##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
 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 I.D. No.)
 201 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618
 (Address of Principal Executive Office, Including Zip Code)
 (949) 450-5400
 (Registrants Telephone Number, Including Area Code)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ




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##### 



Endocare, Inc. and Subsidiary
 INDEX
 Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations  Three and nine months ended September 30,
2008 and 2007
    
    
    3Condensed Consolidated Balance Sheets  September 30, 2008 and December 31, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows  Nine months ended September 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    27Part II. Other InformationItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29Signatures
    
    
    30EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 ENDOCARE, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(In thousands, except per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Total revenues
    
    $
    7,599
    
    
    $
    7,326
    
    
    $
    23,672
    
    
    $
    22,773Costs and expenses:Cost of revenues
    
    
    2,275
    
    
    
    2,171
    
    
    
    7,127
    
    
    
    7,506Research and development
    
    
    626
    
    
    
    699
    
    
    
    1,765
    
    
    
    1,935Selling and marketing
    
    
    3,423
    
    
    
    3,500
    
    
    
    11,120
    
    
    
    11,362General and administrative
    
    
    2,951
    
    
    
    2,881
    
    
    
    9,234
    
    
    
    9,556Gain on recovery of note receivable
    
    
    (750
    )
    
    
    
    
    
    
    (750
    )
    
    
    Litigation settlement, net of
related legal expenses
    
    
    
    
    
    
    (677
    )
    
    
    
    
    
    
    (677
    )Total costs and expenses
    
    
    8,525
    
    
    
    8,574
    
    
    $
    28,496
    
    
    
    29,682Loss from operations
    
    
    (926
    )
    
    
    (1,248
    )
    
    
    (4,824
    )
    
    
    (6,909
    )Interest income, net
    
    
    5
    
    
    
    264
    
    
    
    181
    
    
    
    402Net loss
    
    $
    (921
    )
    
    $
    (984
    )
    
    $
    (4,643
    )
    
    $
    (6,507
    )Net loss per share  basic and diluted
    
    $
    (0.08
    )
    
    $
    (0.08
    )
    
    $
    (0.39
    )
    
    $
    (0.59
    )Weighted average shares of common
stock outstanding
    
    
    11,972
    
    
    
    11,595
    
    
    
    11,854
    
    
    
    10,947
  3




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ENDOCARE, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands, except per share data)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,346
    
    
    $
    7,712Accounts receivable, net
    
    
    3,579
    
    
    
    3,530Inventories, net
    
    
    3,108
    
    
    
    3,022Prepaid expenses and other current assets
    
    
    597
    
    
    
    2,081Total current assets
    
    
    12,630
    
    
    
    16,345Property and equipment, net
    
    
    724
    
    
    
    850Intangibles, net
    
    
    2,701
    
    
    
    3,077Investments and other assets
    
    
    993
    
    
    
    989Total
assets
    
    $
    17,048
    
    
    $
    21,261LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,042
    
    
    $
    2,194Accrued compensation
    
    
    2,111
    
    
    
    3,895Other accrued liabilities
    
    
    2,931
    
    
    
    3,034Loan payable
    
    
    880
    
    
    
    880Obligations under capital lease  current portion
    
    
    26
    
    
    
    28Total current liabilities
    
    
    9,990
    
    
    
    10,031Deferred compensation
    
    
    120
    
    
    
    227Obligations under capital lease  less current portion
    
    
    69
    
    
    
    84Stockholders equity:Preferred stock, $0.001 par value; 1,000 shares
authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 50,000 shares
authorized; 11,811 and 11,762 issued and
outstanding as of September 30, 2008 and December
31, 2007, respectively
    
    
    12
    
    
    
    12Additional paid-in capital
    
    
    201,256
    
    
    
    200,663Accumulated deficit
    
    
    (194,399
    )
    
    
    (189,756
    )Total stockholders equity
    
    
    6,869
    
    
    
    10,919Total liabilities and stockholders equity
    
    $
    17,048
    
    
    $
    21,261
  4




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ENDOCARE, INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 Nine Months Ended September 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (4,643
    )
    
    $
    (6,507
    )Adjustments to reconcile net loss to net cash used in operating activities:Revaluation of Plethora note receivable
    
    
    
    
    
    
    (442
    )Gain on recovery of note receivable
    
    
    (750
    )
    
    
    Inventory reserve
    
    
    238
    
    
    
    (37
    )Depreciation and amortization
    
    
    752
    
    
    
    874Loss on sale of placement units and other fixed assets
    
    
    
    
    
    
    52Extinguishment of payroll tax liabilities
    
    
    
    
    
    
    (121
    )Stock-based compensation
    
    
    810
    
    
    
    2,949Changes in operating assets and liabilities:Accounts receivable
    
    
    (49
    )
    
    
    581Inventories
    
    
    (492
    )
    
    
    (575
    )Prepaid expenses and other assets
    
    
    (123
    )
    
    
    731Litigation settlement receivable, net of related legal expenses payable
    
    
    
    
    
    
    (677
    )Accounts payable
    
    
    1,849
    
    
    
    (640
    )Accrued compensation
    
    
    (1,891
    )
    
    
    427Other liabilities
    
    
    (117
    )
    
    
    (261
    )Net cash used in operating activities
    
    
    (4,416
    )
    
    
    (3,646
    )Cash flows from investing activities:Collection of notes receivable
    
    
    1,601
    
    
    
    Proceeds from recovery of note receivable
    
    
    750Purchases of property and equipment
    
    
    (81
    )
    
    
    (76
    )Net cash provided by (used in) investing activities
    
    
    2,270
    
    
    
    (76
    )Cash flows from financing activities:Payments under capital lease obligation
    
    
    (18
    )
    
    
    Net borrowings on line of credit
    
    
    
    
    
    
    880Payroll tax on issuance of restricted stock
    
    
    (202
    )
    
    
    Proceeds from sale of common stock
    
    
    
    
    
    
    8,600Net cash (used in) provided by financing activities
    
    
    (220
    )
    
    
    9,480Net (decrease) increase in cash and cash equivalents
    
    
    (2,366
    )
    
    
    5,758Cash and cash equivalents, beginning of period
    
    
    7,712
    
    
    
    1,811Cash and cash equivalents, end of period
    
    $
    5,346
    
    
    $
    7,569Non-cash activities:Transfer of inventory to property and equipment for placement at customer
sites
    
    $
    270
    
    
    $
    273Transfer of Cryocare Surgical Systems from property and equipment to
inventory for sale
    
    $
    101
    
    
    $
    103Adoption of
FSP 00-19-2:Reduction of retained earnings
    
    $
    
    
    
    $
    4,373Increase in additional paid-in capital
    
    
    
    
    
    
    5,680Reduction of common stock warrant liability
    
    
    
    
    
    
    1,307
  5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular numbers in thousands, except per share data)
(Unaudited)
 1. Organization and Operations
  2. Basis of Presentation
    3. Recent Operating Results and Liquidity
  Private Placement of Common Stock and Warrants. Collection of Notes Receivable,
   6




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Commitments and Contingencies
   Business Combinations.
   4. Private Placement of Common Stock and Warrants
 May 2007 Private Placement
   7




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Fusion Capital Equity Purchase Agreement
 Recent Operating Results and Liquidity
  March 2005 Private Placement
     8




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Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock Accounting for Registration Payment Arrangements Accounting
for Contingencies.
 5. Bank Line of Credit
 Recent Operating Results and Liquidity
  9




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6. Collection of Notes Receivable
  7. Capital Stock and Net Loss Per Share
  10




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8. Stock-Based Compensation
 Share-Based Payment
   Subsequent
Events.
  9. Inventories
  11




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September 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    1,774
    
    
    $
    2,331Work in process
    
    
    541
    
    
    
    227Finished goods
    
    
    1,187
    
    
    
    958Total inventories
    
    
    3,502
    
    
    
    3,516Less: inventory reserve
    
    
    (394
    )
    
    
    (494
    )Inventories, net
    
    $
    3,108
    
    
    $
    3,022
 10. Commitments and Contingencies
 Governmental Investigations and Legal Proceedings
   Other Litigation
  Investments
  11. Income Taxes
  12




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Accounting for Uncertainty in Income Taxes an interpretation of SFAS No. 109 Accounting for
Income Taxes
  12. Fair Value Measurement
 Fair Value Measurements
    The Fair Value Option for
Financial Assets and Financial Liabilities
 13




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13. Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Cryoablation disposable products
    
    $
    5,676
    
    
    $
    5,312
    
    
    $
    17,186
    
    
    $
    15,932Cryocare Surgical Systems
    
    
    195
    
    
    
    385
    
    
    
    1,093
    
    
    
    1,3835,871
    
    
    
    5,697
    
    
    
    18,279
    
    
    
    17,315Cryoablation procedure fees
    
    
    1,592
    
    
    
    1,541
    
    
    
    5,028
    
    
    
    5,029Cardiac royalties
    
    
    146
    
    
    
    86
    
    
    
    383
    
    
    
    278Other
    
    
    (10
    )
    
    
    2
    
    
    
    (18
    )
    
    
    151$
    7,599
    
    
    $
    7,326
    
    
    $
    23,672
    
    
    $
    22,773Costs of Revenues:Cryoablation disposable products and procedure fees
    
    $
    2,180
    
    
    $
    2,057
    
    
    $
    6,765
    
    
    $
    6,803Cryocare Surgical Systems
    
    
    95
    
    
    
    114
    
    
    
    362
    
    
    
    703$
    2,275
    
    
    $
    2,171
    
    
    $
    7,127
    
    
    $
    7,506
  14. Subsequent Event
     15. Recent Accounting Pronouncements
 Accounting for Collaborative
Arrangements.
 Business Combinations Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements  an
amendment of ARB No. 51.
 14




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Goodwill and Other
Intangible Assets Business Combinations
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Part I  Item 1 of this
report, and the audited consolidated financial statements and notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual
Report on Form 10-K for the fiscal year ended December 31, 2007.
 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 Quarterly Report on Form 10-Q or under Risk Factors in our Annual
Report on Form 10-K referred to above. In addition, there are factors not described in this
Quarterly Report on Form 10-Q or in our 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 Quarterly
Report on Form 10-Q 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
   15




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Strategy and Key Metrics
       16




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Estimated domestic cryoablation procedures
    
    
    2,263
    
    
    
    2,353
    
    
    
    7,122
    
    
    
    7,104Number of cryoprobes sold:Straight probes
    
    
    8,660
    
    
    
    9,957
    
    
    
    28,017
    
    
    
    29,852Right-angle probes
    
    
    2,084
    
    
    
    1,564
    
    
    
    6,058
    
    
    
    4,637Total
    
    
    10,744
    
    
    
    11,521
    
    
    
    34,075
    
    
    
    34,489
   Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Cryoablation disposable products
    
    $
    5,676
    
    
    $
    5,312
    
    
    $
    17,186
    
    
    $
    15,932Cryocare Surgical Systems
    
    
    195
    
    
    
    385
    
    
    
    1,093
    
    
    
    1,3835,871
    
    
    
    5,697
    
    
    
    18,279
    
    
    
    17,315Cryoablation procedure fees
    
    
    1,592
    
    
    
    1,541
    
    
    
    5,028
    
    
    
    5,029Cardiac royalties
    
    
    146
    
    
    
    86
    
    
    
    383
    
    
    
    278Other
    
    
    (10
    )
    
    
    2
    
    
    
    (18
    )
    
    
    151$
    7,599
    
    
    $
    7,326
    
    
    $
    23,672
    
    
    $
    22,773Costs of Revenues:Cryoablation disposable products and procedure fees
    
    $
    2,180
    
    
    $
    2,057
    
    
    $
    6,765
    
    
    $
    6,803Cryocare Surgical Systems
    
    
    95
    
    
    
    114
    
    
    
    362
    
    
    
    703$
    2,275
    
    
    $
    2,171
    
    
    $
    7,127
    
    
    $
    7,506
  17




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Share Based Payment
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 Revenues
 Three Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeCryoablation disposable products
    
    $
    5,676
    
    
    $
    5,312
    
    
    $
    364
    
    
    
    6.9
    %Cryocare Surgical Systems
    
    
    195
    
    
    
    385
    
    
    
    (190
    )
    
    
    (49.4
    )%5,871
    
    
    
    5,697
    
    
    
    174
    
    
    
    3.1
    %Cryoablation procedure fees
    
    
    1,592
    
    
    
    1,541
    
    
    
    51
    
    
    
    3.3
    %Cardiac royalties
    
    
    146
    
    
    
    86
    
    
    
    60
    
    
    
    69.8
    %Other
    
    
    (10
    )
    
    
    2
    
    
    
    (12
    )
    
    
    (600
    )%$
    7,599
    
    
    $
    7,326
    
    
    $
    273
    
    
    
    3.7
    %
 18




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Cost of Revenues
 Three Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ ChangeCost of revenues
    
    $
    2,275
    
    
    $
    2,171
    
    
    $
    104Percent of revenues
    
    
    29.9
    %
    
    
    29.6
    %
  Gross Profit and Gross Margin
 Three Months EndedSeptember 30,2008
    
    
    2007
    
    
    $ Change(dollars in thousands)Cryoablation disposable products and procedure fees
    
    $
    5,088
    
    
    $
    4,796
    
    
    $
    292Cryocare surgical systems
    
    
    100
    
    
    
    271
    
    
    
    (171
    )Cardiac royalties and other
    
    
    136
    
    
    
    88
    
    
    
    48$
    5,324
    
    
    $
    5,155
    
    
    $
    169
 Three Months Ended
    
    
    PercentageSeptember 30,
    
    
    Point(percent of revenues)
    
    2008
    
    
    2007
    
    
    ChangeCryoablation disposable products and procedure fees
    
    
    67.0
    %
    
    
    65.5
    %
    
    
    1.5
    %Cryocare Surgical Systems
    
    
    1.3
    %
    
    
    3.7
    %
    
    
    (2.4
    )%Cardiac royalties
    
    
    1.8
    %
    
    
    1.2
    %
    
    
    0.6
    %70.1
    %
    
    
    70.4
    %
    
    
    (0.3
    )%
  19




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Research and Development Expenses
 Three Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeResearch and development expenses
    
    $
    626
    
    
    $
    699
    
    
    $
    (73
    )
    
    
    (10.4
    )%Percent of total revenues
    
    
    8.2
    %
    
    
    9.5
    %
  Selling and Marketing Expenses
 Three Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeSelling and marketing expenses
    
    $
    3,423
    
    
    $
    3,500
    
    
    $
    (77
    )
    
    
    (2.2
    )%Percent of total revenues
    
    
    45.0
    %
    
    
    47.8
    %
  General and Administrative Expenses
 Three Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeGeneral and administrative expenses
    
    $
    2,951
    
    
    $
    2,881
    
    
    $
    70
    
    
    
    2.4
    %Percent of total revenues
    
    
    38.8
    %
    
    
    39.3
    %
 Business Combinations.
 20




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Gain on Recovery of Note Receivable
 Three Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeGain on recovery of note receivable
    
    $
    (750
    )
    
    $
    
    
    
    $
    (750
    )
    
    
    100
    %Percent of total revenues
    
    
    (9.9
    )%
  Litigation Settlement, Net of Related Legal Expenses
 Three Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeLitigation settlement, net
    
    $
    
    
    
    $
    (677
    )
    
    $
    677
    
    
    
    100
    %Percent of total revenues
    
    
    
    
    
    
    (9.2
    )%
  Interest Income, Net
 Three Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeInterest income, net
    
    $
    5
    
    
    $
    264
    
    
    $
    (259
    )
    
    
    (98.1
    )%Percent of total revenues
    
    
    0.0
    %
    
    
    3.6
    %
  Net Loss
 Three Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeNet loss
    
    $
    (921
    )
    
    $
    (984
    )
    
    $
    63
    
    
    
    6.4
    %Percent of total revenues
    
    
    (12.1
    )%
    
    
    (13.4
    )%
  21




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Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Revenues
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeCryoablation disposable products
    
    $
    17,186
    
    
    $
    15,932
    
    
    $
    1,254
    
    
    
    7.9
    %Cryocare Surgical Systems
    
    
    1,093
    
    
    
    1,383
    
    
    
    (290
    )
    
    
    (21.0
    )%18,279
    
    
    
    17,315
    
    
    
    964
    
    
    
    5.6
    %Cryoablation procedure fees
    
    
    5,028
    
    
    
    5,029
    
    
    
    (1
    )
    
    
    0.0
    %Cardiac royalties
    
    
    383
    
    
    
    278
    
    
    
    105
    
    
    
    37.8
    %Other
    
    
    (18
    )
    
    
    151
    
    
    
    (169
    )
    
    
    (111.9
    )%$
    23,672
    
    
    $
    22,773
    
    
    $
    899
    
    
    
    3.9
    %
   Cost of Revenues
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ ChangeCost of revenues
    
    $
    7,127
    
    
    $
    7,506
    
    
    $
    (379
    )Percent of revenues
    
    
    30.1
    %
    
    
    33.0
    %
  Gross Profit and Gross Margin
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    
    2007
    
    
    $ ChangeCryoablation disposable products and procedure fees
    
    $
    15,449
    
    
    $
    14,158
    
    
    $
    1,291Cryocare surgical systems
    
    
    731
    
    
    
    680
    
    
    
    51Cardiac royalties and other
    
    
    365
    
    
    
    429
    
    
    
    (64
    )$
    16,545
    
    
    $
    15,267
    
    
    $
    1,278
 22




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##### Table of Contents



Nine Months Ended
    
    
    PercentageSeptember 30,
    
    
    Point(percent of revenues)
    
    2008
    
    
    2007
    
    
    ChangeCryoablation disposable products and procedure fees
    
    
    65.3
    %
    
    
    62.2
    %
    
    
    3.1
    %Cryocare Surgical Systems
    
    
    3.1
    %
    
    
    3.0
    %
    
    
    0.1
    %Cardiac royalties
    
    
    1.5
    %
    
    
    1.9
    %
    
    
    (0.4
    )%69.9
    %
    
    
    67.1
    %
    
    
    2.8
    %
  Research and Development Expenses
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeResearch and development expenses
    
    $
    1,765
    
    
    $
    1,935
    
    
    $
    (170
    )
    
    
    (8.8
    )%Percent of total revenues
    
    
    7.5
    %
    
    
    8.6
    %
  Selling and Marketing Expenses
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeSelling and marketing expenses
    
    $
    11,120
    
    
    $
    11,362
    
    
    $
    (242
    )
    
    
    (2.1
    )%Percent of total revenues
    
    
    47.0
    %
    
    
    49.9
    %
  23




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##### Table of Contents



General and Administrative Expenses
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeGeneral and administrative expenses
    
    $
    9,234
    
    
    $
    9,556
    
    
    $
    (322
    )
    
    
    (3.4
    )%Percent of total revenues
    
    
    39.0
    %
    
    
    42.0
    %
  Business Combinations.
  Gain on Recovery of Note Receivable
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeGain on recovery of note receivable
    
    $
    (750
    )
    
    $
    
    
    
    $
    (750
    )
    
    
    100
    %Percent of total revenues
    
    
    (3.2
    )%
  Litigation Settlement, Net of Related Legal Expenses
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeLitigation settlement, net
    
    $
    
    
    
    $
    (677
    )
    
    $
    677
    
    
    
    100
    %Percent of total revenues
    
    
    
    
    
    
    (3.0
    )%
 24




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##### Table of Contents



Interest Income, Net
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeInterest income, net
    
    $
    181
    
    
    $
    402
    
    
    $
    (221
    )
    
    
    (55.0
    )%Percent of total revenues
    
    
    0.8
    %
    
    
    1.8
    %
  Net Loss
 Nine Months EndedSeptember 30,(dollars in thousands)
    
    2008
    
    2007
    
    $ Change
    
    % ChangeNet loss
    
    $
    (4,643
    )
    
    $
    (6,507
    )
    
    $
    1,864
    
    
    
    28.6
    %Percent of total revenues
    
    
    (19.6
    )%
    
    
    (28.6
    )%
  Liquidity and Capital Resources
  Commitments and Contingencies .
   25




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##### Table of Contents



Business Combinations.
  Private Placement of Common Stock and Warrants
     
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  26




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
  Changes in Internal Controls.
 27




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 .
 
 Item 1A. Risk Factors
  We may require additional financing in the future to sustain our operations and without it we may
not be able to continue operations.
      The
value of the equity that we hold in a private company may be subject to
impairment.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  28




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  29




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##### Table of Contents



SIGNATURES
  ENDOCARE, INC.By:
    
    /s/ TERRENCE A. NOONANTerrence A. NoonanInterim Chief Executive Officer and Interim President(Duly Authorized Officer)By:
    
    /s/ MICHAEL R. RODRIGUEZMichael R. RodriguezSenior Vice President, Finance andChief Financial Officer(Principal Financial andAccounting Officer)
  30




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description2.1(1)
    
    Stock Purchase Agreement, dated January 13, 2006, by and among the Company, Plethora
Solutions Holdings plc and Timm Medical Technologies, Inc. The schedules and other
attachments to this exhibit were omitted. The Company agrees to furnish a copy of any
omitted schedules or attachments to the Securities and Exchange Commission upon request.2.2(2)
    
    $1,425,000 Secured Convertible Promissory Note, dated February 10, 2006, from Plethora
Solutions Holdings plc to the Company.3.1(3)
    
    Restated Certificate of Incorporation.3.2(3)
    
    Certificate of Designation of Series A Junior Participating Preferred Stock of the Company.3.3(3)
    
    Certificate of Amendment of Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on September 25, 2000.3.4(4)
    
    Certificate of Amendment of Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on August 17, 2007.3.5(5)
    
    Amended and Restated Bylaws of the Company.3.6(6)
    
    Amendment No. 1 to Amended and Restated Bylaws of the Company.4.1(7)
    
    Form of Stock Certificate.4.2(8)
    
    Form of Series A Warrant.4.3(8)
    
    Form of Series B Warrant.4.4(9)
    
    Rights Agreement, dated 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(10)
    
    Amendment No. 1 to Rights Agreement, dated June 24, 2005, between the Company and U.S.
Stock Transfer Corporation.31.1
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 for Terrence A. Noonan.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 Terrence A. Noonan.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 18, 2006.(2)
    
    Previously filed as an exhibit to our Form 10-K filed on March 16, 2006.(3)
    
    Previously filed as an exhibit to our Registration Statement on Form S-3 filed on September 20, 2001.




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##### Table of Contents



(4)
    
    Previously filed as an exhibit to our Form 8-K filed on August 21, 2007.(5)
    
    Previously filed as an exhibit to our Form 10-K filed on March 15, 2004.(6)
    
    Previously filed as an exhibit to our Form 8-K filed on March 5, 2008.(7)
    
    Previously filed as an exhibit to our Form 10-K for the year ended December 31, 1995.(8)
    
    Previously filed as an exhibit to our Form 8-K filed on March 16, 2005.(9)
    
    Previously filed as an exhibit to our Form 8-K filed on June 3, 1999.(10)
    
    Previously filed as an exhibit to our Form 8-K filed on June 28, 2005.