    cash flows;                                          
|
| |  | developments regarding government and third-party reimbursement;                                                       
|
| |  | changes in government regulation of our products and business
    practices;                                           
|
| |  | developments concerning government investigations of us;                                                               
|
| |  | developments concerning proprietary rights;                                                                            
|
| |  | developments concerning litigation or public concern as to the
    safety of our products or our competitors products;
|
| |  | technological innovations or introduction of new products by us
    or our competitors;                                
|
| |  | investor and analyst perception of us and our industry;                                                                
|
| |  | introduction of new competing technologies;                                                                            
|
| |  | general economic and market conditions; and                                                                            
|
| |  | physician and patient acceptance of cryosurgery.                                                                       

22



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Our intangible assets and goodwill could become impaired.




Our facilities and systems are vulnerable to natural
disasters or other catastrophic events.









|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings





23



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



24



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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


Over-the




|                              |                |      |   |      |     |  |   |      | 
|----------------------------- | -------------- | ---- | - | ---- | --- |  | - | ---- | 
|                              |                | High |   |      | Low | 
|                              |                |      |   |      |     | 
|Year Ended December 31, 2005: |                |      |   |      |     |  |   |     
|                              | First Quarter  |      | $ | 3.70 |     |  | $ | 2.25 | 
|                              | Second Quarter |      |   | 4.40 |     |  |   | 2.98 | 
|                              | Third Quarter  |      |   | 5.15 |     |  |   | 2.89 | 
|                              | Fourth Quarter |      |   | 3.29 |     |  |   | 2.35 | 
|Year Ended December 31, 2004: |                |      |   |      |     |  |   |     
|                              | First Quarter  |      | $ | 4.40 |     |  | $ | 2.95 | 
|                              | Second Quarter |      |   | 4.00 |     |  |   | 2.49 | 
|                              | Third Quarter  |      |   | 3.24 |     |  |   | 2.10 | 
|                              | Fourth Quarter |      |   | 2.95 |     |  |   | 2.25 | 

Holders




Dividends




Recent Sales of Unregistered Securities


10-Q 8-K.


25



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Issuer Purchases of Equity Securities









|        |                                     
|------- | ------------------------------------
|Item 6. | Selected Consolidated Financial Data

10-K. 10-K 10-K


|                                                                                    |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                    |  | 2001 |         |   | 2002 |   |         | 2003 |  |   | 2004    |   |  | 2005 |        
|                                                                                    |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Revenues from continuing operations                                                 |  | $    | 13,037  |   |      | $ | 17,901  |      |  | $ | 19,604  |   |  | $    | 24,181  |   |  | $ | 28,274  |  
|Loss from continuing operations                                                     |  | $    | (11,452 | ) |      | $ | (26,492 | )    |  | $ | (24,963 | ) |  | $    | (31,901 | ) |  | $ | (14,838 | )
|Net loss per share of common stock   basic and
    diluted (continuing operations) |  | $    | (0.68   | ) |      | $ | (1.11   | )    |  | $ | (1.03   | ) |  | $    | (1.31   | ) |  | $ | (0.51   | )
|Weighted-average shares of common stock outstanding                                 |  |      | 16,741  |   |      |   | 23,822  |      |  |   | 24,162  |   |  |      | 24,263  |   |  |   | 28,978  |  
|Balance Sheet Data:                                                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                                                        |  | $    | 95,094  |   |      | $ | 92,628  |      |  | $ | 71,997  |   |  | $    | 34,374  |   |  | $ | 32,237  |  
|Common stock warrants                                                               |  | $    |        |   |      | $ |        |      |  | $ |        |   |  | $    |        |   |  | $ | 5,023   |  






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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






26



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##### Table of Contents







Strategy and Key Metrics








10-year


27



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##### Table of Contents



Results of Operations




|                  |                                                     |                                  |        |        |       |   |        |        |       |   |        |        |       | 
|----------------- | --------------------------------------------------- | -------------------------------- | ------ | ------ | ----- | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                  |                                                     | Year Ended December 31,          |       
|                  |                                                     |                                  |       
|                  |                                                     | 2003                             |        |        | 2004  |   |        | 2005   |      
|                  |                                                     |                                  |        |        |       |   |        |        |      
|                  |                                                     | (In thousands)                   |       
|Revenues:         |                                                     |                                  |        |        |       |   |        |        |       |   |        |       
|                  | Product sales:                                      |                                  |        |        |       |   |        |        |       |   |        |        |      
|                  |                                                     | Cryoablation disposable products |        | $      | 3,552 |   |        | $      | 4,584 |   |        | $      | 6,790 | 
|                  |                                                     | Cryocare surgical systems        |        |        | 1,283 |   |        |        | 1,403 |   |        |        | 743   | 
|                  |                                                     | Cardiac products (CryoCath)      |        |        | 331   |   |        |        |      |   |        |        |      | 
|                  |                                                     | Other (Urohealth)                |        |        | 60    |   |        |        | 49    |   |        |        | 72    | 
|                  |                                                     |                                  |        |        |       |   |        |        |      
|                  |                                                     |                                  | 5,226  |        |       |   | 6,036  |        |       |   | 7,605  |       
|                  | Cryoablation procedure fees                         |                                  |        | 14,378 |       |   |        | 17,516 |       |   |        | 19,780 |      
|                  | Cardiac royalties (CryoCath)                        |                                  |        |       |       |   |        | 629    |       |   |        | 889    |      
|                  |                                                     |                                  |        |        |       |   |        |        |      
|                  |                                                     | $                                | 19,604 |        |       | $ | 24,181 |        |       | $ | 28,274 |       
|                  |                                                     |                                  |        |        |       |   |        |        |      
|Cost of revenues: |                                                     |                                  |        |        |       |   |        |        |       |   |        |       
|                  | Cryoablation disposable products and procedure fees |                                  | $      | 10,626 |       |   | $      | 13,330 |       |   | $      | 15,278 |      
|                  | Cryocare surgical systems                           |                                  |        | 466    |       |   |        | 255    |       |   |        | 460    |      
|                  | Cardiac products (CryoCath)                         |                                  |        | 399    |       |   |        |       |       |   |        |       |      
|                  |                                                     |                                  |        |        |       |   |        |        |      
|                  |                                                     | $                                | 11,491 |        |       | $ | 13,585 |        |       | $ | 15,738 |       
|                  |                                                     |                                  |        |        |       |   |        |        |      











28



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##### Table of Contents









|                                      |                          |                         |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------- | ------------------------ | ----------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                      |                          | Year Ended December 31, |       
|                                      |                          |                         |       
|                                      |                          | 2003                    |        |        | 2004 |   |        | 2005   | 
|                                      |                          |                         |        |        |      |   |        |        | 
|                                      |                          | (In thousands)          |       
|Cost of revenues                      |                          | $                       | 11,491 |        |      | $ | 13,585 |        |  | $ | 15,738 |       
|Research and development              |                          |                         | 1,096  |        |      |   | 1,856  |        |  |   | 2,283  |       
|Sales and marketing                   |                          |                         | 16,097 |        |      |   | 13,354 |        |  |   | 13,001 |       
|General and administrative            |                          |                         | 25,791 |        |      |   | 16,379 |        |  |   | 13,858 |       
|Goodwill impairment and other charges |                          |                         |       |        |      |   | 9,900  |        |  |   | 26     |       
|(Gain) loss on divestitures, net      |                          |                         | (9,979 | )      |      |   | 711    |        |  |   |       |       
|                                      |                          |                         |        |        |      |   |        |        | 
|                                      | Total costs and expenses |                         | $      | 44,496 |      |   | $      | 55,785 |  |   | $      | 44,906 | 
|                                      |                          |                         |        |        |      |   |        |        | 
|Interest income                       |                          | $                       | 587    |        |      | $ | 293    |        |  | $ | 308    |       
|Interest expense                      |                          | $                       | (39    | )      |      | $ | (7     | )      |  | $ | 657    |       
|Minority interests                    |                          | $                       | (619   | )      |      | $ | (583   | )      |  | $ |       |       



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2005 Compared to Year Ended
    December 31, 2004

Revenues.






Cost of Revenues.


29



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##### Table of Contents





Gross Margins.


Research and Development Expenses.


Selling and Marketing Expenses.


General and Administrative Expenses. S-2


Goodwill Impairment and Other Charges.


Interest Income.


Interest Expense.


Loss from Continuing Operations.


Income (Loss) from Discontinued Operations. 24-month


30



---



##### Table of Contents







| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared to Year Ended
    December 31, 2003

Revenues.




Cost of Revenues.


Gross Margins.


Research and Development Expenses.


Selling and Marketing Expenses.


General and Administrative Expenses.


Goodwill Impairment and Other Charges.


31



---



##### Table of Contents





Gain (Loss) on Divestitures, Net.


Interest Income.


Minority Interests.


Loss from Continuing Operations.


Income (Loss) from Discontinued Operations.


Liquidity and Capital Resources









32



---



##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $8,075,000 in cash paid to us on February 10, 2006; and                                                                                                                                                                                                                                              
|
| |  | $1,425,000 in the form of a secured convertible promissory note
    due and payable in full, together with all accrued interest, on
    the date 24 months or, under certain circumstances,
    15 months following the closing date of the transaction,
    bearing interest at 5 percent per annum.







Contractual Obligations




|                                   |  |                        |     |  |      |   |     |           |  |   |           |  |  |   |   | 
|---------------------------------- |  | ---------------------- | --- |  | ---- | - | --- | --------- |  | - | --------- |  |  | - | - | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  | Total                  |     |  | 2006 |   |     | 2007-2008 |  |   | 2009-2010
|                                   |  |                        |     |  |      |   |     |           |  |   |          
|                                   |  | (In thousands)        
|Non-cancelable operating leases(1) |  | $                      | 686 |  |      | $ | 553 |           |  | $ | 133       |  |  | $ |  | 
|Purchase commitments(2)            |  |                        | 225 |  |      |   | 225 |           |  |   |          |  |  |   |  | 
|                                   |  |                        |     |  |      |   |     |           |  |   |           | 
|                                   |  | $                      | 911 |  |      | $ | 778 |           |  | $ | 133       |  |  | $ |  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
    exercised these renewal options and if we entered into
    additional operating lease agreements. For more information, see
    Note 13 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



---



##### Table of Contents



Critical Accounting Policies


10-K.


Revenue Recognition.










Goodwill Impairment.


34



---



##### Table of Contents





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,


Income Taxes.


35



---



##### Table of Contents



Inflation









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk












|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

10-K







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








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures.


13a-15(b)


Managements Annual Report on Internal Control
Over Financial Reporting. 13a-15(f) 15d-15(f)


36



---



##### Table of Contents







| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) pertain to the maintenance of records that, in
    reasonable detail, accurately and fairly reflect the
    transactions and dispositions of the assets of the company;                                                                                                                                                                                         
|
| | (ii) provide reasonable assurance that transactions are
    recorded as necessary to permit preparation of financial
    statements in accordance with generally accepted accounting
    principles, and that receipts and expenditures of the company
    are being made only in accordance with authorizations of
    management and directors of the company; and
|
| | (iii) provide reasonable assurance regarding prevention or
    timely detection of unauthorized acquisition, use or disposition
    of the companys assets that could have a material effect
    on the financial statements.                                                                                                                                      









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














| |                          
| | -------------------------
| | /s/ Ernst & Young
    llp





38



---



##### Table of Contents








|         |                  
|-------- | -----------------
|Item 9B. | Other Information






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 and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



39



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##### Table of Contents






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Financial Statements:


10-K


|                                                                                                             |  |            
|------------------------------------------------------------------------------------------------------------ |  | -----------
|                                                                                                             |  | Page       
|                                                                                                             |  |            
|Consolidated Financial Statements of the Company:                                                            |  |            
|Report of Independent Registered Public
    Accounting Firm                                                  |  | F-1        
|Consolidated Statements of Operations for
    the Years Ended December 31, 2003, 2004 and 2005               |  | F-2        
|Consolidated Balance Sheets as of
    December 31, 2004 and 2005                                             |  | F-3        
|Consolidated Statements of
    Stockholders Equity for the Years Ended December 31,
    2003, 2004 and 2005 |  | F-4 to F-5 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2003, 2004 and 2005               |  | F-6        
|Notes to the Consolidated Financial
    Statements                                                           |  | F-7 to F-34

Financial Statement Schedules:


F-35.


Exhibit:


|            |   |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | - | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   | Description
|            |   |            
|            | 2 | .1(1)       |  | Partnership Interest Purchase Agreement, dated as of
    December 30, 2004, by and between the Company and Advanced
    Medical Partners, Inc.                                                                                                                                                                                                                                     
|            | 2 | .2(2)       |  | 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 | .3          |  | $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.                                                                                                                                                                                                                                              

40



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##### Table of Contents



|            |     |             |  |                                                                                                                                                              
|----------- | --- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     | Description
|            |     |            
|            | 10  | .1(9)       |  | Lease Agreement, dated 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(12)      |  | 2002 Supplemental Stock Plan.                                                                                                                                
|            | 10 | .7(12)      |  | 2002 Executive Separation Benefits Plan.                                                                                                                     
|            | 10 | .8(13)      |  | Employment Agreement, dated as of March 3, 2003, by and
    between the Company and William J. Nydam.                                                        
|            | 10  | .9(14)      |  | Consulting Agreement, dated as of August 27, 2003, by and
    between the Company and Craig T. Davenport.                                                    
|            | 10 | .10(15)     |  | Employment Agreement, dated as of December 15, 2003, by and
    between the Company and Craig T. Davenport.                                                  
|            | 10 | .11(16)     |  | Employment Agreement, dated as of August 11, 2004, by and
    between the Company and Michael R. Rodriguez.                                                  
|            | 10 | .12(17)     |  | 2004 Stock Incentive Plan.                                                                                                                                   
|            | 10 | .13(18)     |  | 2004 Non-Employee Director Option Program under 2004 Stock
    Incentive Plan.                                                                               
|            | 10 | .14(18)     |  | Form of Award Agreement Under 2004 Stock Incentive Plan.                                                                                                     
|            | 10  | .15(18)     |  | Stipulation of Settlement, dated as of November 1, 2004,
    relating to securities class action lawsuit.                                                    
|            | 10 | .16(18)     |  | Description of Craig Davenport salary adjustment, effective
    December 2004.                                                                               
|            | 10  | .17(18)     |  | Confidential Settlement Agreement and Release, dated as of
    December 14, 2004, by and between the Company and certain
    Underwriters at Lloyds, London.
|            | 10  | .18(18)     |  | Release and Settlement Agreement, dated as of December 16,
    2004, by and between the Company and National Union Fire
    Insurance Company.               
|            | 10 | .19(19)     |  | Description of William J. Nydam salary adjustment, effective
    February 2005.                                                                              
|            | 10 | .20(19)     |  | Description of Michael R. Rodriguez salary adjustment, effective
    February 2005.                                                                          
|            | 10  | .21(19)     |  | Confidential Settlement Agreement and Release, dated as of
    February 18, 2005, by and between the Company and Great
    American E&S Insurance Company.   
|            | 10 | .22(20)     |  | 2004 Management Incentive Compensation Program.                                                                                                              
|            | 10 | .23(20)     |  | 2005 Management Incentive Compensation Program.                                                                                                              
|            | 10  | .24(6)      |  | Purchase Agreement, dated as of March 10, 2005, by and
    between the Company and the Investors (as defined therein).                                       
|            | 10  | .25(6)      |  | Registration Rights Agreement, dated as of March 10, 2005,
    by and between Endocare and the Investors (as defined therein).                               
|            | 10 | .26(21)     |  | First Amendment to Employment Agreement with Craig T. Davenport,
    dated as of April 28, 2005.                                                             
|            | 10 | .27(22)     |  | Description of director compensation, as amended on
    September 14, 2005.                                                                                  
|            | 10  | .28         |  | Loan and Security Agreement, dated as of October 26, 2005,
    by and among Endocare, Inc., Timm Medical Technologies, Inc. and
    Silicon Valley Bank.     
|            | 10  | .29         |  | Commercialization Agreement, dated as of November 8, 2005,
    by and between Endocare, Inc. and CryoDynamics, LLC.                                          
|            | 10  | .30         |  | Confidential Settlement Agreement and Release, dated as of
    December 1, 2005, by and between Endocare, Inc. and Liberty
    Mutual Insurance Company.     
|            | 21  | .1(23)      |  | Subsidiaries of Registrant.                                                                                                                                  
|            | 23  | .1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                    

41



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##### Table of Contents



|            |    |             |  |                                                                                                
|----------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 24 | .1          |  | Power of Attorney, included on signature page.                                                 
|            | 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.



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | Previously filed as an exhibit to our
    Form 8-K filed on
    January 6, 2005.                             
|   
|(2) | Previously filed as an exhibit to our
    Form 8-K filed on
    January 18, 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 15, 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.                                                                                                                                                   
|    
|(13) | Previously filed as an exhibit to our
    Form 8-K filed on
    March 27, 2003.                                                                                                                                                      
|    
|(14) | Previously filed as an exhibit to our
    Form 10-K filed on
    March 15, 2004.                                                                                                                                                     
|    
|(15) | Previously filed as an exhibit to our
    Form 8-K filed on
    December 16, 2003.                                                                                                                                                   
|    
|(16) | Previously filed as an exhibit to our
    Form 8-K filed on
    August 12, 2004.                                                                                                                                                     
|    
|(17) | Previously filed as an appendix to our Definitive Proxy
    Statement filed on August 6, 2004.                                                                                                                                       
|    
|(18) | Previously filed as an exhibit to our
    Form 10-K filed on
    March 16, 2005.                                                                                                                                                     
|    
|(19) | Previously filed as an exhibit to our
    Form 10-Q filed on
    May 10, 2005.                                                                                                                                                       
|    
|(20) | Previously filed as an exhibit to our
    Form 8-K filed on
    March 1, 2005.                                                                                                                                                       
|    
|(21) | Previously filed as an exhibit to our
    Form 8-K filed on
    May 3, 2005.                                                                                                                                                         
|    
|(22) | Previously filed as an exhibit to our
    Form 8-K filed on
    September 16, 2005. Our director compensation program was
    subsequently amended on February 23, 2006, as described in
    our Form 8-K filed
    on March 1, 2006.
|    
|(23) | Not applicable because, as a result of our sale of Timm Medical
    on February 10, 2006, we do not have any subsidiaries that
    constitute significant subsidiaries under
    Rule 1-02(w) of
    Regulation S-X.               

Supplemental Information


10-K. 10-K,


42



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##### Table of Contents






SIGNATURES






| |               
| | --------------
| | Endocare, Inc.



| |     |                       
| | --- | ----------------------
| | By: | /s/ Craig T. Davenport

| |                                     
| | ------------------------------------
| |                                     
| | Craig T. Davenport                  
| | Chairman and Chief Executive Officer

POWER OF ATTORNEY


attorney-in 10-K, attorneys-in attorneys-in




|                                                         |  |                                                                                                             |  |                |  | 
|-------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                                |  | Title                                                                                                       |  | Date          
|                                                         |  |                                                                                                             |  |               
|                                                        
|/s/ Craig T. DavenportCraig T. Davenport                 |  | Chairman and Chief Executive Officer (principal executive
    officer)                                      |  | March 16, 2006
|                                                        
|/s/ Michael R.
    RodriguezMichael R. Rodriguez         |  | Senior Vice President, Finance and Chief Financial Officer
    (principal financial and accounting officer) |  | March 16, 2006
|                                                        
|/s/ John R.
    Daniels, M.D.John R. Daniels, M.D.       |  | Director                                                                                                    |  | March 16, 2006
|                                                        
|/s/ David L. GoldsmithDavid L. Goldsmith                 |  | Director                                                                                                    |  | March 16, 2006
|                                                        
|/s/ Eric S. KentorEric S. Kentor                         |  | Director                                                                                                    |  | March 16, 2006
|                                                        
|/s/ Terrence A. NoonanTerrence A. Noonan                 |  | Director                                                                                                    |  | March 16, 2006
|                                                        
|/s/ Michael J.
    Strauss, M.D.Michael J. Strauss, M.D. |  | Director                                                                                                    |  | March 16, 2006
|                                                        
|/s/ Thomas R. TestmanThomas R. Testman                   |  | Director                                                                                                    |  | March 16, 2006

43



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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 31               |        
|                                                                    |                                       |                                       |        
|                                                                    |                                       | 2003                                  |         |        | 2004   |   |         | 2005   |       
|                                                                    |                                       |                                       |         |        |        |   |         |        |       
|                                                                    |                                       | (In thousands, except per share data) |        
|Product sales                                                       |                                       | $                                     | 5,226   |        |        | $ | 6,036   |        |        | $ | 7,605   |       
|Service revenues                                                    |                                       |                                       | 14,378  |        |        |   | 17,516  |        |        |   | 19,780  |       
|Other                                                               |                                       |                                       |        |        |        |   | 629     |        |        |   | 889     |       
|                                                                    |                                       |                                       |         |        |        |   |         |        |       
|                                                                    |                                       |                                       | 19,604  |        |        |   | 24,181  |        |        |   | 28,274  |       
|                                                                    |                                       |                                       |         |        |        |   |         |        |       
|Costs and expenses:                                                 |                                       |                                       |         |        |        |   |         |        |        |   |         |       
|                                                                    | Cost of revenues                      |                                       |         | 11,491 |        |   |         | 13,585 |        |   |         | 15,738 |       
|                                                                    | Research and development              |                                       |         | 1,096  |        |   |         | 1,856  |        |   |         | 2,283  |       
|                                                                    | Selling and marketing                 |                                       |         | 16,097 |        |   |         | 13,354 |        |   |         | 13,001 |       
|                                                                    | General and administrative            |                                       |         | 25,791 |        |   |         | 16,379 |        |   |         | 13,858 |       
|                                                                    | Goodwill impairment and other charges |                                       |         |       |        |   |         | 9,900  |        |   |         | 26     |       
|                                                                    | (Gain) loss on divestitures, net      |                                       |         | (9,979 | )      |   |         | 711    |        |   |         |       |       
|                                                                    |                                       |                                       |         |        |        |   |         |        |       
|                                                                    |                                       | Total costs and expenses              |         |        | 44,496 |   |         |        | 55,785 |   |         |        | 44,906 | 
|                                                                    |                                       |                                       |         |        |        |   |         |        |       
|Loss from operations                                                |                                       |                                       | (24,892 | )      |        |   | (31,604 | )      |        |   | (16,632 | )     
|Interest income                                                     |                                       |                                       | 587     |        |        |   | 293     |        |        |   | 308     |       
|Interest expense                                                    |                                       |                                       | (39     | )      |        |   | (7      | )      |        |   | 657     |       
|                                                                    |                                       |                                       |         |        |        |   |         |        |       
|Loss from continuing operations before minority interests           |                                       |                                       | (24,344 | )      |        |   | (31,318 | )      |        |   | (15,667 | )     
|Minority interests                                                  |                                       |                                       | (619    | )      |        |   | (583    | )      |        |   |        |       
|                                                                    |                                       |                                       |         |        |        |   |         |        |       
|Loss from continuing operations before taxes                        |                                       |                                       | (24,963 | )      |        |   | (31,901 | )      |        |   | (15,667 | )     
|Tax benefit on continuing operations                                |                                       |                                       |        |        |        |   |        |        |        |   | 829     |       
|                                                                    |                                       |                                       |         |        |        |   |         |        |       
|Loss from continuing operations                                     |                                       |                                       | (24,963 | )      |        |   | (31,901 | )      |        |   | (14,838 | )     
|Income (loss) from discontinued operations, net of taxes            |                                       |                                       | (485    | )      |        |   | (5,718  | )      |        |   | 1,159   |       
|                                                                    |                                       |                                       |         |        |        |   |         |        |       
|Net loss                                                            |                                       | $                                     | (25,448 | )      |        | $ | (37,619 | )      |        | $ | (13,679 | )     
|                                                                    |                                       |                                       |         |        |        |   |         |        |       
|Net income (loss) per share of common stock  basic
    and diluted |                                       |                                       |         |        |        |   |         |        |        |   |         |       
|                                                                    | Continuing operations                 |                                       | $       | (1.03  | )      |   | $       | (1.31  | )      |   | $       | (0.51  | )     
|                                                                    | Discontinued operations               |                                       | $       | (0.02  | )      |   | $       | (0.24  | )      |   | $       | 0.04   |       
|Weighted-average shares of common stock outstanding                 |                                       |                                       | 24,162  |        |        |   | 24,263  |        |        |   | 28,978  |       



F-2



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


|                                     |                                                                                                                                                                          |                                            |       |          |        |  |       |          |        | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ----- | -------- | ------ |  | ----- | -------- | ------ | 
|                                     |                                                                                                                                                                          | December 31                                |      
|                                     |                                                                                                                                                                          |                                            |      
|                                     |                                                                                                                                                                          | 2004                                       |       |          | 2005   | 
|                                     |                                                                                                                                                                          |                                            |       |          |        | 
|                                     |                                                                                                                                                                          | (In thousands, except share                |      
|                                     |                                                                                                                                                                          | and per share data)                        |      
|ASSETS                              
|Current assets:                      |                                                                                                                                                                          |                                            |       |          |        |  |       |         
|                                     | Cash and cash equivalents                                                                                                                                                |                                            | $     | 7,830    |        |  | $     | 8,108    |       
|                                     | Accounts receivable less allowances for doubtful accounts and
    sales returns of $74 and $70 at December 31, 2004 and 2005,
    respectively                           |                                            |       | 3,337    |        |  |       | 3,549    |       
|                                     | Inventories                                                                                                                                                              |                                            |       | 2,828    |        |  |       | 2,462    |       
|                                     | Prepaid expenses and other current assets                                                                                                                                |                                            |       | 1,533    |        |  |       | 1,213    |       
|                                     | Assets of discontinued operations                                                                                                                                        |                                            |       | 1,185    |        |  |       | 9,624    |       
|                                     |                                                                                                                                                                          |                                            |       |          |        | 
|                                     |                                                                                                                                                                          | Total current assets                       |       |          | 16,713 |  |       |          | 24,956 | 
|Property and equipment, net          |                                                                                                                                                                          |                                            | 2,672 |          |        |  | 1,794 |         
|Intangibles, net                     |                                                                                                                                                                          |                                            | 4,390 |          |        |  | 4,167 |         
|Investments and other assets         |                                                                                                                                                                          |                                            | 1,343 |          |        |  | 1,320 |         
|Assets of discontinued operations    |                                                                                                                                                                          |                                            | 9,256 |          |        |  |      |         
|                                     |                                                                                                                                                                          |                                            |       |          |        | 
|                                     |                                                                                                                                                                          | Total assets                               |       | $        | 34,374 |  |       | $        | 32,237 | 
|                                     |                                                                                                                                                                          |                                            |       |          |        | 
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                          |                                            |       |          |        |  |       |         
|                                     | Accounts payable                                                                                                                                                         |                                            | $     | 2,279    |        |  | $     | 2,680    |       
|                                     | Accrued compensation                                                                                                                                                     |                                            |       | 3,413    |        |  |       | 3,614    |       
|                                     | Other accrued liabilities                                                                                                                                                |                                            |       | 9,187    |        |  |       | 6,629    |       
|                                     | Liabilities of discontinued operations                                                                                                                                   |                                            |       | 1,855    |        |  |       | 1,461    |       
|                                     |                                                                                                                                                                          |                                            |       |          |        | 
|                                     |                                                                                                                                                                          | Total current liabilities                  |       |          | 16,734 |  |       |          | 14,384 | 
|Minority interests                   |                                                                                                                                                                          |                                            | 214   |          |        |  |      |         
|Common stock warrants                |                                                                                                                                                                          |                                            |      |          |        |  | 5,023 |         
|Stockholders equity:                |                                                                                                                                                                          |                                            |       |          |        |  |       |         
|                                     | Preferred stock, $.001 par value; 1,000,000 shares
    authorized; none issued and outstanding                                                                           |                                            |       |         |        |  |       |         |       
|                                     | Common stock, $.001 par value; 50,000,000 shares
    authorized; 24,342,482 and 30,089,144 shares issued and
    outstanding at December 31, 2004 and 2005, respectively |                                            |       | 24       |        |  |       | 30       |       
|                                     | Additional paid-in capital                                                                                                                                               |                                            |       | 169,400  |        |  |       | 178,477  |       
|                                     | Accumulated deficit                                                                                                                                                      |                                            |       | (151,998 | )      |  |       | (165,677 | )     
|                                     |                                                                                                                                                                          |                                            |       |          |        | 
|                                     |                                                                                                                                                                          | Total stockholders equity                 |       |          | 17,426 |  |       |          | 12,830 | 
|                                     |                                                                                                                                                                          |                                            |       |          |        | 
|                                     |                                                                                                                                                                          | Total liabilities and stockholders equity |       | $        | 34,374 |  |       | $        | 32,237 | 
|                                     |                                                                                                                                                                          |                                            |       |          |        | 



F-3



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##### Table of Contents





ENDOCARE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIENCY)


(In thousands)


|                                                                                         |                                                       |              |        |   |            |   |    |                 |  |       |                 |             |  |             |          |         |          |       |      |              |  |               |                |     |   |        |      |   |  |   |        |   |  |   |         |         |  
|---------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------------ | ------ | - | ---------- | - | -- | --------------- |  | ----- | --------------- | ----------- |  | ----------- | -------- | ------- | -------- | ----- | ---- | ------------ |  | ------------- | -------------- | --- | - | ------ | ---- | - |  | - | ------ | - |  | - | ------- | ------- | -
|                                                                                         |                                                       |              |        |   |            |   |    |                 |  |       |                 | Accumulated |  |             |          |         |          |       |     
|                                                                                         |                                                       |              |        |   |            |   |    |                 |  | Other |                 |             |  |             |          |         |         
|                                                                                         |                                                       | Common Stock |        |   |            |   |    |                 |  |       | Comprehensive   |             |  |             |          |         |          | Total |     
|                                                                                         |                                                       |              |        |   | Additional |   |    | Accumulated     |  |       | Receivable From |             |  | Income, Net |          |         | Deferred |       |      |              |  | Stockholders |               
|                                                                                         |                                                       | Shares       |        |   | Amount     |   |    | Paid-In Capital |  |       | Deficit         |             |  | Stockholder |          |         | of Tax   |       |      | Compensation |  |               | Treasury Stock |     |   | Equity |     
|                                                                                         |                                                       |              |        |   |            |   |    |                 |  |       |                 |             |  |             |          |         |          |       |      |              |  |               |                |     |   |        |     
|Balance at December 31, 2002                                                             |                                                       |              | 24,148 |   |            |   | 24 |                 |  | $     | 169,935         |             |  | $           | (88,932  | )       |          | $     | (214 | )            |  | $             | 13             |     |   | $      | (132 | ) |  | $ | (2,071 | ) |  | $ | 78,623  |        
|                                                                                         |                                                       |              |        |   |            |   |    |                 |  |       |                 |             |  |             |          |         |          |       |      |              |  |               |                |     |   |        |     
|Comprehensive loss:                                                                      |                                                       |              |        |   |            |   |    |                 |  |       |                 |             |  |             |          |         |          |       |      |              |  |               |                |     |   |        |      |   |  |   |        |   |  |   |         |        
|                                                                                         | Net loss                                              |              |        |  |            |   |    |                |  |       |                 |            |  |             |          | (25,447 | )        |       |      |             |  |               |                |    |   |        |      |  |  |   |        |  |  |   |         | (25,447 | )
|                                                                                         | Unrealized gain on available for-sale securities, net |              |        |  |            |   |    |                |  |       |                 |            |  |             |          |        |          |       |      |             |  |               |                | (13 | ) |        |      |  |  |   |        |  |  |   |         | (13     | )
|                                                                                         |                                                       |              |        |   |            |   |    |                 |  |       |                 |             |  |             |          |         |          |       |      |              |  |               |                |     |   |        |     
|Comprehensive loss:                                                                      |                                                       |              |        |   |            |   |    |                 |  |       |                 |             |  |             | (25,447  | )       |          |       |     |              |  |               | (13            | )   |   |        |     |   |  |   |       |   |  |   | (25,460 | )      
|Stock options exercised                                                                  |                                                       |              | 35     |   |            |   |   |                 |  |       | 23              |             |  |             |         |         |          |       |     |              |  |               |               |     |   |        |     |   |  |   |       |   |  |   | 23      |        
|Issuance of restricted stock                                                             |                                                       |              | 5      |   |            |   |   |                 |  |       | 20              |             |  |             |         |         |          |       |     |              |  |               |               |     |   |        |     |   |  |   |       |   |  |   | 20      |        
|Compensation related to issuance of options to employees                                 |                                                       |              |       |   |            |   |   |                 |  |       | 1,780           |             |  |             |         |         |          |       |     |              |  |               |               |     |   |        | 25   |   |  |   |       |   |  |   | 1,805   |        
|Compensation related to issuance of options and warrants to
    consultants for services |                                                       |              |       |   |            |   |   |                 |  |       | 117             |             |  |             |         |         |          |       |     |              |  |               |               |     |   |        |     |   |  |   |       |   |  |   | 117     |        
|Treasury stock received as repayment of loan previously forgiven                         |                                                       |              | (5     | ) |            |   |   |                 |  |       |                |             |  |             |         |         |          |       |     |              |  |               |               |     |   |        |     |   |  |   | (21    | ) |  |   | (21     | )      
|Forgiveness of receivable from stockholder                                               |                                                       |              |       |   |            |   |   |                 |  |       |                |             |  |             |         |         |          |       | 214  |              |  |               |               |     |   |        |     |   |  |   |       |   |  |   | 214     |        
|                                                                                         |                                                       |              |        |   |            |   |    |                 |  |       |                 |             |  |             |          |         |          |       |      |              |  |               |                |     |   |        |     
|Balance at December 31, 2003                                                             |                                                       |              | 24,183 |   |            | $ | 24 |                 |  | $     | 171,875         |             |  | $           | (114,379 | )       |          | $     |     |              |  | $             |               |     |   | $      | (107 | ) |  | $ | (2,092 | ) |  | $ | 55,321  |        
|                                                                                         |                                                       |              |        |   |            |   |    |                 |  |       |                 |             |  |             |          |         |          |       |      |              |  |               |                |     |   |        |     
|Net loss:                                                                                |                                                       |              |       |   |            |   |   |                 |  |       |                |             |  |             | (37,619  | )       |          |       |     |              |  |               |               |     |   |        |     |   |  |   |       |   |  |   | (37,619 | )      
|                                                                                         |                                                       |              |        |   |            |   |    |                 |  |       |                 |             |  |             |          |         |          |       |      |              |  |               |                |     |   |        |     
|Stock options exercised                                                                  |                                                       |              | 350    |   |            |   |   |                 |  |       | 92              |             |  |             |         |         |          |       |     |              |  |               |               |     |   |        |     |   |  |   |       |   |  |   | 92      |        
|Compensation related to issuance of options and warrants                                 |                                                       |              |       |   |            |   |   |                 |  |       | 123             |             |  |             |         |         |          |       |     |              |  |               |               |     |   |        | 13   |   |  |   |       |   |  |   | 136     |        
|Treasury 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 | )       |          | $     |     |              |  | $             |               |     |   | $      |     |   |  | $ |       |   |  | $ | 17,426  |        
|                                                                                         |                                                       |              |        |   |            |   |    |                 |  |       |                 |             |  |             |          |         |          |       |      |              |  |               |                |     |   |        |     

F-4



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##### Table of Contents





ENDOCARE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIENCY) (Continued)


(In thousands)


|                             |  |              |        |  |            |   |    |                 |  |       |                 |             |             |             |          |        |       |              |               |                |  |        |   |  |  |   |   |  |  |   |   |  |  |   |         |  
|---------------------------- |  | ------------ | ------ |  | ---------- | - | -- | --------------- |  | ----- | --------------- | ----------- | ----------- | ----------- | -------- | ------ | ----- | ------------ | ------------- | -------------- |  | ------ | - |  |  | - | - |  |  | - | - |  |  | - | ------- | -
|                             |  |              |        |  |            |   |    |                 |  |       |                 | Accumulated |             |             |          |        |       |             
|                             |  |              |        |  |            |   |    |                 |  | Other |                 |             |             |             |          |       
|                             |  | Common Stock |        |  |            |   |    |                 |  |       | Comprehensive   |             |             |             |          |        | Total |             
|                             |  |              |        |  | Additional |   |    | Accumulated     |  |       | Receivable From |             | Income, Net |             | Deferred |        |       |              | Stockholders |               
|                             |  | Shares       |        |  | Amount     |   |    | Paid-In Capital |  |       | Deficit         |             |             | Stockholder |          | of Tax |       | Compensation |               | Treasury Stock |  | Equity |  
|                             |  |              |        |  |            |   |    |                 |  |       |                 |             |             |             |          |        |       |              |               |                |  |        |  
|Net loss                     |  |              |       |  |            |   |   |                 |  |       |                |             |             |             | (13,679  | )      |       |              |              |                |  |        |  |  |  |   |  |  |  |   |  |  |  |   | (13,679 | )
|Stock options exercised      |  |              | 112    |  |            |   |   |                 |  |       | 116             |             |             |             |         |        |       |              |              |                |  |        |  |  |  |   |  |  |  |   |  |  |  |   | 116     |  
|Compensation expense         |  |              |       |  |            |   |   |                 |  |       | 51              |             |             |             |         |        |       |              |              |                |  |        |  |  |  |   |  |  |  |   |  |  |  |   | 51      |  
|Sale of common stock         |  |              | 5,635  |  |            |   | 6  |                 |  |       | 8,910           |             |             |             |         |        |       |              |              |                |  |        |  |  |  |   |  |  |  |   |  |  |  |   | 8,916   |  
|                             |  |              |        |  |            |   |    |                 |  |       |                 |             |             |             |          |        |       |              |               |                |  |        |   |  |  |   |  
|Balance at December 31, 2005 |  |              | 30,089 |  |            | $ | 30 |                 |  | $     | 178,477         |             |             | $           | (165,677 | )      |       | $            |              |                |  | $      |  |  |  | $ |  |  |  | $ |  |  |  | $ | 12,830  |  
|                             |  |              |        |  |            |   |    |                 |  |       |                 |             |             |             |          |        |       |              |               |                |  |        |   |  |  |   |  



F-5



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                                 |                                                                                     |                                                                                        |         |         |        |   |         |         |        |   |         |         |        |  
|------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------- | ------- | ------ | - | ------- | ------- | ------ | - | ------- | ------- | ------ | -
|                                                                                                 |                                                                                     | For the Years Ended December 31,                                                       |        
|                                                                                                 |                                                                                     |                                                                                        |        
|                                                                                                 |                                                                                     | 2003                                                                                   |         |         | 2004   |   |         | 2005    |       
|                                                                                                 |                                                                                     |                                                                                        |         |         |        |   |         |         |       
|                                                                                                 |                                                                                     | (In thousands)                                                                         |        
|Cash flows from operating activities:                                                            |                                                                                     |                                                                                        |         |         |        |   |         |         |        |   |         |        
|                                                                                                 | Net loss                                                                            |                                                                                        | $       | (25,448 | )      |   | $       | (37,619 | )      |   | $       | (13,679 | )     
|                                                                                                 | Adjustments to reconcile net loss to net cash used in operating
    activities:     |                                                                                        |         |         |        |   |         |         |        |   |         |         |       
|                                                                                                 |                                                                                     | Depreciation and amortization                                                          |         |         | 4,669  |   |         |         | 3,481  |   |         |         | 3,054  |  
|                                                                                                 |                                                                                     | Gain on sale of marketable securities                                                  |         |         | (12    | ) |         |         |       |   |         |         |       |  
|                                                                                                 |                                                                                     | (Gain) loss on divestitures, net                                                       |         |         | (8,631 | ) |         |         | 711    |   |         |         | (609   | )
|                                                                                                 |                                                                                     | Compensation expense related to issuance of options, warrants
    and restricted stock |         |         | 1,942  |   |         |         | 136    |   |         |         | 51     |  
|                                                                                                 |                                                                                     | Treasury stock received as repayment of loan previously forgiven                       |         |         | (21    | ) |         |         |       |   |         |         |       |  
|                                                                                                 |                                                                                     | Goodwill impairment and other charges                                                  |         |         |       |   |         |         | 15,810 |   |         |         | 26     |  
|                                                                                                 |                                                                                     | Loss on disposal of fixed assets                                                       |         |         |       |   |         |         | 139    |   |         |         | 107    |  
|                                                                                                 |                                                                                     | Minority interests                                                                     |         |         | 619    |   |         |         | 584    |   |         |         | (214   | )
|                                                                                                 |                                                                                     | Interest expense on common stock warrants                                              |         |         |       |   |         |         |       |   |         |         | (657   | )
|Changes in operating assets and liabilities, net of effects from
    purchases and divestitures: |                                                                                     |                                                                                        |         |         |        |   |         |         |        |   |         |        
|                                                                                                 |                                                                                     | Accounts receivable                                                                    |         |         | 932    |   |         |         | (248   | ) |         |         | (354   | )
|                                                                                                 |                                                                                     | Inventories                                                                            |         |         | 644    |   |         |         | (1,516 | ) |         |         | (318   | )
|                                                                                                 |                                                                                     | Prepaid expenses and other current assets                                              |         |         | (1,292 | ) |         |         | 1,132  |   |         |         | (454   | )
|                                                                                                 |                                                                                     | Accounts payable                                                                       |         |         | 104    |   |         |         | (394   | ) |         |         | 644    |  
|                                                                                                 |                                                                                     | Accrued compensation                                                                   |         |         | 1,042  |   |         |         | (150   | ) |         |         | 247    |  
|                                                                                                 |                                                                                     | Other accrued liabilities                                                              |         |         | 1,615  |   |         |         | 846    |   |         |         | (2,562 | )
|                                                                                                 |                                                                                     |                                                                                        |         |         |        |   |         |         |       
|Net cash used in operating activities                                                            |                                                                                     |                                                                                        | (23,623 | )       |        |   | (17,088 | )       |        |   | (14,718 | )      
|                                                                                                 |                                                                                     |                                                                                        |         |         |        |   |         |         |       
|Cash flows from investing activities:                                                            |                                                                                     |                                                                                        |         |         |        |   |         |         |        |   |         |        
|                                                                                                 | Purchases of property and equipment                                                 |                                                                                        |         | (276    | )      |   |         | (456    | )      |   |         | (423    | )     
|                                                                                                 | Purchases of intangibles                                                            |                                                                                        |         | (29     | )      |   |         |        |        |   |         | (330    | )     
|                                                                                                 | Partnership distributions to minority interests                                     |                                                                                        |         | (709    | )      |   |         | (739    | )      |   |         |        |       
|                                                                                                 | Sale of available-for-sale securities                                               |                                                                                        |         | 22,183  |        |   |         |        |        |   |         |        |       
|                                                                                                 | Proceeds from divestitures                                                          |                                                                                        |         | 9,480   |        |   |         | 2,388   |        |   |         | 850     |       
|                                                                                                 | Other assets                                                                        |                                                                                        |         | (1,250  | )      |   |         | 315     |        |   |         |        |       
|                                                                                                 |                                                                                     |                                                                                        |         |         |        |   |         |         |       
|Net cash provided by investing activities                                                        |                                                                                     |                                                                                        | 29,399  |         |        |   | 1,508   |         |        |   | 97      |        
|                                                                                                 |                                                                                     |                                                                                        |         |         |        |   |         |         |       
|Cash flows from financing activities:                                                            |                                                                                     |                                                                                        |         |         |        |   |         |         |        |   |         |        
|                                                                                                 | Stock options and warrants exercised                                                |                                                                                        |         | 23      |        |   |         | 92      |        |   |         | 116     |       
|                                                                                                 | Proceeds from sale of stock and warrants, net                                       |                                                                                        |         |        |        |   |         |        |        |   |         | 14,596  |       
|                                                                                                 | Repurchase of treasury stock                                                        |                                                                                        |         |        |        |   |         | (504    | )      |   |         |        |       
|                                                                                                 |                                                                                     |                                                                                        |         |         |        |   |         |         |       
|Net cash provided by (used in) financing activities                                              |                                                                                     |                                                                                        | 23      |         |        |   | (412    | )       |        |   | 14,712  |        
|                                                                                                 |                                                                                     |                                                                                        |         |         |        |   |         |         |       
|Net increase (decrease) in cash and cash equivalents                                             |                                                                                     |                                                                                        | 5,799   |         |        |   | (15,992 | )       |        |   | 91      |        
|Cash and cash equivalents, beginning of year                                                     |                                                                                     |                                                                                        | 18,178  |         |        |   | 23,977  |         |        |   | 7,985   |        
|Less: Cash of discontinued operations                                                            |                                                                                     |                                                                                        | (602    | )       |        |   | (155    | )       |        |   | 32      |        
|                                                                                                 |                                                                                     |                                                                                        |         |         |        |   |         |         |       
|Cash and cash equivalents, end of year                                                           |                                                                                     | $                                                                                      | 23,375  |         |        | $ | 7,830   |         |        | $ | 8,108   |        
|                                                                                                 |                                                                                     |                                                                                        |         |         |        |   |         |         |       
|Non cash activities:                                                                             |                                                                                     |                                                                                        |         |         |        |   |         |         |        |   |         |        
|                                                                                                 | Transfer of inventory to property and equipment for placement at
    customer sites |                                                                                        | $       | 505     |        |   | $       | 951     |        |   | $       | 532     |       
|Other supplemental information:                                                                  |                                                                                     |                                                                                        |         |         |        |   |         |         |        |   |         |        
|                                                                                                 | Interest paid                                                                       |                                                                                        |         | 40      |        |   |         | 8       |        |   |         | 36      |       
|                                                                                                 | Income taxes paid                                                                   |                                                                                        |         | 2       |        |   |         | 2       |        |   |         | 22      |       



F-6



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##### 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









F-7



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                                           
|-- | ------------------------------------------
|3. | Summary of Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation





| |                 
| | ----------------
| | Use of Estimates





| |                    
| | -------------------
| | Revenue Recognition



F-8



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                  |                                                     |                                  |        |        |       |   |        |        |       |   |        |        |       | 
|----------------- | --------------------------------------------------- | -------------------------------- | ------ | ------ | ----- | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                  |                                                     | Year Ended December 31,          |       
|                  |                                                     |                                  |       
|                  |                                                     | 2003                             |        |        | 2004  |   |        | 2005   |      
|                  |                                                     |                                  |        |        |       |   |        |        |      
|Revenues:         |                                                     |                                  |        |        |       |   |        |        |       |   |        |       
|                  | Product sales:                                      |                                  |        |        |       |   |        |        |       |   |        |        |      
|                  |                                                     | Cryoablation disposable products |        | $      | 3,552 |   |        | $      | 4,584 |   |        | $      | 6,790 | 
|                  |                                                     | Cryocare surgical systems        |        |        | 1,283 |   |        |        | 1,403 |   |        |        | 743   | 
|                  |                                                     | Cardiac products (CryoCath)      |        |        | 331   |   |        |        |      |   |        |        |      | 
|                  |                                                     | Other (Urohealth)                |        |        | 60    |   |        |        | 49    |   |        |        | 72    | 
|                  |                                                     |                                  |        |        |       |   |        |        |      
|                  |                                                     |                                  | 5,226  |        |       |   | 6,036  |        |       |   | 7,605  |       
|                  | Cryoablation procedure fees                         |                                  |        | 14,378 |       |   |        | 17,516 |       |   |        | 19,780 |      
|                  | Cardiac royalties (CryoCath)                        |                                  |        |       |       |   |        | 629    |       |   |        | 889    |      
|                  |                                                     |                                  |        |        |       |   |        |        |      
|                  |                                                     | $                                | 19,604 |        |       | $ | 24,181 |        |       | $ | 28,274 |       
|                  |                                                     |                                  |        |        |       |   |        |        |      
|Cost of revenues: |                                                     |                                  |        |        |       |   |        |        |       |   |        |       
|                  | Cryoablation disposable products and procedure fees |                                  | $      | 10,626 |       |   | $      | 13,330 |       |   | $      | 15,278 |      
|                  | Cryocare surgical systems                           |                                  |        | 466    |       |   |        | 255    |       |   |        | 460    |      
|                  | Cardiac products (CryoCath)                         |                                  |        | 399    |       |   |        |       |       |   |        |       |      
|                  |                                                     |                                  |        |        |       |   |        |        |      
|                  |                                                     | $                                | 11,491 |        |       | $ | 13,585 |        |       | $ | 15,738 |       
|                  |                                                     |                                  |        |        |       |   |        |        |      



rent-to 00-21, Revenue Arrangements with Multiple Deliverables.






F-9



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |            
| | -----------
| | Inventories

work-in first-in,




|                       |                   |                |       |       |      |   |       |       | 
|---------------------- | ----------------- | -------------- | ----- | ----- | ---- | - | ----- | ----- | 
|                       |                   | December 31,   |      
|                       |                   |                |      
|                       |                   | 2004           |       |       | 2005 |  
|                       |                   |                |       |       |      |  
|                       |                   | (In thousands) |      
|Raw materials          |                   | $              | 1,727 |       |      | $ | 1,646 |      
|Work in process        |                   |                | 443   |       |      |   | 275   |      
|Finished goods         |                   |                | 1,036 |       |      |   | 911   |      
|                       |                   |                |       |       |      |  
|                       | Total inventories |                |       | 3,206 |      |   |       | 2,832 | 
|Less inventory reserve |                   |                | (378  | )     |      |   | (370  | )    
|                       |                   |                |       |       |      |  
|                       | Inventories, net  |                | $     | 2,828 |      |   | $     | 2,462 | 
|                       |                   |                |       |       |      |  



| |                       
| | ----------------------
| | Property and Equipment





|                                              |                                       |                |        |       |      |   |        |       | 
|--------------------------------------------- | ------------------------------------- | -------------- | ------ | ----- | ---- | - | ------ | ----- | 
|                                              |                                       | December 31,   |       
|                                              |                                       |                |       
|                                              |                                       | 2004           |        |       | 2005 |  
|                                              |                                       |                |        |       |      |  
|                                              |                                       | (In thousands) |       
|Equipment and computers                       |                                       | $              | 1,504  |       |      | $ | 1,697  |      
|Cryosurgical systems placed at customer sites |                                       |                | 5,778  |       |      |   | 5,746  |      
|Furniture and fixtures                        |                                       |                | 834    |       |      |   | 905    |      
|Leasehold improvements                        |                                       |                | 321    |       |      |   | 321    |      
|                                              |                                       |                |        |       |      |  
|                                              | Total property and equipment, at cost |                |        | 8,437 |      |   |        | 8,669 | 
|Accumulated depreciation and amortization     |                                       |                | (5,765 | )     |      |   | (6,875 | )    
|                                              |                                       |                |        |       |      |  
|                                              | Property and equipment, net           |                | $      | 2,672 |      |   | $      | 1,794 | 
|                                              |                                       |                |        |       |      |  



| |                                                                              
| | -----------------------------------------------------------------------------
| | Long-Lived Assets, Goodwill and Intangible Assets Subject to
    Amortization



F-10



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Goodwill and other Intangible
Assets




|                                               |  |  |                | 
|---------------------------------------------- |  |  | -------------- | 
|Trade names (discontinued operations)          |  |  | 15 years       | 
|Domain names                                   |  |  | 5 years        | 
|Covenants not to compete                       |  |  | 3 to 5 years   | 
|Developed technology (discontinued operations) |  |  | 15 years       | 
|Patents                                        |  |  | 3 to 15  years | 

Accounting for the
Impairment or Disposal of Long-Lived Assets,




|           |  |   |       | 
|---------- |  | - | ----- | 
|2006       |  | $ | 537   | 
|2007       |  |   | 467   | 
|2008       |  |   | 467   | 
|2009       |  |   | 467   | 
|2010       |  |   | 467   | 
|Thereafter |  |   | 1,762 | 
|           |  |   |      
|           |  | $ | 4,167 | 
|           |  |   |      



F-11



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |                   |                |        |       |      |   |        |       | 
|------------------------ | ----------------- | -------------- | ------ | ----- | ---- | - | ------ | ----- | 
|                         |                   | December 31,   |       
|                         |                   |                |       
|                         |                   | 2004           |        |       | 2005 |  
|                         |                   |                |        |       |      |  
|                         |                   | (In thousands) |       
|Domain name              |                   | $              | 435    |       |      | $ | 435    |      
|Covenant not to compete  |                   |                | 352    |       |      |   | 352    |      
|Patents                  |                   |                | 5,875  |       |      |   | 6,205  |      
|                         |                   |                |        |       |      |  
|                         | Total intangibles |                |        | 6,662 |      |   |        | 6,992 | 
|Accumulated amortization |                   |                | (2,272 | )     |      |   | (2,825 | )    
|                         |                   |                |        |       |      |  
|                         | Intangibles, net  |                | $      | 4,390 |      |   | $      | 4,167 | 
|                         |                   |                |        |       |      |  



| |            
| | -----------
| | Investments

start-up




| |                   
| | ------------------
| | Product Warranties





| |                         
| | ------------------------
| | Research and Development





| |            
| | -----------
| | Advertising





| |                          
| | -------------------------
| | Cash and Cash Equivalents



F-12



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                              
| | -----------------------------
| | Concentrations of Credit Risk





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments

Black-Scholes




| |                        
| | -----------------------
| | Risks and Uncertainties





| |                 
| | ----------------
| | Reclassification





| |                                             
| | --------------------------------------------
| | Off-Balance Sheet Financings and Liabilities



F-13



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                          
| | -------------------------
| | Other Accrued Liabilities





| |                                     
| | ------------------------------------
| | Capital Stock and Earnings Per Share







| |      
| | -----
| | Taxes





| |                         
| | ------------------------
| | Stock-Based Compensation

Accounting for Stock
Issued to Employees,


F-14



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting for Stock-Based
Compensation  Translation and Disclosure.


|                                  |                                                                                                                        |                         |         |        |      |   |         |        |   |   |         |        |  
|--------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ----------------------- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                  |                                                                                                                        | Year Ended December 31, |        
|                                  |                                                                                                                        |                         |        
|                                  |                                                                                                                        | 2003                    |         |        | 2004 |   |         | 2005   |  
|                                  |                                                                                                                        |                         |         |        |      |   |         |        |  
|                                  |                                                                                                                        | (In thousands)          |        
|Net loss, as reported(a)(c)       |                                                                                                                        | $                       | (25,448 | )      |      | $ | (37,619 | )      |   | $ | (13,679 | )     
|Reconciling items:                |                                                                                                                        |                         |         |        |      |   |         |        |   |   |         |       
|                                  | Add: Stock-based employee compensation expense determined under
    the intrinsic-value-based method for all awards(b) |                         |         | 25     |      |   |         | 136    |   |   |         | 43     |  
|                                  | Less: Stock-based compensation expense determined under the
    fair-value-based method for all awards expense(c)      |                         |         | (2,313 | )    |   |         | (3,875 | ) |   |         | (3,696 | )
|                                  |                                                                                                                        |                         |         |        |      |   |         |        |  
|Net adjustment                    |                                                                                                                        |                         | (2,288  | )      |      |   | (3,739  | )      |   |   | (3,653  | )     
|                                  |                                                                                                                        |                         |         |        |      |   |         |        |  
|Net loss, as adjusted             |                                                                                                                        | $                       | (27,736 | )      |      | $ | (41,358 | )      |   | $ | (17,332 | )     
|                                  |                                                                                                                        |                         |         |        |      |   |         |        |  
|Basic and diluted loss per share: |                                                                                                                        |                         |         |        |      |   |         |        |   |   |         |       
|                                  | As reported                                                                                                            |                         | $       | (1.05  | )    |   | $       | (1.55  | ) |   | $       | (0.47  | )
|                                  | As adjusted                                                                                                            |                         | $       | (1.15  | )    |   | $       | (1.70  | ) |   | $       | (0.60  | )



|                        |  |      |          |   |      |  |          |      |  |  |          |  
|----------------------- |  | ---- | -------- | - | ---- |  | -------- | ---- |  |  | -------- | -
|                        |  | 2003 |          |   | 2004 |  |          | 2005 | 
|                        |  |      |          |   |      |  |          |      | 
|Stock volatility        |  |      | 1.57     |   |      |  | 0.89     |      |  |  | 0.90     |  
|Risk-free interest rate |  |      | 3.4      | % |      |  | 3.6      | %    |  |  | 4.0      | %
|Expected life in years  |  |      | 5  years |   |      |  | 5  years |      |  |  | 5  years |  
|Stock dividend yield    |  |      |         |   |      |  |         |      |  |  |         |  






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | In the past, the Company 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 the Company issues options with exercise prices equal to
    or exceeding the fair values of the underlying common stock, no
    compensation expense is recorded for options issued to
    employees. The recorded expense generally relates to
    compensation charges upon modification of vesting terms,
    cashless exercises, and other non-routine transactions.                                                                                                                                                                                                                                                                                                                                              
|   
|(c) |  | Pursuant to APB No. 25, the reported net loss for 2003
    included $1.8 million in compensation expense relating to
    option settlements with two former executives in conjunction
    with their separation agreements (including a $1.7 million
    charge for replacement options recorded upon termination of the
    former CFO/COO on July 31, 2003). Pursuant to SFAS Nos. 123
    and 148, the fair value of the replacement options would have
    been recorded between the option modification date of
    March 3, 2003 and termination date. The $2.3 million
    expense for 2003 represents stock-based compensation determined
    under SFAS Nos. 123 and 148, less the $1.8 million
    recorded charge.

F-15



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                              
|-- | -----------------------------
|5. | New Accounting Pronouncements

Share-Based
Payment, Accounting for Stock Based
Compensation,






Inventory Costs 
an amendment of ARB No. 43, Chapter 4 Chapter 4, Inventory
Pricing,


Accounting Changes and
Error Corrections, Accounting Changes, Reporting Changes in Interim Financial Statements,


F-16



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                 
|-- | ----------------
|6. | Asset Impairment

Goodwill and Other Intangible
Assets,






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) A third quarter of 2004 impairment charge of
    $5.9 million to reduce the carrying value of Timm
    Medicals goodwill ($3.1 million) and developed
    technology ($2.1 million) to fair value and an additional
    charge of approximately $0.7 million for the estimated cost
    to sell Timm Medical. The charge is included in the net loss
    from discontinued operations. The interim impairment analysis in
    the third quarter of 2004 was required based on the
    Companys decision to actively market Timm Medical to
    potential buyers in July 2004, as well as declining revenues,
    turnover in sales force, and below average growth as compared to
    general industry trends. Based on the purchase price received by
    the Company from the sale of Timm Medical completed in February
    2006 (see Note 8), there was no further impairment as of
    December 31, 2005.                                                                                                                                                                                                                                                                                                      
|
| | b) A third quarter of 2004 impairment charge of
    $9.9 million to write-off the carrying value of goodwill
    ($9.8 million) and covenant not to compete
    ($0.1 million) with respect to the pending divestiture of
    the mobile prostate treatment businesses (the Partnerships). We
    originally acquired the Partnerships in September 2002. The
    goodwill primarily related to the distribution network provided
    by the Partnerships, which allowed the Company to further
    penetrate desired markets. Since investors in the mobile
    treatment businesses are comprised of urologists, the
    Partnerships facilitated the continued promotion of cryosurgery
    as the preferred treatment for prostate cancer. In addition,
    upon the Companys purchase of the Partnerships, the seller
    (USMD) exited the cryosurgical operations and terminated
    its exclusive distribution agreement with the Company, allowing
    the Company to access a previously restricted market. After the
    Company sold the Partnerships in December 2004, the Company
    still expected to, and did, retain access to the service and
    distribution network through the Companys existing

F-17



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | contracts and continue to benefit from the strategic value of a
    non-exclusive distribution arrangement with the buyer. However,
    since this economic benefit could not be quantified with
    reasonable accuracy, the Company recorded the $9.9 million
    charge to write off the excess of the carrying value of the
    Partnerships net assets over the preliminary purchase
    offer, less selling costs. See Note 8 for the loss recorded
    upon final sale in the fourth quarter of 2004.



|   |                                               
|-- | ----------------------------------------------
|7. | Private Placement of Common Stock and Warrants



30-day




S-2 S-2


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 (4.25 years); no
    dividends; a risk free rate

F-18



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | of 4.35 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
    89.46 percent. Under these assumptions, the Black-Scholes
    option-pricing model yielded a value of $1.73 for each of the
    Series A warrants and $1.67 for each of the Series B
    warrants, for an aggregate value of $6.7 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, the Company 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 the Company has the right to call the
    Series A and Series B warrants, effectively compelling
    the holders to exercise their warrants). The Company used a
    statistical formula to calculate the probability that the
    Companys stock price will reach or exceed $6.50 and $7.50,
    respectively. Based on this formula, the Company calculated
    that, for the Series A warrants, the probability that the
    stock price of $6.50 will be reached or exceeded is
    approximately 22.8 percent. Similarly, the Company
    calculated that, for the Series B warrants, the probability
    that the stock price of $7.50 will be reached or exceeded is
    approximately 17.3 percent. Based on these probabilities,
    the Company reduced the valuation of each of the Series A
    warrants to $1.34 (which equals one minus 22.8 percent,
    multiplied by $1.73) and reduced the valuation of each of the
    Series B warrants to $1.38 (which equals one minus
    17.3 percent, multiplied by $1.67). This yields an
    aggregate value of the warrants equal to
    $5.4 million; and
|
| |  | Third, the Company further reduced the value of the warrants on
    the assumption that its 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 million shares outstanding, the
    Company calculated that the exercise of the warrants will result
    in dilution of approximately 6.2 percent. Using the
    dilution figure of 6.2 percent, the Company reduced the
    value of each of the Series A warrants to $1.25 and the
    Series B warrants to $1.29. This yields an aggregate value
    of the warrants equal to $5.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     









| |                                                            
| | -----------------------------------------------------------
| | Other Warrants Issued (expired as of December 31,
    2005)





F-19



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |                                         
|-- | ----------------------------------------
|8. | Dispositions and Discontinued Operations



| |                    
| | -------------------
| | Timm Medical  2005



Accounting for the
Impairment or Disposal of Long-Lived Assets,




F-20



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                               |  |                |        |  |      |   |       | 
|---------------------------------------------- |  | -------------- | ------ |  | ---- | - | ----- | 
|                                               |  | 2004           |        |  | 2005 |  
|                                               |  |                |        |  |      |  
|                                               |  | (In thousands) |       
|Assets:                                        |  |                |        |  |      |   |       | 
|Cash, inventories and other current assets     |  | $              | 1,185  |  |      | $ | 1,216 | 
|Property and equipment, net                    |  |                | 467    |  |      |   | 75    | 
|Goodwill, net                                  |  |                | 4,552  |  |      |   | 4,552 | 
|Intangibles, net                               |  |                | 4,170  |  |      |   | 3,716 | 
|Other assets                                   |  |                | 66     |  |      |   | 65    | 
|                                               |  |                |        |  |      |  
|Total assets                                   |  | $              | 10,440 |  |      | $ | 9,624 | 
|                                               |  |                |        |  |      |  
|                                              
|Liabilities:                                   |  |                |        |  |      |   |       | 
|Accounts payable and other current liabilities |  | $              | 651    |  |      | $ | 942   | 
|Other accrued liabilities                      |  |                | 524    |  |      |   | 519   | 
|Costs to sell                                  |  |                | 680    |  |      |   |      | 
|                                               |  |                |        |  |      |  
|Total liabilities                              |  |                | 1,855  |  |      |   | 1,461 | 
|                                               |  |                |        |  |      |  
|Net assets                                     |  | $              | 8,585  |  |      | $ | 8,163 | 
|                                               |  |                |        |  |      |  





| |                                              
| | ---------------------------------------------
| | Divestitures of Non-Core Product Lines  2003





| |                                               
| | ----------------------------------------------
| | Cryosurgical Products for Cardiac Applications

tm 12-year


F-21



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


tm




| |                                     
| | ------------------------------------
| | Urinary Incontinence and Urodynamics









| |                                                    
| | ---------------------------------------------------
| | Mobile Prostate Treatment Businesses (Partnerships)





|   |                               
|-- | ------------------------------
|9. | Stock-Based Compensation Plans

Accounting for Stock Issued to
Employees,


F-22



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                   |  |                         |           |               |                |   |       |           |               |  |                |   |  |               |      |  |                |  |           |   |  |   |      | 
|---------------------------------- |  | ----------------------- | --------- | ------------- | -------------- | - | ----- | --------- | ------------- |  | -------------- | - |  | ------------- | ---- |  | -------------- |  | --------- | - |  | - | ---- | 
|                                   |  | Year Ended December 31, |          
|                                   |  |                         |          
|                                   |  | 2003                    |           |               | 2004           |   |       | 2005      |              
|                                   |  |                         |           |               |                |   |       |           |              
|                                   |  |                         |           | 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 |  |                         | 3,153,427 |               |                | $ | 8.50  |           |               |  | 5,118,752      |   |  | $             | 5.06 |  |                |  | 5,361,682 |   |  | $ | 4.72 | 
|Granted                            |  |                         | 2,893,000 |               |                |   | 3.42  |           |               |  | 1,397,500      |   |  |               | 2.94 |  |                |  | 1,549,250 |   |  |   | 3.19 | 
|Cancelled                          |  |                         | (892,675  | )             |                |   | 11.96 |           |               |  | (804,570       | ) |  |               | 5.32 |  |                |  | (709,463  | ) |  |   | 5.80 | 
|Exercised                          |  |                         | (35,000   | )             |                |   | 3.73  |           |               |  | (350,000       | ) |  |               | 0.26 |  |                |  | (195,229  | ) |  |   | 2.10 | 
|                                   |  |                         |           |               |                |   |       |           |               |  |                |   |  |               |      |  |                | 
|Outstanding, end of year           |  |                         | 5,118,752 |               |                |   | 5.06  |           |               |  | 5,361,682      |   |  |               | 4.72 |  |                |  | 6,006,240 |   |  |   | 4.27 | 

|               |               |                     |           |               |                     |  |      |                |  |        |                   |       |  |                |           |         |  |   |       |       | 
|-------------- | ------------- | ------------------- | --------- | ------------- | ------------------- |  | ---- | -------------- |  | ------ | ----------------- | ----- |  | -------------- | --------- | ------- |  | - | ----- | ----- | 
|               |               | Options Outstanding |           |               |                    
|               |               |                     |           |               | Options Exercisable | 
|               |               |                     |           | Weighted-Avg. |                     |  |      |                |  |       
|               |               | Number              |           |               | Remaining           |  |      |                |  | Number |                   |       | 
|Range Of       |               | Outstanding at      |           |               | Contractual Life    |  |      | Weighted-Avg.  |  |        | Exercisable at    |       |  | Weighted-Avg.  |          
|Exercise Price |               | December 31, 2005   |           |               | (Number of Years)   |  |      | Exercise Price |  |        | December 31, 2005 |       |  | Exercise Price |          
|               |               |                     |           |               |                     |  |      |                |  |        |                   |       |  |                |          
|$ 0.18 -  2.03 |               |                     | 124,500   |               |                     |  | 1.80 |                |  | $      | 1.29              |       |  |                | 124,500   |         |  | $ | 1.29  |      
|2.06 -  2.85   |               |                     | 2,345,365 |               |                     |  | 8.26 |                |  |        | 2.48              |       |  |                | 877,333   |         |  |   | 2.36  |      
|2.88 -  3.25   |               |                     | 451,945   |               |                     |  | 8.60 |                |  |        | 3.02              |       |  |                | 52,778    |         |  |   | 3.15  |      
|3.26 -  4.00   |               |                     | 421,500   |               |                     |  | 8.99 |                |  |        | 3.54              |       |  |                | 74,375    |         |  |   | 3.57  |      
|4.01 -  5.06   |               |                     | 1,819,209 |               |                     |  | 7.99 |                |  |        | 4.31              |       |  |                | 1,059,021 |         |  |   | 4.34  |      
|5.13 -  7.44   |               |                     | 278,942   |               |                     |  | 5.18 |                |  |        | 5.27              |       |  |                | 278,942   |         |  |   | 5.27  |      
|9.00 - 12.98   |               |                     | 293,708   |               |                     |  | 5.61 |                |  |        | 10.93             |       |  |                | 272,051   |         |  |   | 10.90 |      
|               | 13.42 - 15.00 |                     |           | 126,500       |                     |  |      | 5.92           |  |        |                   | 13.99 |  |                |           | 123,083 |  |   |       | 13.99 | 
|               | 15.42 - 21.23 |                     |           | 144,571       |                     |  |      | 5.88           |  |        |                   | 17.42 |  |                |           | 144,430 |  |   |       | 17.42 | 
|               |               |                     |           |               |                     |  |      |                |  |        |                   |       |  |                |          
|               |               |                     | 6,006,240 |               |                     |  | 7.74 |                |  | $      | 4.27              |       |  |                | 3,006,513 |         |  | $ | 5.30  |      
|               |               |                     |           |               |                     |  |      |                |  |        |                   |       |  |                |          







|    |                       
|--- | ----------------------
|10. | Equity Incentive Plans



| |              
| | -------------
| | Stock Options



2004 Stock Incentive Plan.


F-23



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




1995 Stock Plan.


1995 Director Option Plan. 10-year


2002 Supplemental Stock Plan.


F-24



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Option Arrangements Outside of Plans.








| |                        
| | -----------------------
| | Stockholder Rights Plan





|    |             
|--- | ------------
|11. | Income Taxes



|        |       |                |   |      |  |      |   |   |  |   |      |      |  
|------- | ----- | -------------- | - | ---- |  | ---- | - | - |  | - | ---- | ---- | -
|        |       | Years Ended    |  
|        |       | December 31,   |  
|        |       |                |  
|        |       | 2003           |   | 2004 |  | 2005 |  
|        |       |                |   |      |  |      |  
|        |       | (In thousands) |  
|Federal |       | $              |  |      |  | $    |  |   |  | $ | (705 | )   
|State   |       |                |  |      |  |      |  |   |  |   | (124 | )   
|        |       |                |   |      |  |      |   |   | 
|        | Total |                | $ |     |  |      | $ |  |  |   | $    | (829 | )
|        |       |                |   |      |  |      |   |   | 



F-25



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                   |                                                       |                         |        |         |      |  |        |         |   | 
|---------------------------------- | ----------------------------------------------------- | ----------------------- | ------ | ------- | ---- |  | ------ | ------- | - | 
|                                   |                                                       | 2004                    |        |         | 2005 | 
|                                   |                                                       |                         |        |         |      | 
|                                   |                                                       | (In thousands)          |       
|Deferred tax assets (liabilities): |                                                       |                         |        |         |      |  |        |        
|                                   | Depreciation and amortization                         |                         |        | (27     | )    |  |        | 468     |  
|                                   | Nondeductible reserves and accruals                   |                         |        | 2,899   |      |  |        | 2,280   |  
|                                   | Investment in stock of discontinued operation         |                         |        |        |      |  |        | 10,468  |  
|                                   | Research and experimentation tax credit carryforwards |                         |        | 1,000   |      |  |        | 1,000   |  
|                                   | Net operating loss carryforwards                      |                         |        | 38,468  |      |  |        | 42,578  |  
|                                   | Capital loss carryforwards                            |                         |        | 5,279   |      |  |        | 5,279   |  
|                                   | Other                                                 |                         |        | 752     |      |  |        | 1,417   |  
|                                   |                                                       |                         |        |         |      | 
|                                   |                                                       |                         | 48,371 |         |      |  | 63,490 |        
|                                   | Valuation allowance                                   |                         |        | (48,371 | )    |  |        | (63,490 | )
|                                   |                                                       |                         |        |         |      | 
|                                   |                                                       | Net deferred tax assets |        | $       |     |  |        | $       |  | 
|                                   |                                                       |                         |        |         |      | 





|                                |                              |                          |        |   |      |   |         |      |  |   |        |      |  
|------------------------------- | ---------------------------- | ------------------------ | ------ | - | ---- | - | ------- | ---- |  | - | ------ | ---- | -
|                                |                              | Years Ended December 31, |       
|                                |                              |                          |       
|                                |                              | 2003                     |        |   | 2004 |   |         | 2005 | 
|                                |                              |                          |        |   |      |   |         |      | 
|                                |                              | (In thousands)           |       
|Computed expected tax benefit   |                              | $                        | (8,487 | ) |      | $ | (10,846 | )    |  | $ | (5,327 | )   
|Nondeductible expenses          |                              |                          | 287    |   |      |   | 78      |      |  |   | 89     |     
|Increase in valuation allowance |                              |                          | 9,572  |   |      |   | 12,950  |      |  |   | 4,490  |     
|State taxes                     |                              |                          | (1,372 | ) |      |   | (1,861  | )    |  |   | (81    | )   
|Other                           |                              |                          |       |   |      |   | (321    | )    |  |   |       |     
|                                |                              |                          |        |   |      |   |         |      | 
|                                | Actual tax expense (benefit) |                          | $      |  |      |   | $       |     |  |   | $      | (829 | )
|                                |                              |                          |        |   |      |   |         |      | 



F-26



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                   
|--- | ----------------------------------
|12. | Collaborative and Other Agreements



| |                     
| | --------------------
| | Sanarus Medical Inc.

paid-up paid-up








| |                       
| | ----------------------
| | CryoFluor Therapeutics



F-27



---



##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












| |                                                         
| | --------------------------------------------------------
| | CryoDynamics, LLC  Research & Development
    Agreement









F-28



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                       
| | ------------------------------------------------------
| | Patent, Licensing, Royalty and Distribution Agreements







|    |                              
|--- | -----------------------------
|13. | Commitments and Contingencies



| |       
| | ------
| | Leases



|                              |  |   |     | 
|----------------------------- |  | - | --- | 
|Year ending December 31, 2006 |  | $ | 553 | 
|2007                          |  |   | 120 | 
|2008                          |  |   | 13  | 
|                              |  |   |    
|                              |  | $ | 686 | 
|                              |  |   |    



| |                                    
| | -----------------------------------
| | Employment and Severance Agreements





| |                
| | ---------------
| | Former Officers



| |                                                         
| | --------------------------------------------------------
| | Former Chief Executive Officer and Chairman of the Board



F-29



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                                           
| | ----------------------------------------------------------
| | Former Chief Financial Officer and Chief Operating Officer









| |                               
| | ------------------------------
| | Former Chief Financial Officer



F-30



---



##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                        
| | ---------------------------------------
| | 2002 Executive Separation Benefits Plan

30-day




| |                       
| | ----------------------
| | Employee Benefit Plans





| |              
| | -------------
| | Legal Matters









F-31



---



##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










F-32



---



##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|    |               
|--- | --------------
|14. | Line of Credit









|    |                           
|--- | --------------------------
|15. | Related Party Transactions





F-33



---



##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                            
|--- | -------------------------------------------
|16. | Quarterly Results of Operations (Unaudited)



|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | ------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                                                                  |  | Quarter Ended |        |   | Quarter Ended |   |        | Quarter Ended |  |   | Quarter Ended |  
|                                                                                  |  | March 31,     |        |   | June 30,      |   |        | September 30, |  |   | December 31,  |  
|                                                                                  |  | 2005          |        |   | 2005          |   |        | 2005          |  |   | 2005          |  
|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |  
|Revenues from continuing operations                                               |  | $             | 6,867  |   |               | $ | 6,919  |               |  | $ | 7,008         |   |  | $ | 7,481  |  
|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |  
|Cost of revenues from continuing operations                                       |  | $             | 4,186  |   |               | $ | 3,924  |               |  | $ | 3,809         |   |  | $ | 3,819  |  
|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |  
|Loss from continuing operations                                                   |  | $             | (5,219 | ) |               | $ | (4,522 | )             |  | $ | (2,997        | ) |  | $ | (2,101 | )
|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |  
|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 |   |               |   | 30,060 |               |  |   | 30,069        |   |  |   | 30,081 |  

|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | ------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                                                                  |  | Quarter Ended |        |   | Quarter Ended |   |        | Quarter Ended |  |   | Quarter Ended |  
|                                                                                  |  | March 31,     |        |   | June 30,      |   |        | September 30, |  |   | December 31,  |  
|                                                                                  |  | 2004          |        |   | 2004          |   |        | 2004          |  |   | 2004          |  
|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |  
|Revenues from continuing operations                                               |  | $             | 5,325  |   |               | $ | 6,244  |               |  | $ | 6,223         |   |  | $ | 6,389  |  
|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |  
|Cost of revenues from continuing operations                                       |  | $             | 3,302  |   |               | $ | 3,355  |               |  | $ | 3,485         |   |  | $ | 3,443  |  
|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |  
|Loss on divestitures, net                                                         |  | $             |       |   |               | $ |       |               |  | $ |              |   |  | $ | (711   | )
|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |  
|Loss from continuing operations                                                   |  | $             | (8,441 | ) |               | $ | (5,414 | )             |  | $ | (13,467       | ) |  | $ | (4,579 | )
|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |  
|Net loss                                                                          |  | $             | (8,623 | ) |               | $ | (5,620 | )             |  | $ | (19,257       | ) |  | $ | (4,118 | )
|                                                                                  |  |               |        |   |               |   |        |               |  |   |               |  
|Loss from continuing operations per share of common
    stock  basic and diluted |  | $             | (0.35  | ) |               | $ | (0.23  | )             |  | $ | (0.56         | ) |  | $ | (0.19  | )
|Net loss per share of common stock  basic and diluted                            |  | $             | (0.36  | ) |               | $ | (0.23  | )             |  | $ | (0.80         | ) |  | $ | (0.17  | )
|Weighted average shares of common stock outstanding 
    basic and diluted       |  |               | 24,088 |   |               |   | 24,000 |               |  |   | 24,175        |   |  |   | 24,342 |  

F-34



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS


|                                                     |  |                |       |           |            |   |      |       |            |            |   |            |            |   |        |   |  |   |       | 
|---------------------------------------------------- |  | -------------- | ----- | --------- | ---------- | - | ---- | ----- | ---------- | ---------- | - | ---------- | ---------- | - | ------ | - |  | - | ----- | 
|                                                     |  |                |       | Additions |            |   |      |      
|                                                     |  | Balance at the |       |           |            |   |      |       | Balance at |           
|                                                     |  | Beginning of   |       |           | Charges to |   |      |       |            |            |   | the End of |           
|                                                     |  | the Period     |       |           | Operations |   |      | Other |            | Deductions |   |            | the Period |  
|                                                     |  |                |       |           |            |   |      |       |            |            |   |            |            |  
|                                                     |  | (In thousands) |      
|2003                                                 |  |                |       |           |            |   |      |       |            |            |   |            |            |   |        |   |  |   |       | 
|Allowance for Doubtful Receivables and Sales Returns |  | $              | 1,624 |           |            | $ | 658  |       |            | $          |  |            |            | $ | (296   | ) |  | $ | 1,986 | 
|2004                                                 |  |                |       |           |            |   |      |       |            |            |   |            |            |   |        |   |  |   |       | 
|Allowance for Doubtful Receivables and Sales Returns |  | $              | 1,986 |           |            | $ | (726 | )     |            | $          |  |            |            | $ | (1,186 | ) |  | $ | 74    | 
|2005                                                 |  |                |       |           |            |   |      |       |            |            |   |            |            |   |        |   |  |   |       | 
|Allowance for Doubtful Receivables and Sales Returns |  | $              | 74    |           |            | $ | 10   |       |            | $          |  |            |            | $ | (14    | ) |  | $ | 70    | 






F-35



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##### Table of Contents



EXHIBIT INDEX


|            |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     | Description
|            |     |            
|            | 2   | .1(1)       |  | Partnership Interest Purchase Agreement, dated as of
    December 30, 2004, by and between the Company and Advanced
    Medical Partners, Inc.                                                                                                                                                                                                                                     
|            | 2   | .2(2)       |  | 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   | .3          |  | $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 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(12)      |  | 2002 Supplemental Stock Plan.                                                                                                                                                                                                                                                                                                                                                      
|            | 10 | .7(12)      |  | 2002 Executive Separation Benefits Plan.                                                                                                                                                                                                                                                                                                                                           
|            | 10 | .8(13)      |  | Employment Agreement, dated as of March 3, 2003, by and
    between the Company and William J. Nydam.                                                                                                                                                                                                                                                                              
|            | 10  | .9(14)      |  | Consulting Agreement, dated as of August 27, 2003, by and
    between the Company and Craig T. Davenport.                                                                                                                                                                                                                                                                          
|            | 10 | .10(15)     |  | Employment Agreement, dated as of December 15, 2003, by and
    between the Company and Craig T. Davenport.                                                                                                                                                                                                                                                                        
|            | 10 | .11(16)     |  | Employment Agreement, dated as of August 11, 2004, by and
    between the Company and Michael R. Rodriguez.                                                                                                                                                                                                                                                                        
|            | 10 | .12(17)     |  | 2004 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                         
|            | 10 | .13(18)     |  | 2004 Non-Employee Director Option Program under 2004 Stock
    Incentive Plan.                                                                                                                                                                                                                                                                                                     
|            | 10 | .14(18)     |  | Form of Award Agreement Under 2004 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                           
|            | 10  | .15(18)     |  | Stipulation of Settlement, dated as of November 1, 2004,
    relating to securities class action lawsuit.                                                                                                                                                                                                                                                                          
|            | 10 | .16(18)     |  | Description of Craig Davenport salary adjustment, effective
    December 2004.                                                                                                                                                                                                                                                                                                     
|            | 10  | .17(18)     |  | Confidential Settlement Agreement and Release, dated as of
    December 14, 2004, by and between the Company and certain
    Underwriters at Lloyds, London.                                                                                                                                                                                                                      
|            | 10  | .18(18)     |  | Release and Settlement Agreement, dated as of December 16,
    2004, by and between the Company and National Union Fire
    Insurance Company.                                                                                                                                                                                                                                     



---



##### Table of Contents



|            |     |             |  |                                                                                                                                                           
|----------- | --- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     | Description
|            |     |            
|            | 10 | .19(19)     |  | Description of William J. Nydam salary adjustment,
    effective February 2005.                                                                           
|            | 10 | .20(19)     |  | Description of Michael R. Rodriguez salary adjustment,
    effective February 2005.                                                                       
|            | 10  | .21(19)     |  | Confidential Settlement Agreement and Release, dated as of
    February 18, 2005, by and between the Company and Great
    American E&S Insurance Company.
|            | 10 | .22(20)     |  | 2004 Management Incentive Compensation Program.                                                                                                           
|            | 10 | .23(20)     |  | 2005 Management Incentive Compensation Program.                                                                                                           
|            | 10  | .24(6)      |  | Purchase Agreement, dated as of March 10, 2005, by and
    between the Company and the Investors (as defined therein).                                    
|            | 10  | .25(6)      |  | Registration Rights Agreement, dated as of March 10, 2005,
    by and between Endocare and the Investors (as defined therein).                            
|            | 10 | .26(21)     |  | First Amendment to Employment Agreement with Craig T.
    Davenport, dated as of April 28, 2005.                                                          
|            | 10 | .27(22)     |  | Description of director compensation, as amended on
    September 14, 2005.                                                                               
|            | 10  | .28         |  | Loan and Security Agreement, dated as of October 26, 2005,
    by and among Endocare, Inc., Timm Medical Technologies, Inc. and
    Silicon Valley Bank.  
|            | 10  | .29         |  | Commercialization Agreement, dated as of November 8, 2005,
    by and between Endocare, Inc. and CryoDynamics, LLC.                                       
|            | 10  | .30         |  | Confidential Settlement Agreement and Release, dated as of
    December 1, 2005, by and between Endocare, Inc. and Liberty
    Mutual Insurance Company.  
|            | 21  | .1(23)      |  | Subsidiaries of Registrant.                                                                                                                               
|            | 23  | .1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                 
|            | 24  | .1          |  | Power of Attorney, included on signature page.                                                                                                            
|            | 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.



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | Previously filed as an exhibit to our
    Form 8-K filed on
    January 6, 2005.                             
|   
|(2) | Previously filed as an exhibit to our
    Form 8-K filed on
    January 18, 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 15, 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.                     
|    
|(13) | Previously filed as an exhibit to our
    Form 8-K filed on
    March 27, 2003.                        
|    
|(14) | Previously filed as an exhibit to our
    Form 10-K filed on
    March 15, 2004.                       
|    
|(15) | Previously filed as an exhibit to our
    Form 8-K filed on
    December 16, 2003.                     
|    
|(16) | Previously filed as an exhibit to our
    Form 8-K filed on
    August 12, 2004.                       
|    
|(17) | Previously filed as an appendix to our Definitive Proxy
    Statement filed on August 6, 2004.         



---



##### Table of Contents





|     |                                                                                                                                                                                                                                      
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(18) | Previously filed as an exhibit to our
    Form 10-K filed on
    March 16, 2005.                                                                                                                                                     
|    
|(19) | Previously filed as an exhibit to our
    Form 10-Q filed on
    May 10, 2005.                                                                                                                                                       
|    
|(20) | Previously filed as an exhibit to our
    Form 8-K filed on
    March 1, 2005.                                                                                                                                                       
|    
|(21) | Previously filed as an exhibit to our
    Form 8-K filed on
    May 3, 2005.                                                                                                                                                         
|    
|(22) | Previously filed as an exhibit to our
    Form 8-K filed on
    September 16, 2005. Our director compensation program was
    subsequently amended on February 23, 2006, as described in
    our Form 8-K filed
    on March 1, 2006.
|    
|(23) | Not applicable because, as a result of our sale of Timm Medical
    on February 10, 2006, we do not have any subsidiaries that
    constitute significant subsidiaries under
    Rule 1-02(w) of
    Regulation S-X.