##### 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 March 31,
    2003                                               
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the Transition Period
    from           to           .                                     

Commission file number: 000-27212

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)


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.
(1)      Yes o          No þ          (2)     Yes þ          No o

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes þ          No o

The number of shares of the Registrants
common stock, par value $.001 per share, outstanding at
May 31, 2004 was 24,007,482.



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ENDOCARE, INC. AND SUBSIDIARIES

FORM 10-Q, QUARTER ENDED MARCH 31,
2003

TABLE OF CONTENTS

|                                                                                                       |                                                                 |      |    |   | 
|------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | ---- | -- | - | 
|                                                                                                       |                                                                 | Page
|                                                                                                       |                                                                 |     
|PART I 
    FINANCIAL INFORMATION                                                                     |                                                                 |      | 2  |  
|Item 1.  Condensed
    Consolidated Financial Statements                                               |                                                                 |      | 2  |  
|                                                                                                       | Condensed
    Consolidated Statements of Operations (Unaudited) |      |    | 2 | 
|                                                                                                       | Condensed
    Consolidated Balance Sheets                       |      |    | 3 | 
|                                                                                                       | Condensed
    Consolidated Statements of Cash Flows (Unaudited) |      |    | 4 | 
|                                                                                                       | Notes
    to Condensed Consolidated Financial Statements        |      |    | 5 | 
|Item 2.  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations |                                                                 |      | 20 |  
|Item 3.  Quantitative
    and Qualitative Disclosures About Market Risk                                |                                                                 |      | 37 |  
|Item 4.  Controls
    and Procedures                                                                   |                                                                 |      | 37 |  
|PART II 
    OTHER INFORMATION                                                                        |                                                                 |      | 38 |  
|Item 1.  Legal
    Proceedings                                                                         |                                                                 |      | 38 |  
|Item 2.  Changes
    in Securities                                                                     |                                                                 |      | 40 |  
|Item 3.  Defaults
    Upon Senior Securities                                                           |                                                                 |      | 40 |  
|Item 4.  Submission
    of Matters to a Vote of Security Holders                                       |                                                                 |      | 40 |  
|Item 5.  Other
    Information                                                                         |                                                                 |      | 40 |  
|Item 6.  Exhibits
    and Reports on Form 8-K                                                          |                                                                 |      | 40 |  
|SIGNATURE PAGE                                                                                         |                                                                 |      | 42 |  
|EXHIBIT INDEX                                                                                          |                                                                 |      | 43 |  
|EXHIBIT 31.1                                                                                          
|EXHIBIT 31.2                                                                                          
|EXHIBIT 32.1                                                                                          
|EXHIBIT 32.2                                                                                          



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##### Table of Contents



EXPLANATORY NOTE:We are filing this past due quarterly report on Form 10-Q
for the quarter ended March 31, 2003 concurrently with our
filing of past due quarterly reports on Form 10-Q for the
quarters ended September 30, 2002, June 30, 2003 and
September 30, 2003. Except as otherwise noted, this
quarterly report on Form 10-Q speaks as of the date of
filing. Accordingly, statements in this report on Form 10-Q
containing the words (i) now,
currently, present, to date,
and words of similar import, or (ii) believes,
intends, anticipates,
expects, estimates, should,
could, may, plans,
planned, and words of similar import, are used to
refer to conditions existing on the date of filing of this
quarterly report on Form 10-Q.




PART I  FINANCIAL
INFORMATION






|        |                                                
|------- | -----------------------------------------------
|Item 1. | Condensed Consolidated Financial
    Statements

ENDOCARE, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited)


|                               |                                     |                                                            |            |            |            |   |            |           |            |  
|------------------------------ | ----------------------------------- | ---------------------------------------------------------- | ---------- | ---------- | ---------- | - | ---------- | --------- | ---------- | -
|                               |                                     |                                                           
|                               |                                     | Three Months Ended March 31,                              
|                               |                                     |                                                           
|                               |                                     | 2003                                                       |            | 2002      
|                               |                                     |                                                            |            |           
|                               |                                     |                                                            |            | (Restated)
|Total revenues                 |                                     | $                                                          | 7,661,784  |            |            | $ | 6,640,026  |          
|                               |                                     |                                                            |            |            |            |   |            |          
|Costs and expenses:            |                                     |                                                            |            |            |            |   |            |          
|                               | Cost of revenues                    |                                                            |            | 3,996,046  |            |   |            | 3,304,736 |           
|                               | Research and development            |                                                            |            | 332,813    |            |   |            | 734,575   |           
|                               | Selling, general and administrative |                                                            |            | 9,547,856  |            |   |            | 6,407,163 |           
|                               |                                     |                                                            |            |            |            |   |            |          
|                               |                                     | Total costs and expenses                                   |            |            | 13,876,715 |   |            |           | 10,446,474 |  
|                               |                                     |                                                            |            |            |            |   |            |          
|Loss from operations           |                                     |                                                            | (6,214,931 | )          |            |   | (3,806,448 | )        
|Interest income                |                                     |                                                            | 221,229    |            |            |   | 333,167    |          
|Interest expense               |                                     |                                                            | (4,777     | )          |            |   |           |          
|                               |                                     |                                                            |            |            |            |   |            |          
|Loss before minority interests |                                     |                                                            | (5,998,479 | )          |            |   | (3,473,281 | )        
|Minority interests             |                                     |                                                            | (89,419    | )          |            |   |           |          
|                               |                                     |                                                            |            |            |            |   |            |          
|Net loss                       |                                     | $                                                          | (6,087,898 | )          |            | $ | (3,473,281 | )        
|                               |                                     |                                                            |            |            |            |   |            |          
|                               |                                     | Net loss per share of common stock 
    basic and diluted |            | $          | (0.25      | ) |            | $         | (0.15      | )
|                               |                                     | Weighted average shares of common stock
    outstanding    |            |            | 24,151,962 |   |            |           | 22,808,000 |  

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

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ENDOCARE, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                         |                                                                                                        |                                            |         |              |            |  |         |             |            | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ------------ | ---------- |  | ------- | ----------- | ---------- | 
|                                         |                                                                                                        | March 31,                                  |         | December 31,
|                                         |                                                                                                        | 2003                                       |         | 2002        
|                                         |                                                                                                        |                                            |         |             
|                                         |                                                                                                        | (Unaudited)                                |         |             
|ASSETS                                  
|Current assets:                          |                                                                                                        |                                            |         |              |            |  |         |            
|                                         | Cash and cash equivalents                                                                              |                                            | $       | 21,026,336   |            |  | $       | 18,177,825  |           
|                                         | Available-for-sale securities                                                                          |                                            |         | 14,119,940   |            |  |         | 22,183,160  |           
|                                         | Accounts receivable, net                                                                               |                                            |         | 4,860,398    |            |  |         | 4,604,576   |           
|                                         | Inventories                                                                                            |                                            |         | 2,862,699    |            |  |         | 3,455,973   |           
|                                         | Prepaid expenses and other current assets                                                              |                                            |         | 810,165      |            |  |         | 640,758     |           
|                                         | Assets held for sale                                                                                   |                                            |         | 3,800,517    |            |  |         | 3,800,517   |           
|                                         |                                                                                                        |                                            |         |              |            |  |         |            
|                                         |                                                                                                        | Total current assets                       |         |              | 47,480,055 |  |         |             | 52,862,809 | 
|                                         | Property and equipment, net                                                                            |                                            |         | 7,925,680    |            |  |         | 8,229,288   |           
|                                         | Goodwill                                                                                               |                                            |         | 17,538,224   |            |  |         | 17,538,224  |           
|                                         | Intangibles, net                                                                                       |                                            |         | 12,677,971   |            |  |         | 13,013,880  |           
|                                         | Investments and other assets                                                                           |                                            |         | 1,619,608    |            |  |         | 983,754     |           
|                                         |                                                                                                        |                                            |         |              |            |  |         |            
|                                         |                                                                                                        | Total assets                               |         | $            | 87,241,538 |  |         | $           | 92,627,955 | 
|                                         |                                                                                                        |                                            |         |              |            |  |         |            
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                        |                                            |         |              |            |  |         |            
|                                         | Accounts payable                                                                                       |                                            | $       | 2,879,451    |            |  | $       | 2,932,439   |           
|                                         | Accrued compensation                                                                                   |                                            |         | 3,077,304    |            |  |         | 2,816,320   |           
|                                         | Other accrued liabilities                                                                              |                                            |         | 7,780,324    |            |  |         | 7,327,703   |           
|                                         |                                                                                                        |                                            |         |              |            |  |         |            
|                                         |                                                                                                        | Total current liabilities                  |         |              | 13,737,079 |  |         |             | 13,076,462 | 
|Minority Interests                       |                                                                                                        |                                            | 922,087 |              |            |  | 928,741 |            
|Commitments and Contingencies            |                                                                                                        |                                            |         |              |            |  |         |            
|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; 24,148,254 issued and
    outstanding |                                            |         | 24,350       |            |  |         | 24,350      |           
|                                         | Additional paid-in capital                                                                             |                                            |         | 169,947,893  |            |  |         | 169,935,487 |           
|                                         | Accumulated deficit                                                                                    |                                            |         | (95,019,481  | )          |  |         | (88,931,583 | )         
|                                         | Receivable from stockholder                                                                            |                                            |         | (150,042     | )          |  |         | (214,292    | )         
|                                         | Accumulated other comprehensive income (loss),
    net of tax                                          |                                            |         | (25,628      | )          |  |         | 12,466      |           
|                                         | Deferred compensation                                                                                  |                                            |         | (123,089     | )          |  |         | (132,045    | )         
|                                         | Treasury stock at cost, 201,200 shares                                                                 |                                            |         | (2,071,631   | )          |  |         | (2,071,631  | )         
|                                         |                                                                                                        |                                            |         |              |            |  |         |            
|                                         |                                                                                                        | Total stockholders equity                 |         |              | 72,582,372 |  |         |             | 78,622,752 | 
|                                         |                                                                                                        |                                            |         |              |            |  |         |            
|                                         |                                                                                                        | Total liabilities and stockholders equity |         | $            | 87,241,538 |  |         | $           | 92,627,955 | 
|                                         |                                                                                                        |                                            |         |              |            |  |         |            

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

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ENDOCARE, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Unaudited)


|                                       |                                                                                     |                                                         |            |            |           |   |            |             |             |  
|-------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------- | ---------- | --------- | - | ---------- | ----------- | ----------- | -
|                                       |                                                                                     |                                                        
|                                       |                                                                                     | Three Months Ended March 31,                           
|                                       |                                                                                     |                                                        
|                                       |                                                                                     | 2003                                                    |            | 2002      
|                                       |                                                                                     |                                                         |            |           
|                                       |                                                                                     |                                                         |            | (Restated)
|Net cash used in operating activities: |                                                                                     | $                                                       | (4,142,814 | )          |           | $ | (1,740,528 | )          
|Cash flows from investing activities:  |                                                                                     |                                                         |            |            |           |   |            |            
|                                       | Acquisitions, net of cash acquired                                                  |                                                         |            |           |           |   |            | (10,481,922 | )          
|                                       | Purchases of property and equipment                                                 |                                                         |            | (240,874   | )         |   |            | (582,900    | )          
|                                       | Intangibles                                                                         |                                                         |            | (61,000    | )         |   |            |            |            
|                                       | Sales (purchases) of available-for-sale
    securities                              |                                                         |            | 8,025,126  |           |   |            | (10,233,803 | )          
|                                       | Other assets                                                                        |                                                         |            | (635,854   | )         |   |            | 38,617      |            
|                                       |                                                                                     |                                                         |            |            |           |   |            |            
|                                       |                                                                                     | Net cash provided by (used in) investing
    activities |            |            | 7,087,398 |   |            |             | (21,260,008 | )
|                                       |                                                                                     |                                                         |            |            |           |   |            |            
|Cash flows from financing activities:  |                                                                                     |                                                         |            |            |           |   |            |            
|                                       | Partnership distributions to minority interests                                     |                                                         |            | (96,073    | )         |   |            |            |            
|                                       | Stock options and warrants exercised                                                |                                                         |            |           |           |   |            | 539,729     |            
|                                       |                                                                                     |                                                         |            |            |           |   |            |            
|                                       |                                                                                     | Net cash (used in) provided by financing
    activities |            |            | (96,073   | ) |            |             | 539,729     |  
|                                       |                                                                                     |                                                         |            |            |           |   |            |            
|                                       | Net increase (decrease) in cash and cash
    equivalents                            |                                                         |            | 2,848,511  |           |   |            | (22,460,807 | )          
|                                       | Cash and cash equivalents, beginning of period                                      |                                                         |            | 18,177,825 |           |   |            | 81,886,801  |            
|                                       |                                                                                     |                                                         |            |            |           |   |            |            
|                                       | Cash and cash equivalents, end of period                                            |                                                         | $          | 21,026,336 |           |   | $          | 59,425,994  |            
|                                       |                                                                                     |                                                         |            |            |           |   |            |            
|Non-cash activities:                   |                                                                                     |                                                         |            |            |           |   |            |            
|                                       | Transfer of inventory to property and equipment
    for placement at customer sites |                                                         | $          | 417,745    |           |   | $          | 84,806      |            
|                                       | Common stock issued and options assumed in the
    acquisition of Timm Medical      |                                                         |            |           |           |   |            | 25,741,128  |            
|                                       | Common stock issued for patents and
    covenant-not-to-compete                     |                                                         |            |           |           |   |            | 1,410,039   |            
|                                       | Change in unrealized gain (loss) on
    available-for-sale securities               |                                                         |            | 38,094     |           |   |            | (15,313     | )          

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

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ENDOCARE, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




|   |                                               
|-- | ----------------------------------------------
|1. | Organization and Operations of the
    Company

Endocare, Inc. (Endocare or the
Company) is a medical device company focused on
developing, manufacturing and selling cryosurgical products with
the potential to improve the treatment of cancer and other
tumors. In addition, through its wholly-owned subsidiary, Timm
Medical Technologies, Inc. (Timm Medical), the
Company offers vacuum therapy systems for non-pharmaceutical
treatment of erectile dysfunction. The Company was formed in
1990 as a research and development division of Medstone
International, Inc., a manufacturer of shockwave lithotripsy
equipment for the treatment of kidney stones. The Company was
incorporated under the laws of the state of Delaware in 1994 and
became an independent, publicly-owned corporation upon
Medstones distribution of the Companys stock to the
existing stockholders on January 1, 1996.

Following the rules and regulations of the
Securities and Exchange Commission (the SEC), the
Company has omitted footnote disclosures in this report that
would substantially duplicate the disclosures contained in the
Companys annual audited financial statements. The
accompanying unaudited condensed consolidated financial
statements should be read together with the consolidated
financial statements and the notes thereto included in the
Companys December 31, 2002 and 2003 Annual Report on
Form 10-K, filed with the SEC on December 3, 2003 and
March 15, 2004, respectively.

Additionally, the condensed consolidated
financial statements for the quarter ended March 31, 2002
contained in this report reflect various restatement adjustments
made as a result of a review by management of historical
financial statements previously filed with the SEC, including
the report filed for that period. For a further description of
the nature and status of these adjustments see Note 6
below, Item 2  Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Note 3 to our consolidated financial
statements contained in the Companys Annual Report on
Form 10-K for the year ended December 31, 2002 filed
with the SEC on December 3, 2003.

The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim
financial information and reflect all adjustments, consisting
solely of normal recurring accruals, needed to present fairly
the financial results for these interim periods. The condensed
consolidated results of operations presented for the interim
periods are not necessarily indicative of the results for a full
year.

All intercompany transactions and accounts have
been eliminated in consolidation.



|   |                                           
|-- | ------------------------------------------
|2. | Recent Operating Results and
    Liquidity

The Companys operating results for the
first quarter of 2003 reflect sales and gross profits, as well
as operating expenses associated with certain non-core product
lines divested later in 2003. While these divestitures have
allowed the Company to better concentrate on its core
businesses, they have also eliminated some sources of revenue
and gross profit for the Company. In addition, while the Company
lowered certain operating costs in 2003 by consolidating
functions that were formerly performed by its subsidiaries into
the Irvine, California headquarters, the Company has also
incurred significant one-time charges associated with ongoing
investigations related to its historical accounting and
financial reporting. These costs have amounted to approximately
$20.2 million from the fourth quarter of 2002 through the
first quarter of 2004 (including executive severance charges of
$3.2 million in the third quarter of 2003). Of these costs,
$1.0 million were incurred in the first quarter of 2003. In
addition to charges for executive severance payments, these
non-recurring expenses have included legal fees and settlements,
audit fees and accounting support fees.

Since inception, the Company has incurred losses
from operations and has reported negative cash flows. As of
March 31, 2003, the Company had an accumulated deficit of
$95.0 million and cash and available-for-sale securities of
$35.1 million. Commencing in the fourth quarter of 2002,
the Company has incurred, and continues to incur, significant
additional costs in connection with internal and regulatory
investigations into its

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ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

historical accounting and financial reporting and
has continued to incur operating losses. The Company also faces
potentially large costs related to directors and
officers liability insurance, delinquent state and local
tax obligations, as well as additional expenditures needed to
bring the Company into compliance with SEC rules and
regulations, including with Section 404 of the
Sarbanes-Oxley Act of 2002, and efforts to regain listing on a
national exchange or market.

There may also be material cash payments required
in connection with resolving a class action and a derivative law
suit (see Note 9). The Company may be required to pay
judgments or settlements and to incur expenses in defending
against these claims that could exceed the Companys
directors and officers liability insurance coverage.
Regulators may fine the Company when the investigations are
complete.

The Company has continued to experience growth in
probe and procedure revenues during the remainder of 2003 and
into the first quarter of 2004. Costs and expenses have also
grown through this period. Management plans continued investment
in sales and marketing to increase market penetration and in
research and development to improve existing products and
develop new ones. The Company will continue to use cash reserves
to finance its cash flow deficit. If the Company is unable to
generate cash flows from operations, it may need to raise
additional capital to fund operations through the sale of equity
securities to public or private investors, debt or the sale or
licensing of its assets. Additional capital, if needed, might
not be available on terms acceptable to the Company, or at all.
If additional capital were raised through the issuance of equity
securities, the percentage of the Companys stock owned by
its then-current stockholders would be reduced.

The Company has no long-term debt and no other
material financial commitments other than those under operating
lease agreements and purchase commitments for raw materials used
in manufacturing its products.



|   |                         
|-- | ------------------------
|3. | Stock-Based Compensation

At March 31, 2003, Endocare had four
stock-based compensation plans. The Company accounts for the
plans under the recognition and measurement principles (the
intrinsic-value method) prescribed in Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Compensation cost
for stock options granted to employees is reflected in net
income (loss) and is measured as the excess of the market price
of the Companys stock at the date of grant over the amount
an employee must pay to acquire the stock, or the exercise
price. Compensation costs for fixed awards that are subject to
vesting is recognized pro-rata over the vesting period. In
practice, the Company has only awarded stock options to its
employees with exercise prices equal to the fair market value of
the stock at the date of grant.

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ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has adopted the disclosure provisions
required by Statement of Financial Accounting Standard
(SFAS) No. 148, Accounting for Stock-Based
Compensation  Translation and Disclosure. The
following table illustrates the effect on net loss and loss per
share if the Company had applied the fair value recognition
provisions to stock-based employee compensation.

|                                                |                                                                                                                            |                              |            |            |   |   |            |          |  
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ---------- | ---------- | - | - | ---------- | -------- | -
|                                                |                                                                                                                            |                             
|                                                |                                                                                                                            | Three Months Ended March 31,
|                                                |                                                                                                                            |                             
|                                                |                                                                                                                            | 2003                         |            | 2002      
|                                                |                                                                                                                            |                              |            |           
|Net loss, as reported(a)                        |                                                                                                                            | $                            | (6,087,898 | )          |   | $ | (3,473,281 | )       
|Reconciling items (net of related tax effects): |                                                                                                                            |                              |            |            |   |   |            |         
|                                                | Add: Stock-based employee compensation expense
    determined under the intrinsic-value-based method for all
    awards(b) |                              |            | 6,194      |   |   |            | 3,307    |  
|                                                | Less: Stock-based compensation expense determined
    under the fair-value-based method for all awards expense             |                              |            | (1,474,857 | ) |   |            | (744,207 | )
|                                                |                                                                                                                            |                              |            |            |   |   |            |         
|Net adjustment                                  |                                                                                                                            |                              | (1,468,663 | )          |   |   | (740,900   | )       
|                                                |                                                                                                                            |                              |            |            |   |   |            |         
|Net loss, as adjusted                           |                                                                                                                            | $                            | (7,556,561 | )          |   | $ | (4,214,181 | )       
|                                                |                                                                                                                            |                              |            |            |   |   |            |         
|Basic and diluted loss per share:               |                                                                                                                            |                              |            |            |   |   |            |         
|                                                | As reported                                                                                                                |                              | $          | (0.25      | ) |   | $          | (.15     | )
|                                                |                                                                                                                            |                              |            |            |   |   |            |         
|                                                | As adjusted                                                                                                                |                              | $          | (0.31      | ) |   | $          | (.18     | )
|                                                |                                                                                                                            |                              |            |            |   |   |            |         



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The Company issues stock options and warrants to
    consultants for services performed. Compensation expense for the
    fair value of these instruments is determined by the
    Black-Scholes option-pricing model and is charged to operations
    over the service period or as the performance goals are
    achieved. Such expense is 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, except for compensation expense equal to
    the intrinsic value of unvested options assumed in the
    Companys acquisition of Timm Medical and amortized over
    the remaining vesting period.



|   |                              
|-- | -----------------------------
|4. | Available-for-Sale Securities

The Company invested its idle cash in a
diversified portfolio of marketable debt securities, which
consisted of corporate bonds, government agencies securities and
commercial paper. These securities were classified as
available-for-sale in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. Fair values were based on quoted prices in
active markets. Unrealized gains or losses, net of applicable
income taxes, were recorded as a component of accumulated other
comprehensive income in stockholders equity. These
securities had fair values which approximated their carrying
values and had contractual maturities from less than 1 year
to over 10 years. During the second quarter of 2003, the
investment portfolio was liquidated, resulting in an
insignificant gain.



|   |                               
|-- | ------------------------------
|5. | Goodwill and Intangible Assets

The excess of the purchase price over the fair
value of net assets acquired has been allocated to goodwill and
identifiable intangible assets. The Company had no reported
goodwill prior to January 1, 2002. The Company does not
amortize goodwill, which is consistent with the provisions of
SFAS No. 142, Goodwill and other Intangible
Assets, but goodwill is subject to impairment tests on an
annual basis or more frequently if impairment indicators exist.
Under the guidance of SFAS No. 142, the Company uses a
discounted cash flow methodology to assess the fair values of
its reporting units. Impairment is measured by comparing the
goodwill

7



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

derived from the hypothetical purchase price
allocation to the carrying value of the goodwill balance. During
the fourth quarter of 2002, the Company recorded an impairment
charge of $18 million to reduce the carrying value of
goodwill acquired in the Timm Medical acquisition resulting from
the termination or abandonment of three of the acquired
distribution agreements for urological products following the
acquisition. No goodwill impairment indicators existed for the
three months ended March 31, 2003 and, as a result, interim
impairment testing was not required.

Intangible assets that are deemed to have finite
useful lives are recorded at cost and amortized using the
straight-line method over their estimated useful lives.
Estimated useful lives of such intangible assets are as follows:

|                        |  |  |                | 
|----------------------- |  |  | -------------- | 
|Trade name              |  |  | 15 years       | 
|Domain name             |  |  | 5 years        | 
|Covenant-not-to-compete |  |  | 3 to 5 years   | 
|Developed technology    |  |  | 15 years       | 
|Patents                 |  |  | 3 to 15  years | 

Changes in circumstances (for example, changes in
laws or regulations to which the Company is subject,
technological advances or changes in the Companys
strategies) may result in changes to the useful lives from
initial estimates. Factors such as changes in the planned use of
intangibles may result from changes in customer base,
contractual agreements, or regulatory requirements and may
result in shorter useful lives. In such circumstances, the
Company will revise the useful life of the long-lived asset and
amortize the remaining net book value over the adjusted
remaining useful life. There were no changes in estimated useful
lives during 2002 and 2003.



|   |                                    
|-- | -----------------------------------
|6. | Restatement of Financial Statements

On October 24, 2002, the former General
Manager of Timm Medical reported to the Board of Directors his
concerns regarding the accounting for several transactions. The
Companys Audit Committee promptly directed outside legal
counsel to investigate the accounting concerns. On
October 31, 2002, the Audit Committees legal counsel
engaged an accounting firm independent of the Companys
then auditors, KPMG LLP (KPMG), to investigate
the complaints. On December 11, 2002, KPMG notified the
Company that their audit report on the Companys
consolidated financial statements as of December 31, 2001,
and for the year then ended, had been withdrawn and could no
longer be relied upon. In addition, KPMG advised that the
consolidated financial statements for the quarters ended
March 31, 2002 and June 30, 2002 should not be relied
upon. Trading of the Companys stock on The Nasdaq Stock
Market was halted on December 12, 2002. The Company was
delisted effective January 16, 2003 and has been trading in
the so-called pink-sheets since that date.

The Company hired a new President and Chief
Operating Officer and a new Chief Financial Officer in March
2003. The Companys Board of Directors, upon recommendation
of the Audit Committee, approved dismissal of KPMG as the
Companys independent auditors effective March 7,
2003. On April 1, 2003, the Company appointed new
independent auditors and engaged them to re-audit the
Companys consolidated financial statements for the years
ended December 31, 2000 and 2001 and to audit its
consolidated financial statements for the year ended
December 31, 2002. In September 2003, the Companys
former auditors notified the Company that they were withdrawing
their reports on the Companys consolidated financial
statements for the years ended December 31, 1999 and 2000
and that these financial statements could no longer be relied
upon.

To address the matters discovered in the
investigations, the Company has implemented remedial actions,
including improved processes for and controls over all financial
transactions and the employees involved in

8



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ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

them. These remedial actions included the
development and implementation of policies and procedures
governing sales personnel and sales orders, new and more
stringent credit approval practices, the adoption of improved
expense recognition and approval policies, improved controls and
documentation over the issuance of options and warrants in
financial transactions, and new internal financial reporting
procedures.

The discovery of accounting errors required the
Company to restate previously issued financial statements.
Following are explanations of the restatement adjustments and
presentation of affected accounts in the condensed consolidated
statements of financial position and results of operations as
previously reported and as restated.



| |         
| | --------
| | Revenues

The Company discovered that its revenues had been
overstated relating to the sale of Cryocare Surgical System
units and cryoprobes because certain sales did not meet all
revenue recognition criteria required under Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial
Statements. The Company restated previously recognized
revenues related to certain Cryocare Surgical Systems and
cryoprobes transactions by $1,133,000 for the quarter ended
March 31, 2002. These adjustments primarily relate to the
following:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. Revenues previously recorded in the
    period in which certain Cryocare Surgical Systems were shipped
    to a company-controlled facility. These revenues were restated
    to record such revenues in the period the customer actually took
    possession.                                                                                                                                                                                    
|
| | b. Concessions provided to certain customers
    purchasing Cryocare Surgical Systems that were not accounted for
    in the period the revenues were recorded. Restated revenues
    include recording concessions for interest buy-downs in the
    period the Cryocare Surgical Systems were sold.                                                                                                                                                
|
| | c. Revenues previously recorded for certain
    Cryocare Surgical Systems sales where the customers
    commitment or ability to pay was contingent upon the
    customers arranging financing, the sale to a newly formed
    partnership, or the re-sale by a distributor to a third-party.
    Restated revenues reflect the recording of Cryocare Surgical
    Systems sales in the period the contingency was removed or
    payment received.
|
| | d. The sale of a Cryocare Surgical System to
    a customer where the Company failed to record a customer
    trade-in of a competitors equipment at the appropriate
    value and in the proper period. Restated revenues and property
    and equipment reflect the customer trade-in at the lower
    fair-value of the equipment received in the period of the
    exchange.                                                                    
|
| | e. Receipt of certain licensing fees and
    milestone payments where these licensing fees were recorded as
    revenue in the period received, and payments for volume
    discounts determined on a retrospective basis where these
    payments were recorded as cost of sales when paid. Licensing
    fees and milestone payments are recorded net of volume discounts
    as restated revenues in the period they were earned.                 



| |                 
| | ----------------
| | Cost of Revenues

The Company made certain adjustments to increase
cost of revenues, which totaled $544,000 for the first quarter
of 2002. These adjustments primarily relate to the following:



| |                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. Failure to properly apply standard
    costing to its inventory, or to allow for shrinkage, excess and
    obsolescence. Additionally, depreciation of Cryocare Surgical
    Systems placed at hospital locations was not consistently
    recorded. Restated cost of revenues reflects the effects of
    properly valuing inventory and depreciating placed Cryocare
    Surgical Systems.
|
| | b. Incorrect omission from the preliminary
    purchase price allocation for the Timm Medical acquisition of
    certain amortizable developed technology (see Note 5).
    Restated cost of revenues reflects increased amortization since
    the date of the Timm Medical acquisition.                                                                                                      

9



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ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. Reclassification to cost of revenues
    certain research and development and quality assurance expenses
    related to routine manufacturing operations.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Selling, General and Administrative
    Expenses and Research and Development Costs

The Company made certain adjustments to increase
selling, general and administrative expenses (S,G&A), which
totaled $2,193,000 for the first quarter of 2002 and to reduce
research and development costs by $213,000 in the first quarter
of 2002. These adjustments primarily relate to the following:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. Failure to consistently accrue expenses
    in the periods when the obligations were incurred, including
    accrual of expenses in the period invoices were received rather
    than in the period the expenses were incurred; capitalization of
    legal, transactional and advertising expenses normally expensed;
    and establishing and recording unsupported general reserves.                                                                                   
|
| | b. Insufficient accrual of capital, sales
    and use taxes, and state and local taxes, which are assessed on
    a basis other than taxable income.                                                                                                                                                                                                                                                                                                                         
|
| | c. Incorrect recording of: (1) expenses
    associated with stock options and warrants issued as
    compensation to consultants; and (2) the assets and related
    amortization where warrants were issued to acquire certain
    patents. Adjustments were recorded to expense the fair value of
    consultant stock options and warrants in the period services
    were provided, and capitalize and amortize the fair value of
    warrants issued to acquire patents.
|
| | d. Forgiveness of an interest-bearing loan
    made to a Company executive (see Note 10) for the
    purchase of Company common stock. Adjustments were recorded to
    write-off the principal and interest over a 4-year period as
    compensation expense.                                                                                                                                                                                                               
|
| | e. Reclassification from research and
    development to S,G&A of certain expenses related to
    collection of clinical data for marketing purposes, consulting
    and patent litigation. (see Cost of Revenues, paragraph c.
    above).                                                                                                                                                                                                                                  
|
| | f. Absence of substantiation for the
    existence and/or carrying values of certain property and
    equipment.                                                                                                                                                                                                                                                                                                                                                             



| |                      
| | ---------------------
| | Other Income and Loss

The Company made certain adjustments to increase
other income, net, which totaled $17,000 for the first quarter
of 2002. These adjustments primarily relate to the following:



| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | a. Incorrect recording of interest income
    related to a forgivable loan to a Company executive (see
    S,G&A paragraph d. above).
|
| | b. Improper recording of unrealized gains on
    investments.                                                                        

The consolidated financial statements for the
three months ended March 31, 2002, and notes thereto, have
been restated to include the items described above.

10



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Condensed Consolidated Statements of
Operations

|                                                                    |         |                |           |                |  |   |            |            | 
|------------------------------------------------------------------- | ------- | -------------- | --------- | -------------- |  | - | ---------- | ---------- | 
|                                                                    |         | As Previously  |           |               
|                                                                    |         | Reported Three |           | Restated Three
|                                                                    |         | Months Ended   |           | Months Ended  
|                                                                    |         | March 31, 2002 |           | March 31, 2002
|                                                                    |         |                |           |               
|Revenues                                                            |         | $              | 7,773,064 |                |  | $ | 6,640,026  |           
|Cost of revenues                                                    |         |                | 2,760,755 |                |  |   | 3,304,736  |           
|Research and development                                            |         |                | 947,867   |                |  |   | 734,575    |           
|Selling, general and administrative                                 |         |                | 4,214,632 |                |  |   | 6,407,163  |           
|                                                                    |         |                |           |                |  |   |            |           
|Total costs and expenses                                            |         |                | 7,923,254 |                |  |   | 10,446,474 |           
|                                                                    |         |                |           |                |  |   |            |           
|Loss from operations                                                |         |                | (150,190  | )              |  |   | (3,806,448 | )         
|Interest income                                                     |         |                | 316,163   |                |  |   | 333,167    |           
|                                                                    |         |                |           |                |  |   |            |           
|Net income (loss)                                                   |         |                | 165,973   |                |  |   | (3,473,281 | )         
|                                                                    |         |                |           |                |  |   |            |           
|Net income (loss) per share of common
    stock  basic and diluted |         | $              | .01       |                |  | $ | (.15       | )         
|                                                                    |         |                |           |                |  |   |            |           
|Weighted average shares of common stock
    outstanding             |         |                |           |                |  |   |            |           
|                                                                    | Basic   |                |           | 22,163,000     |  |   |            | 22,808,000 | 
|                                                                    | Diluted |                |           | 23,032,000     |  |   |            | 22,808,000 | 



|   |             
|-- | ------------
|7. | Acquisitions



| |                                    
| | -----------------------------------
| | Timm Medical Technologies,
    Inc.

On February 21, 2002, the Company entered
into an agreement and plan of reorganization to acquire Timm
Medical for total consideration of $37,350,000 (including
$838,000 in legal, accounting and other acquisition-related
costs). In connection with the merger, all outstanding shares of
the capital stock of Timm Medical were exchanged for $10,770,000
in cash and 1,620,530 shares of the Companys common
stock valued at $23,806,000 (of which 63,412 shares were
held in escrow, all of which have now been released).

In addition, the Company assumed certain
outstanding options of Timm Medical, which were exercisable into
168,162 shares of Endocare common stock at $7.25 per
share. These options were valued at $1,935,000 using the
Black-Scholes option pricing model, of which $1,770,000 related
to vested options and $165,000 related to unvested options.
Except for the adjustment in the number of exercisable shares
and the corresponding exercise price per share based on the
conversion ratio as defined in the purchase agreement, all other
option terms and vesting periods remained unchanged. The value
of the unvested options was recorded as deferred compensation on
the acquisition date to be amortized over the remaining vesting
period.

This transaction was accounted for under the
purchase method of accounting and the consolidated financial
statements of the Company include the financial results of Timm
Medical from February 21, 2002 through subsequent periods.
The total purchase price of $37,350,000 (including transaction
costs and the

11



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

amount recorded as deferred compensation) was
allocated to the tangible and intangible assets acquired based
on their respective fair values as follows:

|                                               |                      |   |            |             |  
|---------------------------------------------- | -------------------- | - | ---------- | ----------- | -
|Total purchase consideration and related costs |                      | $ | 37,350,000 |            
|Fair value of tangible net assets acquired     |                      |   | (1,041,000 | )          
|Fair value of amortizable intangibles:         |                      |   |            |            
|                                               | Developed technology |   |            | (10,000,000 | )
|                                               | Trademark            |   |            | (500,000    | )
|Unearned compensation                          |                      |   | (165,000   | )          
|                                               |                      |   |            |            
|Goodwill (non-tax deductible)                  |                      | $ | 25,644,000 |            
|                                               |                      |   |            |            

Factors contributing to the origination of
goodwill include the enhancement of the product line and
projected growth in urology sales through collaborative
distribution agreements with other medical device companies and
the sales force which the Company believed would be valuable
assets as the Company divested non-core product lines and
redeployed existing resources in the area of cancer treatment.
Intangible assets relating to developed technology and trade
name are amortized over estimated useful lives of 15 years.

Net cash paid in the acquisition is as follows:

|                                               |  |   |             |  
|---------------------------------------------- |  | - | ----------- | -
|Total purchase consideration and related costs |  | $ | 37,350,000  |  
|Fair value of common stock issued              |  |   | (23,806,000 | )
|Fair value of options assumed                  |  |   | (1,935,000  | )
|                                               |  |   |             |  
|Cash paid                                      |  |   | 11,609,000  |  
|Cash acquired                                  |  |   | (1,127,000  | )
|                                               |  |   |             |  
|Net cash paid                                  |  | $ | 10,482,000  |  
|                                               |  |   |             |  

Subsequent to the acquisition date, the Company
decided to divest certain non-core product lines, including the
Dura II penile implants line sold in April 2003, and the
urinary incontinence and urodynamics lines sold in October 2003
(See Note 8).



| |                                         
| | ----------------------------------------
| | Mobile Prostate Treatment
    Businesses

On September 30, 2002, the Company completed
the acquisition of certain general and limited equity interests
in the mobile prostate and benign prostatic hyperplasia
(BPH) treatment businesses (Mobile Prostate
Treatment Businesses) from a group of affiliated companies
collectively known as USMD. Under the terms of the original
agreement, the Company agreed to forgive $7.7 million,
consisting of a $6.8 million loan and a $900,000 earnest
money deposit, if the Mobile Prostate Treatment Businesses
achieved $12 million in gross revenues during the period
from October 1, 2002 to December 31, 2005 (the
Forgiveness Period). At the time of the acquisition,
the Company assumed the loans would be forgiven and, therefore,
included them in the total purchase consideration of $11,734,000.

In February, 2004, the purchase agreement was
amended to extend the Forgiveness Period to December 31,
2008. In addition, effective January 1, 2004, the Company
reduced the service fee it pays to one of the partnerships for
the use of their Cryocare Surgical Systems from $2,500 to
$2,000 per procedure, representing an adjustment to a
market rate. As a result, the reduction in service fee does not
require a reallocation of goodwill.

12



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In late 2003 and early 2004, the Company
initiated the dissolution of five of the 13 partnerships
acquired from USMD, two of which were engaged in BPH treatment
and three of which were engaged in cryosurgical procedures for
prostate cancer (see Note 8).

The total purchase price was allocated to the
tangible and intangible assets acquired based on their
respective fair value as follows:

|                                                                                  |  |   |            |  
|--------------------------------------------------------------------------------- |  | - | ---------- | -
|Total purchase consideration (includes $549,000
    in acquisition related costs) |  | $ | 11,734,000 |  
|Fair value of tangible net assets acquired
    (primarily property and equipment) |  |   | (1,616,000 | )
|Covenant-not-to-compete                                                           |  |   | (240,000   | )
|                                                                                  |  |   |            |  
|Goodwill (non-tax deductible)                                                     |  | $ | 9,878,000  |  
|                                                                                  |  |   |            |  

The goodwill is primarily related to the
distribution network provided by the Mobile Prostate Treatment
Businesses, which allows the Company to further penetrate
desired markets. The tangible assets acquired include 11
Cryocare Surgical Systems previously purchased from the Company
by USMD and resold to the partnerships. These systems were
recorded at their fair value of $2,109,000 on the acquisition
date, which approximated the carrying value recorded by USMD,
and are depreciated over their remaining useful lives not to
exceed three years. The covenant-not-to-compete is amortized
over three years.

Net cash paid in the acquisition is as follows:

|                                               |  |   |            |  
|---------------------------------------------- |  | - | ---------- | -
|Total purchase consideration and related costs |  | $ | 11,734,000 |  
|Cash acquired                                  |  |   | (396,000   | )
|                                               |  |   |            |  
|Net cash paid                                  |  | $ | 11,338,000 |  
|                                               |  |   |            |  

Endocare is the general partner or member in each
of the Mobile Prostate Treatment Businesses and generally holds
over 20% in combined general and limited equity interests. The
Company has sole responsibility for the management of the Mobile
Prostate Treatment Businesses and exercises exclusive control
over their operations. Other equity holders have limited
participation rights, which are protective in nature. As such,
the Mobile Prostate Treatment Businesses have been consolidated
with the Companys operations since September 30, 2002.



| |                                    
| | -----------------------------------
| | Pro Forma Results of
    Operations

The following table presents pro forma results of
operations for the three months ended March 31, 2002,
assuming the Timm Medical and Mobile Prostate Treatment Business
acquisitions occurred as of January 1, 2002:

|                                     |  |   |            |  
|------------------------------------ |  | - | ---------- | -
|Revenues                             |  | $ | 8,464,528  |  
|                                     |  |   |            |  
|Net loss                             |  | $ | (5,276,978 | )
|                                     |  |   |            |  
|Net loss per share basic and diluted |  | $ | (.23       | )
|                                     |  |   |            |  
|Weighted average shares outstanding  |  |   | 23,038,870 |  
|                                     |  |   |            |  

The pro forma results of operations reflect
adjustments for additional amortization expense for intangible
assets acquired, reduction in interest income due to net cash
paid in acquisitions, stock compensation expense related to
employee options assumed, and increased weighted average shares
outstanding to reflect the issuance of common stock in the Timm
Medical acquisition.

13



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                
| | ---------------
| | Asset Purchases

The Company has acquired intangible assets from
time to time, including patents and intellectual property as
follows:

On May 28, 2002, pursuant to an asset
purchase agreement, the Company agreed to acquire the
cryosurgical assets of Cryomedical Sciences, Inc., now known as
BioLife Solutions, Inc. (BioLife), consisting
primarily of a portfolio of patents, for $2,200,000 in cash and
120,022 shares of the Companys common stock valued at
$1,847,000. This transaction was accounted for under the
purchase method of accounting. The total purchase consideration
of $4,119,000 (including $72,000 in acquisition-related costs)
was allocated to the patents since other assets acquired had
de minimis value. Pursuant to a Registration Rights
Agreement, the Company was required to file a registration
statement with the SEC to register the shares issued to BioLife.
In November 2002, BioLife filed suit against the Company for
failing to register the shares in a timely manner, seeking
damages for breach of contract (see Note 9).

In February 2002, the Company entered into an
asset purchase agreement with a cryosurgeon inventor of certain
technologies related to the Companys business to acquire
certain patents and a covenant-not-to-compete for
100,000 shares of the Companys common stock valued at
$1,410,000. Of this amount, $1,058,000 (75,000 shares) was
allocated to the patent and is amortized over 15 years and
the remaining $352,000 (25,000 shares) was allocated to the
covenant-not-to-compete and is amortized over five years. The
agreement also requires the seller to provide certain consulting
services over 15 years for the consideration received. No
consideration was allocated to the consulting agreement since
the value of such services could not be accurately determined.
In January 2003, the Company extended a $344,000 loan to the
seller to finance tax payments related to the gain on the sale
(see Note 10).



|   |                                              
|-- | ---------------------------------------------
|8. | Dispositions and Restructuring
    Activities

In 2003, the Company refocused its strategy on
its core technological competence and primary market emphasis in
the area of minimally invasive technologies for tissue and
cancer ablation. Part of this strategy entailed divestiture of
certain product lines unrelated to the Companys core
businesses. The Company also undertook a review of its strategic
plans and operational infrastructure in order to maximize
efficiency and promote optimal use of resources. In addition to
the divestiture of a Florida billing and contracting subsidiary
in December 2002, which reduced headcount by 12 employees,
the Company downsized Timm Medicals Eden Prairie,
Minnesota, operations in June 2003, consolidating many
administrative functions at its Irvine, California, headquarters
and reducing headcount by 26 employees. The Companys Board
of Directors also approved the divestiture of certain non-core
product lines and assets in the first quarter of 2003, including
the sale of the Dura II penile implants, the
cardiac-related product manufacturing operations and license of
related technology, and the urinary incontinence and urodynamics
product lines. These related assets were classified as
held for sale at March 31, 2003. The
corresponding balances at December 31, 2002 have also been
reclassified as held for sale for comparative
presentation.

Assets held for sale relating to the divested
product lines at December 31, 2002 and March 31, 2003
include the following:

|                                        |  |   |           | 
|--------------------------------------- |  | - | --------- | 
|Inventory                               |  | $ | 1,036,000 | 
|Property and equipment, net             |  |   | 15,000    | 
|Intangibles, net (developed technology) |  |   | 2,749,000 | 
|                                        |  |   |           | 
|                                        |  | $ | 3,801,000 | 

14



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                        
| | -----------------------
| | Dura II Penile Implants

On April 7, 2003, Timm Medical sold certain
assets related to the Dura II positionable urological
prostheses product line to American Medical Systems, Inc. for
approximately $2,150,000 in cash. Assets sold include developed
technology, intellectual property, customer lists, production
equipment and Dura II inventory. The sale resulted in a
loss of $35,000 in the second quarter of 2003.



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

On April 14, 2003, the Company sold its
cardiac-related product manufacturing operations and licensed
the related intellectual property to CryoCath Technologies, Inc.
(CryoCath) for $10 million and a nine-year
descending royalty based on net sales of products incorporating
the licensed technology. Upon consummation of the sale, the
Company terminated its pre-existing distribution agreement with
CryoCath. CryoCath was the exclusive distributor for cryoprobes
and consoles in connection with the SurgiFrost system, a
cryoablation system designed to treat cardiac arrhythmias. Since
the technology was internally developed and the tangible assets
sold had de minimus value, the sale resulted in a 2003
second quarter gain of $10 million. The $10 million
was collected in four installments, three in 2003 and one in the
first quarter of 2004. The royalty stream decreases from 10% to
3% of net sales from the SurgiFrost system during the period
from 2004 to 2012. The first royalty payment of $131,000 was
collected and recorded in the first quarter of 2004, based on
CryoCath revenues for that period.



| |                   
| | ------------------
| | Minnesota Facility

Subsequent to the acquisition of Timm Medical,
the Company undertook a review of the Companys operational
and financial infrastructure. To maximize operational efficiency
and resource utilization, the Board of Directors approved a plan
in the first quarter of 2003 to downsize Timm Medicals
operations in Minnesota. With the exception of certain marketing
and financial functions, all of Timm Medicals operations
were transferred to the Companys Irvine, California,
headquarters in June 2003 or were outsourced. The cost of the
restructuring totaled $386,000, which included $266,000 in
severance payments and $120,000 in lease losses for vacating the
unused leased space. These losses were recorded in the second
quarter of 2003 upon the communication of the separation terms
to the affected employees. In addition, Timm Medical had
$465,000 in property and equipment, a portion of which may be
abandoned or sold for salvage value at a future date. These
assets are classified as held and used until they are disposed
or abandoned. In the first quarter of 2003, management had
adjusted the useful life of the assets to be abandoned to
amortize their carrying value, less estimated salvage, through
the scheduled abandonment date of April 2004.



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

On October 15, 2003, Timm Medical agreed to
sell the manufacturing assets related to its urodynamics and
urinary incontinence product lines to SRS Medical Corp.
(SRS) for a $2,694,000 note. The note bears
interest at 7.5% and is secured by the assets sold, which
consist of certain patents, trademarks, inventory, customer
lists and technical know-how. Under the terms of the original
agreement, quarterly payments were to begin on March 31,
2004, equal to the higher of (a) minimum quarterly payments
as defined or (b) 15% of the net revenues related to the
urinary incontinence assets acquired and 15% of the net revenues
related to SRS existing urodynamics business, including
the urodynamics assets acquired. These minimum quarterly
payments were to commence at $112,500 for the quarter ended
March 31, 2004, and increase to $298,406 for the quarter
ended March 31, 2007. Amounts which remain outstanding at
March 31, 2007 were to be payable at $250,000 per
quarter thereafter until fully paid. The carrying values of the
urodynamics and urinary incontinence related assets were
$1,314,000 on the date of sale. Management concluded that
collection of the note from SRS was not reasonably assured. As a
result, a loss of $1,314,000 was recorded in the fourth quarter

15



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of 2003 equal to the carrying value of the assets
sold. Collections on the note, if any, will be reported as gain
in the period received. In March 2004, the Company agreed to
amend the purchase agreement to reduce the minimum quarterly
payments to $45,000, increasing to $60,000 for the quarter ended
December 31, 2005. Amounts which remain outstanding at
December 31, 2005 will be payable at $60,000 per
quarter until the outstanding principal and accrued interest are
paid in full.



| |                                         
| | ----------------------------------------
| | Mobile Prostate Treatment
    Businesses

In late 2003 and early 2004, the Company
initiated the dissolution of five of the 13 partnerships
acquired from USMD, two of which were engaged in BPH treatment
and three of which were engaged in cryosurgical procedures for
prostate cancer. The BPH partnerships discontinued operations
beginning in the first quarter of 2003 due to significant
reduction in payor reimbursements and the Companys desire
to exit the non-core BPH business. The Company elected to
terminate the cryosurgical partnerships due to decisions by
certain of the limited partner physicians to withdraw from these
partnerships. After the dissolution, the Cryocare Surgical
Systems held by these partnerships were redeployed to other
markets as placement units. The assets held by the BPH
partnerships will be liquidated.



|   |                              
|-- | -----------------------------
|9. | Commitments And Contingencies



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

The Company entered into a Separation Agreement
and a one-year Consulting Agreement with the Companys
former Chief Executive Officer and Chairman of the Board (the
former CEO), each effective as of July 31,
2003. Under the Separation Agreement, the former CEO was
entitled to receive a $375,000 severance payment and a $375,000
upfront payment for a one-year covenant-not-to-compete and an
agreement to provide consulting services. The Company recorded a
charge of $775,500 in the third quarter of 2003 for the
severance and related benefits. The total severance payment was
deposited into an escrow account held by the Company and
released to the former CEO in March 2004.



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

The Company entered into an employment agreement,
dated March 3, 2003 (the Employment Agreement),
with the Companys former Chief Financial Officer
(former CFO). Under the Employment Agreement, upon
any Qualified Termination (as defined) the former CFO was
entitled to receive a cash payment of $616,000, continued
participation in the Companys benefit plans for
24 months, a $50,000 relocation allowance and an additional
payment to cover the tax liabilities relating to the allowance.
In addition, the Employment Agreement also provided that all of
the former CFOs options to purchase outstanding common
stock (385,000 shares) would be cancelled and replaced by
immediately exercisable options to be granted between
September 4, 2003 and November 3, 2003. Effective
July 31, 2003, the Company terminated the former CFOs
employment other than for cause. The Company recorded a charge
of $731,000 in the third quarter of 2003 for the severance and
related benefits due under the Employment Agreement. In
addition, the Company recorded a third quarter charge for
$1,715,000 for the fair value of the 385,000 replacement options
issued to the former CFO on October 30, 2003 determined
using the Black-Scholes option-pricing model. The total
severance payments due of $616,000 were deposited into an escrow
account held by the Company. In March 2004, all amounts due to
the former CFO under the Employment Agreement were released from
the escrow account.



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

Effective July 17, 2002, the Company adopted
the 2002 Executive Separation Benefits Plan (Separation
Plan) to provide separation benefits to certain designated
employees upon or following a change in control, as defined. In
February 2004, the Board of Directors voted to terminate the
Separation Plan effective July 18,

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ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2004. On February 13, 2004, Craig T.
Davenport (Chairman and Chief Executive Officer),
William J. Nydam (President and Chief Operating Officer)
and Katherine Greenberg (Chief Financial Officer) were added as
Eligible Employees as defined in the Separation Plan.



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

The Company is a party to lawsuits in the normal
course of its business. Litigation and governmental
investigation can be expensive and disruptive to normal business
operations. Moreover, the results of complex legal proceedings
are difficult to predict. The Company can provide no assurance
that significant judgments or settlements in connection with the
legal proceedings described below will not have a material
adverse effect on the Companys business, financial
condition, results of operations and cash flows. (See
Part I, Item 2  Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Part II, Item 1 
Legal Proceedings,) Other than as described below, the
Company is not a party to any material legal proceedings.

In November 2002, the Company was named as a
defendant, together with certain former officers, one of whom is
also a former board member, in a class-action lawsuit filed in
the United States District Court for the Central District of
California. On February 2, 2003, the court issued an order
consolidating this action with various other similar complaints
and ordering plaintiffs to file a consolidated complaint, which
was filed on October 31, 2003. The consolidated complaint
asserts two claims for relief, alleging that the defendants
violated sections of the Securities Exchange Act of 1934 by
purportedly issuing false and misleading statements regarding
the Companys revenues and expenses in press releases and
SEC filings. Plaintiffs seek class certification and unspecified
damages from the Company, as well as forfeiture and
reimbursement of bonus compensation received by two of the
individual defendants. On April 26, 2004, the court issued
an order denying the Companys motion to dismiss the
consolidated complaint. The Company intends to defend the case
vigorously, but cannot assure you that it will be resolved in
the Companys favor.

On November 26, 2002, BioLife Solutions,
Inc. (BioLife) filed an action against the Company
in the Delaware Court of Chancery seeking damages for alleged
breaches of contract stemming from the Companys
acquisition, pursuant to an asset purchase agreement dated
May 28, 2002, of the tangible and intangible assets related
to BioLifes cryosurgical business. In the action, styled
as BioLife Solutions, Inc. v. Endocare, Inc., Del. Ch.,
C.A. No. 20057-NC, BioLife alleged that the Company failed
to timely register 120,022 shares of its common stock that
were provided to BioLife in connection with the asset purchase
agreement, in violation of a registration rights agreement
relating to the shares that was executed in conjunction with the
asset purchase agreement. BioLife sought damages of
approximately $1.6 million. The Company defended the action
on the grounds that its obligation to register the shares was
excused for various reasons, including as a consequence of
BioLifes failure to transfer assets in accordance with the
asset purchase agreement. Trial on all but one of the claims in
the action was held during the week of March 31, 2003. On
October 1, 2003, the Delaware Court ruled in favor of
BioLife, awarding BioLife $1,648,000, plus pre-judgment interest
and costs (including legal fees), and requiring BioLife to
surrender the 120,022 shares of the Companys common
stock to the Company. That ruling became an appealable final
order and judgment on October 10, 2003. On
February 20, 2004, the Company agreed with BioLife to
settle all claims. As part of the settlement the Company paid to
BioLife $1,887,000, which represented a discount of $150,000
from the total judgment amount (including accrued interest and
costs), BioLife returned to the Company the 120,022 shares
of the Companys common stock referred to above and the
Company agreed to abandon its appeal.

On December 6, 2002, Frederick Venables
filed a purported derivative action against the Company and
certain former officers and certain current and former board
members in the California Superior Court for the County of
Orange alleging breach of fiduciary duty, abuse of control,
gross mismanagement, waste of corporate assets and unjust
enrichment. On April 23, 2004, the parties filed a
stipulation agreeing to a conditional stay of the action for
270 days, continuing the deadline to respond to the
complaint until after

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ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

expiration of the stay. The complaint seeks
unspecified monetary damages, equitable relief and injunctive
relief based upon allegations that the defendants issued false
and misleading statements regarding the Companys revenues
and expenses in press releases and SEC filings. The Company
intends to defend the case vigorously, but cannot assure you
that it will be resolved in the Companys favor.

The SEC is currently conducting an investigation
to determine whether any federal securities laws were violated
in connection with the filing of the Companys financial
statements for 2001 and the first two quarters of 2002,
including investigation into allegations that the Company and
certain of the Companys current and former officers and
directors issued or caused to be issued false and misleading
statements regarding the Companys revenues and expenses in
those SEC filings. The Company is cooperating fully with this
investigation. The Company cannot assure you that this matter
will be resolved in its favor.

The Department of Justice (DOJ) is
currently conducting an investigation into allegations that the
Company and certain of its current and former officers and
directors intentionally issued or caused to be issued false and
misleading statements regarding the Companys revenues and
expenses in SEC filings. The Company is cooperating fully with
this investigation. The Company cannot assure you that this
matter will be resolved in its favor.

In December 2002, the Company filed a demand for
arbitration before the American Arbitration Association in
Minnesota against a former employee. The complaint included
various claims in response to which the employee made several
counterclaims. In March 2003, the Company was notified by the
United States Department of Labor that counsel for the employee
had presented a letter of complaint alleging that the Company,
its former CEO and former CFO violated 18 U.S.C.§1514A
by improperly retaliating against the employee. In December
2003, the Company and the employee agreed to settle all claims
on mutually acceptable terms without the admission of liability
by any party for an amount that is not significant. Pursuant to
the settlement, the employee withdrew his letter of complaint,
and the Department of Labor has indicated that it considers the
matter closed.

In June 2003, the Company was awarded a favorable
judgment for $351,000 in a litigation matter previously
initiated by Timm Medical against a third party. Since
collection is not assured, any amount recovered in connection
with this judgment will be recorded in the period when it is
actually paid to the Company.



|    |                           
|--- | --------------------------
|10. | Related Party Transactions



| |                  
| | -----------------
| | Loans to Officers

In November 1999, the Company received a full
recourse promissory note for $1,028,125 in connection with the
sale of 175,000 common shares at fair value to the
Companys then-Senior Vice President, Sales and Marketing.
The four-year note bore interest at 5.99% per annum,
payable annually, and was recorded as a reduction in
stockholders equity. The Company agreed to forgive the
principal on the note ratably over four years subject to
performance of certain objectives that were to be mutually
agreed upon by the borrower and the Company and subject to the
borrower remaining an employee of the Company. The outstanding
principal balance at March 31, 2003 and December 31,
2002 totaled $150,042 and $214,292, respectively. The Company
forgave $64,250 for the three months ended March 31, 2003
and 2002, which was recorded as compensation expense (included
in selling, general and administrative expense). As of
September 30, 2003, the full value of the note had been
written off.

In January 2003, the Company extended a $344,000
non-recourse loan to an individual who is a shareholder and
consultant. The Company previously entered into an asset
purchase agreement with the shareholder in February 2002 to
acquire certain patents and a covenant-not-to-compete. The
Company extended the loan to the shareholder to assist with the
payment of federal income taxes arising from the 2002

18



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##### Table of Contents



ENDOCARE, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purchase transaction. The loan is secured by the
shares issued, bears interest at 1.8% and is due at the earlier
of January 2005 or 30 days after the borrower ceases to be
a consultant to the Company (see Note 7).



|    |                                     
|--- | ------------------------------------
|11. | Capital Stock and Earnings Per Share

Basic earnings (loss) per share are computed by
dividing net income (loss) by the weighted average number of
common shares outstanding for the respective periods. Diluted
earnings (loss) per share, calculated using the treasury stock
method, gives effect to the potential dilution that could occur
upon the exercise of certain stock options and warrants that
were outstanding during the respective periods presented. Since
the Company reported a net loss for the quarters ending
March 31, 2003 and 2002, these potentially dilutive common
shares were excluded from the diluted loss per share calculation
because they were anti-dilutive.

|                                                              |  |                              |            |      |  |   |            |  
|------------------------------------------------------------- |  | ---------------------------- | ---------- | ---- |  | - | ---------- | -
|                                                              |  |                             
|                                                              |  | Three Months Ended March 31,
|                                                              |  |                             
|                                                              |  | 2003                         |            | 2002
|                                                              |  |                              |            |     
|Net loss                                                      |  | $                            | (6,087,898 | )    |  | $ | (3,473,281 | )
|Basic and diluted loss per common share                       |  | $                            | (0.25      | )    |  | $ | (0.15      | )
|Basic weighted average shares                                 |  |                              | 24,151,962 |      |  |   | 22,808,000 |  
|Dilutive effect of outstanding stock options and
    warrants |  |                              |           |      |  |   |           |  
|                                                              |  |                              |            |      |  |   |            |  
|Dilutive weighted average shares                              |  |                              | 24,151,962 |      |  |   | 22,808,000 |  



|    |             
|--- | ------------
|12. | Income Taxes

The Company reported no income tax expense for
each of the quarters ended March 31, 2003 and 2002 due to
its operating losses. The continuing operating losses resulted
in an increase in the valuation allowance of $2,435,000 and
$1,389,000 during the quarters ended March 31, 2003 and
2002, respectively. Due to the Companys history of
operating losses, management cannot conclude that it is more
likely than not that the Companys deferred tax assets will
be realized through future earnings. Accordingly, valuation
allowances were recorded to fully reserve the Companys
deferred tax assets as of March 31, 2003 and 2002.



|    |                  
|--- | -----------------
|13. | Subsequent Events

During the first quarter ended March 31,
2004, the Company retired 326,222 of its common shares held in
treasury, including 120,022 shares re-purchased from
BioLife for $503,729 in February 2004 in connection with the
settlement of its litigation with this company.

Through its acquisition of Timm Medical in
February 2002, the Company obtained offices, manufacturing and
research facilities for its erectile dysfunction products in a
28,066 square foot building in Eden Prairie, Minnesota.
This lease expired on April 30, 2004. Due to the net
downsizing of its Minnesota operations and divestiture of
several product lines acquired in the purchase of Timm Medical,
the Company decided not to renew its existing lease and instead
negotiated a lease for a smaller facility. In May 2004, the
Company agreed to enter into a new lease on 8,919 square
feet in the existing facility to house its Minnesota operations.
The monthly rental payment during the term of the lease will
range from $0.61 to $0.67 per square foot, excluding common
area maintenance costs. The aggregate rental obligation over the
term of the lease will be approximately $343,000. The lease for
this office and warehouse facility expires in 2009.

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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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
Reports on Form 10-K for the fiscal years ended
December 31, 2003 and 2002.

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. In addition, there are
factors not described in this Quarterly Report on Form 10-Q
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

We are a medical device company focused on
developing, manufacturing and selling cryosurgical products with
the potential to improve the treatment of cancer and other
tumors and on manufacturing and marketing vacuum technology as a
non-pharmacological option for treatment of erectile
dysfunction. Our cryosurgical products include a computerized
device (the Cryocare Surgical System), and
disposable cryoprobes and temperature probes used to safely and
effectively freeze cancerous tissue or other tumors through our
proprietary argon gas-based technology. We recently introduced
the next generation of our Cryocare Surgical System, the
Cryocare CS. Our erectile dysfunction products, sold through our
wholly-owned subsidiary, Timm Medical, include the ErecAid
Esteem and the ErecAid Classic for treatment of impotence as
well as the RigiScan for diagnostic evaluation of this condition.

Currently, our cryosurgical products are sold
chiefly to hospitals for the treatment of prostate cancer. In
addition, we are exploring the application of our cryosurgical
technologies for ablation of other tumors, specifically in the
treatment of tumors of the kidney, lung, and liver and for pain
management related to metastatic bone cancer. We sell our vacuum
therapy products for treatment of erectile dysfunction primarily
to individual patients on a prescription basis. Our RigiScan
products are sold to physicians.

We have incurred significant operating losses and
negative cash flows from operations in each full fiscal year
since January 1, 1996. We incurred a net loss of
approximately $6.1 million for the quarter ended
March 31, 2003 and a loss of $42.0 million for the
year ended December 31, 2002. As of March 31, 2003, we
had an accumulated deficit of $95.0 million. We expect to
incur additional losses as we expand our sales and marketing
efforts, strengthen our infrastructure, improve our financial
reporting processes and controls and continue to develop new
products.

In addition to the cash needed to fund our
ongoing operations, there have been and will continue to be
substantial demands on cash in connection with ongoing
investigations by the SEC and DOJ of our historical accounting
and financial reporting and related matters, including
restatements of our consolidated financial statements filed in
our Annual Reports on Form 10-K for the years 2000 and 2001
and in our Quarterly Reports on Form 10-Q for the first and
second quarters of 2002, as well as expenses related to
shareholder litigation. (See Notes 1 and 2 to the condensed
consolidated financial statements included in this report and
below under Liquidity and Capital Resources.)

20



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##### Table of Contents



Results of Operations



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Three Months Ended March 31, 2003
    Compared to Three Months Ended March 31, 2002

Major factors contributing to the fluctuation of
our operating results in the quarter ended March 31, 2003,
compared to the quarter ended March 31, 2002, included the
acquisitions of two significant businesses: Timm Medical,
purchased on February 21, 2002 and the mobile prostate
treatment businesses previously owned by USMD purchased on
September 30, 2002. Each of these acquisitions brought with
them additional sales as well as additional costs.

Another factor affecting our results included a
decision by our new management to concentrate our marketing
efforts in areas related to our core technologies 
cryoablation of tumors and vacuum therapy for treatment of
erectile dysfunction. This decision resulted in the winding down
of research and development activities associated with the
Horizon Prostatic Stent and the SurgiFrost product line.
Additionally, we embarked on a strategy aimed at divesting
several non-core product lines. These divestitures occurred
during the remainder of 2003 and included sales of assets and
licensing of the intellectual property and manufacturing rights
associated with the SurgiFrost product used in the treatment of
cardiac arrhythmia as well as the Dura II penile prosthesis
and the urinary incontinence products acquired in the Timm
Medical purchase.

Finally, results in the first quarter of 2003
were impacted by the commencement of internal and regulatory
investigations into our historical accounting and financial
reporting and the resulting distraction of both management and
sales personnel. In addition, negative publicity associated with
these investigations, the fall in our stock price and the
delisting of our stock from Nasdaq on January 16, 2003, all
contributed to uncertainty among our customers regarding the
viability of our business. Also as a result of these
investigations, we began to incur significant legal and other
costs related to addressing matters stemming from the
investigations, including the need to appoint new independent
auditors and a new President and Chief Financial Officer.

Revenues.We
generate revenues from sales of our Cryocare Surgical Systems,
disposable cryoprobes and other disposable devices used in
cryoablation procedures. We also contract with hospitals and
other health care providers for the use of our Cryocare Surgical
Systems in cryoablation treatments for which we charge a
per-procedure fee. Beginning with the first quarter of 2003, we
shifted our sales emphasis for cryosurgical products in the
urology market from equipment sales to procedure growth. Through
our placement program, we provide equipment to hospitals with
high-volume potential for cryosurgery procedures and charge them
a per-procedure fee for use of the equipment.

The procedure fee typically includes a procedure
kit containing cryoprobes and other disposables
needed to perform a cryosurgical procedure, in addition to a
service component. The service component of the procedure fee
generally consists of rental and transport of a Cryocare
Surgical System as well as the services of a technician to
assist the physician with the set-up, use and monitoring of the
equipment. In certain instances, we will provide the service
component of the procedure to the hospital as well as the
devices. At other times, we will contract with third parties to
perform the service component of the procedures and will remit a
service fee to the third party upon invoicing the hospital. We
also sell just the disposable devices to hospitals, without the
service component, where the hospital either owns the equipment
or independently contracts with a service provider.

In addition to our cryosurgery products, we sell
other urological products acquired when we purchased Timm
Medical, a urological device manufacturer, in February 2002. We
continue to sell our ErecAid vacuum therapy systems and RigiScan
monitors, although in 2003 we either divested or discontinued
the remaining product lines acquired in the Timm Medical
purchase. Sales of subsequently divested or discontinued product
lines acquired in the Timm Medical purchase totaled $891,000 and
$490,000 for the first three months of 2003 and 2002,
respectively.

A portion of our revenues also comes from sales
of the SurgiFrost cryosurgical line which we developed for
treatment of cardiac arrhythmia. In 2002 and through the first
quarter of 2003, we sold these products to CryoCath under the
terms of a distribution agreement. In April 2003, we licensed to
CryoCath the manufacturing and intellectual property rights to
these products and sold them the related assets. Beginning

21



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##### Table of Contents



with the first quarter of 2004, we are entitled
to royalty income based on CryoCaths sales of these
products. Sales to CryoCath totaled $80,000 and $248,000 for the
first three months of 2003 and 2002, respectively.


Revenues for the three months ended
March 31, 2003 increased 15.4% to $7,662,000 compared to
$6,640,000 for the three months ended March 31, 2002. While
revenues increased overall, there was a significant shift in the
mix of cryosurgical and Timm Medical products between the first
quarter of 2002 and the first quarter of 2003. The first quarter
of 2003 included a full three months of revenues, or
$3,511,000, from our Timm Medical subsidiary compared to
approximately one month of Timm Medical revenues, or $1,789,000,
recorded for the post-acquisition period between
February 21, 2002 and March 31, 2002.

Another change in product mix resulted from the
fact that there were significantly fewer sales of Cryocare
Surgical Systems in the first quarter of 2003 compared to the
earlier quarter. We sold nine Cryocare Surgical Systems in the
first three months of 2002 compared to two smaller international
units in the first quarter of 2003 which accounted for a
$1,524,000 reduction in revenues.

Sales of Cryocare Surgical Systems slowed
dramatically in late 2002 following commencement of internal and
regulatory investigations into our historical accounting and
financial reporting. As discussed above, negative publicity and
poor stock performance resulting from these investigations
affected both our sales staff and our customers. Concerns
regarding our viability created reluctance on the part of most
customers to make new capital investments in our products. In
addition to the external factors affecting sales of Cryocare
Surgical Systems, new management made the decision in March 2003
to shift our strategy from growing cryosurgical sales through
sales of capital equipment to a focus on growing the number of
cryosurgical procedures performed.

Notwithstanding this slow-down in sales of
capital equipment, the number of cryosurgical procedures
performed, and related sales of disposable products used in
these procedures, grew in the first three months of 2003
compared to the same period in 2002. Procedures jumped from an
estimated 418 in the first quarter of 2002 to an estimated 717
in the first quarter of 2003, while the related revenues
increased from $2,937,000 in the earlier quarter to $3,308,000
in the first quarter of 2003.

Sales in each of the first quarters of 2003 and
2002 included approximately $971,000 and $738,000, respectively,
for Timm Medical and SurgiFrost products subsequently divested.
(See Note 8 to our condensed consolidated financial
statements included in this report).

Cost of Revenues.Cost of revenues consists of fixed and variable costs incurred
in the manufacture of our products in addition to depreciation
of Cryocare Surgical Systems placed in the field with customers
under our placement program or with our sales and service
personnel. We incur an additional cost of revenues in the form
of a fee for equipment usage and other services when a procedure
is performed on a Cryocare Surgical System owned by an unrelated
service provider. That portion of the procedure fee remitted to
the third-party service provider is charged to cost of revenues
when the procedure is performed and billed. We retain a larger
profit on procedures performed on systems owned by us where no
outside service fees are incurred.

In addition, charges for product warranties as
well as excess and obsolete inventory, shrinkage and other
inventory carrying costs are included in our cost of revenues as
are costs of maintaining patents or other intellectual property
rights to processes or technologies related to our products,
royalties on product sales and amortization of developed
technology acquired in connection with our acquisition of Timm
Medical.

Cost of revenues for the three months ended
March 31, 2003 increased 20.9% to $3,996,000 compared to
$3,305,000 for the three months ended March 31, 2002. Cost
of revenues related to products acquired in the purchase of Timm
Medical increased by approximately $814,000 in the quarter ended
March 31, 2003 compared to the prior year quarter which
included only one month of Timm Medical sales. In addition,
higher sales of cryoprobes and procedure fees increased cost of
revenues by approximately $221,000 for the quarter ended
March 31, 2003 compared to the same period in the prior
year. Part of this quarter-over-quarter increase in cost of
revenues was that the number of cryosurgical procedures
performed where we billed the hospitals and paid a third party
to service the cases grew as a percentage of our business in
2003.

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Additionally, due to the fact that we had
increased the number of Cryocare Surgical Systems loaned to our
customers under our placement program, we recorded higher
depreciation costs related to systems located in the field. The
number of placement Cryocare Surgical Systems grew from 47 at
year-end 2001 to 117 at year-end 2002.

Furthermore, due both to the addition of a
significant number of Cryocare Surgical Systems in our placement
program as well as the large number of systems manufactured for
sale in 2002, production levels of systems were much higher in
2002 than in 2003. During 2002, we manufactured and sold 21
Cryocare Surgical Systems and placed an additional 70 systems
with our customers. In addition, we manufactured and shipped an
additional 16 systems for which we could not recognize revenue
in 2002. In contrast, during all of 2003, we added only three
systems to our placement program. In the first quarter of 2003,
we sold only two systems. In 2002, when production levels were
high, we were able to absorb our manufacturing overhead costs
into inventory. In 2003, when production slowed dramatically,
costs related to excess production capacity were expensed as
cost of revenues.

Offsetting these increases in cost of sales was a
reduction in cost of revenues related to sales of fewer Cryocare
Surgical Systems in the 2003 quarter. In addition to the fact
that we sold fewer systems in the first quarter of 2003 compared
to the first quarter of 2002, we included in cost of revenues
for the earlier period the manufacturing cost of four Cryocare
Surgical Systems of approximately $160,000, which were shipped
during the period but for which we could not recognize revenue.
Since we no longer had possession of or title to the equipment,
we determined that it was appropriate to record the cost related
to these Cryocare Surgical Systems in the period when they were
shipped. Cost of revenues related to system sales declined from
approximately $353,000 in the three months ended March 31,
2002 to $91,000 during the same period in 2003.

Gross Margins.Gross
margins on revenues decreased to 47.8% for the three months
ended March 31, 2003 compared to 50.2% for the three months
ended March 31, 2002. The reduction in our gross margins
was due to the under-absorption of manufacturing overhead
related to the lack of production of our Cryocare Surgical
Systems in the 2003 quarter as well as higher depreciation on an
increased number of Cryocare Surgical Systems placed with our
customers. An additional factor affecting our margins was the
increase in the percentage of cryosurgical cases serviced by
third parties in the first quarter of 2003 compared to the first
quarter of 2002.

Research and Development
Expenses.Research and development
expenses include expenses associated with the design and
development of new products as well as significant enhancements
to existing products. These expenses consist primarily of
salaries and related benefits and overhead costs for staff
engaged in research and development activities, costs for
materials and supplies used in performing research and
development activities, costs of clinical trials conducted for
the purpose of obtaining regulatory approval of our products,
consulting and advisory fees for outside service providers
directly involved in research and development activities, and
depreciation on equipment used directly for research and
development activities. We expense research and development
expenses when incurred. Our research and development efforts are
periodically subject to significant non-recurring expenses and
fees that can cause some variability in our quarterly research
and development expenses.

Research and development expenses for the three
months ended March 31, 2003 decreased 54.7% to $333,000
compared to $735,000 for the three months ended March 31,
2002. The decrease was primarily attributable to a reduction in
costs associated with the development of our stent products for
the treatment of BPH and in costs related to development of the
SurgiFrost product for the cardiac market. During 2003, in view
of the significant investment needed to bring the Horizon
Prostatic Stent to market and the fact that it did not fit well
with our strategic focus on cancer treatment, we decided to
abandon further efforts to obtain Food and Drug Administration
(FDA) approval of this product as well as our ThermaStent. We
are currently looking for a buyer for the patent and product
portfolio related to our stent products. We sold the SurgiFrost
product line to CryoCath in April 2003.

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As a percentage of revenues, research and
development expenses decreased from 11.1% in the first quarter
of 2002 to 4.3% during the three months ended March 31,
2003, due to the combination of decreased spending and increased
revenues.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses primarily consist of salaries,
commissions and related benefits and other overhead costs for
employees and activities in the areas of sales, marketing,
customer service, legal affairs, finance, information
technology, human resources and administration. Fees for
attorneys, independent auditors and certain other outside
consultants and suppliers are included where their services or
products are related to selling, general and administrative
activities. Expenses associated with advertising, trade shows,
promotional and training costs related to marketing our products
are also classified as selling, general and administrative
expenses as are the costs of conducting clinical research
studies for the purpose of collecting clinical data used in
promoting our products.

Selling, general and administrative expenses for
the three months ended March 31, 2003 increased 49.0% to
$9,548,000 compared to $6,407,000 for the three months ended
March 31, 2002. Costs grew primarily due to significant
additions in field sales, service, and administrative personnel
following our 2002 acquisitions of Timm Medical and the mobile
prostate treatment businesses of USMD. Salaries as well as costs
related to travel and training of these new employees
contributed to the increase in expenses.

Other selling, general and administrative costs,
such as advertising and marketing, insurance, legal, taxes, rent
and utilities also increased due to our acquisition of these
businesses. The increase in selling, general and administrative
expenses attributable to acquisitions was approximately
$1,914,000 during the quarter ended March 31, 2003 over the
prior year quarter.

Also included in selling, general and
administrative expenses in the first quarter of 2003 were
approximately $969,000 in legal, audit and accounting support
fees related to the ongoing internal and regulatory
investigations of the Companys historical accounting and
financial reporting discussed elsewhere in this report.

As a percentage of revenues, selling, general and
administrative expenses were 124.6% and 96.5% for the first
quarters of 2003 and 2002, respectively.

Interest Income,
Net.Interest income, net for the
three months ended March 31, 2003 was $216,000 compared to
$333,000 for the three months ended March 31, 2002. The
drop in net interest income in 2003 compared to 2002 resulted
from declining cash balances throughout 2003 combined with lower
interest rates.

Minority Interests.Minority interests represent earnings attributable to minority
investors in the mobile prostate treatment businesses we
acquired from USMD on September 30, 2002. The amount
recorded for minority interests was $89,000 for the three months
ended March 31, 2003.

Net Loss.Net loss
for the three months ended March 31, 2003 was $6,088,000 or
$0.25 per diluted share on 24,151,962 weighted average
shares outstanding, compared to a net loss of $3,473,000, or
$0.15 per share on 22,808,000 weighted average shares
outstanding for the same period in 2002. The loss for the three
months ended March 31, 2003 as compared to net loss for the
same period in 2002 increased primarily as a result of lower
gross margins as a percentage of revenues and higher selling,
general and administrative expenses. These increases were
partially offset by reductions in research and development costs.

Liquidity and Capital Resources

Since inception, we have incurred losses from
operations and have reported negative cash flows. As of
March 31, 2003, we had an accumulated deficit of
$95.0 million and cash, cash equivalents and
available-for-sale securities of $35.1 million. We
currently have no long-term debt, and no long-term financial
obligations other than under operating leases and purchase
commitments for raw material used in manufacturing our products.
Although we believe that our existing cash and marketable
securities will be sufficient to fund our working capital
requirements, capital expenditures and other obligations through
2004, there are certain risks and uncertainties that could, in
the future, change our opinion regarding the adequacy of our
capital.

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After March 31, 2003, our cash reserves
continued to decline. From April 2003 through March 31,
2004, our cash was principally used to fund a total of
$36.6 million in operating losses, excluding a
$8.6 million net gain on divestitures and including
$13.7 million in non-recurring legal and accounting costs
associated with the ongoing investigations into our historical
accounting and financial reporting. In addition, we made
$3.6 million in executive severance payments, of which
$1.5 million were in cash, related primarily to our former
Chief Executive Officer and Chief Financial Officer. (See
Note 9 to our condensed consolidated financial statements
included in this report.) These expenses were partially offset
by $10 million in proceeds from the sale of our
cardiac-related products and manufacturing operations to
CryoCath and $2 million in proceeds from the sale of our
Dura II line.

In addition to the payments described in the
prior paragraph, in February 2004 we paid approximately
$1.5 million in directors and officers
liability insurance premiums, and we paid approximately
$1.9 million to BioLife to settle litigation, as described
above in Note 9 to our condensed consolidated financial
statements. During the first quarter of 2004 we incurred
approximately $3.3 million in non-recurring legal and
accounting fees associated with the ongoing investigations into
possible irregularities in our accounting and financial
reporting in earlier periods.

We face the possibility that there will be
additional material cash payments required in connection with
resolving matters related to the investigations into our
historical accounting and financial reporting. We and certain
former officers and certain current and former board members
have been named defendants in a class action and a derivative
lawsuit. We are generally obliged, to the extent permitted by
law, to indemnify our directors and officers who are named
defendants in these lawsuits. At this point in time we are
unable to provide a reasonable estimate of our potential
liability in these lawsuits.

We may be required to pay judgments or
settlements and to incur expenses in defending against these
claims that could be material. Further, while we carry
$20 million of directors and officers liability
insurance coverage, this coverage may not be adequate to cover
all costs related to these lawsuits, including any resulting
judgments or settlements. As described below under Risks
Related to Our Business, for claims asserted during the
period from June 10, 2002 through June 10, 2003, our
three excess carriers have filed arbitration complaints,
contending our former management made misstatements or omissions
in the applications for insurance coverage and seeking
rescission of the policies. A claim in excess of our insurance
coverage would have to be paid out of cash reserves, which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.

Beyond the factors described above, we expect to
face significant demands on our capital resources related to the
execution of our 2004 operating plan, regaining compliance with
the SEC rules and regulations required of publicly traded
companies, including Section 404 of the Sarbanes-Oxley Act
of 2002, and fulfilling requirements prerequisite to becoming
re-listed on a national stock exchange or market. We incurred
total net losses of $25.4 million in 2003 and are currently
projecting an operating loss for fiscal 2004, as well as a net
use of cash.

We will continue to use cash reserves to finance
our projected 2004 cash flow deficit. Our 2004 forecast provides
for an increase in revenues and improvement in gross profit as
well as a reduction in general and administrative expenses. The
reduction in general and administrative costs is due partly to
the winding down of certain activities related to various
investigations of accounting and financial reporting matters and
reductions in both staffing and marketing programs. In addition,
we have trimmed general and administrative costs through the
elimination of redundant functions at our subsidiaries and
centralizing them at our Irvine, California headquarters, and
plan to continue cost reduction programs aimed at improving our
financial health.

At the same time, however, we have planned
certain strategic investments in sales and marketing activities
to increase our market penetration as well as in inventory
related to the introduction of our new Cryocare CS System. We
have also planned expenditures on staffing and infrastructure
improvements in finance and information technology to ensure
that we will be able to comply with internal control and other
SEC requirements.

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Risks Related to Our Business

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

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

In order to execute our business plan, we need to
attract, retain and motivate a significant number of highly
qualified managerial, technical, financial and sales personnel.
If we fail to attract and retain skilled scientific and
marketing personnel, our research and development and sales and
marketing efforts will be hindered. Our future success depends
to a significant degree upon the continued services of key
management personnel, including Craig T. Davenport, our Chief
Executive Officer, William J. Nydam, our President and Chief
Operating Officer, and Katherine Greenberg, our Senior Vice
President and Chief Financial Officer. None of our key
management personnel is covered by an insurance policy of which
we are the beneficiary.



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our management members have spent
    considerable time and effort dealing with internal and external
    investigations and re-auditing of financial
    statements.

In addition to the challenges of the SEC
investigation, the DOJ investigation, a shareholder class-action
and a derivative lawsuit and other legal proceedings described
below, our new management members have spent considerable time
and effort dealing with internal and external investigations
involving our previous internal controls, accounting policies
and procedures, disclosure controls and procedures and corporate
governance policies and procedures. The significant time and
effort spent has adversely affected our operations and may
continue to do so in the future.



| |                                             
| | --------------------------------------------
| | We face risks relating to our
    liquidity.

Since the fourth quarter of 2002, we have
incurred significant costs related to, among other things,
legal, accounting and other professional fees associated with
our internal reviews of various accounting and other matters,
the ongoing investigation of us by the SEC and DOJ, various
shareholder class-action and derivative lawsuits and other legal
proceedings described below. In addition we are making
significant investments in the development and implementation of
sound internal controls and corporate governance policies and
procedures designed to enhance the accuracy, quality and
consistency of our financial information and reporting. We will
continue to incur significant related expenses in the future.

If we are not able to significantly grow market
share, improve our gross margins and reduce our operating
expenses, or if we become subject to significant judgments or
settlements in connection with the legal proceedings described
in Part II, Item 1 of this Quarterly Report on
Form 10-Q, we will require additional financing. Additional
equity or debt financing may not be available on acceptable
terms, or at all, in part because our common stock was de-listed
from The Nasdaq Stock Market. If we are unable to obtain
additional capital, we may be required to reduce our sales and
marketing activities, reduce the scope of or eliminate our
research and development programs, relinquish rights to
technologies that we might otherwise seek to develop or
commercialize, or sell certain assets.

We recently made several significant payments
that have reduced our cash reserves. On March 8, 2004, we
paid to our former Chief Executive Officer an aggregate of
$750,000, which we owed to him under a separation agreement and
consulting agreement that we previously executed. Also on
March 8, 2004, we paid to our former Chief Financial
Officer an aggregate of $616,000, which we owed to him under an
employment agreement we previously executed. At the request of
the SEC, these payments were deposited into escrow accounts
during the fourth quarter of 2003; the funds were released upon
termination of the related escrow agreements. Additionally, on
February 20, 2004, we paid approximately $1.5 million
in directors and officers liability insurance
premiums. Furthermore, as described below in Part II,
Item 1 of this Quarterly Report on Form 10-Q, in
February 2004 we paid approximately $1.9 million to BioLife
to settle litigation.

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If we fail to adequately address our liquidity
concerns, then our independent auditors may issue a qualified
opinion, to the effect that there is substantial doubt about our
ability to continue as a going concern. A qualified opinion
could itself have a material adverse effect on our business,
financial condition, results of operations and cash flows.

For a further description of the nature of the
risks relating to our liquidity see, Part I,
Item 2  Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.



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

We have limited experience in manufacturing,
marketing and selling our Cryocare Surgical System in commercial
quantities. In addition, during 2002, we completed our
acquisitions of Timm Medical, the cryosurgical assets of
BioLife, and our acquisition of the mobile prostate treatment
businesses owned by USMD. As a result, we have a short history
in marketing and selling the products we acquired or have rights
to commercialize through these acquisitions or to market our
products on the scale required by these acquisitions. In
addition, we have limited experience in managing the complex
demands of a business with multiple entities and locations, a
large workforce and diverse information technology systems.

We have incurred annual operating losses each
year since our inception. For the quarter ended March 31,
2004, we had losses from operations of approximately
$8.6 million. As of March 31, 2004, our accumulated
deficit was approximately $123.0 million. It is possible
that we will not generate sufficient revenues from product sales
and service revenues to achieve or sustain profitability. Even
if we do achieve significant revenues from our product sales and
service revenues, we expect that increased operating expenses
will result in significant operating losses over the next
several quarters, as we, among other things:



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expand our infrastructure to support more robust
    internal controls, including policies and procedures related to
    our accounting practices, disclosure controls and corporate
    governance;
|
| |  | incur costs related to legal proceedings,
    including ongoing government investigations;                                                                                                          
|
| |  | 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 new products.                                                                                        

We will need to significantly increase the
revenues we receive from sales of our products and services as a
result of these increased operating expenses. We may be unable
to do so, and therefore, may not achieve profitability. Even if
we do achieve profitability, we cannot be certain that we will
be able to sustain or increase profitability on a quarterly or
annual basis.



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

If we fail to achieve and maintain profitability
and positive cash flow, or if we undertake or accelerate
significant research and development projects for new products
or pursue corporate acquisitions, we may need additional outside
financing. We may raise these additional funds by selling one or
more lines of business or products, selling our equity
securities, incurring debt or entering into collaborative
arrangements. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve
interest expense and restrictive covenants. Collaborative
arrangements, if necessary to raise additional funds, may
require us to relinquish rights to some of our technologies,
products or marketing territories. Our failure to raise capital
when needed could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.

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| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot assure you that we will not
    discover additional instances of historical breakdowns in
    controls, policies and procedures affecting our previously
    issued financial statements.

We have made significant changes in our internal
controls, accounting policies and procedures, disclosure
controls and procedures and corporate governance policies and
procedures throughout 2003 and the first quarter of 2004. While
we believe that our newly implemented controls, policies and
procedures will help to prevent the occurrence of financial
reporting problems in the future, it is possible that we may
discover additional instances of historical breakdowns in our
internal controls, policies and procedures of the types that led
to restatements of our financial statements for the years 2000
and 2001 and for the first two quarters of 2002. In the event
such breakdowns are discovered they could impact both historical
financial statements and future reported results.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | We face risks related to investigations by
    the SEC and DOJ and related to other legal
    proceedings.

The SEC and the DOJ are conducting investigations
into allegations that we and certain of our current and former
officers and directors issued or caused to be issued false and
misleading statements regarding our revenues and expenses in
press releases and SEC filings. Although we have fully
cooperated with these governmental agencies in these matters and
intend to continue to fully cooperate, these agencies may
determine we have violated federal securities laws. We cannot
predict when these investigations will be completed or their
outcomes. If it is determined that we have violated federal
securities laws or other laws or regulations, we may face
sanctions, including, but not limited to, significant monetary
penalties and injunctive relief.

In addition, we and certain former officers and
certain current and former board members have been named
defendants in a class action and a derivative lawsuit. The
findings and outcome of the investigations described above may
affect the class action and the derivative lawsuit that are
pending. We are generally obliged, to the extent permitted by
law, to indemnify our directors and officers who are named
defendants in some of these lawsuits. We are unable to estimate
what our liability in these matters may be, and we may be
required to pay judgments or settlements and incur expenses in
aggregate amounts that could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.

We have $20 million of directors and
officers liability insurance coverage. The coverage is
provided in four $5 million policies issued by a primary
insurance carrier and three excess insurance carriers. For
claims asserted during the period from June 10, 2002
through June 10, 2003, the three excess carriers have filed
arbitration complaints, contending our former management made
misstatements or omissions in the applications for insurance
coverage and seeking rescission of the policies. A claim in
excess of our insurance coverage would have to be paid out of
cash reserves, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our investors, customers, vendors and
    suppliers may react adversely to the restatement of our
    historical financial statements and our inability to timely file
    all of our SEC filings.

Our future success depends in large part on the
support of our investors, customers, vendors, and suppliers. The
restatement of our historical financial statements and our
inability to timely file all of our SEC filings has resulted in
negative publicity about us and has, and may continue to have, a
negative impact on the market price of our common stock. The
restatement of our historical financial statements and our
inability to timely file all of our SEC filings also could cause
some of our customers or potential customers to refrain from
purchasing or to defer or cancel purchases of our products.
Additionally, our current and potential vendors and suppliers
may re-examine their willingness to do business with us, to
develop critical interfaces for us or to supply products and
services if they lose confidence in our ability to fulfill our
commitments.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Our common stock was de-listed from the
    Nasdaq Stock Market and, as a result, trading of our common
    stock has become more difficult.

Our common stock was de-listed from The Nasdaq
Stock Market on January 16, 2003. One result of this action
is a limited public market for our common stock. Trading is now
conducted in the over-the-counter

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market in the so-called Pink Sheets.
Consequently, selling our common stock is more difficult because
smaller quantities of shares can be bought and sold,
transactions can be delayed and security analyst and news media
coverage of us may be reduced. These factors could result in
lower prices and larger spreads in the bid and ask prices for
shares of our common stock as well as lower trading volume.
Although we will seek to have our common stock re-listed on a
national stock exchange or market once we are in full compliance
with our obligations as a reporting company, we can provide no
assurance that we will be re-listed.


As a result of the delisting of our common stock
from The Nasdaq Stock Market, our common stock has become
subject to the penny stock regulations, including
Rule 15g-9 under the Securities Exchange Act of 1934. That
rule imposes additional sales practice requirements on
broker-dealers that sell low-priced securities to persons other
than established customers and institutional accredited
investors. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for
the purchaser and have received the purchasers written
consent to the transaction prior to sale. Consequently, the rule
may affect the ability of broker-dealers to sell our common
stock and affect the ability of holders to sell their shares of
our common stock in the secondary market. To the extent our
common stock remains subject to the penny stock regulations, the
market liquidity for the shares will be adversely affected.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect to derive a significant portion
    of our future revenues from our cryosurgical products, which
    could fail to achieve market acceptance or generate significant
    revenue.

We introduced our Cryocare Surgical System to the
market in July 1999. We derived a significant portion of our
revenues in 2001 and 2002 from sales of Cryocare Surgical
Systems and related disposable cryoprobes and temperature
probes, as well as from per-procedure fees. In 2003, we shifted
our business model to focus on sales of procedures and
disposable devices rather than on sales of Cryocare Surgical
Systems. We expect sales of cryosurgical products and the
related procedure fees will constitute a significant portion of
our revenues for the foreseeable future, although we expect
revenue from system sales to fluctuate from quarter to quarter
and decrease, over time, as a percentage of our revenue.

Our success is reliant on the acceptance by
doctors and patients of the Cryocare Surgical System as a
preferred treatment for tumor ablation. Cryosurgery has existed
for many years, but has not been widely accepted primarily due
to concerns regarding safety and efficacy and widespread use of
alternative therapies. Because the technology previously lacked
precise monitoring capabilities, cryosurgical procedures
performed in the 1970s resulted in high cancer recurrence and
negative side effects, such as rectal fistulae and incontinence,
and gave cryosurgical treatment negative publicity. To overcome
these negative side effects, we have developed ultrasound
guidance and temperature sensing to enable more precise
monitoring in our Cryocare Surgical System. Nevertheless, we
will need to overcome the earlier negative publicity associated
with cryosurgery in order to obtain market acceptance for our
products. In addition, use of our Cryocare Surgical System
requires significant physician education and training. As a
result, we may have difficulty obtaining recommendations and
endorsements of physicians and patients for our Cryocare
Surgical System. We may also have difficulty raising the brand
awareness necessary to generate interest in our Cryocare
Surgical System. Any adverse side effects, including impotence
or incontinence, recurrence of cancer or future reported adverse
events or other unfavorable publicity involving patient outcomes
from the use of cryosurgery, whether from our products or the
products of our competitors, could adversely affect acceptance
of cryosurgery. In addition, emerging new technologies and
procedures to treat cancer, prostate enlargement and other
prostate disorders may negatively affect the market acceptance
of cryosurgery. If our Cryocare Surgical System does not achieve
broad market acceptance, we will likely remain unprofitable.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | If we are unable to continue to develop and
    enhance our Cryocare Surgical System, our business will
    suffer.

Our growth depends in part on our continued
ability to successfully develop enhancements to our Cryocare
Surgical System. We may experience difficulties that could delay
or prevent the successful development and commercialization of
these products. Our products in development may not prove safe
and effective in clinical trials. Clinical trials may identify
significant technical or other obstacles that must be overcome
before obtaining necessary regulatory or reimbursement
approvals. In addition, our competitors may succeed in
developing commercially viable products that render our products
obsolete or less attractive.

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Failure to successfully develop and commercialize
new products and enhancements would likely have a significant
negative effect on our financial prospects.




| |                                                                            
| | ---------------------------------------------------------------------------
| | Our strategy of divesting non-core product
    lines may not be successful.

We are refocusing our business on the development
of minimally invasive technologies for tissue and tumor
ablation. As part of this strategy, we have begun divesting
certain non-core product lines, as evidenced by our sale of our
Dura II Penile Prosthesis product line, our sale of our
urodynamics and urinary incontinence product lines and our
licensing of our cardiac technology and sale of related assets.
We can provide no assurance that our strategy of focusing on our
core technologies for tumor ablation applications and our
divestitures of non-core technologies and product lines will be
successful.



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

Hospitals and other health care providers in the
United States generally rely on third-party payors, principally
federal Medicare, state Medicaid and private health insurance
plans, to reimburse all or part of the cost of medical
procedures involving our products. While private health insurers
in some areas of the United States provide reimbursement for
procedures in which our products are used, we can provide no
assurance that private insurance reimbursement will be adopted
nationally or by additional insurers. Furthermore, those private
insurance companies currently paying for procedures in which our
products are used may terminate such coverage. If reimbursement
levels from Medicare, Medicaid, other governmental health care
programs or private insurers are not sufficient, physicians may
choose not to recommend, and patients may not choose, procedures
utilizing our products.

Previously, reimbursement under Medicare for our
cryosurgical disposable products used in outpatient procedures
was provided on a so-called pass-through basis. This
enabled the hospital or other health care provider to obtain
separate reimbursement for our disposable devices in addition to
reimbursement for the procedure fee. Pass-through status was
terminated on December 31, 2003. As a result, the cost of
our disposable products now is incorporated into the Hospital
Outpatient Prospective Payment System and there will be no
separate reimbursement for the disposables.

Given the end to pass-through status for our
disposable cryoprobes and temperature probes, we expect Medicare
reimbursement for our products used in outpatient settings to
continue to fluctuate. This may influence reimbursement rates
for our products by private insurers as well. We can provide no
assurance that changes in outpatient reimbursement rates will
not affect our ability to negotiate favorable charges for our
products to hospitals.

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

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

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

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



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We acquired Timm Medical, the cryosurgical
    assets of BioLife and the mobile prostate treatment businesses
    of USMD and face risks associated with integrating these
    businesses into our existing business operations.

We continue to face numerous risks and expenses
related to integration of the businesses we acquired from Timm
Medical, BioLife and USMD. In addition, the acquired businesses
have suffered because managements resources have been
consumed by, among other things, the internal and external
investigations involving various accounting and related matters
as well as the work involved in re-auditing and restating our
consolidated financial statements for the years ended
December 31, 2000 and 2001 and for the first two quarters
of 2002. The businesses acquired from Timm Medical have suffered
because resources have been diverted in divesting certain
non-core product lines and in downsizing our Eden Prairie
operations. The businesses we acquired from USMD have suffered
for many of the same reasons in addition to the fact that we
recently assumed administrative responsibility for management of
these complex businesses. If we do not successfully integrate
and grow the acquired businesses, our business will suffer.



| |                                                                   
| | ------------------------------------------------------------------
| | Introduction of alternative therapies may
    affect our revenues.

We sell medical devices for the treatment of
certain urological disorders. If physicians and patients do not
accept our products, our sales will decline. Patient acceptance
of our products depends on a number of factors, including the
failure of other therapies, the degree of invasiveness involved,
the rate and severity of complications from the procedures, and
other adverse side effects. Patients are more likely first to
consider non-invasive alternatives to treat their urological
disorders. The introduction of new oral medications or other
less-invasive therapies may cause our sales to decline in the
future.



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

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

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

Our success will depend to a significant degree
on our ability to secure and protect intellectual property
rights and to enforce patent and trademark protections relating
to our technology. From time to time, litigation may be
advisable to protect our intellectual property position.
However, these legal means afford only limited protection and
may not adequately protect our rights or permit us to gain or
keep any competitive advantage. Any litigation in this regard
could be costly, and it is possible that we will not have
sufficient resources to fully pursue this litigation or to
protect our other intellectual property rights. It could result
in the rejection or invalidation of our existing and future
patents. Any adverse outcome in litigation relating to the
validity of our patents, or any failure to pursue litigation or
otherwise to protect our patent position, could have a material
adverse effect on our business, financial condition, results of
operations and cash flows. Also, even if we prevail in
litigation, the litigation would be costly in terms of
management distraction as well as in money. In addition,
confidentiality agreements with our employees, consultants,
customers, and key vendors may not prevent the unauthorized
disclosure or use of our technology. It is possible that these
agreements will be breached or that they will not be enforceable
in every instance, and that we will not have adequate remedies
for any such breach. Enforcement of these agreements may be
costly and time consuming. Furthermore, the laws of foreign
countries may not protect our intellectual property rights to
the same extent as the laws of the United States.



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

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

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

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

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



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

We use internal manufacturing capacity and
expertise to manufacture our products. We have limited
experience in producing our products in commercial quantities.
We may encounter difficulties in scaling up production of new
products, including problems involving production yields,
quality control and assurance, component supply and shortages of
qualified personnel. Our failure to overcome these manufacturing
problems could have a material adverse effect on our business,
financial condition, results of operations and cash flows.

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Our success will depend in part upon our ability
to manufacture our products in compliance with the FDAs
Quality System regulations and other regulatory requirements in
sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs.



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

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



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

Government regulation has a significant impact on
our business. Government regulation in the United States and
other countries is a significant factor affecting the research
and development, manufacture and marketing of our products. In
the United States, the FDA has broad authority under the federal
Food, Drug and Cosmetic Act to regulate the distribution,
manufacture and sale of medical devices. Foreign sales of drugs
and medical devices are subject to foreign governmental
regulation and restrictions, which vary from country to country.
The process of obtaining FDA and other required regulatory
clearances and approvals is lengthy and expensive. We may not be
able to obtain or maintain necessary approvals for clinical
testing or for the manufacturing or marketing of our products.
Failure to comply with applicable regulatory approvals can,
among other things, result in fines, suspension or withdrawal of
regulatory approvals, product recalls, operating restrictions,
and criminal prosecution. In addition, governmental regulations
may be established which could prevent, delay, modify or rescind
regulatory approval of our products. Any of these actions by the
FDA, or change in FDA regulations, could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.

Regulatory approvals, if granted, may include
significant limitations on the indicated uses for which our
products may be marketed. In addition, to obtain such approvals,
the FDA and foreign regulatory authorities may impose numerous
other requirements on us. FDA enforcement policy prohibits the
marketing of approved medical devices for unapproved uses. In
addition, product approvals can be withdrawn for failure to
comply with regulatory standards or unforeseen problems
following initial marketing. We may not be able to obtain or
maintain regulatory approvals for our products on a timely
basis, or at all, and delays in receipt of or failure to receive
such approvals, the loss of previously obtained approvals, or
failure to comply with existing or future regulatory
requirements could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



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

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

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

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



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

Our business exposes us to potential product
liability claims that are inherent in the testing, production,
marketing and sale of medical devices. We are also subject to
various other claims as described below in Part II,
Item 1   Legal Proceedings. While we
believe that we are reasonably insured against these risks, we
may not be able to maintain insurance in amounts or scope
sufficient to provide us with adequate coverage against all
potential liabilities. A claim in excess of our insurance
coverage would have to be paid out of cash reserves, which could
have a material adverse effect on our business, financial
condition, results of operations and cash flows. In addition,
any product liability claim likely would harm our reputation in
the industry and our business.

We have $20 million of directors and
officers liability insurance coverage. The coverage is
provided in four $5 million policies issued by a primary
insurance carrier and three excess insurance carriers. For
claims asserted during the period from June 10, 2002
through June 10, 2003, the three excess carriers have filed
arbitration complaints, contending our former management made
misstatements or omissions in the applications for insurance
coverage and seeking rescission of the policies. A claim in
excess of our insurance coverage would have to be paid out of
cash reserves, which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.



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

The medical device industry generally, and the
urological disease treatment market in particular, are
characterized by rapid technological change, changing customer
needs, and frequent new product introductions. If our
competitors existing products or new products are more
effective than or considered superior to our products, the
commercial opportunity for our products will be reduced or
eliminated. We face intense competition from companies in the
cryosurgical marketplace as well as companies offering other
treatment options, including radical surgery, radiation therapy
and hormone therapy. If we are successful in penetrating the
market for treatment of prostate cancer with our cryosurgical
treatment, other medical device companies may be attracted to
the marketplace. Many of our potential competitors are
significantly larger than we are and have greater financial,
technical, research, marketing, sales, distribution and other
resources than we do. We believe there will be intense price
competition for products developed in our markets. Our
competitors

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may develop or market technologies and products,
including drug-based treatments, that are more effective or
commercially attractive than any that we are developing or
marketing. Our competitors may obtain regulatory approval, and
introduce and commercialize products before we do. These
developments could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. Even if we are able to compete successfully, we may not
be able to do so in a profitable manner.




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

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



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | impact of legal proceedings;                                                                                                                 
|
| |  | costs of expanding our infrastructure to support
    more robust internal controls, including more effective policies
    and procedures;    
|
| |  | costs to strengthen our accounting practices,
    disclosure controls and corporate governance;                                              
|
| |  | 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;                                 
|
| |  | potential impact of acquisitions;                                                                                                            
|
| |  | timing of regulatory approvals for new products;                                                                                             
|
| |  | outcomes of clinical studies by us or our
    competitors;                                                                                   
|
| |  | competition from other treatment
    modalities; and                                                                                         
|
| |  | physician and patient acceptance of cryosurgery.                                                                                             

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



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

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



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | actual or anticipated variations in our operating
    results;              
|
| |  | developments regarding government and third-party
    reimbursement;        
|
| |  | changes in government regulation of our products
    and business practices;
|
| |  | developments concerning government investigation
    of us;                 
|
| |  | developments concerning proprietary rights;                                 

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| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | developments concerning litigation or public
    concern as to the safety of our products or our
    competitors products;
|
| |  | technological innovations or introduction of new
    products by us or our competitors;                                    
|
| |  | investor and analyst perception of us and our
    industry;                                                                
|
| |  | general economic and market conditions; and                                                                                
|
| |  | physician and patient acceptance of cryosurgery.                                                                           

In addition, the stock market is subject to price
and volume fluctuations that affect the market prices for
companies in general, and small-capitalization, high technology
companies in particular, which are often unrelated to the
operating performance of these companies.



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

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



| |                                                              
| | -------------------------------------------------------------
| | Our intangible assets and goodwill could
    become impaired.

Intangible assets acquired in a purchase, such as
intellectual property or developed technology, are generally
amortized over various periods depending on their anticipated
economic benefits or useful lives. Long-lived assets, including
amortizable intangibles, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to
be generated by the asset. Following a review, if such assets
are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying value of the
assets exceeds the fair value of the assets.

We had no reported goodwill prior to
January 1, 2002. With the adoption of Statement of
Financial Accounting Standards No. 142 Goodwill and
Intangible Assets, goodwill can no longer be amortized
against earnings. Goodwill balances are subject to an impairment
review on an annual basis or sooner if indicators of potential
impairment exist. The test for impairment requires us to first
compare the fair value of the net assets of each reporting unit
to their carrying value, including goodwill. If the fair value
of the reporting unit is less than the carrying value, goodwill
of the reporting unit is potentially impaired and we next
calculate the implied fair value of goodwill by deducting the
fair value of all tangible and intangible net assets of the
reporting unit from the fair value of the reporting unit. If the
implied fair value of goodwill is less then the carrying amount
of goodwill, an impairment loss is recognized equal to the
difference. In the fourth quarter of 2002, we recorded goodwill
impairment related to our Timm Medical acquisition and an
impairment of our investment in U.S. Medical Development,
Inc. Significant estimates, including assumptions regarding
future events and circumstances that cannot be easily predicted
are required to perform an analysis of the value of goodwill.
These estimates and assumptions may differ materially from
actual outcomes and occurrences. Furthermore, no assurance can
be given that we will not have further impairment charges
related to Timm Medical or other acquisitions.



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

During the past several years, the United States
and other international markets experienced a significant
economic downturn. In addition, the United States and other
countries suffered significant acts of hostility, terror and
war. Such acts may increase or prolong such negative economic
conditions. The economic downturn may impact our ability to
maintain or increase profitability by negatively affecting
growth in demand for our products. There can be no certainty as
to the degree or severity of the duration of this downturn. We

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also cannot predict the extent and timing of the
impact of the economic downturn in the United States and in
other countries and geographic regions in which we conduct our
business.




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

Our headquarters, cryosurgical products
manufacturing facilities, research facilities and much of our
infrastructure, including computer servers, are located in
California, an area that is susceptible to earthquakes and other
natural disasters. Our erectile dysfunction products are
assembled, packaged and shipped in our Minneapolis facility. A
natural disaster or other catastrophic event, such as an
earthquake, fire, flood, severe storm, break-in, terrorist
attack or other comparable problems could cause interruptions or
delays in our business and loss of data or render us unable to
accept and fulfill customer orders in a timely manner, or at
all. In addition, as our Minneapolis facility is located in an
area that is susceptible to harsh weather, a major storm, heavy
snowfall or other similar event could prevent us from delivering
products in a timely manner. We have no formal disaster recovery
plan and our business interruption insurance may not adequately
compensate us for losses that may occur. In the event that an
earthquake, natural disaster or other catastrophic event were to
destroy any part of our facilities or interrupt our operations
for any extended period of time, or if harsh weather conditions
prevent us from delivering products in a timely manner, our
business, financial condition and operating results would be
seriously harmed.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

The primary objective of our investment
activities is to preserve principal while at the same time
maximizing the income we receive from our invested cash without
significantly increasing risk of loss. Our financial instruments
include cash, cash equivalents, short-term investments, accounts
receivable, investments, accounts payable and accrued
liabilities. The carrying values of our financial instruments
approximated their fair values. Our policy is not to enter into
derivative financial instruments. In addition, we do not enter
into any futures or forward contracts and therefore, we do not
have significant market risk exposure with respect to commodity
prices.

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






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

(a) Evaluation of Disclosure Controls and
Procedures. As required by Securities and Exchange
Commission Rule 13a-15(b), our Chief Executive Officer and
our Senior Vice President, Chief Financial Officer have
evaluated the effectiveness of our disclosure controls and
procedures within 90 days prior to the filing date of this
report. Based on their evaluation, our Chief Executive Officer
and our Senior Vice President, Chief Financial Officer have
concluded that our disclosure controls and procedures are not
yet effective because, until the filing of this report and the
other past due reports on Form 10-Q that we are filing
concurrently with this report, we have not been current in our
reporting under Section 15(d) of the Securities Exchange
Act of 1934. Our inability to timely file the required reports
is due to, among other things, the fact that managements
time and attention have been consumed by the auditing and
re-auditing of our financial statements for the years ended
December 31, 2000, 2001, 2002 and 2003, and the resulting
restatements, by the development and implementation of
improvements to our internal controls and financial reporting
processes, and by the internal and external investigations into
the accounting and other matters described in our consolidated
financial statements and the related notes contained in this
report in Part I, Item 1 and in our Annual Reports on
Form 10-K for the years ended December 31, 2002 and
2003 and in Part I, Item 2 of this report,
Managements Discussion and Analysis of Financial Condition
and Results of Operations.

Since March 2003, management has implemented and
continues to implement significant changes in organization,
policies and procedures designed to enhance our disclosure
controls and procedures and the related internal controls. These
include, among other measures: new restrictions and guidelines
governing sales

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personnel, terms and conditions of sale and
revenue recognition; new and more stringent credit approval
policies; new policies governing approval, review and recording
of expenditures and other legal and financial transactions; new
procedures governing documentation and approval of options and
warrants issued in connection with legal and financial
transactions; and new internal reporting procedures.
Nevertheless, during much of 2003, many of these enhancements to
our disclosure controls and procedures and the related internal
controls were not yet in place, or were only partially in place.
For this reason, management has undertaken an extensive and
substantive review and evaluation of all financial transactions
that, individually or collectively, could have a material impact
on the information contained in this Form 10-Q. These
review procedures, in combination with the changes in internal
control that have been implemented as of the date of the filing
of this report, form the basis for our determination that the
financial statements and other information contained in this
report fairly present, in all material respects, our financial
condition, results of operations and cash flows for the three
months ended March 31, 2003 and 2002.


(b) Changes in Internal Controls.
Except as described above in subsection (a) of this
Item 4, there have been no significant changes in our
internal controls or in other factors which could significantly
affect internal controls subsequent to the date of our most
recent evaluation of our internal controls.




PART II  OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

We are a party to lawsuits in the normal course
of our business. Litigation and governmental investigation can
be expensive and disruptive to normal business operations.
Moreover, the results of complex legal proceedings are difficult
to predict. We can provide no assurance that significant
judgments or settlements in connection with the legal
proceedings described below will not have a material adverse
effect on our business, financial condition, results of
operations and cash flows. See Note 9 to the condensed
consolidated financial statements included herein and
Part I, Item 2  Managements
Discussion and Analysis of Financial Condition and Results of
Operations. Other than as described below, we are not a
party to any material legal proceedings.

In November 2002, we were named as a defendant,
together with certain former officers, one of whom is also a
former board member, in a class-action lawsuit filed in the
United States District Court for the Central District of
California. On February 2, 2003, the court issued an order
consolidating this action with various other similar complaints
and ordering plaintiffs to file a consolidated complaint, which
was filed on October 31, 2003. The consolidated complaint
asserts two claims for relief, alleging that the defendants
violated sections of the Securities Exchange Act of 1934 by
purportedly issuing false and misleading statements regarding
our revenues and expenses in press releases and SEC filings.
Plaintiffs seek class certification and unspecified damages from
us, as well as forfeiture and reimbursement of bonus
compensation received by two of the individual defendants. On
April 26, 2004, the court issued an order denying our
motion to dismiss the consolidated complaint. We intend to
defend the case vigorously, but cannot assure you that it will
be resolved in our favor.

On November 26, 2002, BioLife filed an
action against us in the Delaware Court of Chancery seeking
damages for alleged breaches of contract stemming from our
acquisition, pursuant to an asset purchase agreement dated
May 28, 2002, of the tangible and intangible assets related
to BioLifes cryosurgical business. In the action, styled
as BioLife Solutions, Inc. v. Endocare, Inc., Del. Ch.,
C.A. No. 20057-NC, BioLife alleged that we failed to timely
register 120,022 shares of our common stock that were
provided to BioLife in connection with the asset purchase
agreement, in violation of a registration rights agreement
relating to the shares that was executed in conjunction with the
asset purchase agreement. BioLife sought damages of
approximately $1.6 million. We defended the action on the
grounds that our obligation to register the shares was excused
for various reasons, including as a consequence of
BioLifes failure to transfer assets in accordance with the
asset purchase agreement. Trial on all but one of the claims in
the action was held during the week of March 31, 2003. On
October 1, 2003, the Delaware Court ruled in favor of
BioLife, awarding BioLife $1,648,000, plus pre-judgment interest
and costs (including legal fees), and requiring BioLife to

38



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##### Table of Contents



surrender the 120,022 shares of our common
stock to us. That ruling became an appealable final order and
judgment on October 10, 2003. On February 20, 2004, we
agreed with BioLife to settle all claims. As part of the
settlement: we paid to BioLife $1,887,000, which represented a
discount of $150,000 from the total judgment amount (including
accrued interest and costs); BioLife returned to us the
120,022 shares of our common stock referred to above; and
we agreed to abandon our appeal.


On December 6, 2002, Frederick Venables
filed a purported derivative action against us and certain
former officers and certain current and former board members in
the California Superior Court for the County of Orange alleging
breach of fiduciary duty, abuse of control, gross mismanagement,
waste of corporate assets and unjust enrichment. On
April 23, 2004, the parties filed a stipulation agreeing to
a conditional stay of the action for 270 days, continuing
the deadline to respond to the complaint until after expiration
of the stay. The complaint seeks unspecified monetary damages,
equitable relief and injunctive relief based upon allegations
that the defendants issued false and misleading statements
regarding our revenues and expenses in press releases and SEC
filings. We intend to defend the case vigorously, but cannot
assure you that it will be resolved in our favor.

The SEC is currently conducting an investigation
to determine whether any federal securities laws were violated
in connection with the filing of our financial statements for
2001 and the first two quarters of 2002, including investigation
into allegations that we and certain of our current and former
officers and directors issued or caused to be issued false and
misleading statements regarding our revenues and expenses in
those SEC filings. We are cooperating fully with this
investigation. We cannot assure you that this matter will be
resolved in our favor.

The DOJ is currently conducting an investigation
into allegations that we and certain of our current and former
officers and directors intentionally issued or caused to be
issued false and misleading statements regarding our revenues
and expenses in SEC filings. We are cooperating fully with this
investigation. We cannot assure you that this matter will be
resolved in our favor.

In December 2002, we filed a demand for
arbitration before the American Arbitration Association in
Minnesota against a former employee. The complaint included
various claims in response to which the employee made several
counterclaims. In March 2003, we were notified by the United
States Department of Labor that counsel for the employee had
presented a letter of complaint alleging that we and our former
CEO and former CFO violated 18 U.S.C.§1514A by
improperly retaliating against the employee. In December 2003,
we and the employee agreed to settle all claims on mutually
acceptable terms without the admission of liability by any party
for an amount that is not significant. Pursuant to the
settlement, the employee withdrew his letter of complaint, and
the Department of Labor has indicated that it considers the
matter closed.

In June 2003, we were awarded a favorable
judgment for $351,000 in a litigation matter previously
initiated by Timm Medical against a third party. Since
collection is not assured, any amount recovered in connection
with this judgment will be recorded in the period when it is
actually paid to us.

39



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##### Table of Contents








|        |                      
|------- | ---------------------
|Item 2. | Changes in Securities

None.






|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults Upon Senior
    Securities

None.






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

None.






|        |                  
|------- | -----------------
|Item 5. | Other Information

None.






|        |                                      
|------- | -------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K.



| |     |         
| | --- | --------
| | (a) | Exhibits

|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 2  | .1(1)       |  | Agreement and Plan of Reorganization dated
    February 21, 2002, by and among the Company, Technologies,
    Inc., TMT Acquisition Corporation and certain stockholders of
    Timm Medical Technologies, Inc. Certain schedules and other
    attachments to this exhibit were omitted. We agree to furnish
    supplementally a copy of any omitted schedules or attachments to
    the Commission upon request.                            
|            | 2  | .2(2)       |  | Agreement and Plan of Merger dated June 30,
    1999, by and among the Company, Advanced Medical Procedures,
    Inc., Advanced Medical Procedures, LLC, Gary M. Onik, M.D.,
    Robert F. Byrnes and Jerry Anderson. Certain schedules and other
    attachments to this exhibit were omitted. We agree to furnish
    supplementally a copy of any omitted schedules or attachments to
    the Commission upon request.                      
|            | 2  | .3(3)       |  | Asset Purchase Agreement, dated February 6,
    2002, by and between the Company and Gary M. Onik, M.D.
    Certain schedules and other attachments to this exhibit were
    omitted. We agree to furnish supplementally a copy of any
    omitted schedules or attachments to the Commission upon request.                                                                                                                                    
|            | 2  | .4(3)       |  | Asset Purchase Agreement dated May 28, 2002,
    by and among the Company and Cryomedical Sciences, Inc. Certain
    schedules and other attachments to this exhibit were omitted. We
    agree to furnish supplementally a copy of any omitted schedules
    or attachments to the Commission upon request.                                                                                                                                   
|            | 2  | .5(4)       |  | Partnership and Limited Liability Company
    Membership Interest Purchase Agreement, dated as of
    August 12, 2002, by and among Endocare, Inc. and
    U.S. Medical Development, Inc., U.S.M.D., Ltd. and
    U.S.M.D. I, L.L.C. Certain schedules and exhibits
    referenced in this exhibit have been omitted. We agree to
    furnish supplementally a copy of any omitted schedules or
    attachments to the Commission upon request.
|            | 2  | .6(5)       |  | Amendment No. 1 to Partnership and Limited
    Liability Company Membership Interest Purchase Agreement, dated
    as of September 30, 2002, by and among Endocare, Inc. and
    U.S. Medical Development, Inc., U.S.M.D., Ltd. and
    U.S.M.D. I, L.L.C.                                                                                                                                                                                     
|            | 3  | .1(2)       |  | Certificate of Amendment of Restated Certificate
    of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                          
|            | 3  | .2(2)       |  | Certificate of Designation of Series A
    Junior Participating Preferred Stock of the Company.                                                                                                                                                                                                                                                                                                                                                
|            | 3  | .3(2)       |  | Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                         
|            | 3  | .4(6)       |  | Amended and Restated Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10 | .1(7)      |  | Employment Agreement, dated as of March 3,
    2003, by and between the Company and William J. Nydam.                                                                                                                                                                                                                                                                                                                                          

40



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##### Table of Contents



|            |    |             |  |                                                                                                          
|----------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 10 | .2(7)      |  | Employment Agreement, dated as of March 25,
    2003, by and between the Company and Katherine Greenberg.
|            | 10 | .3(6)      |  | Employment Agreement, dated as of March 25,
    2003, by and between the Company and Kevin Quilty.       
|            | 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 Katherine Greenberg.           
|            | 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 Katherine Greenberg.           



---



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



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | Management contract or compensatory plan or
    arrangement



|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | Previously filed as an exhibit with our
    Form 8-K filed on March 5, 2002.                                                      
|   
|(2) | Previously filed as exhibits with our
    Registration Statement on Form S-3 filed on
    September 20, 2001 and October 31, 2001.
|   
|(3) | Previously filed as exhibits with our
    Form 10-Q filed on August 14, 2002.                                                     
|   
|(4) | Previously filed as an exhibit with our
    Form 8-K filed on August 16, 2002.                                                    
|   
|(5) | Previously filed as an exhibit with our
    Form 8-K filed on October 15, 2002.                                                   
|   
|(6) | Previously filed as an exhibit with our
    Form 10-K filed on March 15, 2004.                                                    
|   
|(7) | Previously filed as an exhibit with our
    Form 8-K filed on March 27, 2003.                                                     

(b) Reports on Form 8-K

We filed a Form 8-K under Item 5 on
January 16, 2003 to report that we had been notified by The
Nasdaq Stock Market, Inc. that our common stock would be
delisted from The Nasdaq Stock Market.

We filed a Form 8-K under Item 4 on
March 14, 2003 to report the dismissal of KPMG LLP as our
independent auditor. We subsequently filed amendments to this
Form 8-K on May 1, 2003 and on May 16, 2003.

We filed a Form 8-K under Item 5 on
March 27, 2003 to report the appointment of William J.
Nydam as our President and Chief Operating Officer and the
appointment of Katherine Greenberg as our Chief Financial
Officer, as well as to report that Paul Mikus had vacated the
title of Chief Executive Officer.

41



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date: June 28, 2004



| |               
| | --------------
| | ENDOCARE, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/ CRAIG T. DAVENPORT

| |                            
| | ---------------------------
| |                            
| | Craig T. Davenport         
| | Chief Executive Officer and
| | Chairman of the Board      
| | (Duly Authorized Officer)  



| |     |                        
| | --- | -----------------------
| | By: | /s/ KATHERINE GREENBERG

| |                                                      
| | -----------------------------------------------------
| |                                                      
| | Katherine Greenberg                                  
| | Senior Vice President and Chief Financial
    Officer
| | (Principal Financial and Accounting
    Officer)     

42



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##### Table of Contents






EXHIBIT INDEX

|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 2  | .1(1)       |  | Agreement and Plan of Reorganization dated
    February 21, 2002, by and among the Company, Technologies,
    Inc., TMT Acquisition Corporation and certain stockholders of
    Timm Medical Technologies, Inc. Certain schedules and other
    attachments to this exhibit were omitted. We agree to furnish
    supplementally a copy of any omitted schedules or attachments to
    the Commission upon request.                            
|            | 2  | .2(2)       |  | Agreement and Plan of Merger dated June 30,
    1999, by and among the Company, Advanced Medical Procedures,
    Inc., Advanced Medical Procedures, LLC, Gary M. Onik, M.D.,
    Robert F. Byrnes and Jerry Anderson. Certain schedules and other
    attachments to this exhibit were omitted. We agree to furnish
    supplementally a copy of any omitted schedules or attachments to
    the Commission upon request.                      
|            | 2  | .3(3)       |  | Asset Purchase Agreement, dated February 6,
    2002, by and between the Company and Gary M. Onik, M.D.
    Certain schedules and other attachments to this exhibit were
    omitted. We agree to furnish supplementally a copy of any
    omitted schedules or attachments to the Commission upon request.                                                                                                                                    
|            | 2  | .4(3)       |  | Asset Purchase Agreement dated May 28, 2002,
    by and among the Company and Cryomedical Sciences, Inc. Certain
    schedules and other attachments to this exhibit were omitted. We
    agree to furnish supplementally a copy of any omitted schedules
    or attachments to the Commission upon request.                                                                                                                                   
|            | 2  | .5(4)       |  | Partnership and Limited Liability Company
    Membership Interest Purchase Agreement, dated as of
    August 12, 2002, by and among Endocare, Inc. and
    U.S. Medical Development, Inc., U.S.M.D., Ltd. and
    U.S.M.D. I, L.L.C. Certain schedules and exhibits
    referenced in this exhibit have been omitted. We agree to
    furnish supplementally a copy of any omitted schedules or
    attachments to the Commission upon request.
|            | 2  | .6(5)       |  | Amendment No. 1 to Partnership and Limited
    Liability Company Membership Interest Purchase Agreement, dated
    as of September 30, 2002, by and among Endocare, Inc. and
    U.S. Medical Development, Inc., U.S.M.D., Ltd. and
    U.S.M.D. I, L.L.C.                                                                                                                                                                                     
|            | 3  | .1(2)       |  | Certificate of Amendment of Restated Certificate
    of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                          
|            | 3  | .2(2)       |  | Certificate of Designation of Series A
    Junior Participating Preferred Stock of the Company.                                                                                                                                                                                                                                                                                                                                                
|            | 3  | .3(2)       |  | Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                         
|            | 3  | .4(6)       |  | Amended and Restated Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10 | .1(7)      |  | Employment Agreement, dated as of March 3,
    2003, by and between the Company and William J. Nydam.                                                                                                                                                                                                                                                                                                                                          
|            | 10 | .2(7)      |  | Employment Agreement, dated as of March 25,
    2003, by and between the Company and Katherine Greenberg.                                                                                                                                                                                                                                                                                                                                      
|            | 10 | .3(6)      |  | Employment Agreement, dated as of March 25,
    2003, by and between the Company and Kevin Quilty.                                                                                                                                                                                                                                                                                                                                             
|            | 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 Katherine Greenberg.                                                                                                                                                                                                                                                                                                                                                 
|            | 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 Katherine Greenberg.                                                                                                                                                                                                                                                                                                                                                 



---



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



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | Management contract or compensatory plan or
    arrangement



|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | Previously filed as an exhibit with our
    Form 8-K filed on March 5, 2002.                                                      
|   
|(2) | Previously filed as exhibits with our
    Registration Statement on Form S-3 filed on
    September 20, 2001 and October 31, 2001.

43



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##### Table of Contents





|    |                                                                                
|--- | -------------------------------------------------------------------------------
|(3) | Previously filed as exhibits with our
    Form 10-Q filed on August 14, 2002.  
|   
|(4) | Previously filed as an exhibit with our
    Form 8-K filed on August 16, 2002. 
|   
|(5) | Previously filed as an exhibit with our
    Form 8-K filed on October 15, 2002.
|   
|(6) | Previously filed as an exhibit with our
    Form 10-K filed on March 15, 2004. 
|   
|(7) | Previously filed as an exhibit with our
    Form 8-K filed on March 27, 2003.  

44